Cash Management

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Once the trade orders are generated, cash must be provided for buy orders which primarily funded by sell orders. For a single exchange and single currency portfolio, there is not much concern except that you need to ensure that sell orders are filled faster than your buy orders. Therefore, communications between traders and fund managers is important. The traders may need to consult fund managers to delay the buy orders or change the limits of sell orders especially when the sell orders are difficult to fill.

For multi-currency and multi-market portfolio, complication increases as different settlement date sets in. Even in the US market, there are different settlement date between stocks, options and money market funds. For stock market, the usual settlement date for US, and most European stocks are T+3, except for German stock market which has a settlement cycle of T+2.  Some other Asia stock exchange has T+2 settlement cycle such as Korea and Hong Kong stock exchange. Shanghai Stock Exchange has settlement cycle of T+1. Although Taiwan market has settlement cycle of T+2, however, there is pre-funding requirement of T or T-1. If you intended to sell certain securities or certain stock market to fund another, you must make sure that you do not sell securities with longer settlement cycle to fund securities with short settlement cycle. The reverse is a better practice. Cash forecast report is an important tool that allows fund managers and traders to execute the trades more effectively.

Please note that the type of orders also impact the trading decisions. Some fund managers prefer to re-balance the portfolio daily with trade order that is good for the day. This allows fund manager to have a better view of the trading conditions.

Cash Management in Details

Listed below is an aggregate of all the Buy and Sell orders of each exchange.

10 Portfolio			Proposed Buy Order (USD)	Proposed Sell Order (USD)	Proposed Net Cash (USD)
NYSE	USD	T+3	(100,000,000.00)	50,000,000.00	(50,000,000.00)
NASDAQ	USD	T+3	(75,000,000.00)	2,000,000.00	(73,000,000.00)
NYSE Euronext	EUR	T+3	(5,000,000.00)	64,000,000.00	59,000,000.00
Deutsche Boerse	EUR	T+2	(3,000,000.00)	22,000,000.00	19,000,000.00
London SE	GBP	T+3	(7,000,000.00)	47,000,000.00	40,000,000.00
Tokyo SE	JPY	T+3	(20,000,000.00)	180,000,000.00	160,000,000.00
Hong Kong SE	KHD	T+2	(32,000,000.00)	3,000,000.00	(29,000,000.00)
Korea	KRW	T+2	(65,000,000.00)	2,000,000.00	(63,000,000.00)
Shanghai SE	RMB	T+1	(35,000,000.00)	3,000,000.00	(32,000,000.00)
Taiwan	TWD	T-1 (T+2)	(35,000,000.00)	4,000,000.00	(31,000,000.00)

Please note that there are some assumptions in the following scenario:

1.    We do not trade foreign exchange actively, instead we instruction the custodian bank to perform foreign exchange transaction on a need to basis.

2.    All unused cash will be converted to portfolio currency.

Listed below is an aggregate of all the Buy and Sell order for a single portfolio (Portfolio A).

Portfolio A			Proposed Buy Order (USD)	Proposed Sell Order (USD)	Proposed Net Cash (USD)
NYSE	USD	T+3	(10,000,000.00)	5,000,000.00	(5,000,000.00)
NASDAQ	USD	T+3	(7,500,000.00)	200,000.00	(7,300,000.00)
NYSE Euronext	EUR	T+3	(500,000.00)	6,400,000.00	5,900,000.00
Deutsche Boerse	EUR	T+2	(300,000.00)	2,200,000.00	1,900,000.00
London SE	GBP	T+3	(700,000.00)	4,700,000.00	4,000,000.00
Tokyo SE	JPY	T+3	(2,000,000.00)	18,000,000.00	16,000,000.00
Hong Kong SE	KHD	T+2	(3,200,000.00)	300,000.00	(2,900,000.00)
Korea	KRW	T+2	(3,500,000.00)	300,000.00	(3,200,000.00)
Shanghai SE	RMB	T+1	(6,500,000.00)	200,000.00	(6,300,000.00)
Taiwan	TWD	T-1 (T+2)	(3,500,000.00)	400,000.00	(3,100,000.00)

Listed below is the aggregate of all Buy and Sell orders for each currency. The table also shows the current cash account and available balance.

