As rising inflation, monetary policy change and other uncertainties threaten, corporate investors are looking for real-time data-driven solutions to help manage their financial resources, especially in the fast-moving world of cash management, writes Ed Lopez, Chief Revenue Officer, Calastone.
There can be no doubt that the first question on every treasurer’s mind is what is likely to happen to monetary policy over the coming year. We are in for change – but what kind? In a recent webinar we discussed this with Tim Broadly, who runs Mosaic, Goldman Sachs’ liquidity management platform, and Pat O’Callaghan, Goldman’s head of client portfolio management for liquidity solutions.
The financial environment has changed in many ways since the global financial crisis, but O’Callaghan, who tracks everything monetary for Goldman Sachs, pointed out that there are still parallels to be drawn between today and the world of 2008/9. One is that we are again in a zero interest-rate environment and another is that the Fed has responded to the pandemic by bringing back some of the emergency facilities it pioneered in the wake of the credit crisis. There have been some new pro-liquidity facilities as well.
“I think the big difference in asset purchases is the scale and the pacing of the programme. If you go back to the years 2009 to 2014, when quantitative easing was wound down, the Fed balance sheet had gone up to about $4.5 trillion. But today we are going to end up with a Fed balance sheet north of $9 trillion. That is an incredible amount of liquidity, and at an incredible pace. On top of that the Fed reintroduced the money market liquidity facility, plus new facilities, and they did this very quickly because they had recent institutional memory of how volatile things could become,” says O’Callaghan.
How did corporates and their treasuries react to the pandemic and the central bank intervention in its wake? Mainly by ditching short-term investments such as government securities and prime money market funds in favour of low-risk cash. This in turn forced the Fed to pump liquidity into the markets through bond and other asset purchases, resulting in that $9 trillion asset balance sheet.
The question for corporate treasurers now is what kind of asset rotation will we see as interest rates start to rise?
“I expect a little more focus on near-term incremental return,” O’Callaghan says. He also points out that Fed innovations like the reverse repo facility, which allows companies to loan short-term cash to the central bank, has become an important part of short-term cash investment strategy for many corporates. This follows the decision to greatly reduce their reliance on prime money market funds.
Treasury technology should be as simple as the click of a button
We then discussed how Goldman Sachs sees the evolution of treasury and transaction technology in such exceptional and potentially volatile times. Tim Broadly is in charge of Goldman’s Mosaic investment platform, so we discussed whether he expects permanent changes in the way clients see technology as an important tool in cash management.
He notes that the move to remote working during the pandemic has led corporate treasuries to reconsider their mode of operations. Paper based or manual processes are no longer practical in an era of working from home and cybersecurity is also a concern. This means that clients who traditionally didn’t think in terms of technology solutions suddenly saw their use. Now that remote working has become normalised, processes are being automated even in areas where technology was previously considered inappropriate, such as on-boarding.
“Certainly, we can automate a lot,” Broadly says. “But with any process, whether it is settlement, reporting or trading, the key is always to understand the needs of the client, understand their own set-up, ask who is the counterparty, what is the region, what are the cut-off times and the currencies. The devil is in the detail.”
This aligns with my conversations with industry practitioners over the last year. It’s clear investors want a digital investment process that integrates with their treasury systems. Ultimately, treasurers want to get rid of repetitive, high-volume and low-value tasks while reducing risks and costs. In short, they want to make the treasury more strategic.
For this reason, we at Calastone are focused on removing frictions from the short term investment process. In doing so have enabled treasurers – and the fund providers and portals who serve them – to find new ways to create a more consumer-like experience with functionality driven by a single click. For instance, as a treasurer, would you like to trade, settle and update your treasury system with just one click of a button?
Interest rates and more…
During the webinar we also discussed the markets and specifically interest rates, we covered how treasury managers might end up being affected by the interplay of new variants of coronavirus, which may or may not take hold, and tightening of monetary policy that may or may not play out as expected. These are clearly questions with no certain answers, yet treasurers have to prepare for them nevertheless.
“Everything is very fluid,” says O’Callaghan. “That is why it is so important to leverage your partnership with asset management and technology providers. As the situation is likely to change quickly, there could be fast-moving impacts on your cash, where your cash is and how markets are likely to react. So you have to make sure you have access to the right tools to track performance, make sure you have the connectivity you need to act quickly.”
In this era of uncertainty, should treasury managers consider integrating digital asset classes using blockchain technology into their offerings? If so, should they be thinking of working with proven partners, or even develop capabilities entirely in-house?
Find ways to become resilient to future shocks
Broadly notes that interest in blockchain-enabled asset classes has picked up pace in the past 18 months. “It’s still baby steps, but getting bigger. The key thing is that blockchain has to bring efficiencies, and it has to be scalable. It has to enhance the day-to-day for the client.
“But if we talk about technology in general, I think there is a change related to the users of technology. Because today the investor is the same user who at the weekends is using an app, whether it’s the bank or whether it’s shopping. They are accustomed to cutting-edge technology in their personal life and they will expect to use the same technology in their business.”
These are all good points. The change in working patterns enforced by the pandemic has accelerated technology adoption and we are looking at a liquidity landscape that is once again changing fast. While we all hope to transition out of the worst of the pandemic and work in a more normal fashion, we still have to be ready for shocks. That means leveraging your partnerships, using their expertise and always being ready for the unexpected.