Nearly 77 percent of funds available in J.P. Morgan’s credit facilities were drawn down during the global pandemic, which suggests businesses were left holding a significant portion of idle cash and missing opportunities to leverage that cash to redeploy or re-invest. Businesses also consistently seek additional sources of funding and opportunities to optimize costs or returns by strategically mobilizing cash, which becomes even more relevant in an environment where cost of borrowing will increase. These situations highlight the need for stronger strategies to optimize liquidity and multi-currency management—strategies that will make your business more resilient in the future and reap benefits of the return to normalcy.
Among those strategies, treasurers should prioritize real-time visibility into their business’ cash positions, as well as enable the ability to deploy liquidity in the right location and currency. Additionally, treasurers should review their debt management and funding strategies to prepare for increasing interest rates. For many businesses, though, to ensure they have access to their internal cash as a vehicle for funding, growth and value creation, this may mean tapping into the more restricted markets and currencies in the Asia Pacific region.
Businesses seek solutions to manage currency risk, drive efficiencies
The increased volatility in Asian currencies is leading firms to find alternative ways to manage currency risk and adopt automated systems for maximum efficiency—whether it is to move, convert, or to draw-down against funds. With the help of automated solutions and working alongside your banking partner, you can begin to integrate the more restricted markets into a holistic liquidity solution or funding ecosystem and increase cash mobilized within the group.
As part of this integration, it is important to recognize the potential benefits that a regional liquidity solution brings—this could then ultimately connect to a global structure. Centralizing Asian currencies in Asia Pacific would provide enhanced interest or FX conditions and extended settlement windows. As well, clients could potentially benefit from a favorable regulatory environment and potential tax incentives for regional treasury centers in their banking partner’s regional hub locations.
Finding the right liquidity and multi-currency management strategy
When thinking about how to optimize your liquidity and multi-currency management, consider these six questions to help frame your discussion:
- How much of your cash do you consider restricted?
- Do you have centralized or decentralized treasury operations in Asia?
- Are you manually triggering the movement of funds and foreign exchange transactions?
- How do you currently manage the restricted currency exposures?
- Are balances seasonal or shifting from cash short to revenue generating post capital rejection?
- Are you funding with the right amount at the right time, or do you prefund?
Three strategies to optimize liquidity and multi-currency management
The best way to think about optimizing liquidity and multi-currency management is across three different actions:
Automate funding to ensure my business can fulfill its payment obligations at the right time and in the right currency
A short term strategy, with the goal of reducing pre-funding buffers and costs associated to forecasting errors.
- Automate funding in fungible and restricted currencies without, in most cases, the need for regulatory approvals.
- Manage position mismatches in a notional pool by being able to draw down in one account or currency versus another.
- Optimize cut-off and value dating with onshore FX conversion on a manual or an automated basis.
Flowchart title: Short-term strategy: Same-day funding of local operations.
There are three levels in this flowchart.
The first level is labeled National Pool. This level has two boxes, one on the left and one on the right. Both are labeled SGD. A dotted-line box surrounds both boxes.
The second level has one box on the right labeled USD. There is an arrow pointing from the SGD box in first level down to the USD box in this level.
The third level has one box on the right labeled Local currency. There is an arrow pointing from the USD box in the second level down to the Local currency box in this level.
Extract excess cash for further mobilization within the group while getting the best return on balances that remain locally
A medium term strategy, this unlocks additional liquidity by tapping into restricted markets.
- Optimize intercompany reporting and/or segregate flows with virtual accounts.
- Automate cash extraction of excess cash while leaving a certain balance in-country to offset payment obligations in the local currency and thus optimize FX exposure.
- Enhance yield on restricted cash balances while funds remain fully liquid.
There are three levels in this flowchart.
The first level is labeled National Pool. This level has two boxes, one on the left and one on the right. Both are labeled SGD. A dotted-line box surrounds both boxes.
The second level has one box on the right labeled USD. There is one double-ended arrow pointing both up and down from the SGD box in the first level to the USD box in this level.
The third level has two boxes. The box on the left is labeled + Yield. The box on the right is labeled Local currency. There is one arrow pointing down from the USD box in the second level to the Local currency box in this level. There is another dotted-line arrow pointing up from the Local currency box in this level to the USD box in the second level.
In addition, there is one double-ended horizonal arrow pointing both left from the Local currency box to the + Yield box, as well as pointing right from the + Yield box to the Local currency box.
Scale and consolidate some of your activities in one location or entity—all to better manage currency risk and prepare your treasury organization for future volatility
A long term strategy, your aim is to integrate your global business through scalable efficiency and synchronized currency risk management, all of which strengthens control of your global cash positions and payments.
- Transform from an FX Agent or Treasury Center to an Inhouse Bank, centralizing payment initiation and decision making on funding, foreign exchange and investments.
- Define repatriation or in-country redeployment strategies for the more restricted markets.
- Integrate your global business though a scalable liquidity and multi-currency solution.
There are four levels in this flowchart.
The first level has one box on the right labeled USD.
The second level is labeled National Pool. There are two boxes in this level. The box on the left is labeled EUR. The box on the right is labeled USD. A dotted-line box surrounds both boxes. There is one double-ended arrow pointing both up and down from the USD box in the first level and the USD box in this level.
The third level is labeled National Pool. There are two boxes in this level. The box on the left is labeled SGD. The box on the right is labeled USD. A dotted-line box surrounds both boxes. There is one double-ended arrow pointing both up and down from the USD box in the second level and the USD box in the this level.
The fourth level has one box on the right labeled Local currency. There is one double-ended arrow pointing both up and down from the USD box in the third level and the Local currency box in this level.
Take the next steps to mastering your liquidity challenges
As the world continues along its path to normal, mastering your liquidity challenges to build a more resilient business is imperative. But you do not have to go on this journey alone. Combining our expertise in the Asia Pacific region with our liquidity and multi-currency solutions, we can create a potent formula for businesses like yours.
Connect with your J.P. Morgan representative to get started today.
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