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Managing interest rate and liquidity risk
| 06-09-2016 | Rob Söentken |
Funding is one of the key focus areas of a treasurer. There are numerous dimensions to funding:
1. Assessing amount and timing of cashflows
2. Arranging access to funding
3. Developing and implementing hedging policy
4. Optimizing funding cost and risk
Assessing amount and timing of cashflows
Assessing the amount and timing of cashflows is a continuous process. Because needs can change both in short and long term.
Arranging access to funding
Matching funding needs with supply from financial institutions is also a continuous process. The typical approach would be to match tenors, but immediate access to cash is critical for the survival of any entity. It could be considered to arrange longer term financing, even for short term (revolving) funding needs. The downside is that long term access is more expensive than short term access. This may be acceptable, but if the spread between borrowing and lending excess cash is too wide, it will become very unattractive to borrow for long tenors.
Developing and implementing hedging policy
To ensure the treasurer works within the boundaries of his mandate, he has to develop a hedging policy which must be documented (‘on paper’) and approved by his management. The document should describe the whole area of funding, to ensure both the creation and hedging of risks are described.
Optimizing funding cost and risk
The main focus drifts towards reducing funding cost. The funding market typically has a steep cost curve, meaning that rates are higher for longer tenors. This results from a steep ‘risk free’ curve and / or from a steep ‘credit spread’ curve. Which often brings entities to borrow for the cheapest tenor possible, being monthly, weekly or even overnight funding. Funding for very short tenors creates the considerable risk that can cause a company to run into a liquidity crisis, in case access to funding disappears. How to deal with this dilemma?
The best approach is to define a number of scenarios to assess the impact of combinations of financing and hedging on funding and risk. A base scenario could be to finance all funding needs using overnight loans. In case of liquidity problems, what would be the impact on the funding rates? Another scenario would be using quarterly funding or yearly rollover funding, potentially combined with:
What are the incremental funding cost? What are incremental operational expenses of running various products? Can the entity deal with managing margin requirements? Is the entity aware of the basis risks involved when using credit derivatives, which are fairly complex products?
Rob Söentken
Ex-derivatives trader
Blockchain: Some remarkable announcements part II
| 05-09-2016 | Carlo de Meijer |
Utility Settlement Coin
A second remarkable announcement was that of a number of large global banks to create their own digital currency. This plan could be seen as another example of going alone, or at least with just a limited number of players, while large scale collaboration is required for more massive adoption of this technology.
Separately, a group of four R3 consortium members, including BNY Mellon, Deutsche Bank, Icap and Santander have joined with UBS and Clearmatics to a blockchain based transaction settlement project called the Utility Settlement Coin (USC), and plan tests in a real-world environment.
What is USC?
USC is an asset backed digital cash instrument implemented on distributed ledger technology. The USC is focused on facilitating a new model for digital central bank cash. (By the way, there are several digital cash models being explored). USC is aimed at facilitating payments and settlement for use within global institutional financial markets. Using this technology could contribute to more efficient transactions in terms of speed and lower costs.
USC is aimed as a service of cash assets, with a version for each of the major currencies and USC is convertible at par with a bank deposit in the correspondent currency. USC is fulltime backed by current assets held at a central bank. Sending a USC will be sending its paired real world currency.
Going forward
The group will collectively build of on earlier experiments by UBS and blockchain software company Clearmatics. They launched the concept in September 2015 to validate the potential benefits of USC for capital efficiency, settlement and systemic risk reduction and as a forerunner for central bank backed digital cash issuance. The virtual coin will act as a proxy for physical currency assets held in deposit at the central bank.
“The focus of the work will consist of financial structuring of the USC and wider market structure implications, as well as market integration points for a fully operational utility settlement coin for future use by institutions” according to the group.
The USC concept will be developed through a series of short repetitive phases and platform developments. At each stage the aim is to increase the number of market participants, broadening engagement, connectivity and network effects. That virtual currency, USC, should go live in 2018.
Active dialogue
Active dialogue with central banks and regulators will continue to ensure a regulation compliant, robust and efficient structure within which the USC can be deployed. Recent discussion of digital currencies by central banks and regulators has confirmed their potential significance.
Read more remarkable Blockchain announcements in the first part of this article.
Carlo de Meijer
Economist and researcher
Che Guevara, Musk and 0%. Whose story do you listen to?
| 02-09-2016 | Pieter de Kiewit |
I remembered the book during my recent vacation in Ireland. Apparently Che Guevara has Irish roots, his forefathers are from Galway. Locally he is portrayed as a revolutionary hero. During this vacation I saw an US television series in which he was described as a terrorist….
Recently our Dutch media describe the negative interest and quantitative easing as disastrous. I do not read Italian, Greek or Spanish newspapers but can imagine they write different stories. And today Elon Musk is in the news. Tesla, the company he founded, is buying one of his other companies Solarcity, where two of his cousins are in the board. He did not mention this transaction when, a few months ago, Tesla sold stock worth $1.4 billion. One has to play by the rules… Companies that are making the world a better place by developing environmentally technology should be stimulated in their actions and Musk is creating advancement. Should this part be included in the articles?
The media do not offer a balanced story, the media consumers (read: we) do not have the time or patience to listen to nuance. Should they/we?
Pieter de Kiewit
PS Without broadcasting an opinion, how can it be that almost 100% of the Dutch think Trump is unacceptable as a president of the US and a substantial portion of US citizens consider him their next president? What media do we listen to?
Pieter de Kiewit
Owner Treasurer Search