The financial crisis exposed the inadequacies of industry-wide cash management operations, making the case for intra-day cash management ever-more compelling. In this round table, a range of senior industry executives discuss the challenges of shifting to a new operational model. Writer Michelle Price

The challenges surrounding cash and liquidity management are attracting considerable attention from regulators globally: from the UK Financial Services Authority's (FSA's) strengthening liquidity risk standards regime to the Basel Committee's revamp of Basel II, the proper way in which to manage, move and allocate cash and liquidity within financial institutions is a hot topic.

This has major implications for the monitoring and accuracy of intra-day cash positions: in the absence of hard and fast data, many large financial institutions rely on internal projections to square off their end-of-day positions. Few institutions use automated intra-day confirmations or automated sweeping to ensure the accuracy and completeness of their cash position. As such, poor cash management can cost institutions between $10m to $20m a year in fees and lost or incurred interest, according to some estimates, to say nothing of the rising regulatory risk.

As the long arm of the regulator reaches ever deeper in to day-to-day banking operations, extending to the inspection of institutions' daily cash positions, the case for moving to an automated intra-day cash and liquidity management operational model becomes increasingly compelling. But to what extent are financial institutions embracing intra-day cash and liquidity management, and what are the challenges in moving to the intra-day operating model? What is the true extent of the problem and are bank boards providing adequate leadership on this issue?

At a lunchtime round table, hosted by FT Business Events in conjunction with The Banker and sponsored by transaction lifecycle management specialist SmartStream Technologies, a broad range of senior executives, including senior treasurers, heads of securities services businesses and global heads of collateral management, discussed these and other pressing questions on the condition of anonymity. Michelle Price, business editor of The Banker, chaired the discussion.

The state of play

Among a number of participating institutions, the operational challenges relating to liquidity and cash management were revealed to be acute. At the height of the crisis in the final quarter of 2008, these shortcomings became painfully obvious, said one head of funding and liquidity of a major US bank: "You have to be able to forecast, measure, stress and report [on your liquidity position] which, speaking from my own bank's experience, was definitely lacking: we did not have the ability to do [this] and we were very reliant on clearers telling us what we were doing," she said, adding: "To a certain extent, we are still not quite there yet. It will probably take until towards the middle of 2010 before we have systems in place to do that for us."

The problem also prevails among custodians and securities services providers. According to one head of securities services at a major European bank, the past 12 months have brought a surge in client demand for reports on liquidity and cash exposures. Depending on the client, this can prove a challenge, he explained: "Many of our clients are asset managers and they will have a view on their cash. Actually, when you really start to dig in to try to give them some sensible, structured cash-projection reporting, you quite often find that the bank position is a completely different picture and not where [the client] expected it to be. Pulling enough data together to be able to feed that level of information back to our clients is always a challenge because you are dealing with, in our case, a huge range of instruments."

Participants agreed that there is an urgent need to address the situation. As one global head of collateral management at a European bank said: "I fully agree that the necessity for accurate cash management is absolutely there from two perspectives: from the control on counterparty risk management on the one hand, and from [a] cost [perspective] on the other hand." But does the urgency derive from regulatory pressure alone? According to many participants, the urgency is as much cyclical as it is regulatory. The industry has a limited window of opportunity in which to make the necessary changes before the next credit cycle ramps up and interest rate pressure reveals the true cost of poor cash management, said several participants. "When the market starts to recover and we start to see decent, positive yield curves, and investment opportunities are out there, that is when we will start to have very hard conversations at board level in terms of how much this is really costing," said one senior liquidity manager.

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Phil Cantor, senior product manager for strategy and product management at SmartStream

A positive shift

At board level there are already positive signs. Increasingly, bank boards are implementing new reporting structures to ensure a constructive dialogue with subsidiary functions, participants revealed, particularly among US financial institutions. As one treasurer said: "I am part of a weekly risk meeting which discusses market and credit risk and all of the other operational risks we have in the organisation, including liquidity risk. This reports through on a weekly basis to the management committee and the board of directors of our European entities. That has been there for some time, but clearly post-crisis the treasurer has much more of a seat at the table."

Elsewhere in Europe, the FSA's new liquidity regime is forcing the board to sit up and take notice, said one senior manager of a major UK bank. "Clearly the boards are taking an interest in this post-crisis, but the FSA is obliging them to. We will have to produce liquidity policies and liquidity plans which have to be signed off by the board under the new regulation," he explained.

In several institutions, this dialogue is resulting in positive operational change. One US institution has already seen a major transformation. "Focusing on liquidity management has always been very high up on the radar screen. However, when it comes down to the real details as to what our intra-day exposures look like, [that is] now very much at the forefront," said the bank's treasurer. "A lot of the conversations I am now having internally are around these sorts of issues and making sure that we have the technology and the controls in place, [and] the monitoring so that we understand what we are seeing. The change has been dramatic," he said.

Noting a similar shift in her own institution, a banker from a US institution added: "Treasury, cash management and operations were kind of at the bottom of the list of priorities and we have now suddenly grown in numbers, budget and technology spend. It is one of the groups that the business has to come to first in order to understand what their trading or new business initiatives are going to mean in terms of liquidity and contingent liquidity charges. There has been a very big sea change [and] I see more of that happening."

A technical problem?

To what extent can the operational challenges relating to liquidity risk and cash management be successfully addressed by technology alone? Participants were divided on this question. In banks where major technology investment has proved ongoing, the value of further technology changes were questioned. For those institutions nursing post-crisis merger and acquisition integration, however, getting the technology right is crucial. And for other institutions, improving technology controls will be vital in allowing the bank to scale up in line with the next upswing in the markets, as one senior manager at a European bank explained: "Speed is a factor that I would like to see us [improve]. It is very apparent that the [manual data collection] in our organisation is working harder, so some of the need for speedier delivery of information is being overcome with plain muscle."

While regulatory pressure has released funding for technology investment in many institutions, the real driver and derived benefit relates to cost, said one business technologist at a major US bank that is due to begin work on a transformative technology overhaul. The project, he explained, has been prompted by the additional operational effort that has resulted from new controls and due-diligence processes. "When you look at the additional cost of that, suddenly the benefit of technology can completely eliminate that operational cost," he said. "Our technology programme has been driven by an objective to almost completely eliminate operational effort through a next generation of joined-up systems," he added. For the bank, this means consolidating disparate applications on a single cohesive platform, in order to accommodate increasing complexity, growing volumes and provide customisation, he explained. "The opportunity for us to eliminate some of the additional bureaucracy that comes hand in hand with some of the regulation, trying to pre-empt some of that is a big driver behind what we are trying to do."

As Phil Cantor, senior product manager for strategy and product management at SmartStream, said it is evident that the industry has been active in addressing some of the challenges outlined. "But it is perhaps difficult to distinguish activity from progress," he said. The march of progress, however, may take some time to show itself.

The issues

- the present state of cash management

- the challenges in moving to an intra-day model

- the level of leadership provided by the board

- the importance of technology change

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