Considerations for the treasury function including digital money and ESG

liquidity expert Nick Jepson
Pete McIntyre, the liquidity expert

Written by Pete McIntyre

April 27, 2022

Nick Jepson, chief client officer at Planixs, discusses managing the flock of black swan risks and using digital tools to prepare for the future

As Europe and North America move towards a post-pandemic world, liquidity remains important. The second black swan event in two years, in the form of Russia’s invasion of Ukraine, has reinforced the need for treasurers to have a good overview over their cashflow. Corporates and banking firms need to be quick in identifying exposures that have been affected by sanctions or market volatility.

Nick Jepson, our chief client officer, discusses the importance of digitalising data collection to improve those capabilities and preparing the treasury function to take advantage of emerging trends.

What impact has the war in Ukraine had on the priorities of the treasury function?

Is cash still king? Cash still is king, unless its Ruble, but you also need to understand your entire securities portfolio so that you can have a real-time comprehensive view of your total available liquidity and its current monetizable value.

Location, location, location. Knowing where your liquidity is, and how readily you can move it to where it is needed, exponentially increases the complexity of data insights that a treasury function needs.

People are now starting to find value in safe havens, if any can be found in the current market. Partly due to sanctions and also considering politically-motivated factors, it will be a further challenge for treasurers to model and apply stress scenarios related to liquidity availability and latency as well as counterparty and country risk. Of course these scenarios are significantly more complex than those required in current standard BCBS reporting; so it is reasonable to expect these scenarios to be added in the next few years.

Treasury now needs to be treated in a similar way to many of the other front office functions. It needs to be far more visible to the CFO than would historically have been the case.

How important is it to move towards intra-day and real time visibility of accounts?

Treasury has become much more front of mind in terms of business governance. As we have seen over recent years, liquidity can preserve a business, but not knowing where your liquidity is could kill it. Managing through volatile times from a liquidity perspective has become increasingly challenging.

I don’t think many people prior to 2007 understood how important intraday liquidity could be; it’s moved on significantly since that point. It’s now a case of expecting intraday and encouraging people to operate on a real time basis.

Consider a situation where there is a sizable outflow in the final few minutes of the day and what it can say about the control and capabilities of a treasury function. Real-time insight can give as much focus as possible on addressing unexpected movements and reacting to them; allowing you to present a controlled end of day position. Now consider that situation with T+1 visibility, or even hourly updates.

Real-time capabilities supported by an agile, responsive operating model can demonstrate to the regulators that a treasurer is adequately in control, which can have a positive impact on their Pillar 2 capital requirements.

What would you say to those in the process of digitalisation?

There is no global standard format for cash and security information. Every organisation that wants to synthesise multiple sources with different formats and different update frequencies will face substantial challenges. Many organisations that have achieved a consolidated view have focused on a limited number of data attributes to reduce complexity. Regardless, the IT and Operational challenges are substantial and should be undertaken in response to a clear view on the strategic objectives and the information needed to feed the target operating model.

Leading software solutions have flexibility designed into them to allow additional data sources to be “plugged in” easily. Planixs’ solution supports a range of standard digital and manual inputs to speed up the implementation process.

Treasurers must ensure they have appropriate control mechanisms. When capturing any activity, you need appropriate governance to make sure it is checked before it’s committed and used as part of your considerations regarding positions, and any regulatory reporting you might be doing.

How will central bank digital currencies (CBDCs) and cryptoassets affect treasury?

CBDCs and crypto markets are going to mature rapidly. The technology underpinning them will develop significantly faster than the average treasury IT department can keep up with. The important thing is to start planning early.

Treasury managers also need to work out what they can strategically gain from early support for CBDC’s and cryptosassets. Organisations and regulators may take differing views depending on their appetite for these products. But ultimately, there may not be a choice. CBDCs are going to be, in our view, a key enabler as organisations continue to move towards a ‘follow the sun’ low latency liquidity model.

Planixs’ teams are already in advanced discussions with current clients, FMIs and regulators about how to incorporate CBDCs and crypto into our understanding of liquidity.

What impact will ESG initiatives have on the function?

Over the last 18 months, visibility and importance of ESG has taken a big step forward following the recommendation paper from the Financial Stability Board’s (FSB) Task Force on Climate Related Disclosures (TCFD). This paper has led to several countries including ESG consideration in financial reporting and investment decisions.

This is another data dimension that needs to be captured, controlled and modelled. It would not surprise me if, over the next few years, some jurisdictions prioritise ESG investment. A couple of years ago, we saw a similar trend in the divestment of firearms and tobacco. Further it could conceivably impact the class of HQLA based on an assessment of the ESG credentials of a bond.

What is one thing you would like to see treasurers do this year?

I would encourage them to consider current and strategic capabilities.

Are they able to see liquidity information in real-time? If not, then they should consider building an investment case to achieve real-time for as much as possible of their portfolio. This will allow treasurers to take a liquidity-based view of information and then join it with insights from other areas.

Are they already real-time? Then consider CBDCs, ESG and stress modelling. Ideally, they should also be able to use credit risk information to give them interesting insights about the appetite to invest in certain business sectors. Treasurers tend to only look at liquidity information; combining real-time liquidity data with other data from across the business can provide really powerful insights.

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