a global view of cash investment - hsbc

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MONEY MARKET FUNDS 2014

T reasurers around the world are approaching a watershed inthe way that they formulate cash investment policies andprocesses. Persistently low interest rates, local and global

regulatory and market developments, and changing global cash andliquidity management needs, are placing ever-increasing demands ontreasurers. While security and availability of cash will continue to bekey investment priorities for corporations, the ways in whichtreasurers will manage these priorities in the future will undoubtedlychange. Consequently, treasurers need to keep informed of global,regional and local investment trends and opportunities, and maintaintheir investment policies and processes accordingly, in partnershipwith a trusted asset management partner.

Diverse investment influencesThere is inevitably no single factor that is driving change in the cashinvestment environment; furthermore, these differ within each region andindeed within individual markets:

Globally, as banks progress in their implementation of Basel IIIbefore the 2019 deadline, their appetite for different types and tenorsof investments will change. This is leading to the emergence of newinvestment products and more competitive rates for instruments thatmeet banks’ capital and liquidity requirements. Consequently,investment solutions that may be considered less attractive todaymay become more compelling and vice versa – indeed there is

A Global View of CashInvestmentby Nick Jones, Head of Treasury Business Development, Institutional UK HSBC Global AssetManagement, and Hugo Parry-Wingfield, Senior Liquidity Product Specialist, HSBC Global Asset Management

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potential for a disconnect between acompany’s need for short-term options toinvest surplus cash and a bank’s need forlonger-term stable funding.

In addition to Basel III, the developmentof bank recovery and resolution regimes(such as the Dodd-Frank Act in the UnitedStates, and the Recovery and ResolutionDirective in Europe - which comes into forcein early 2015) means it is no longer sensibleto factor in the concept that a bank is ‘toobig to fail’.

Bank RegulationsDeveloped market governments appear nolonger willing to accept putting tax payermoney at risk, and whilst arguably theprobability of bank default has reduced sincethe crisis, the size of loss given a defaultrisks rising substantially. It is worth notingalso that in some cases a bank’s ratingcurrently includes an implied level of statesupport, which would need to be revisited ifthe potential for that support is explicitlyremoved.

Bank ResolutionIn a world where the concept of ‘too big tofail’ is in question, there are two clearoptions to manage the risk: robust creditanalysis is required to better manage creditrisk; and diversification of issuer risk isrequired to reduce the impact if a defaultoccurs.

MMF RegulationsRegionally, there are further challenges. InEurope and North America, regulatoryreform of money market funds (MMFs) islikely to lead to some changes in thestructure of funds that are used by corporateinvestors, even though there is now someuncertainty about the timing of reforms inEurope since the postponement of recom-mendations by the European Parliament’sEconomic and Monetary Affairs Committee.In addition to regulatory uncertainty,corporate treasurers continue to struggle tofind sufficient repositories for cash thatmeet their investment criteria. Theseinvestment policies have often become morerigorous since the global financial crisis,resulting in a declining pool of appropriate

investments, exacerbated by constrainedmarket liquidity. The prolonged low interestrate environment further aggravates thedilemma for treasurers, as company boardsbecome more focused on investment returnswithout sacrificing security or liquidity.

The MMF industry will continue to playan important role in meeting the needs ofcorporate investors in regions such as NorthAmerica and Europe where these funds arealready well established, even though theremay be changes to the way that these fundsoperate. A key proposal from regulators isthe greater use of variable net asset value(VNAV) funds, which have the potential for asmall degree of volatility in the fund’s yieldas well as the potential removal for a fundsability to pay for the fund to be rated. For

these reasons, investors will need to reviewtheir investment policies and relevantprocesses in order to adapt to the newenvironment.

Managing global cash investmentrequirementsWhere companies have entered newmarkets, for example European or NorthAmerican multinationals developingbusinesses in Asia and elsewhere, much ofthe focus of cash and working capitalmanagement has been on investment in thebusiness. As many companies are nowmoving to a growth stage in these markets,generating healthy cash flows, the treasurerwill pay more attention to managing

Robust credit analysis is required to bettermanage credit risk; and diversification ofissuer risk is required to reduce the impact if adefault occurs.

Nick Jones Head of Treasury Business Development, InstitutionalUK HSBC Global Asset Management

Nick is Head of Sales for the HSBC Liquidity business acrossEMEA and has been working in the treasury and bankingindustry since 1987. Before joining HSBC in 2004, he heldtreasury and cash management related sales positions at Bankof America and the former FleetBoston. Nick holds treasuryand banking related qualifications with the ACT, ACIB and anhonours degree in Economics. He is also a member of thePromotion and Investment Education Committee of theInstitutional Money Market Fund Association.


