IBOR Fallbacks: 7 Questions Corporate Treasurers should ask

Anyone who’s been reading the financial press knows that LIBOR is on the nose. Billions of dollars in fines, sanctions, regulatory action and even jail time have ensured LIBOR has a limited life.

LIQUIDITY INSIGHTS: DEFINING CASH FOR AUSTRALIAN INVESTORS

Defining cash for Australian investors

Aidan Shevlin, CFA
Head of Asia Pacific Liquidity Fund Management
J.P. Morgan Asset Management

The definition of cash, while ostensibly straightforward – banknotes and coins – becomes increasingly challenging when the demands for higher returns counteracts the obligation to ensure adequate liquidity and the commitment to avoid losses.

As memories of the liquidity stress and market dislocation triggered by the global financial crisis faded, the range of financial instruments deemed acceptable in Australian cash products broadened dramatically. This was also a time when investors grappled with the challenges of outperforming attractive headline retail bank deposit rates.

Unfortunately, defining which instruments are truly cash equivalents is one of the most difficult tasks for modern corporate treasurers.

The Regulatory Dilemma

Globally, cash investors look to regulators and rating agencies to define and clarify suitable cash investment instruments and structures.  This is especially true in the United States, European Union, and China, where the size and systemic importance of liquidity and money market funds (MMFs) made this a critical regulatory issue following the 2008 financial crisis.

These rules and regulations vary from prescriptive, listing specific approved and unapproved instruments, to abstract, outlining key sources of investment risk and limits to mitigate them.  Regardless of the regulator’s philosophy, the ultimate goals remain the same – to ensure adequate liquidity and minimise the probability of losses.  Over the past decade, global regulators have strengthened MMF guidelines. They now demand higher levels of liquidity, impose tighter investment limits and require increased diversification.  For both retail and institutional investors, these new rules have raised the standard of MMF investing while significantly reduced the likelihood of funds suffering losses, albeit at the expense of lower potential returns.

In contrast to detailed global standards, Australian regulators have historically demurred the responsibility to define cash or the suitability of various instruments for cash investments.  The Federal government’s unlimited bank guarantee during the Global Financial Crisis helped shelter the local financial industry while a long history of self-regulation encouraged investors to create their own definitions of cash and cash equivalents.

However, in 2018, a review of cash investment products by the Australian Prudential Regulation Authority (APRA) raised significant concerns about the level of volatility and risk in these products.  Across the industry, the range of instruments and structures defined as cash varied enormously – as did returns. This created confusion for retail and institutional investors.  In its subsequent report, APRA highlighted “examples in the industry where cash investment options appear to include exposure to underlying investments that would not generally be considered cash or cash-like in nature”1.

To encourage investment consistency and reduce the volatility of cash investment products, APRA concluded that “cash equivalents represent short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value”1

Cash means security, liquidity and return

The report signalled a tougher regulatory stance and additional focus on questionable cash investments styles.  However, in the absence of detailed regulatory guidelines and exact definition of liquidity and risk, investor due diligence is still required to balance the need to preserving capital, while ensuring suitable levels of liquidity and maximising returns.

Three key steps in this process involve clarifying investment policies, creating well defined investment objectives and implementing cash segmentation.

Firstly, using an investment policy statement forms a solid foundation for cash investment decisions.  A well written policy provides clarity, instils discipline and allows the organisation to successfully navigate shifting markets, changing regulations and evolving business needs.

Secondly, by defining short term investment objectives and the strategies for achieving them, an organisation can establish acceptable levels of risk, identify permissible investments and detail relevant constraints.

Finally, by putting cash into different segments, the organisation can optimise its investment choices – ensuring it has sufficient liquid cash to meet its daily needs while avoiding the opportunity costs associated with very high levels of liquidity and principal protection by diversifying across different types of cash investment depending on their level of liquidity, volatility, and diversification.

In Conclusion

The new APRA definition of cash has already prompted a significant reorganisation across the Australian cash management industry with several instrument structures being avoided and more conservative investment guidelines introduced.  This, combined with more due diligence and understanding of the underlying risks by retail and institutional investors, should help the industry create a safer foundation for future growth.

To read more our liquidity insights, visit www.jpmgloballiquidity.com

  1. CASH INVESTMENT OPTIONS’ NON-CASH HOLDINGS: INDUSTRY GUIDANCE

Agile Treasury Thought Leadership Series – Empower and Scale

Agile Treasury Thought Leadership Series – Empower and Scale

Systems should empower people to effectively perform clearly defined processes, which means that time spent innovating and making valuable strategic decisions is maximised.

