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It’s time to take cash seriously

The Liquidity Conundrum – As we start 2017, it is clear that institutional investors and asset managers alike are faced with a very real challenge in terms of managing, maintaining and continually assessing portfolio liquidity. With an ever-increasing search for yield, investors must consider the implications of less liquid investments, their ability to raise cash if needed, and how to manage excess cash..

There are several factors bringing this subject into sharp focus, from continued low/negative interest rates around the globe, to new regulations such as the central clearing of derivatives and the Basel Committee on Banking Supervision’s Basel III accord. Also, the domestic US market saw a huge shift in money market fund (MMF) investor sentiment leading up to the implementation of new MMF regulation. It remains to be seen whether this will also play out in Europe, now that the future of the EU MMF regulation has been defined and agreed.

In essence, the liquidity conundrum can be distilled as follows:

  • If you are holding a higher proportion of cash in your portfolios, for example to margin on derivatives or to service illiquid investments, at best how can you generate an attractive rate of return or, at worst, can you actually find counterparties willing to hold the cash for you or are there investment options available which your current investment policy does not permit.
  • Conversely, if you require cash to meet obligations, what are the potential sources of funding available to you, at what rates are they offered  and, will they be there in times of market stress?

Coping Mechanisms

In response to these challenges we have seen investors and managers employ various strategies and adopt different tools and techniques to help manage and source cash efficiently and effectively. These vary from good planning, in terms of forecasting and segmenting cash, to more sophisticated and structural approaches, such as investing on a liquidity-based budget as opposed to, or as well as, a risk-based budget. 

Taking a more holistic approach to the liquidity conundrum requires a wider and more fundamental prioritization of the four key tenets of any liquidity management strategy – Security, Liquidity, Operating Efficiency and Yield. More recently, we have seen a fifth key tenet emerge – Cost, being both the cost of sourcing cash and the cost, or drag on performance, of holding cash.

To start along this journey there are some practical steps investors can take to help address the liquidity conundrum:

  • Understand investment portfolios from a liquidity perspective by maintaining a liquidity ladder and considering future calls on cash;
  • Model and stress test your asset liquidity profile to be aware of the worst case scenario and potential sources of liquidity in normal and stressed markets;
  • Determine optimal short and long cash positions, with associated supporting arrangements.

Do You Have a Plan?

To learn more about the liquidity conundrum and to review ways in which investors are beginning to address the challenge, read our full white paper on effective liquidity management


© 2017 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch; Northern Trust Global Services Limited; Northern Trust Global Investments Limited; Northern Trust Securities LLP. The following information is provided to comply with Article 9(a) of The Central Bank of the UAE’s Board of Directors Resolution No 57/3/1996 Regarding the Regulation for Representative Offices: Northern Trust Global Services Limited, Abu Dhabi Representative Office. The Northern Trust Company of Saudi Arabia – a Saudi closed joint stock company – Capital SAR 52 million. Licensed by the Capital Market Authority –License No. 12163-26 – C.R: 1010366439. Northern Trust Global Services Limited Luxembourg Branch, 6 rue Lou Hemmer, L-1748 Senningerberg, Grand-Duché de Luxembourg, Succursale d’une société de droit étranger RCS B129936. Northern Trust Luxembourg Management Company S.A., 6 rue Lou Hemmer, L-1748 Senningerberg, Grand-Duché de Luxembourg, Société anonyme RCS B99167. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) Registered Office: Trafalgar Court Les Banques, St Peter Port, Guernsey GY1 3DA.

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