SD-05.5 — Cash Equitisation & Drag Management

Business Domain: BD-05 Portfolio Management (Front office) · Applies: BOTH

Purpose

Keeps a portfolio’s uninvested cash exposed to markets and minimises cash drag. A portfolio always carries operational cash — pending allocations, redemptions, dividend and coupon receipts, rebalancing cash — and uninvested cash is a drag on return whenever markets rise. Cash Equitisation overlays index futures or ETFs on that cash so it tracks the target exposure. It is a purpose-specific overlay — it shares the futures and collateral machinery of SD-05.4 but its purpose is drag elimination, not exposure shaping.

Service Operations

• Identify and monitor operational cash — track the unintended and operational cash balances across the portfolio.
• Measure cash drag — quantify the basis-point cost of idle cash against the benchmark.
• Equitise cash — overlay index futures or ETFs so that cash plus the synthetic position tracks the target market exposure.
• Size and roll the synthetic exposure — size the contracts to the cash balance, roll the futures, and manage the margin.
• Attribute the drag outcome — report the drag avoided and the residual.

Inputs and outputs

• Inputs: the portfolio’s cash balances and cash forecasts; the target beta or duration; futures and ETF market data.
• Outputs: the equitisation positions and the cash-drag attribution.

Entities

• Consumes: Portfolio / Mandate (E-03), Holding / Position (E-04, book = ibor), Price & Market Data (E-08).
• Owns: none — the equitisation positions are recorded as holdings (E-04).

Standards

• No external standard governs cash equitisation. It is an established practitioner technique, executed with equity-index futures.

Open extensions

• The shared machinery with SD-05.4 — the split is by purpose (drag elimination versus exposure shaping), not mechanism.
• The interaction with SD-05.6 on cash held deliberately for liquidity rather than operationally.