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cumulated by lending out unused or unspent capital,
there are concerns that it could create additional
counterparty risk. For instance, institutions will want
full assurances that these loans are fully collateral-
ised and that borrowers are not a counterparty credit
risk.
A not entirely simple undertaking
Establishing an active treasury operation is not
straightforward though. For starters, it needs qual-
ified people at the helm and management commit-
ment. “The greatest challenge is not operational
but more organisational, in that a program like this
requires time and investment so clearly needs senior
management sponsorship. It is really important to
build a credible business case to ensure this is identi-
fied as a strategic priority,” comments Lloyd.
There are other operational constraints too. “The
first challenge is to build a proper cash flow forecast-
ing tool. This tool will be fed by the various middle
and back office systems used by the asset manager
for all event generating cash movements. The second
challenge is to implement a strong risk management
capability that includes a gapping management tool.
This tool will allow the treasurer to assess its gapping
positions and address any shortfalls against its guide-
lines,” comments Dubost of BNP Paribas Securities
Services.
Regulation could also create challenges, adds Du-
bost. “Other constraints relate to adherence with the
fund prospectus and the MMF liquidity ratio. The
Central Securities Depository Regulation brings in
penalties for fails. On the sell-side, the Basel Com-
mission on Banking Supervision 248 Framework
also calls for a tighter use of intraday liquidity. The
current regulatory framework makes monitoring of
cash positions more crucial,” he says.
The way forward
One solution could be to engage with experienced
service providers offering treasury solutions. “Some
managers are investing very heavily into their treas-
ury operations either by developing or licensing the
technology themselves or hiring human manpower.
Others do not have the capabilities to do this so
are more open to outsourcing treasury operations
entirely to third party providers such as ourselves,
who have the technology infrastructure all set-up.
Automation is something that is critical to treasury
management,” says Rathi.
Active management is in a bind and returns are
likely to remain subdued until central banks become
less dovish. While previously managers may have
scoffed at the idea of investing in treasury to deliver
a handful of bps, performance has been so shaky that
many are now open to the idea. As the active funds
industry continues to face pushback from clients
about high fees, the few extra bps offered by treasury
management could help stem that pressure.
Spring 2020
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