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surpluses so they are invested in line withcentral or global guidelines that arecomparable with those on the companies’home markets.

In addition to markets where MMFs arealready well-established, MMFs are likely tobecome increasingly important in regionssuch as Asia and Latin America asmultinational corporations seek the samedegree of security, liquidity anddiversification in the investment of surpluscash as that to which they have becomeaccustomed in more mature markets. Thereare some challenges, however, not least dueto the different cultural, market andregulatory environment that exists in eachcountry.

In China, the MMF industry is only 10years old, and comprises two tiers of funds:local funds that are structured in line withlocal custom and regulation and fundsoffered by international asset managers thatare more consistent with MMFs available inEurope and North America. For multinationalcorporations headquartered outside China, itis important that investments comply withglobal investment policies, meaning manyopt for MMFs offered by the maininternational asset managers offering MMFsin China. In China, bank interest is liable toincome tax and the rate paid is regulated,meaning that the returns on MMFs can behigher than traditional bank deposits.

In India, where MMFs have a longer trackrecord, investors are typically moreconservative than in markets such as China,with recent regulatory changes to furthermanage risk, influencing the composition ofMMFs. For example, the maximum tenor ofinstruments held in a MMF is 91 days,compared with 397 days in United Statesand Europe. MMFs play an important role formultinational corporations in particular toensure security and liquidity of cash anddiversification of investment holdings.

In Latin America, in countries such asBrazil and Argentina, we are witnessingincreased interest in MMF investment. As alargely USD-based market, manymultinationals will use global funds;however, as the use of local currencies byforeign multinationals and growing localcompanies increases, local fixed incomeproducts and MMFs are becoming moreattractive. There is significant potential forcompanies headquartered in the region to

take advantage of these products; whilstthere is less familiarity with these solutionscurrently, it is increasing.

Refining policies and processesInvestment in maturing markets may bringsome challenges in that local customs,regulations and investment solutions maydiffer from those in other markets. Inaddition, the use of investment portals(widely used in the US and parts of Europedue to their efficient, straight-throughprocessing of transactions) is less well-established for MMFs in Asia and LatinAmerica. Consequently, treasurers need toensure that policies are being appliedconsistently and that processes demonstratean appropriate degree of efficiency andcontrol. For example, a number of centralisedtreasury centres in Europe and the US, whilstsetting investment guidelines centrally, arestill transacting investments either regionallyvia SSCs (shared service centres) or at thelocal operating company level. This means theneed for visibility and a full audit trail oninvestment and subscription transactions thatcan be monitored from all treasury touch

points across the business has never beenmore important.

Leveraging asset managementexpertiseTreasurers with surplus cash need to keepabreast of changing regulatory and marketconditions, and explore investmentopportunities in markets in which they are,or are becoming, cash-generative. This mayresult in revisions to investment policy toensure that companies are able to takeadvantage of new opportunities as theymaterialise. This can take time, so it isimportant to act now to work with yourglobal asset manager to leverage theirexpertise in credit and risk management,investment management and executionacross their global footprint. This will ensurethat organisations have investment policiesand processes that support changingregulatory and market conditions, and globalliquidity management requirements,therefore avoiding delay in the efficientmanagement of global cash. �

www.globalliquidity.hsbc.com

Hugo Parry-WingfieldSenior Liquidity Product Specialist, HSBC Global AssetManagement

Hugo Parry-Wingfield is the Senior Product Specialist andEMEA Head of Liquidity Product for HSBC Global AssetManagement. Based in the UK, he has responsibility for thedevelopment and implementation of the liquidity productstrategy in EMEA. Hugo joined HSBC Global AssetManagement in August 2013 and has been working in thecash management and liquidity industry for over 15 years. Hejoined from Citibank’s Treasury & Trade Solutions business,where he was Co-Head of EMEA Liquidity & InvestmentProducts and Head of Liquidity Market Management. Prior tothat Hugo held senior liquidity sales, product management andconsultancy positions at JPMorgan and at PwC.Hugo has a Bachelor of Science degree in Business

Administration and Human Psychology from the University ofAston, in Birmingham UK, and holds the UK Association ofCorporate Treasurers’ Certificate in International CashManagement.


a global view of cash investment - hsbc

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