The past decade has seen huge technological advancements and regulatory reform across financial markets. As a consequence, many markets have evolved to be more transparent, liquid and easy to access. But not every market has progressed to give participants a more efficient experience.
Distilling the conversations we have had, corporate treasuries are often in a situation today where they have to do more with less. This is an operational challenge set within a backdrop of greater economic uncertainty and, frequently, a more complex marketplace.
Most, if not all, are also under pressure to get the best returns for their cash within a responsible and sometimes restrained risk level.
To cope with all this, treasurers are seeking solutions that make their daily workflows as efficient as possible. Corporate treasurers are increasingly receptive to making day-to-day processes digital – including cash management, liquidity sourcing and transacting. Treasurers naturally want to be a strategic partner to their business, and that means streamlining operations and gaining both efficiency and time.
Starting with the UK, the daily market turnover in sterling is approximately £60bn, according to Bank of England data – that’s for unsecured institutional money market deposits.
Looking at Europe as a whole, the European Central Bank (ECB) puts unsecured money markets at €120bn. Nearly half of these transactions take place inside a country’s own borders – a surprisingly high proportion for a single currency market.
Contrary to how many other markets trade, none of this turnover is on any kind of central exchange. The result is a highly manual and opaque market where institutions can struggle to obtain adequate pricing information.
Other figures underline the antiquated nature of the market:
Thinking about the operational pressures treasurers face, digitising the process of lending and borrowing ensures a greater return on investment and gives back valuable time for other treasury activities.
In addition, know your customer protocols and counterparty risk assessments on potential new trading partners for deposits are a crucial part of the process. Leveraging technology can streamline this process and save crucial hours to ensure each firm is onboarding the most suitable counterparties.
Having a digital network of counterparties, rather than relying on managing contacts, makes it easier to make trading connections, put liquidity to work and then be able to prove best execution.
With corporates in Europe holding approximately €1 trillion in cash, according to Moody’s estimates, there is clear scope for upside for lenders to find the best returns for these funds. Markets such as the Netherlands and Switzerland have especially high corporate cash pools, reflecting multinational or regional headquarters, but major markets like the UK also have significant cash balances.
The idea was born out of the liquidity crisis of 2008, when trust in money markets broke down and interbank lending seized up.
Our founder, Hugh Macmillen, who had spent his career at large inter-dealer brokers, decided to turn his focus to solving an inefficient and often ignored part of the market. Instimatch Global officially launched in 2017.
As an example trade flow, let’s say a UK-based corporate (lender) and a Zurich-based bank (borrower) are onboarded and able to trade with each other through the network.
The lender can view and trade on live executable bids from a range of borrowing counterparties and sectors. They can see the names, ratings and information about each firm before they agree to trade. If we assume the Zurich bank accepts the corporate’s offer – the trade is done.
A trade confirmation is immediately seen on the screen and in email, as well as in the trade history of both counterparties. This includes all relevant trade information of both companies and is also sent to the back office of each counterparty for bilateral settlement.
Since launching in 2017, we have grown to have a presence in four main markets: the UK, Benelux, Switzerland and Germany.
The platform has seen steady growth in this time as well. There are now more than 100 user participants on our network across seven countries and we are currently onboarding about three to four each week. Activity is growing, and of course having a diversity of borrowers and lenders is critical to starting to achieve a network effect.
We see great potential in the digitisation of other short-term over-the-counter money market instruments with similar characteristics to unsecured deposits – for example fiduciary money market instruments.
We’re also researching the potential for intraday money market liquidity, based on distributed ledger technology. This is becoming important for the banks, as the ECB is starting to stress test bank liquidity at specific points in the day – and if the banks need to do this, it will have ramifications for the overall money markets ecosystem in which corporate treasurers have to play.
Britni Noel Doo, head of sales at Instimatch, has 10 years of sales and business development experience from leading fintechs MarketAxess and Algomi. For more, click here
