The role of Treasury in Portfolio Management (Part II)

by Leonardo Orlando

Last time we explained how Treasury role can become crucial in the portfolio management, highlighting the four main pillars where it can provide its value:

  1. A.      Business Decision Making Support
  2. B.      Liquidity & Funding Optimisation
  3. C.      Asset & Liability Management Optimisation
  4. D.      Capital Management Optimisation

This article will focus on pillar B – Liquidity & Funding Optimisation. As part of its core function, Treasury needs to optimise liquidity and funding, the final goal being the creation of an operating model where Business is funded at a competitive price and the liquidity buffer is kept at its lowest regulatory based level.

In the previous article we defined four main targets, which I would like to deep dive into:

  • Minimise funding excess
  • Ensure that Treasury has access to the data required to optimise funding strategy
  • Optimise the operating model for repo funding
  • Optimise the size of the liquidity pool

Minimise funding excess: in Financial Services it is crucial to have a right level of liquidity to fund Business but without exceeding on external funding. Treasury need to ensure that all Business Divisions have access to the planned level of liquidity, originating the predefined level of debt with Third Parties. The following golden rules need to be followed:

  1. Optimise intercompany funding to reduce external funding
  2. Ensure a contingency funding plan to minimise operational risk
  3. Use the “right” mix of short and long term debt
  4. Use the “right” mix of debt and equity
  5. Assess the right level of liquidity required by Business

Ensure that Treasury has access to the data required to optimise funding strategy: Treasury needs consistent and granular information to perform an accurate liquidity forecasting, put in place an effective liquidity transfer pricing model and monitor balance sheet effectiveness.  The following golden rules need to be followed:

  1. Data structure should be consistent across Front Office, Finance, Treasury and Risk Management
  2. Market data should be available to Treasury, in order to make the proper liquidity risk analysis
  3. A structured reporting process should ensure the possibility to roll-up and roll-down information, without discrepancies among different reporting layers (due to manual adjustments)

Optimise the operating model for repo funding: One of the most used tools from Treasury to balance liquidity needs is represented by repurchase agreements, where Treasury can adjust its short/long term position buying/selling spot securities and selling/buying forward. The following golden rules need to be followed:

  1. Repo transactions need to be used to optimise cash management and fill liquidity gap
  2. Repo transactions timeline needs to be aligned to liquidity exposure
  3. Underlying securities need to be low risk profile

Optimise the size of the liquidity pool: Treasury needs to face to liquidity needs, fund Business in an efficient manner and reduce the cost/opportunity to have a liquidity buffer higher than required. The following golden rules need to be followed:

  1. High liquid assets need to cover expected and unexpected cash out flow in the upcoming 30 days
  2. Liquidity buffer need to be constantly kept between 1 and 1.5 times the mandatory buffer
  3. Liquidity check needs to be performed at least 3 times per day (as per Tokyo, UK, New York Market closure)
  4. A liquidity contingency plan needs to be structured

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