Portfolio A & Cash Account		Proposed Buy Order (USD)	Proposed Sell Order (USD)	Proposed Net Cash (USD)	19/2/2013 (USD)
USD	T+3	(17,500,000.00)	5,200,000.00	(12,300,000.00)	5,000,000.00
EUR	T+3	(800,000.00)	8,600,000.00	7,800,000.00	-
GBP	T+3	(700,000.00)	4,700,000.00	4,000,000.00	-
JPY	T+3	(2,000,000.00)	18,000,000.00	16,000,000.00	-
HKD	T+2	(3,200,000.00)	300,000.00	(2,900,000.00)	-
KRW	T+2	(3,500,000.00)	300,000.00	(3,200,000.00)	-
RMB	T+1	(6,500,000.00)	200,000.00	(6,300,000.00)	-
TWD	T-1 (T+2)	(3,500,000.00)	400,000.00	(3,100,000.00)	-

Based on the proposed orders and the existing cash, we can issue some foreign exchange instruction as follows: 

FX	Settlement Cycle		Amount
Buy TWD/ Sell USD	T+2		(3,100,000.00)
Buy RMB/Sell USD	T+2		(1,500,000.00)

Please note that all Forex transaction has the settlement date of T+2.

The traders can now trade with the following cash forecast report. Please note that the traders cannot trade in Taiwan market because of the prefunding requirement. For the Hong Kong, Korea and China market, trader can only buy whatever they could sell.

15-Feb-13
Portfolio A Cash Account			Outstanding Buy Order (USD)	Outstanding Sell Order (USD)	Outstanding Net Cash (USD)	15/2/2013 (USD)	16/2/2013 (USD)	17/2/2013 (USD)
USD	T+3		(17,500,000.00)	5,200,000.00	(12,300,000.00)	5,000,000.00	-	400,000.00
EUR	T+3		(800,000.00)	8,600,000.00	7,800,000.00	-	-	-
GBP	T+3		(700,000.00)	4,700,000.00	4,000,000.00	-	-	-
JPY	T+3		(2,000,000.00)	18,000,000.00	16,000,000.00	-	-	-
HKD	T+2		(3,200,000.00)	300,000.00	(2,900,000.00)	-	-	-
KRW	T+2		(3,500,000.00)	300,000.00	(3,200,000.00)	-	-	-
RMB	T+1		(6,500,000.00)	200,000.00	(6,300,000.00)	-	-	1,500,000.00
TWD	T-1 (T+2)		(3,500,000.00)	400,000.00	(3,100,000.00)	-	-	3,100,000.00

Below is a list of all the trades done on 15 Feb 2013

Traded on 15 Feb 2013		Transacted Buy Order (USD)	Transacted Sell Order (USD)	Net Cash (USD)
USD	T+3	(7,000,000.00)	3,120,000.00	(3,880,000.00)
EUR	T+3	(800,000.00)	5,160,000.00	4,360,000.00
GBP	T+3	(700,000.00)	2,820,000.00	2,120,000.00
JPY	T+3	(2,000,000.00)	10,800,000.00	8,800,000.00
HKD	T+2	(300,000.00)	300,000.00	-
KRW	T+2	(300,000.00)	300,000.00	-
RMB	T+1	(200,000.00)	200,000.00	-
TWD	T-1 (T+2)	-	400,000.00	400,000.00

Base of the trades done, we can deliver a preliminary cash forecast report as follows.

