Now that the dust has somewhat settled on what felt almost like a “Lehman moment” last month… I thought it might be a good time to reflect on some important lessons learned, and to use these lessons to consider adding Diversification as a new entrant to the Security, Liquidity, Yield (SLY) modus operandi.
I’ll start at the beginning – always a good place. The “old” core mantra for any custodians of cash should always be Security, Liquidity and Yield, in that order. Cash is the lifeblood of an organisation and it’s more important today than ever before that treasurers never lose sight of those three words. One false move and the company could suffer or even cease to exist – it’s that simple.
I feel passionately about this approach to cash management. As somebody who spent an entire city career working in MMFs, I think I’m well positioned to understand how treasurers feel about Security, Liquidity and Yield and that they think about the management of cash in that order. However, there does seem to be a misconception that every instrument they invest in is risk-free, that banks won’t fail, that MMFs won’t break the buck and that everything is always going to be just fine. As a result of this common misconception I regularly hear that “cash isn’t a priority for us at this time, John“, or “we only bank with our core relationship banks and they’re all safe because they’re within our treasury policy, so we don’t need anything else at this time, thank you John”. Does that sound like a familiar thought?
I’m not suggesting that corporates don’t “care” about cash, quite the opposite in fact, but I think there is a notion that their cash is always 100% safe, that it’s fully diversified in mutual funds and that they are somehow immune to market forces that can afflict even the largest financial institutions, like the events in Switzerland. It’s all fine until it’s not and then you hear the stories of anguish and of sleepless nights as they try to work out the full cost of their house bank failing, with all their liquidity tied up in deposits that they couldn’t break – these stories may resonate with you, or at the very least, reflect on the “what if” that happens to you.
No one can be certain of the future. The only thing we can be 100% certain of is that there will be more uncertainty in future. The next existential event a la COVID, Trussenomics or the Russian invasion of Ukraine could be just around the corner and with it who knows what we might see; unsecured depositors or Prime MMF investors losing money is never off the cards.
Throughout my career I have worked with many corporations and financial institutions and to this day I enjoy continuing to do so as Head of Sales at TreasurySpring – and those three words ‘Security, Liquidity and Yield’ are mentioned time and again. I however am now going to ask you to consider adding a new addition to the SLY acronym; one that we all know but perhaps never fully consider as we think we already do it adequately through the use of mutual funds (to some extent you are but only for a maximum of two/three funds before you’re doubling down on the same instruments through a limited pool of eligible assets to buy), and that word is diversification.
Treasury functions are rarely seen as profit centres for businesses. They are not mandated to get the best returns on cash, just a return that makes sense on a risk-adjusted basis. So it would make sound economic sense to accept a slightly lower rate of return for a materially safer group of cash options, in the safest homes available, such as the UK/US or German/French Government or SSA quasi-government securities, for example. These securities allow you to truly diversify your risk by simultaneously decoupling you from the banking sector and investing in materially safer asset classes. Alternatively, if it’s important to feed your relationship banks, then why not consider doing so via the secured repo markets rather than using unsecured deposits. Repo represents a far better efficient use of capital for banks and they’ll thank you for it – a win for all. In fact these securities are the ones used by the largest investment/retail banks and Building Societies Treasury teams to manage their multiple tens of billions of liquidity and one should really consider asking why that is. Why is it that they don’t invest unsecured? Why aren’t they willing to take that risk? Those market participants answered the question a long time ago about investing unsecured, they just don’t, so why should you?
“But ”, I hear you say, “I’d love to invest in direct securities or take security over my cash (who wouldn’t, especially after recent news), but we don’t have the bandwidth, resources, money or even market connectivity to access those cash instruments. How can we short-circuit a three year process?”. Well, the answer is, very easily actually…..
OK, full disclosure now: I am speaking about what we do at TreasurySpring. Although, with such risk out there, it almost feels like a public service to share a smarter and better way to invest excess cash.
Yes, we offer clients unfettered access to the risk-free rate as well as access to the repo market, and yes I think our products are brilliant (of course I do) but actually there is a wider point here, that’s relevant to you whether you’re a start-up, a FTSE100 or a US multinational company. We are offering everyone the ability to access those instruments, using enterprise-level technology to truly diversify, to help to move away from some of the structurally unstable or unsecured instruments that exist within the financial ecosystem that will affect you either directly (if you invest in a defaulting instrument) or indirectly if you’re a tax-payer bailing out a failing institution. It’s also, I think, pretty darn cool to be at the forefront of a proper innovation in the cash markets which have not seen any material change since MMFs were invented in the 1970s.
For those of you who use bank deposits, you may have the misconception that your cash is safe as you’re investing excess balances with your relationship banks, but those existing options are not as safe as you may think they are. Those current strategies were deemed safe by investors across the US and Switzerland, who invested in SVB and Credit Suisse. Clients simply can’t act quickly enough to market forces – had Governments and regulators not stepped in, there would be a lot of very unhappy and bankrupt companies now, who would have lost everything. Check out our CEO, Kevin Cook’s blog here for further thoughts on this as it relates to SVB and the new buzzword… Diversification…
Why not take this opportunity now to really re-reconsider the importance of cash within the business, open your mind to the risks that exist and gain the ability through TreasurySpring’s platform to apportion some of your liquidity to invest in safer instruments such as Government bonds, SSAs or repo to Tier 1 investment banks. The absolute safety of cash is always the most important consideration and so now is the time, before the next existential event occurs (and it will), to embrace change, innovate and be able to give your treasury toolkit a third option – like the third leg on a stool, to provide more stability and balance to your cash investments stable.
And a final point from me: TreasurySpring solves for all client types. We are fortunate enough to have small, medium and large institutional investors who use our platform to gain what we all strive for, diversification and safety. Whether you’re a small SME with excess cash balances of £5m, whether you’re a FTSE 250 or 100 company with hundreds of millions of excess cash across multiple currencies, whether you’re an Asset Manager with UCITS cash sat at the custodian, unencumbered cash or regulatory capital, or even if you’re a bank treasurer or ALM looking after the banks liquidity, FTFs as a cash investment product have solved for all these regulated and unregulated cash pools. Our clients can not only now access the UK Government, SSA and repo to Tier 1 Investment Banks, but do so simply through one free onboarding with us and at the click of a button.
Our clients are investing their cash in the smartest way possible, so shouldn’t everyone be considering doing the same or is everyone else happy that it won’t happen to them…ever?