SOURCE: marcus evans

marcus evans

February 25, 2016 11:12 ET

Looking at the Future of Liquidity Management

Interview With Rosanna Pezzo-Brizio, Treasurer and Head of Fixed Income at IntesaSanpaolo NY Branch

NEW YORK, NY--(Marketwired - February 25, 2016) - The management of cash flow and liquidity is crucial to bank treasury departments, especially in demonstrating the solvency and financial soundness of an institution. Liquidity risk management continues to be a vital cause for discussion as banks incorporate the requirements set forth by the Basel Committee into their business models to achieve compliance.

Rosanna, Treasurer and Head of Fixed Income at IntesaSanpaolo NY Branch, recently spoke with marcus evans about topics to be discussed at the upcoming 11th Annual Liquidity Management Conference:

What are the key challenges when creating a greater portfolio of sustainable HQLA's?

RPB: Finding Liquidity is the greatest challenge. Even AAA names with $1B issue size sometimes have illiquid markets and not enough dealers actively trading those assets.

  • Diversifying risk amongst issuers is also challenging. Only a handful of issuers are semi-liquid, so buying smaller issues to diversify risk creates problems, since those issues are no longer liquid.
  • Price discovery and fairly "marking" assets is increasingly challenging, since "executable" quotes are becoming difficult to obtain because dealers are not incentivized to post tight prices electronically.
  • Avoiding crowded trades is also difficult: the worry is that too many people compete for the same assets. Banks with higher cost of funds are in a position where holding short term, safer paper can become unprofitable.
  • Portfolio Managers will have to get used to a very different world from the one in which they have operated for years, where Central Bank QE was the force driving markets: with Zero Rates and QE driven Central Bank buying, Fund Managers could just be long and be heroes. As the market turmoil since the first ever so tiny Fed rate hike has shown us, rising rates will be a very different trading world. Spread compression of the past years will be history. Credit quality of your portfolio will be far more important. 
  • Timing your direction rate hedges around potential Fed hike dates will become a new skill: many in the market who are younger never have traded in a rising rate scenario and no one traded in a negative rate and negative swap spread environment.
  • Portfolio Managers have to learn to perform under DFA, (Dodd Frank Act) which limits the tools available to manage risk. Various banks will all have different interpretations of the law, and thus restrictions placed upon traders and products that can be used to manage risk.

How do you think the NSFR will affect the future of financial institutions?

RPB: Financial institutions will continue to operate with low leverage; low leverage is good for market stability, but leads to low or no profits for banks and, as a consequence, less liquidity.

  • The NSFR will increase the liquidity requirements of every institution making the cost of funding more expensive not just for Banks but also for the entire credit system: Corporations will have to raise money at wider spreads.
  • The transformation of maturities (lending the long maturities and financing on the short side) -- the traditional banking business -- will be a less remunerating business and this could possibly open doors to unregulated entities. Regulators have to understand the social value of the financial system that do perform the transformation of maturities and try to block the expansion of the unregulated entities.

What does the future of low strategy risk management look like?

RPB: The world we live and trade in is becoming far more complex. We have more regulations today than ever before, which has unintended consequences, or costs, lack of liquidity and greater bid offer spreads to name just few. All of these new laws that impact traders increase the risk of a trader running afoul of the rules. Beyond reputation risk traders may face criminal penalties. This puts new meaning to the term risk management. High Strategy goes so far beyond the simple measure of VAR and DV01, or P&L calculation; it must encompass far more today. We have Operational Risk, Reputation Risk and Legal and Compliance Risk. Banks these days can pay far more in fines or legal fees and settlement costs than a trader could lose in a bad trade. So Risk Management has become a far more complex task. Protecting the banks' capital requires greater scope of understanding of the complex world in which we operate. 

What are some of your best practices for being a leader in liquidity and cash management?

RPB: I think best practices start with good IT systems to project and coordinate all of the banks' cash flows.

  • Efficiently using the capital available to meet liquidity and cash management needs is key to being a leader in this area.
  • Shorten Asset Maturities can help not only because short maturity assets are more liquid but also because there is a direct benefit in owning assets that matures during a period of cash crunch
  • Reducing contingent commitments -- cutting back on line of credit for instance will help reducing future potential outflows
  • Obtain liquidity protection, when possible since it is a very expensive option -- trying to buy protection from banks/insurances/central banks
  • Taking advantage of moments in the market of tighter spread or favorable FX basis for issuing longer maturity bonds
  • Issuing more zero coupon bonds that have the advantage for a bank not to pay coupons
  • Issue more equity (common stock is equivalent to a bond with a perpetual maturity but without the obligation of paying coupons)

Being involved in Interest Rate Risk, how is this effecting liquidity in the industry? Where do you see it going?

RPB: Everything is becoming more electronic in terms of trading, and I see that continuing to increase. The effect on liquidity could be negligible in normal trading conditions, but as we have seen a few times recently, periods of severe illiquidity will exist in times of extreme stress in the market. 

  • In the currency markets, again spot is out of scope with DFA yet CLS settlement data show shrinking trade settlements. Some of this could be less activity by bond and equity managers.
  • The DFA is drying up liquidity, no question about that. Banks have withdrawn from segments of the bond markets. Trading size to move a market has shrunk. In treasury bonds -- which are out of scope for DFA -- spreads from current bonds to off the run have gone wider. Liquidity at a given price is smaller, or at any given time of the day: if you need to trade a large size you need to find the most liquid market windows, around larger data releases which will draw more participants into the market. In fact Dealers, in order to increase revenues, have shrunk staff and capital available; they have reduced inventory of bonds owned, making it harder even to buy. They no longer will buy and hold but act more like brokers, making it much harder to sell. Some banks have simply stopped trading certain products, for example I have heard some banks will no long use interest rate futures to hedge and some others closed the Money Market desk. Under DFA before trading you must define what the trade is hedging. If you cannot trade offensively due to DFA everything must be to reduce risk. Often the traders' job is not to make money but to maximize the value of the banks' natural position.

What are you looking forward to hearing and learning more about from this conference?

RPB: I am curious how other foreign banks are dealing with their own "fair pricing" policies. How does their risk management mark their liquidity portfolios?

  • Where do other banks find their sources of liquidity?
  • How much are the upcoming changes in Money Market reforms really going to affect how banks obtain funding?
  • Do market participants see potential problems due to these changes?
  • How do the economies in the long run survive and prosper if the financial system slows down by all the regulations?

Rosanna Pezzo-Brizio is currently the Treasurer and Head of Fixed Income at IntesaSanpaolo NY Branch. In her current role she is in charge of managing the liquidity of the Branch as well as supervising a Proprietary Portfolio. Mrs. Pezzo-Brizio is also an Adjunct Assistant Professor in the Department of Mathematics at Columbia University where she teaches Fixed Income Portfolio Management. She has a PhD in Mathematics of Finance from the University Brescia in Italy and a Master of Mathematics of Finance from Columbia University. Before joining Intesa Sanpaolo Mrs. Pezzo-Brizio was an Exotic Trader at RBS, a Risk Manager at Greenwich Capital and an Analyst at Goldman Sacks Asset Management.

Join Rosanna at the 11th Annual Liquidity Management Conference, March 15-16, 2016 at the Millennium Broadway Hotel in New York, New York. View the conference agenda to check out Rosanna's round table discussion topic.  For more information, please contact Rachel Strug, Digital Marketing Coordinator, marcus evans, at 312.894.6327 or

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  • For more information, please contact
    Rachel Strug
    Digital Marketing Coordinator
    marcus evans