The Link Between Post Trade Infrastructure & Treasury Innovation in Capital Markets

The Link Between Post Trade Infrastructure & Treasury Innovation in Capital Markets

Ascendant Strategy MD James Maxfield reflects on a Treasury Automation conference

Last week I had the good fortune to attend a conference on automation of the treasury function and the drive towards real time treasury. We have been active in this space recently, helping a client look at their infrastructure around optimising cash and inventory management so felt that this would be a good opportunity to understand more from a treasury perspective around some of their challenges.

What was clear to me was that though much of the agenda was focussed around leveraging technology to improve the insights of a treasury function, there is a significant dependency on what happens upstream in the process to enable optimisation of liquidity and capital. The positioning of the treasury function within the processing chain makes them hugely reliant on an upstream appreciation of their world – which given process, technology and data fragmentation in most organisations makes this understanding patchy at best.

Much was spoken of the importance of the treasury innovation officer as a function, but it was clear from the audience that this is an extremely nascent concept for most. But given the absence of this role, how will the treasury function position itself to leverage FinTech, drive engagement with innovation labs, integrate with re-platforming opportunities or drive data strategy?

I reflected on my own experiences both within banks and consulting for clients and remembered this disconnect – the treasury function often being an afterthought to strategic programmes or front to back initiatives. Given the prevalence of this issue, it clearly isn’t down to personality and so must be something more fundamental. Given the financial implications of optimisation (in areas such as intraday liquidity buffers) are so significant, it is surprising that there isn’t a closer alignment between treasury and the rest of the post trade world.

Data centricity and technology are so fundamental to the future of investment banks, what should the treasury of the future look like and how should it think?

  1. Stop Being A Client. Treasury functions often think of themselves as a client of the rest of the organisation – to be provided data to and serviced (simply speaking). What this means is that whilst there may be engagement with the front office – who are consumers of funding and so technically a revenue source – other corporate functions (such as operations or technology) are only engaged reactively. This behaviour limits understanding and appreciation of each other’s goals, preventing partnerships forming and true collaboration being taken forward.
  2. Explain Treasury Objectives & Contextualise. Lack of engagement with the upstream functions prevents an understanding and contextualisation of what treasury is trying to achieve. Linking the importance of payment netting to the LCR for someone in Operations can deliver significant economic benefit if they are educated around the context. Similarly, linking the implication of late collateral receipts from a client to funding spikes it can create a different emphasis for a middle office team responsible for its oversight.
  3. Make ALCO’s Accessible. The ALCO is often the only forum where corporate functions engage with Treasury on a practical basis and its agenda is typically focussed on objectives of liquidity governance. This limits the ability of the wider organisation to engage around understanding how their processes and objectives can influence the overall liquidity position. Best in class in my experience was an organisation which implemented effectively an ALCO working group – this included business management, credit risk, operations, finance and technology – and focussed on lower level agendas. Collateral efficiency, netting opportunities to optimise buffers, material known outflows/inflows driven by business activity and technology initiatives were all part of the agenda. The result was an increasingly treasury ‘savvy’ organisation that made big strides in capital efficiency and automation – which ultimately led to tangible buffer reductions. Sharing information and objectives across these groups led to a much closer engagement and had a material impact on the overall cost base of the organisation.
  4. Data Centricity. Unsurprisingly, data standardisation and availability are critical ingredients for a high performing treasury function. And unsurprisingly this was viewed as the biggest challenge by many given the infrastructure fragmentation within their organisation. There is no silver bullet here, but ensuring alignment with enterprise wide initiatives or leveraging upstream transformation is key to success – no-one will solve this all in one go and it requires a patient and progressive approach to gaining the right data to drive the right insights and also drive the right behaviours.
  5. The Virtual Innovation Officer. I remain conflicted with the value of a central point of innovation – where it works well, the individual has a mandate to drive technology across the organisation but where it works poorly, they are usually little more than a figurehead. Regardless, treasury should consider how to embrace the technology available and look to drive and influence the organisation around it. Treasury functions (not mandated individuals) should be taking an interest in how FinTech solutions can drive capital efficiency through middle and back office – ‘how can we net more, what is out there to improve collateral efficiency’ – rather than merely focussing on gaining stress driven data insights. These are extremely important, but my point here is treasury has a unique insight into how upstream process efficiency can have a material impact on the economics of an organisation. Far and away above some of the automation benefits that often pre-occupy middle and back office.

As the capital markets industry continues to restructure, the treasury organisation must take an active role in driving and shaping the future state operating model. The sustainable businesses of the future will, in my opinion, be one where treasury is a core part of the operating model rather than merely a recipient of data from it.