In today’s regulatory environment, treasurers are facing the prospect of higher bank pricing for capital-intensive services. In addition, there is a move from short- to longer-term funding and increased pressure on lending. Meanwhile, debt levels remain high and, as such, treasurers have to manage a larger pool of assets and liabilities. The larger the pool becomes, the greater the operational risk and complexity. A further hurdle is the regulatory change requiring companies to effectively manage their collateral in their dealings with counterparties. Complete exposure to a single counterparty is no longer acceptable and the treasurer is being tasked with keeping everything in order.
These drivers have prompted many corporate treasurers to adopt additional banking services. For companies looking to manage ever-larger cash balances, custody services are becoming more commonly used. Other companies are looking for alternatives to bank lending and, as a result, are finding they have more need for securities-based services than in the past.
At the same time, in order to streamline the processes involved in managing their balance sheets, treasurers are looking for more information, increased visibility over their activities and integrated services across the board. In particular, as corporations focus on improving efficiency within their treasury processes, they are increasingly looking for platforms that can incorporate a wider range of solutions and services.
When cash meets securities
Historically, custody and agency services offered by some global banks were managed separately from cash management and transaction services. Today, these areas are becoming increasingly integrated with other services offered to both corporate and financial institution clients. They include:
Custody: when companies manage a portfolio of investments, a custodian is typically appointed in order to settle and safe keep the transactions and positions within the portfolio.
IPA: the focus of an IPA is on the liability side of the balance sheet. An IPA supports clients in raising short- and medium-term debt, for example, by facilitating issuance and maturity payments.
Escrow: an escrow is a legal agreement that is used as a means of managing risk within a specific event, such as an M&A transaction. The depositor asks a neutral third party to hold assets on their behalf until certain conditions have been fulfilled, whereupon the assets are delivered to the end beneficiary.
Each of these areas can be combined with transaction banking in order to achieve synergies. Escrow, for example, is based on any infrastructure that would have supported the cash business and can therefore be combined very effectively with transaction services. Custody, meanwhile, acts as a connection between transaction banking and the rest of the markets business, enabling a bank to coordinate these two areas more effectively. Where an IPA is concerned, banks can help clients reduce risk by acting both as an IPA and cash clearer for when they issue debt.
By integrating custody and IPAs into the cash transaction services, business operational risk can be reduced as cash can move automatically to and from the custodian. Additionally, debt raised from an issuance can move automatically from the IPA to the cash clearer. Both of these remove the need of having to pay out to a third-party cash provider.
The benefits of an integrated approach
By positioning themselves more robustly as integrated providers, banks stand to benefit as more corporations choose to adopt custody and IPA services. Rather than offering these areas as standalone products, banks have an opportunity to work more closely with their clients in order to understand both their balance sheets and investment strategies at a transaction banking level.
As corporations pursue greater efficiency in managing evolving balance sheets and fluctuating investment strategy requirements, they can gain greater flexibility through a single global platform that supports securities processing. This integrated approach offers businesses wide access to an array of financial solutions across prime brokerage, clearing, collateral management, securities lending and custody. The result is a fully integrated servicing experience, from execution to final settlement.
“Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and members of SIPC, and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured • May Lose Value • Are Not Bank Guaranteed. ©2014 Bank of America Corporation
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