Liquidity Portfolio Management

ADB’s liquidity portfolio helps ensure the uninterrupted availability of funds to meet loan disbursements, debt servicing, and other cash requirements; provides a liquidity buffer in the event of financial stress; and contributes to ADB’s earning base. ADB’s Investment Authority governs ADB’s investments in liquid assets. The primary objective is to maintain the security and liquidity of funds invested. Subject to these two parameters, ADB seeks to maximize the total return on its investments. ADB does not switch currencies to maximize returns on investments, and investments are generally made in the same currencies in which they are received. At the end of 2011, ADB held liquid investments in 23 currencies.

Liquid investments are held in government and government-related debt instruments, time deposits, and other unconditional obligations of banks and financial institutions. To a limited extent, they are also held in corporate bonds that are rated at least A–. These investments are held in five portfolios—core liquidity, operational cash, cash cushion, discretionary liquidity, and ad hoc—all of which have different risk profiles and performance benchmarks.

The core liquidity portfolio is invested to ensure that the primary objective of a liquidity buffer is met. Cash inflows and outflows are minimized to maximize the total return relative to a defined level of risk. The portfolio has been funded by equity, and the average duration of the major currencies in the portfolio was about 2.26 years at December 31, 2011.

The operational cash portfolio is designed to meet net cash requirements over a 1-month horizon. It is funded by equity and invested in short-term highly liquid money market instruments.

The cash cushion portfolio holds the proceeds of ADB’s borrowing transactions pending the disbursement of these funds. It is invested in short-term instruments, and aims to maximize the spread earned between the borrowing costs and investment income.

The discretionary liquidity portfolio is used to support medium-term funding needs and is funded by debt to provide flexibility in executing the funding program over the medium term, and to opportunistically permit borrowing ahead of cash-flow needs and bolster ADB’s access to short-term funding through continuous presence in the market.

Year-end balance of liquidity portfolios

The year-end balance of the portfolios and the return on the liquidity portfolio in 2011 and 2010 are presented below:

Year-end balances and returns on liquidity portfolios

  Year-end balancea
(in millions of U.S. dollars)		 Annualized financial return
%
  2011 2010 2011 2010
Core liquidity portfolio 14,400 12,592 3.44   3.83  
Operational cash portfolio 196 218 0.09   0.13  
Cash cushion portfolio 2,136 1,933 0.57  0.87  
Discretionary liquidity protfolio 4,408 3,091 0.44b 0.34b
Others 562 453 3.57   4.14  
Total 21,701 18,286    
a Including receivables for securities repurchased under resale arrangements, securities transferred under securities lending arrangements, unsettled trades, and accrued interest. The composition of the liquidity portfolio may shift from year to year as part of the ongoing asset and liquidity management operations.
b Spread over funding cost at December 31.
Note: Figures may not add up due to rounding

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