Bank Interview: Robin Terry & Yera Hagopian, HSBC

Published: Sep 2007

In this interview Robin and Yera share their views on the key issues and drivers in liquidity management, why and how HSBC has responded to their clients’ needs and the future for liquidity solutions.

Robin Terry

Deputy Head, Corporate Sales – Europe

Robin Terry is Deputy Head of Corporate Sales and Sector Sales Head for Consumer Brands and the Retail industry in Europe. He is responsible for overseeing relationships with the Bank’s largest customers and has considerable experience in the area of Shared Services Centres and liquidity structures. Before this role, Robin managed HSBC’s Continental European Sales team for five years.

Prior to returning to Europe in 1999, Robin was Senior Vice President and Regional Manager for HSBC’s global cash management operation in New York.

Yera Hagopian

Senior Product Manager, Liquidity Services

Yera Hagopian read French and Italian at Brasenose College, Oxford before joining Barclays Bank’s Management Development Program. She worked in Treasury and Relationship Management, including two years in the United States, prior to positions as European Sales Manager in Payments and Cash Management and International Product Director in Global Electronic Banking. In 1999 she joined HSBC as Global Product Manager for Liquidity Services.

Robin, what are the major issues for your clients with regard to liquidity management right now?

We are seeing an increasing need to establish cross-border, cross-currency liquidity structures as a result of four primary drivers:

  1. Requirement to increase visibility of cash balances on a global basis.
  2. The ability to access trapped cash and optimise use of that cash.
  3. The Treasurer’s desire to reduce bank interest rate spreads.
  4. More and more trade flows being conducted in emerging market currencies, leading to more complex liquidity management.

The Group Treasurer sits at the heart of the organisation. They have a wonderful perspective on the company’s financial pulse but they don’t run the company. By the nature of their role they are the go-betweens, marriage brokers and peace negotiators. They are very often the ‘glue’ within the enterprise and the challenge in any sizeable organisation is to break down stovepipes. This is just as true in liquidity as it is in other business areas. These stovepipes to which I alluded may be organisational – for example, one entity doesn’t communicate with another. They may be geographic – for example each country is responsible for its own business unit and not accountable to anyone other than at the highest level of the organisation so that liquidity is centralised but only within certain countries or regions. Or they may be currency – for example all liquidity is being managed via single currency pools but there is no management of the overall portfolio globally.

OK Robin, but if you had to prioritise, which would you say is the single most important liquidity management need today and over the next two to three years?

Finding solutions that take into account the whole business and that basically run themselves. Too many liquidity solutions leave all the hard work, and the responsibility for accuracy, to the client. Inaccurate and clunky liquidity management means bigger margins for the banks. Customers need solutions that are not disastrous if they get their forecasts wrong one day.

Even the solutions that exist today are generally good for one country or one region but fail to encompass the whole position for the client. Some pooling here and sweeping there but very little everywhere else.

If an all-inclusive solution can be delivered today, as companies grow, then the future looks bright enabling new jurisdictions and/or currencies to be added.

Yera, why exactly has HSBC addressed these issues and when do you expect to have a solution ready that really satisfies these requirements?

Quite simply, without a robust liquidity management solution we jeopardise our chances of winning domestic, regional and indeed global mandates comprising the core transaction services, accounts, payables and receivables mandates which make up a large proportion of our revenues. We have, therefore, completely re-engineered our liquidity management capabilities. We are linking all our back office systems to a single global liquidity engine capable of taking a single view across the customer’s entire enterprise. This provides the optimal solution possible given country, currency and legal entity ‘mix’. We believe this is a far more flexible and holistic solution than we have seen in the marketplace to date.

This is a major investment for HSBC, the project is well underway and deployment will start to roll-out in the first tranche of countries later this year.

HSBC will be showcasing the new solution at this year’s International Cash and Treasury Management Conference in Vienna from 18th-20th September. Please call by the HSBC exhibition stand, if you are attending, to find out more.

So Yera, why do you think HSBC is in a strong position to respond to the above needs?

There are two key reasons: Firstly, we have made the significant investment to link our back offices which enable us to offer such a flexible solution, and secondly, because of who and what we are; we have huge currency positions and balances in a broad range of geographies. Our footprint, depth and business diversity in multiple geographies means we are very well placed to manage customers’ positions as part of our overall balance sheet. Neither reason would be sufficient in itself, but together they make a compelling proposition.

“Cross-currency, cross-border pooling, or the ‘Holy Grail’ as it is often called, is and always was a bit of a myth.”

Yera Hagopian, Senior Product Manager, Liquidity Services
This all sounds very positive Yera. Are you saying multi-bank, multi-currency, multi country and multi-legal entity liquidity management solutions are a reality today? Let me be even more specific. I am a multinational company with trade flows in 20 different currencies, including some ‘exotics’ operating in 30 countries across different time zones with three Regional Treasury Centres. Do you have a solution which provides for full set-off of balances across this multiple bank account structure?

