Cash & Liquidity Management

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Do You Keep Cash Close to (the Currency) Home? From increased payments and collections efficiency to more controls over exposures, BNP Paribas suggest the value proposition of centralising by currency is particularly compelling, especially when it comes to USD in the United States.

Do You Keep Cash Close to (the Currency) Home?

Do You Keep Cash Close to (the Currency) Home? 

By Amy Goldstein, Managing Director, International Cash and Liquidity Management Sales, BNP Paribas

 
Centralisation has been a key theme in corporate treasury for some years, with many corporations successfully operating regional centres to support particular geographies. Increasingly, however, we see a trend towards centralisation by currency. Corporate treasurers have created account structures to centralise critical balances by currency in the ‘home market’ for that currency. The benefits apply to every currency; however, the value proposition of centralising USD in the United States is often particularly compelling considering its widespread use as an international trading currency and the high volume of cash involved.


The USD imperative

According to estimates by Capital Economics earlier this year, US companies are holding $2.5tr offshore: an increase of nearly 20% over the past two years, and equivalent to nearly 14% of GDP. In addition, non-US headquartered corporations, particularly from Asia, Africa and Latin America, frequently denominate and settle in USD. Given the scale of balances involved, and the ubiquity of the currency for world trade, optimising USD is critical for all companies operating internationally. Comparable value may also exist, for other major currencies such as EUR, GBP and JPY, depending on the materiality of balances and the nature of the organisation’s business model.

 

Keeping close to home

There are a variety of reasons why companies may consider centralising their USD (or other currency) balances in the currency home market. 


Liquidity management 

Looking first at US-headquartered corporations; many larger companies have regional treasury centres to support cash and liquidity management, while activities such as group financing, FX management, investment etc. are more often located at headquarters. As a result, there can be significant benefits to centralising USD in the US: keeping USD cash pools and residual balances close at hand and in the same time zone while benefiting from later cut-off-times to meet investment deadlines. For non-US headquartered corporations there are investment and payment efficiency benefits of centralising USD.


Investments

Having centralised liquidity, investment options are deeper in the currency’s indigenous market, with more access to markets and liquidity. This allows treasurers to meet investment and risk objectives and potentially provide value generation. At the same time, treasurers can manage counterparty risk more precisely by maintaining central visibility and control over exposures.


Payment and collection efficiency

There is also an opportunity to reduce costs of cross-border payments and collections, depending on the company’s supply chain, customer base and where suppliers are located. Cross-border flows are typically more expensive, take longer to settle. As value dating is sometimes unpredictable, companies often need to maintain a higher cash buffer or put in place larger than necessary intra-day overdraft lines. Reconciliation of incoming customer flows can also be more time and labour-intensive as remittance data is frequently omitted or truncated as part of the cross-border payment process. In contrast, by centralising a currency in its home market, the number of cross-border payments and collections can be reduced, allowing companies to leverage local clearing systems that result in reduced costs, improved reconciliation and greater efficiency. 


Managing the pressure

Given the pressure on treasury to ‘do more with less’, centralising funds on a currency basis can be an attractive proposition. Furthermore, the benefits of doing so are not limited to cash, liquidity and investment. For example, treasurers face a range of risk and regulatory challenges, including event risk, such as bank exits from certain product lines or markets. Managing the outcomes of this can be very taxing for corporate treasury and creates business continuity risk. Holding currency nearby at lower costs with access to the depth and breadth of the home market ensures that companies are best positioned to deal with market events. KYC requirements can also be complex and onerous, with differences in requirements between banks and markets, so centralising currencies into a single geographic location and therefore simplifying global account structures can reduce the compliance burden. 

One question, however, is why treasurers have not chosen to centralise cash balances into each currency’s home market in the past. One reason is perhaps that the opportunity to do so has not always been clear. For example, in Europe, while the euro as a single currency has existed since 1999, the Eurozone effectively comprised multiple domestic markets with the same currency until the introduction of SEPA (Single Euro Payments Area). Therefore there were often either actual or perceived market or regulatory barriers to centralisation. Since SEPA payment instruments have replaced most domestic payment types, with a harmonised legal framework, more companies operating in different euro-based countries are now centralising euros into a single location. Although some domestic payment instruments remain and clearing systems in each European country have different characteristics, such as cut off and settlement times, these should not result in treasurers opting to fragment euro cash balances.

 

 

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