Why the role of treasury is so unique for a pure-play trading firm

Normal corporation: Let us take the case of a manufacturing firm. They have an order book which gives them visibility to their future revenues. They know their forecasted costs required to service that order book. The role of treasury is to monitor the certainty of these inflows and outflows and manage the ensuing mismatch risks. These risks may be compounded if the inflows are in a different currency from the outflows (introducing FX hedging).  However the central role remains the same i.e. of planning for mismatches. 

• If there is a deficit forecasted, then arranging for short term funding through working capital loans or overdrafts and 
• If there is a surplus forecasted, then planning for a judicious avenue of placing the excess cash to earn some return for the company. 

 Pure-play trading firm: This can become very complicated in the case of a pure play trading firm. It is in the nature of how a trading firm operates that its entire revenues are dependent on the daily vagaries of the market. There is no forecast of revenues by days / weeks or months which will stand the test of certainty. The costs can be divided in two categories. 

• First is ongoing working capital costs of salaries, subscriptions, infrastructure etc – these are generally predictable. 
• The second are margin payments settled on a daily basis – new trading positions (initial margin requirements) and market moves on existing trading positions (variation margin or MTM). These are unpredictable and also form the largest cash outflow component. 

However forecasting them is also fiendishly difficult. Decisions on new positions are taken at the moment by traders, depending on a view and market opportunity. MTM moves are market dependent entirely. Managing this complexity is as much an art as it is a science. Time sensitivity can be an important factor for these Treasury functions.

Treasury however is a cost function and, for management, it becomes difficult to justify spending money on extending the same front desk systems and tools for the use of a support function. Treasurers should however, continue to demand role-specific and custom technology to create scenarios and give visibility to management. These focused tools can be delivered at much lower costs. The top of the list item is to run possible market conditions and see the call on cash from margin calls. It is key that there is flexibility in the creation of scenarios so that management can build realistic situations in evolving markets and see the impact on liquidity. Automation of this critical activity heavily leverages the time of the treasurer to the benefit of the company and management for a pure-play trading firm.