Sameer Shalaby

Post-crisis pressure means fund managers are looking to get more from their treasury functions, according to Hazeltree CEO Sameer Shalaby

What kind of trends are you seeing in the treasury space today?

Over the last four or five years, the market segment of treasury has been evolving, maturing and expanding, and that’s a direct result of the financial crisis in 2008. Pre-crisis, there was little to no focus on treasury in the buy-side and hedge fund community—it was all handled by their counterparties. For instance, unencumbered free cash that was held at, say, a prime broker, would have been earning interest on par with what they would get elsewhere, so no one cared much.

Prime brokers were happy to accumulate cash balances from their clients. Additionally, there were very few details on fee transparency, and clients were not very focused on optimising fees across their prime brokers, opting to focus on generating higher returns from their portfolios. Finally, no one had much concern about counterparty exposure—who would have ever imagined that having Lehman Brothers as a counterparty was too risky?

Fast forward to 2008 and beyond, and suddenly counterparty exposure and the health of the counterparty is now paramount for every fund manager and its investors. Questions around how a manager monitors counterparty exposure and keeps track of credit are now standard in due diligence, and managers must have a good response or they won’t get any funding.

Additionally, with new regulations such as the Dodd-Frank Act, the European Markets Infrastructure Regulation and Basel III, balance sheet consumption has been a focus for all banks. As a result, prime brokers are telling clients to take their cash elsewhere—for small funds, they’re imposing minimum monthly fees, or telling them to take their business elsewhere altogether.

What are the additional drivers of change, aside from regulation?

There are multiple catalysts driving this. There is the regulatory side to it, but also average hedge fund performance is not keeping pace with what we have been accustomed to seeing in the past, ranging from negative 4 percent to highs of 1 to 1.5 percent.

Managers are looking for any opportunity to reduce their cost structure, reduce the cost of borrowing and funding, and to generate any kind of yield they can. Whereas previously there wasn’t a specific need for this, now it’s important to add basis points (bps) wherever possible.

However, when yields are at 0 percent or even negative across the board, and prime brokers want that excess cash out of the account, for fund managers, moving the cash around is just an operational headache with no reward. We’re starting to see more of a focused effort on managing cash—starting with managers aggregating cash balances with the respective rates across all accounts globally, optimising debits and credits, hedging foreign exchange exposure, and ultimately sweeping excess cash out of prime broker accounts into custodian and money market funds, which aligns with prime brokers’ demands.

The key objectives of any treasurer managing cash are: safety, liquidity and, to a lesser extent, yield. In an ideal world, a treasurer can have the tools to effectively manage cash, optimise all cash usage, then easily sweep unencumbered free cash to safe and liquid providers, like money market funds.

Today, this could add 20 to 30 bps of additional yield, while keeping prime brokers happy. But, in a rising interest rate environment, this could yield much higher return.

In addition to cash management, collateral management is another focus area for most treasurers. With the low interest rates we have today, cash is the main form of collateral. When a fund is dealing with a billion dollars of collateral across multiple positions it could be over-collateralised at any given time. Typically, their counterparties don’t report excess collateral, indicating they can recall it, and historically this didn’t matter too much. But today, treasurers are looking to closely track collateral and to recall any excess collateral so they can deploy it elsewhere, which could also easily yield another 20 to 30 bps with a basic cash sweep.

Additionally, fund managers want to understand the cost of funding and deconstruct their cost of borrowing, as well as understand any potential revenue opportunities that may exist in their long books. As such, with a tight treasury function, fund managers can effectively manage their counterparties when it comes to borrowing costs and the lending of their own portfolios.

One important note is that treasurers aren’t necessarily looking to optimise and save every penny they can from their counterparty—doing so would only negatively impact their overall relationship with their prime brokers. Instead, they want to understand their overall costs so they can better manage the overall relationship.

Finally, investors are getting more diligent about understanding every aspect of their managers’ operations, which includes effective cash management and controls, cost of funding, and counterparty exposure metrics. Over time, we expect to see investors demanding regular treasury reports with key metrics around managing this function.

Where does cash movement come into the treasury management function?

Physical cash movement is a big part of it—how do we actually move cash from one bank account to another or to a payee of some sort? This is particularly relevant at the moment because of the concerns around cybersecurity.