16-Feb-13
Portfolio A Cash Account		Outstanding Buy Order (USD)	Outstanding Sell Order (USD)	Outstanding Net Cash (USD)	16/2/2013 (USD)	17/2/2013 (USD)	18/2/2013 (USD)
USD	T+3	(10,500,000.00)	2,080,000.00	(8,420,000.00)	5,000,000.00	400,000.00	(3,480,000.00)
EUR	T+3	-	3,440,000.00	3,440,000.00	-	-	4,360,000.00
GBP	T+3	-	1,880,000.00	1,880,000.00	-	-	2,120,000.00
JPY	T+3	-	7,200,000.00	7,200,000.00	-	-	8,800,000.00
HKD	T+2	(2,900,000.00)	-	(2,900,000.00)	-	-	-
KRW	T+2	(3,200,000.00)	-	(3,200,000.00)	-	-	-
RMB	T+1	(6,300,000.00)	-	(6,300,000.00)	-	1,500,000.00	-
TWD	T-1 (T+2)	(3,500,000.00)	-	(3,500,000.00)	-	3,500,000.00

Based on the cash forecast reports, the fund management team can issue additional Forex instructions as follows:

FX
BuyRMB/SellJPY	T+2	(4,800,000.00)
BuyKRW/SellJPY	T+2	(3,200,000.00)
BuyHKD/SellJPY	T+2	(800,000.00)
BuyHKD/SellGBP	T+2	(2,100,000.00)
BuyUSD/SellEUR	T+2	(4,360,000.00)
BuyUSD/SellGBP	T+2	(20,000.00)

The updated cash forecast report will be shown on 16 Feb 2013

16-Feb-13
Portfolio A Cash Account			Outstanding Buy Order (USD)	Outstanding Sell Order (USD)	Outstanding Net Cash (USD)	16/2/2013 (USD)	17/2/2013 (USD)	18/2/2013 (USD)
USD	T+3		(10,500,000.00)	2,080,000.00	(8,420,000.00)	5,000,000.00	400,000.00	900,000.00
EUR	T+3		-	3,440,000.00	3,440,000.00	-	-	-
GBP	T+3		-	1,880,000.00	1,880,000.00	-	-	-
JPY	T+3		-	7,200,000.00	7,200,000.00	-	-	-
HKD	T+2		(2,900,000.00)	-	(2,900,000.00)	-	-	2,900,000.00
KRW	T+2		(3,200,000.00)	-	(3,200,000.00)	-	-	3,200,000.00
RMB	T+1		(6,300,000.00)	-	(6,300,000.00)	-	1,500,000.00	6,300,000.00
TWD	T-1 (T+2)		(3,500,000.00)	-	(3,500,000.00)	-	3,500,000.00	-

The red mark indicates that we could trade China and Korea market which we previously could not. There are no restrictions in trading markets with T+3 settlement cycle.

Below is a list of all the trades done on 16 Feb 2013:

Traded on 16 Feb 2013		Transacted Buy Order (USD)	transacted Sell Order (USD)	Net Cash (USD)
USD	T+3	(10,500,000.00)	2,080,000.00	(8,420,000.00)
EUR	T+3	-	3,440,000.00	3,440,000.00
GBP	T+3	-	1,880,000.00	1,880,000.00
JPY	T+3	-	7,200,000.00	7,200,000.00
HKD	T+2	(2,900,000.00)	-	(2,900,000.00)
KRW	T+2	(3,200,000.00)	-	(3,200,000.00)
RMB	T+1	(1,500,000.00)	-	(1,500,000.00)
TWD	T-1 (T+2)	-	-	-

Based on the trades done on 16 Feb 2013, our preliminary cash forecast report is shown below:

17-Feb-13
Portfolio A Cash Account		Outstanding Buy Order (USD)	Outstanding Sell Order (USD)	Outstanding Net Cash (USD)	17/2/2013 (USD)	18/2/2013 (USD)	19/2/2013 (USD)
USD	T+3	-	-	-	400,000.00	900,000.00	(7,520,000.00)
EUR	T+3	-	-	-	-	-	3,440,000.00
GBP	T+3	-	-	-	-	-	1,880,000.00
JPY	T+3	-	-	-	-	-	7,200,000.00
HKD	T+2	-	-	-	-	-	-
KRW	T+2	-	-	-	-	-	-
RMB	T+1	(4,800,000.00)	-	(4,800,000.00)	-	4,800,000.00	-
TWD	T-1 (T+2)	(3,500,000.00)	-	(3,500,000.00)	3,500,000.00	-	-

