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Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
and as demand for HQLA grows, they will be looking
to transform assets unsuitable for collateral postings
into HQLA or cash to meet their cleared and non-
cleared swap requirements.
Finally, the treasury team will manage the
organization’s entire pool of firm level cash each day
to ensure their obligations and look across their set
of FX exposures to adjust balances as required. In
organizations without a trade financing unit, treasury
may also be handling all of the fund level cash
movements daily.
Today, in many asset owner organizations, each of
these operations is happening in a silo with each team
just looking at their portion of the firm’s assets. As a
result, the pools of cash, HQLA and other securities
are being utilized suboptimally and opportunities to
use assets in one part of the organization to satisfy
needs in another part of the organization are lacking.
Incentives Emerge to Create a Holistic View &
Determine Best Use of Assets
The goal of liquidity management is to bring
those pools into alignment under a single set of
decision-makers. This is illustrated in Chart 37.
There are many benefits an organization can
derive if they are able to move to this model of
liquidity management.
Respondents to the survey noted that they would be
able to capture their collateral netting potential across
silos. Rather than having a team in one area posting
collateral to meet their daily margin call and a team in
another area of the firm receiving in collateral, there
is an opportunity to manage that pool across the
entire organization and potentially reduce the overall
outlay of collateral each day.
There is also more flexibility to determine a hierarchy
of uses for an asset. Sophisticated asset owners that
control this capability internally today note that they
have put into place instructions that tier how assets
should be used. The optimal use is modeled and if
the asset cannot be used in that way, the next most
optimal use is modeled and this cycle repeats until
each asset is utilized as fully as possible. This allows
“ We need a better understanding of our capital. The way
we look at it is quite confused—we could be better at
managing liquidity, and honestly don’t know where it is,”
— Asset Owner—Money Manager
“ There is a problem when an organization has OTC collateral
management, securities lending and short-term money markets
in silos. These groups are all sort of doing roughly the same
thing with slightly different objectives. They have to mobilize
collateral. A lot of these securities sit in different operational
silos. They are housed on different systems and have data
inconsistencies and complexities,” — Industry Trade Association
“ We definitely see our model as one that the industry will move to
over time. Some of our major competitors today in the insurance
space are like we were six years ago. Stock lending, repo, FX
and OTC are all counterparty risks, but they sit in different
groups. If someone asked me my exposure to Citi, I could tell
you in nine seconds. A few years ago, I would have had to run
to this desk and that desk and manually compile that answer,”
— Asset Owner—Money Manager
Source: Citi Business Advisory Services
Chart 37: Unified Approach to Liquidity Management
Securities
Lending
Trade
Financing
Derivatives
Clearing
FX &
Treasury
Asset Leaving Organization
Asset Entering Organization
Cash
HQLA
Other
Securities
STAKEHOLDERS
LIQUIDITY MANAGEMENT UNIT