Multi-billion dollar funds that have accounts in different countries can easily have hundreds of accounts. For each of these, every time a fund manager wants to access a bank’s secure online portal, they have to use a token to log on to that account. Someone—a CFO or COO—has to keep track of those tokens.

At the same time, if you have to move a large sum of money from one account to another, they have to get internal approvals from multiple (typically two, but often three or four) people, who each have to manage their tokens as well.

All of this makes cash movement a big operational problem, and the COOs and CFOs in charge of the tokens face significant challenges tracking and managing tokens along with password expirations.

Hazeltree has integrated these security and audit trails into a centralised cash management platform, aggregating all of the tokens into one secure interface with all the counterparties, meaning each fund manager only needs one token.

Having one integrated platform for moving money around provides the same level of security but without having to log in to various different portals. With due diligence around physical cash movements and the focus on cyber security, this is emerging as a key interest. Everyone wants to have tight cyber defences, but if the process is too cumbersome, they just won’t deal with it.

Do the challenges differ, depending on jurisdiction?

It’s a tough environment for everybody. We have clients in New York and around the US generally, in Europe—predominantly London, but also Zurich and Geneva, as well as in Hong Kong and Singapore.
If there is any difference, it’s around the size of fund managers. Those that are of size and scale have a much tighter focus on treasury management, while smaller funds, even if their counterparties are pushing them a little bit, don’t necessarily have the flexibility to push back.

In general, the bigger the fund, the more focus on treasury management and the more return on investment they’re likely to get. The US market typically has large funds, followed by London and then Switzerland. About 40 percent of our clients are US-based, 35 percent are in Europe and the rest are in Asia, where there aren’t many big funds.

Still, regulations are more or less consistent globally. Some regulators may have enforced certain parts of it earlier than others, but we see everything converging to pretty much the same landscape.

The latest interviews from Asset Servicing Times
The UK’s pensions industry is facing challenges from all angles, but KAS Bank’s cost transparency dashboard is here to lend a helping hand, says Pat Sharman
Real Estate Investment Times

Visit our sister site
for all the latest real estate investment news
View interviews section
The latest features from Asset Servicing Times
Gerard Bermingham and Madhu Ramu of IHS Markit explain how firms can avoid the pitfalls of bad corporate actions data
With the industry in perpetual change, it’s important for firms to work together to take advantage of big data, according to Roy Kirby of SIX
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
As technology developments shape the world around them, financial services firms are starting to adapt. This year’s Sibos conference outlined where the industry is settling in, and where there are still milestones to pass
Rocky Martinez considers how AI can help improve post-trade processes, and how SmartStream’s new reconciliations solution is moving a step in the right direction towards helping firms keep costs at sustainable levels
New regulations, new competition and new cost pressures mean custodians and sub-custodians have more balls in the air than ever before
Mark Aldous, head of managed services for Delta Capita, discusses product governance and the need for more cooperation between manufacturers and distributors before the 3 January 2018
The past decade has seen significant change in securities services, but some challenges lead to lessons learnt, says Deutsche Bank’s Satvinder Singh
Artificial intelligence is already a reality in daily life, and it has a place in financial services, says Matt Davey of Societe Generale Securities Services
View features section
Country profiles
The latest country profiles from Asset Servicing Times
The Asian market may be improving on the harmonisation front, but the situation is still far from ideal. Experts discuss what there is still left to do
Brazil is hogging the limelight from its South American neighbours. But, although reforms are in full swing, there is still work to be done
Securities Lending Times

Visit our sister site
for all the latest securities lending news and analysis
No nation is an island, and the Polish CSD has post-trade services to cater to all of Central and Eastern Europe, says KDPW’s Iwona Sroka
In a region as geographically, culturally and economically diverse as Asia, funds passports have a tricky road ahead if they’re to redefine the industry
Amid cross-border restrictions and tightened belts, Luxembourg’s kingdom of real estate investment won’t be crumbling any time soon
The Chinese market has taken a knock to its confidence, but despite its size, it is still merely an emerging market, and must take these setbacks in its stride
Rich in sunshine, cork hats and tired clichés, Australia’s funds industry doesn’t buck the trend, boasting record levels of assets under custody
As the Saudi Arabian stock exchange finally opens its doors to foreign investments, the influx from abroad will be in baby steps, not leaps and bounds
View country profiles section