Innovative plug-and-play technology is helping treasury departments adapt to higher interest rates, ESG strategies and changing regulations, thereby reducing risk and optimising liquidity, writes Ed Lopez
We’ve moved into an environment not seen for at least 15 years – rising interest rates. And no one knows how long we will be here or how high they will go. Add in many companies’ drive to embed environmental and social concerns and good governance across their organisation, not to mention the ever-present prospect of new regulation, and there’s a lot for treasury departments to contend with right now.
Indeed, in this year’s TMI Calastone Global Liquidity Barometer, 54 per cent of treasurers said interest rates were their number one concern when it comes to short-term investments. Inflation was second, at 39 per cent.
All this raises many questions for treasury departments, whose job it is to offset interest-rate expenses with interest-rate income. If they lock in to deals now, will higher rates down the line make these deals look poor value? Can they contribute to the company’s ESG targets by investing excess cash short-term in ESG-related funds? And how might proposed new regulations in the US and Europe affect their liquidity options?
I discussed all this with Benjamin Defays, former treasurer and order-to-cash senior manager of Koch Engineered Solutions, Jeannot Jonas, former assistant treasurer in cash and capital markets at Carrier Global, and Jim Fuell, who heads global liquidity sales at JP Morgan Asset Management. The discussion was hosted by Treasury Management International (TMI).
A new interest-rate environment
Many working in treasury departments won’t have any experience of rising interest rates. The knee-jerk reaction may well be to lock in to a deal now. But is this the right thing to do?
Ben Defays was clear it is not. “As a general rule, increase liquidity in periods of uncertainty and build in flexibility,” he said. He recommended having a good forecasting process that allows you to know how much excess cash you may have, where and until when you can invest it. Where you can invest it may include hitherto overlooked opportunities beyond institutional money market funds, such as paying back debt early.
To do this effectively, you need transparency and data. This is where innovative technology can come in, providing the links via APIs to funnel the right data, such as interest rate, revenue and payment forecasts. That way, treasurers can make informed decisions in good time.
ESG in the treasury
As in most areas of business, ESG is moving up the treasury agenda. But there’s a paradox. ESG investing is seen as longer-term; treasury investing, by its nature, is very short-term. In addition, ESG investments may deliver lower returns. Even so, our report found that 37 per cent plan to invest in green or sustainable deposits in the coming year and 32 per cent are looking to use ESG-compliant money management systems. (View this full report here)
According to Jim Fuell, a treasury department investing along ESG lines won’t drive the company’s overall strategy, but “it can look at what an asset manager is doing with cash and certainly place money with firms promoting ESG”.
Again, being able to do so comes down to having access to the right data so treasury can make the right decisions swiftly. Having said that, the scope here is not big enough on its own to be a driver of technology investment. Rather, it’s likely to play a supporting role, helping to build a robust case for those looking to increase their tech capabilities.
Regulatory change
Although regulation dropped out of the top three challenges for treasury departments in our survey, it remains a concern. And rightly so. Even if current proposals to change regulations regarding short-term money market funds aren’t adopted, that doesn’t mean to say there won’t be change down the line. As Jeannot Jonas said: “Regulatory change is a concern. We don’t have a crystal ball.”
Those that have treasury management systems that can pull together data from across the portfolio will be able to adapt reporting easily, swiftly and at low cost, whenever change occurs. This cuts risk and makes compliance far easier. However, not all are aware of such technology or how easy it can be to implement.
Get with the programme
It’s not just the interest-rate environment, ESG influence and regulations that are changing: so too is the power of innovative technology. APIs make linking to new data sources quick and easy. And it’s already happening. As Jim said: “In the past week I’ve used terms like APIs, TMS integration, open architecture. It’s a new language for us. Asset managers are getting used to treasurers’ needs. If they can’t get their head round that… their time in this space is going to be short-lived. They’ve got to get with the programme as that’s what treasury is looking for.”
Key takeaways for treasurers
Jim: Stay awake, stay alert and stay abreast of change. You don’t necessarily need to do anything, but be aware.
Jeannot: Revise your short-term investment policy to ensure it’s adapted to the new environment. Work with the likes of Ed and Jim (technology providers and asset managers) so all stakeholders collaborate to achieve the best short-term investment outcomes.
Ben: Attend conferences and webinars. The knowledge they provide will contribute to your running a centre of excellence in your treasury team. And be a disruptor.
Ed: Be aware of the options and services available in the marketplace. Don’t assume things can’t be made better easily or only at vast expense. Automate and plug-and-play, co-operate. Move to tech now in these volatile times.