Based on the preliminary report, we need to convert most currencies into USD to fund the purchase. The Forex instructions are as follows:

Buy USD / Sell EUR	T+2	(3,440,000.00)
Buy USD / Sell GBP	T+2	(1,880,000.00)
Buy USD / Sell GBP	T+2	(7,200,000.00)

The final cash forecast report taking into consideration of Forex instructions is as follows:

17-Feb-13
Portfolio A Cash Account		Outstanding Buy Order (USD)	Outstanding Sell Order (USD)	Outstanding Net Cash (USD)	17/2/2013 (USD)	18/2/2013 (USD)	19/2/2013 (USD)
USD	T+3	-	-	-	400,000.00	900,000.00	5,000,000.00
EUR	T+3	-	-	-	-	-	-
GBP	T+3	-	-	-	-	-	-
JPY	T+3	-	-	-	-	-	-
HKD	T+2	-	-	-	-	-	-
KRW	T+2	-	-	-	-	-	-
RMB	T+1	(4,800,000.00)	-	(4,800,000.00)	-	4,800,000.00	-
TWD	T-1 (T+2)	(3,500,000.00)	-	(3,500,000.00)	3,500,000.00	3,500,000.00	3,500,000.00

We can complete all the China trades today; however, we can only start trading Taiwan stock starting tomorrow.

Trades done on 17 Feb 2013 will be:

Traded on 17 Feb 2013		Transacted Buy Order (USD)	transacted Sell Order (USD)	Net Cash (USD)
RMB	T+1	(4,800,000.00)	-	(4,800,000.00)
TWD	T-1 (T+2)	-	-	-

The final cash forecast on 18 Feb 2013, there is no need for Forex instructions:

18-Feb-13
Portfolio A Cash Account		Outstanding Buy Order (USD)	Outstanding Sell Order (USD)	Outstanding Net Cash (USD)	18/2/2013 (USD)	19/2/2013 (USD)
USD	T+3	-	-	-	900,000.00	5,000,000.00
RMB	T+1	-	-	-	-	-
TWD	T-1 (T+2)	(3,500,000.00)	-	(3,500,000.00)	3,500,000.00	3,500,000.00

We can buy all the Taiwan stocks today.

Trades done on 18 Feb 2013 will be:

Traded on 17 Feb 2013		Transacted Buy Order (USD)	transacted Sell Order (USD)	Net Cash (USD)
TWD	T-1 (T+2)	(3,500,000.00)	-	(3,500,000.00)

The final cash forecast will be:

19-Feb-13
Portfolio A Cash Account		Outstanding Buy Order (USD)	Outstanding Sell Order (USD)	Outstanding Net Cash (USD)	19/2/2013 (USD)	20/2/2013 (USD)	21/2/2013 (USD)
USD	T+3	-	-	-	5,000,000.00	5,000,000.00	5,000,000.00
TWD	T-1 (T+2)	(3,500,000.00)	-	(3,500,000.00)	3,500,000.00	-	-

As you can see, cash management is a complex task especially with multiple currencies. Cash management usually are done by the fund management support team under the supervision of the fund managers. Cash forecast report are generate daily for the fund management team.

One common practice is for the fund managers to hold the buy orders until the sell orders are done. This is to ensure that Buy order for individual portfolio are not delayed or left out due to funding problem.

Please note that the whole operation will get more complicated if we are managing 20 different portfolios. Every portfolio must be managed separately and their cash holding may be different from other portfolios.

As far as traders are concern, they will aggregate all the buy orders and sell orders for a particular exchange and for a particular stock. Therefore, it is the fund manager team’s responsibility to instruct traders to hold the buy orders due to funding problem.

If the investment firm has the policy of foreign exchange hedging then the fund management team will work with Forex traders. Traders will negotiate with the custodian for a better price and at the same time buying some futures to perform hedging and eliminate foreign exchange risk.

For some portfolio, especially fixed income portfolio or balanced portfolio, the client requires that excess cash should be place with the money market fund. This will greatly increase the complexity of cash management.

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