Cross-currency, cross-border pooling, or the ‘Holy Grail’ as it is often called, is and always was a bit of a myth. Let’s face it, the number of countries in which a bank can net the balances of different legal entities of a company and, furthermore, report these on a net basis for its own regulatory capital reporting is very limited. If the bank can’t, then pooling in the strict sense of the word is not economic to offer to customers. After all, the bank will be incurring a cost of capital on the customers’ debit balances which it will not be able to pass onto the customer. So, what is actually called pooling in many countries is not really pooling at all.

Our solution is best described as interest optimisation whereby credit and debit balances are priced incorporating a significantly narrowed margin to the extent that they are equal and opposite. You probably detected I deliberately didn’t use the term ‘offset’. If we understand this, we can easily see that this approach can be extended across many countries and currencies.

The solution to which you allude is therefore possible subject to country regulations, the pace of our roll-out of back office connectivity and the extent to which we can include third party bank balances via bi-lateral agreements and SWIFT connectivity.

Robin, how does HSBC see the future for corporate liquidity management or has it gone far enough?

Actually, it is surprising how neglected liquidity management still is. It is far easier to argue over the cost of an individual transaction and leave the liquidity to manage itself – a classic case of the ’tail wagging the dog.’ There is almost a tacit agreement that the balances compensate for the transactional business but how much are the balances worth or indeed what are the balances? No one seems to know. However, there are signs the market is waking up and more and more transactional business is being awarded on the basis of good liquidity management tools. Another development we see is the integration of automated investment tools with liquidity solutions to optimise interest earnings on surplus cash balances. HSBC is developing these STP capabilities in conjunction with its new global liquidity platform and in the case of passive management it will shortly be possible to invest via an automated sweep in HSBC’s Global Liquidity Funds operated by our colleagues at HSBC Investments.

Yera, we hear much about internal drivers within organisations. How do these sit with a global liquidity management approach?

Some of the internal issues were mentioned in response to an earlier question but are we really saying that companies cannot implement the solutions they choose? We read a lot about demonstrating the Return on Investment or ROI of a particular solution. It’s our view that there has to be something in it for all parties. In liquidity management terms, this means some of the interest benefit must be passed back to the participants. They must not just be able to see the benefit; they must be able to feel it. This is actually good practice from a tax and accounting perspective too.

What about cash flow forecasting Yera – where does this fit with a liquidity structure?

Accurate forecasting is, of course, highly desirable yet often hard to achieve. It is important from an intra day liquidity management perspective and certainly vital in terms of managing the longer term positions. In terms of the day-to-day liquidity there has to be some margin of error; unexpected payments and/or receipts happen. Passive liquidity management as we call it must have the effect that errors in the forecasts do not prove disastrous.

And what about the external factors such as SEPA, increased regulation, lack of tax and legal harmonisation? Yera, how do these impact liquidity management structures?

All of these have different drivers. None of these has improved corporate liquidity management as its primary aim. Will SEPA mean that corporations only need a single Euro account? Well probably no in most cases, although, there may be circumstances where bank account rationalisation is possible. The adoption of the EU Insolvency Directive has done a great deal to harmonise the ability to include European entities in a notional pool in ‘pool-friendly’ locations but is, as you say, lacking and indeed in some jurisdictions there is evidence that the authorities are adopting wider powers to safeguard their fiscal flows and domestic shareholders. We shouldn’t be too surprised, however, and that is just in the Euro zone.

Tax, legal and regulatory issues involved with pooling structures have, in the past, prevented the type of holistic solution you have been talking about. Yera, how do the new solutions being developed by HSBC overcome these?

We are not trying to overcome tax and regulatory constraints per se. We are simply trying to work within these to provide the best possible solution to our customers. That said, without offering specific tax advice we do keep abreast of developments in these important areas and offer advice and guidance to our clients on any potential pitfalls.

Transaction services of the type mentioned earlier tend to be allocated on the basis of the provision of credit from the banks. Given the solution you have described works best with a single bank provider I assume, Robin, how do you satisfy a multi-bank structure to ensure the company derives optimal benefit?

A single bank relationship globally is rather ambitious and would entail a great many compromises so we recognise the need for multi-bank solutions. In less regulated and liquid markets, there are techniques utilising SWIFT for moving liquidity between banks on an automated basis. In more regulated markets this is harder to achieve. Transaction services are not the only bonbons in the corporate party bag however. If the benefits of a global liquidity solution are sufficiently large, a more creative approach to bank remuneration might be needed.

Finally, Robin, if you were to predict the liquidity management solutions in say three years time, what would you say would be different from today?

Greater automation is a given but also less of a lottery when it comes to the outcome. We worry a great deal about the process of liquidity management but the only thing which really matters is the outcome. The treasurer should know the worst case scenario he/she will earn and/or be charged X on credit and/or debit positions and this should be a predictable outcome rather than the uncertainty which exists today.

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