Designing a system can only be best achieved once the process the system is meant to empower is first designed. Ideally, the process will also be developed, implemented and operated for a period in a fast, flexible solution (Excel!) to refine the steps, calculations and clear actionable outputs.

Common Shortfalls

• Expensive, committed technology licenses
• Highly fragmented system data and multiple sources of truth
• Lack of process planning prior to technology commitment
• Extended implementation and training
• Lack of technology flexibility as strategic requirements change
• Lack of dataflow alignment to processes and policies
• Lack of prescriptive or clear calls to action from workflow output

Solutions
• RFP management should an advanced system still be deemed valuable
• Strategic and holistic construction of low-cost, flexible operating tools in Excel
• Implementation and training on new system
• Integrated solutions for the identification, measurement, management and monitoring of risks

Download a copy of the case study prepared by Rochford Group on a global pharmaceutical distributor.

This case study has been developed by Rochford Group

Rethinking Treasury by HSBC

How CFOs and corporate treasurers are rising to the risk management challenge

The HSBC Risk Management Survey findings highlight a number of themes that are likely to reshape and strengthen the relationship between the CFO and treasurer in the future.

  1. CFOs expect their treasurer to react to more risks in a faster and more efficient way
  2. Treasurers need to view the world through an increasingly strategic lens.
  3. Rethinking the role of the treasury is likely linked to further digital transformation.

Get ready for the global IBOR transition

Get ready for the global IBOR transition

Have you met SONIA? Financial institutions are beginning to plan for the transition away from traditional IBORs, a change described as one of the biggest to ever occur to financial markets.

In December last year, Commonwealth Bank of Australia (“CBA”) did something that no other Australian bank had done before. It issued an Australian-origin transaction with a reference rate that was not an interbank offered rate (“IBOR”). The CBA transaction (GBP125 million of one year notes) referenced a margin of 40 basis points over the Sterling Overnight Index Average (“SONIA”), the interest rate benchmark being primed to take over from the London Inter-bank Offered Rate (“LIBOR”).

Download a copy of the full Treasury Trends article by Barrington Treasury Services.

This piece has been developed by Barrington Treasury Services.

The Women in Treasury Global Study 2019


The Women in Treasury Global Study 2019

Treasury Today’s global Women in Treasury initiative recognises the importance of women in the corporate treasury profession and creates a means for women in treasury to communicate with one another; learn from each other and network in order to help each other. Whilst the treasury profession remains largely male-dominated, there are remarkable women enjoying remarkable careers.

Women need to be much more visible in their roles, both inside and outside of their organisation. While women can hesitate to promote themselves, this initiative aims to help bridge the gap.

Treasury Today run an annual global study of women working in the treasury profession to build up a picture of the profiles and careers of women from junior roles to Group Treasurer/Financial Director/CFO positions. The study is now open and we strongly encourage you to participate and make a difference!

Exchange April 2019

The April Exchange Newsletter is out now! The newsletter covers upcoming CPD events including the Treasury Management Course and Fundamentals, and more!

Agile Treasury Thought Leadership Series

Agile Treasury Thought Leadership Series


People should be empowered to innovate and perform critical decision making, which means they are driving long-term strategies that maximise enterprise value.

Any agile treasury process needs to be designed from a holistic stakeholder perspective. This means lateral input across a senior level, but also, critically, horizontal input from key operational staff through to the CFO and the Board. This is especially true for global entities with staff in diverse time zones or who maintain relatively low interaction with head office.

Common Shortfalls
– Lack of time
– Skills or experience gap
– Competing or uncertain strategic agendas
– Team size limitations
– Excessive key-man risk
– Lack of KPI alignment to commercial & risk management objectives

Solutions
– Consultation with stakeholders
– Ongoing experienced strategic and operational support
– Event driven strategic advice and management
– Upskilling internal personnel
– Align individual’s performance assessment/awards to relevant KPIs

Download a copy of the case study prepared by Rochford Group on how they identified, designed and implemented an interim and long-term solution for a client.

This case study has been developed by Rochford Group

EACT Briefing Focus: KYC

EACT Briefing Focus: KYC

KYC has become a serious concern for many corporate treasurers over recent years: it is increasingly complex to fulfill all unstructured requests. In all recent surveys conducted by the EACT, KYC is listed as a top priority for corporates and its rising costs are a source of frustration as KYC consumes lots of time, resources and money. Central KYC registers or solutions would create significant savings.

Exchange March 2019

The March Exchange Newsletter is out now! The newsletter covers upcoming CPD events including Essential Treasurer and Fundamentals, and a blog post from our WA Chapter Chair sharing tips for the modern treasurer.