Features : Market Forces
TREASURY & CASH MANAGEMENT / LIQUIDITY MANAGEMENT
Global banks are devising innovative solutions to help multinationals marshal their cash reserves.


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Deutsche Bank’s Lisa
Rossi

As globalization casts its net ever wider, the multinationals flocking to developing countries are finding themselves enmeshed in a complex web of legal and regulatory requirements that hinder their movement of capital—and, hence, their ability to do business. Local currency restrictions, such as those in place in India, for example, can force companies to leave revenues sitting idle in local bank accounts. Faced with such bottlenecks in their cash management processes, corporate treasurers are increasingly demanding greater flexibility when it comes to mobilizing their cash.

Perhaps not surprisingly, multinationals looking for growth outside their core domestic markets are finding cash and liquidity management practices accepted in one country do not automatically apply in another. French telecommunications provider Alcatel has centralized its treasury management for greater efficiency and has cash pools including pan-European pooling of domestic euro balances. However, Baudouin Courau, director of corporate finance and treasury, says these kinds of liquidity management structures are not possible in a lot of places, particularly Asia.

Banks are now stepping up to try to create workable global liquidity management solutions so companies can achieve greater visibility into their payment flows and control demands on liquidity from a single location. Last year ABN AMRO launched its multi-bank cash concentration solution, which enables corporates to automatically sweep local and cross-border third-party balances to a designated ABN AMRO master account. Automatically sweeping funds to a master account and consolidating cash balances enables treasurers to achieve enhanced yields on their surplus cash.

Deutsche Bank also launched a global cash concentration solution, which physically sweeps US dollar and euro local cash balances to a designated Deutsche Bank account anywhere in the world. Customers can redeploy surplus euro and dollar balances by sweeping them from Asia to Europe, for example. Lisa Rossi, global head of liquidity management at Deutsche Bank Global Transaction Banking, says the bank hopes to add multi-currency capabilities to its global cash concentration solution next year.

Eric Kamback, executive vice president of treasury management services at The Bank of New York, says the banking industry is at a transition point where the value proposition banks offer their corporate customers is changing from one that is transaction-based to one based on balance compensation. “It is about managing liquidity needs as well as balances associated with those transactions and creating the best spreads for customers,” he explains. “The more banks can do that, the more successful they will be themselves in creating new business.”


Physical Barriers
But technology and ingenuity can only achieve so much in the face of local taxation, currency restrictions and the physical impediments that exist when companies operate in multiple markets. Paulo Mueller, corporate treasurer for Logitech International in Switzerland, remarks that in many countries where the banking infrastructure and transaction reporting is less sophisticated it is difficult to acquire the information necessary to manage liquidity on a real-time, let alone global, basis. “Even if we had this information, it would be difficult to cover our overdraft balances in Asia,” he explains. “In China it is almost impossible. Even if I had real-time information every morning on my desk, it would be too late because of cut-off times, so there are physical barriers.”

China is particularly challenging for companies looking to apply Western liquidity management concepts to a market that is not yet fully liberalized. Marlene Wittman, group managing director for Hong Kong-based alternative investments company Aquitaine Investment Advisers, which has been investing in China since 1999, says recent legislation instituted in China governing private equity investments is intentionally vague as the Chinese authorities wanted “trailblazers” to test it. When it comes to moving capital out of China, Wittman says everything is regulated. “You can only get a certain amount of money out of China,” she explains. “Any payment exceeding $100,000 must be approved by SAFE [State Administration for Foreign Exchange].”

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Kamback: Industry is
in transition

Until recently in China corporate treasurers could forget about liquidity management tools such as cross-border notional pooling of surplus cash balances, intercompany loans or sweeping excess cash to an offshore account. China permits onshore bilateral US dollar loans only via an entrustment loan framework, whereby surplus cash is managed in the form of a bank loan from one company entity to another. “Entrustment loans just create fees for the bank in the middle and is just another way of regulating it,“ remarks Wittman.

Ernest Mak, vice president, Bank of America Global Treasury Services, says that progress on foreign currency transfers both within China and overseas has been slower. “When China elected to open its economy, it took the decision to keep capital accounts closed, and this remains largely the picture today,” he writes. “This increasingly creates the problem of ‘trapped cash’ not only for multinationals but also for the ever more globally minded domestic enterprises.”

Changes are afoot, however. The Pudong Nine Measures pilot introduced last year grants qualifying foreign and Chinese multinationals in Shanghai’s Pudong area greater flexibility in terms of their ability to physically pool foreign currency balances between entities using entrustment loans. Mak says the regional headquarters of multinational companies with treasury centers in Pudong can also concentrate foreign currency funds from overseas subsidiaries and SAFE-approved funds from domestic subsidiaries to offshore bank accounts. “Trapped” cash balances can now be lent to overseas subsidiaries or parent companies, he says.

Imagination
However, these measures apply only to qualifying companies—they must have at least three operating entities in China—in the Pudong region, and SAFE authorization is still required for certain transactions. “China is one of the toughest markets at the moment for mobilizing cash,” says Kenneth Vallen, assistant vice president for treasury management services at The Bank of New York. However, he anticipates that demand from multinationals and banks will force Chinese regulators to address companies’ liquidity concerns sooner rather than later.

In the meantime, banks and companies are having to exercise some ingenuity. Even where there are currency restrictions in place, Kamback says it can help companies achieve better yields on their cash balances by notionally pooling them up to a US dollar denomination so they can be invested for value. In China, where FX hedging is restricted, the Bank of New York also offers corporates the ability to hedge their exposures using non-deliverable forwards.

One of the biggest challenges corporate treasurers face is earning greater yields on cash balances, particularly “trapped” cash. Historically, most companies invested excess balances in a bank-sponsored overnight sweep product, says Kamback. “That is now changing,” he notes. Corporates are considering alternative investments, he says, as a means of optimizing yields on their idle cash balances. “It is about re-inventing the wheel in some of the more challenging markets and also educating customers, banks and providers of treasury management services about alternative investments,” he adds.

Truly Global
Global liquidity management is still a relatively immature business. Despite all the technological advances banks may make, “corporate treasurers still have to manage their regional positions,” says Rossi. “That is not going to go away any time soon.” For companies such Alcatel, which has local operations in more than 100 countries, the complexity of doing business is such that the corporate pipe dream of maintaining a single bank account for each currency is unlikely to become a reality any time soon.

Kamback concedes that truly global liquidity management solutions are still a way off. “There are physical barriers, whether it is regulatory, education or a limit to investment products, that have been developed,” he explains. However, he says corporates must also shoulder some of the responsibility: “Corporates are very much siloed in their treasury operations and manage risk and liquidity independently. There needs to be a coming together from an industry standpoint, both from the banks and the corporates, so it is possible to provide true global liquidity management."


Anita Hawser
 

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