The Asset Manager’s Dilemma: Optimizing Cash and Liquidity in Today’s Environment

Cash and liquidity management is becoming an increasingly critical function for asset managers. However, with rising interest rates, increased market volatility, and the move toward t+1 settlement for traditional securities and intraday settlement for digital/tokenized assets, it will become even more difficult to maximize liquidity, minimize operational risk and achieve optimal returns or borrowing costs. For example, T+1 will impact intraday liquidity by shortening the windows to optimally manage funding, margin and collateral requirements.

For asset managers in Europe, the proposed T+1 U.S. securities settlement cycle will have an even more severe impact on liquidity. Due to differing time zones, investment management staff will have a very compressed time interval to match and correct trades and perform stock recalls; all leading to increased fails and significantly affecting funding processes.

The current environment is creating new challenges for cash management and forecasting efforts, adding significant stress on fragmented legacy systems, infrastructure and processes. As a result, many asset managers are on the search to find or develop new solutions that address these challenges.

The Dilemma 

For many asset managers, an inability to easily optimize cash usage coupled with the historically low interest rate environment has led to the de-prioritization of investments in cash management solutions. As a result, these firms maintain significant cash buffers to ensure they have sufficient liquidity to meet cash demands. In a zero-rate environment, the impact of these decisions is lower. However, with rising interest rates and the increased need to manage cash intraday, the cost of maintaining large cash buffers is becoming more substantial, with greater “drag” on the portfolio. Additionally, there is a tangible opportunity cost of not investing the extra cash. Lastly, rising rates are increasing the cost of intra-day borrowing, another added expense. Without the right tools, many asset managers have no choice but to make suboptimal investment and borrowing decisions. 

The Challenge 

Cash management teams work extremely hard to manage their intraday cash balances, often through spreadsheets or legacy technology systems. However, these current capabilities seem to be reaching an operational tipping point; we hear many of the same themes regarding infrastructure challenges including:

• Difficulty achieving real-time connectivity and seamless integration of cash data from internal and external sources
• Disconnected data inhibiting the use of analytics, alerts, and workflow tools at a firm-wide, regional, desk, or fund level
• Lack of alignment between investing, trading, margining activity regarding the impact on cash positions
• Fragmented, non-scalable cash management platforms and processes
• Limited transparency into potential investment and borrowing opportunities 
• No structured, optimization framework to help guide investment and borrowing decisions

As a result, these challenges have made it very difficult to maintain current cash management processes in today’s environment. 

Architecting a Solution 

There are several critical capabilities asset managers require to address current cash management challenges and also plan for future needs. 

Real-time Integrations: Cash management platforms require innovative tools to aggregate current and projected settlement, inventory and margin data in real-time. While not all data providers supply information in real-time, their capabilities are improving, and as a result, cash management platforms must be able to assimilate to these requirements. With cryptocurrency and tokens becoming more prevalent, real-time data integration and access will soon be critical. 

Holistic Data: Intraday cash management requires both an internal (e.g. OMS data) and external (e.g. custodian data) view in order to forecast accurately and make the most informed business decisions. One view without the other significantly increases the probability of suboptimal or even incorrect investment and borrowing decisions. Furthermore, a solid data foundation is crucial for analyzing inventory and forecasting future settlements. As a result, firms require the harmonization of current and historical data for enhanced decision-making. Lastly, optimally managing cash globally necessitates the storage of granular data attributes regarding accounts for various custodians and paying agents. For example, firms must know what times the accounts are available for cash activity and when they close in order to fully systematize cash management.    

Powerful Analytics: Managing cash activity intraday requires user-friendly dashboards, configurable alerts and workflow tools in order to identify and address cash balance anomalies. Without clear and proactive information, it is much more difficult for firms to mitigate inefficiencies or risks in their accounts.    

End-to-End Capabilities: The most powerful cash management capabilities facilitate an end-to-end workflow. However, to achieve this, firms need full transparency into various investment and lending options with associated return, cost, risk data in order for an optimization engine to generate recommended allocations. To complete the process, there must also be intelligent integrations that can translate cash optimization recommendations to booking instructions that automatically execute the requests with the appropriate OMS/EMS/Fund Investment platform. 

Introducing Transcend 

Transcend’s team has decades of experience solving cash and collateral management challenges for both sell-side and buy-side clients. With a state-of-the-art, modular platform, Transcend’s clients can quickly gain critical cash and collateral management capabilities to address the challenges of today’s borrowing and investing environment. To learn more, click here to get in touch with the Transcend team.