In 2022 the treasury world changed______

Ed Lopez, President, Global Money Market Services

Change is sometimes sudden and far-reaching. The world is now a different place and treasuries need to respond. By Ed Lopez

From low inflation to raging inflation. From predictability to uncertainty. Even from peace to war. This has been the year when the environment for business was reshaped, and not always for the better.

Most years we look back at the previous 12 months and conclude that things are changing, slowly. Not this year.

The dominant theme in 2022 was the seismic shift from low inflation and low interest rates to high and rising rates, and its consequences for cash management, foreign exchange and short-term investing. But there was more: the effect of sustainability thinking on treasury operations; the impact of new technologies that slash risk, create real time trading environments for opaque asset classes (think money market funds); and the prospect of far-reaching regulatory reforms of the short-term money markets.

Inflation and interest rates: The standout question for treasurers is how the high rate environment of 2022 (which many forecast will persist well into 2023) will change their stance on managing cash. With rates much higher, treasurers may be under pressure to diversify their short-term capital into alternative fund types with higher yield. And how wise would that be?

Cash preservation: In our annual TMI Calastone Global Liquidity Barometer survey, 54 per cent of treasurers said interest rates were their number one concern when it comes to short-term investments. Treasurers are under pressure to show they are preserving their cash in a high-inflation environment. Earlier in the year I discussed all this with Benjamin Defays, senior treasury and order-to-cash manager for Koch Engineered Solutions. Defays was keen to stress that the temptation to lock in higher rates with longer-term investments should be treated with caution. “As a general rule, increase liquidity in periods of uncertainty and build in flexibility,” he said.

This was echoed in my discussions with Richard Hallett, head of money markets at Aviva Investors, and Patrick Kunz, chief treasury consultant at Pecunia Treasury & Finance, who had both observed how treasurers across many leading firms were looking at how they could be more responsive to rapidly changing liquidity requirements in an uncertain world. Fundamentally, it’s all about giving your firm a built-in suspension that lets you manage future bumps in the road whenever they arrive.  

“If you have short-term cash, stay with money market funds, so you can get your money back whenever you want it,” said Hallett. “For more strategic cash, think about short-term bond funds, short-duration funds, for as long as we see inflation as high as it is.”

Kunz agreed, adding, “In this situation there’s always this struggle between risk, reward and uncertainty for any treasurer making an investment decision. You always have to ask, what is more important? Is it risk? Is it yield? Or is it even about showing the world how green you are? And can you do all three? I’m not sure you can.”

The world may have changed, but treasurer risk-aversion has not. To Kunz’s point, should treasurers be doing more on the sustainability front? This came up in a webinar I shared with Jim Fuell, who heads global liquidity sales at JP Morgan Asset Management, and he was clear that while it is not the role of treasurers to start driving corporate ESG policy, it is their role to look at their investment providers through a sustainability lens. A treasury department should always “look at what an asset manager is doing with cash and certainly place money with firms promoting ESG”, he said.

One innovative way treasurers could do that is by using tokenised exchange traded funds (ETFs), which may be configured to fulfil any number of strategies, including ESG strategies. This came up in our discussion around the use of ETFs and tokenised funds. The argument put forward from BlackRock was that while such funds are unlikely to be used for daily operations at this time, they may be useful as part of a wider liquidity strategy. For example, ETF assets are usually held in a strategic bucket where there’s an investment horizon of one year or more.

One issue that was on many treasurers’ minds this year was proposed money market fund reform in both the US and Europe. This is still evolving, but it seems likely that whatever the final shape of regulatory reforms, the money market will probably end up having to deliver more rapid price disclosure and more frequent and deeper reporting. And this will call for technology solutions. Without further automation, it is unlikely that funds or counterparties with manual or non-integrated processes will be able to manage the costs of compliance with the new MMF regulatory requirements.

This is a subject always close to our hearts at Calastone, where we strongly believe that integrated treasury technology can drive fund transparency, reduce risks and reduce costs. But technology does not implement itself: it does require some focus. But, that is why you have experienced partners whose focus should be to make any onboarding process seamless, even if this means connecting you to multiple partners simultaneously.

What we know for certain is that while it’s possible to connect a legacy treasury system easily and quickly to another system irrespective of connectivity method. In short, your goal is to be able to set up a connection with any liquidity fund provider, portal and settlement bank you wish using the least amount of effort possible. It’s not to use an API integration, neither should it be iterative or costly.

Calastone’s Jim Griffin, head of US money market services, recently commented on this. “Partnership is key,” he said. “If you want to integrate as fast as possible and get everything up and running, then you need strong partners with the backend technical support that can really communicate with the treasury management system and the corporate treasury team, and become a strategic part of the corporate treasury team.” In this year of change, that’s a goal worth striving for.

Ed Lopez, President, Global Money Market Services

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