Page 1

EXPERT INSIGHT ON GLOBAL TREASURY AND FINANCE

GTB G L O B A L T R E A S U RY B R I E F I N G

BREXIT: REASSEMBLING THE PUZZLE

ALSO IN THIS ISSUE TECHNOLOGY EXPERTISE: NO LONGER OPTIONAL AT BOARD LEVEL BIG DATA: DIVING INTO A POOL OF NEW OPPORTUNITIES

Published by


GTB

C O NT E NT S

G L O B A L T R E A S U RY B R I E FI NG

GLOB AL TREASURY BRIEFING

CONTENTS 5

EDITOR’S LETTER

6

BATTLE ROYAL: HONG KONG VS. SINGAPORE FOR REGIONAL TREASURIES

10 THE ITALIAN JOB: MANAGING A GLOBAL TREASURY AT GE POWER CONVERSION 12

COVER STORY

THE BREXIT LEGACY

15 FINANCIAL TECHNOLOGY: THE FUTURE IS NEARER THAN YOU THINK 16 BIG DATA: DIVING INTO A POOL OF NEW OPPORTUNITIES 18 TECHNOLOGY EXPERTISE: NO LONGER OPTIONAL AT BOARD LEVEL 20 ROBOTICS: THREAT OR OPPORTUNITY FOR TREASURY? 22 BIG DATA MEANS BIG OPPORTUNITY FOR TREASURERS 24 CYBERATTACKS ON THE RISE AS TECHNOLOGIES IMPROVE 26 A SWEET ALTERNATIVE TO CASH INVESTMENTS 29

NOTIONAL POOLING:

WHAT’S THE ALTERNATIVE?

32 CORPORATE TREASURY: AN EVOLVING STRATEGIC ROLE 35

SIBOS 2016 PREVIEW:

NEW PAYMENT METHODS REQUIRE SIMPLE RULES AND CONNECTIVITY

37 PAYMENTS AT SIBOS: WHAT TO LOOK OUT FOR

CEO Louis Warner louis.warner@contentive.com EDITOR Graham Buck graham@gtnews.com EDITORIAL CONTRIBUTORS Peter Williams John Hintze Rebecca Brace ADVERTISING Carolina Quintana carolina@gtnews.com | +44(0)20 8080 9168 DESIGN & PRODUCTION Alex Panichi - Accelerate Digital www.acceleratedigital.com Copyright © 2016 gtnews. Copying and redistributing prohibited without permission of the publisher. This information is provided with the understanding that the publisher is not engaged in rendering legal, accounting or other professional services. If legal or other expert assistance is required, the services of a competent professional person should be sought. CONTENTIVE One Hammersmith Broadway Hammersmith W6 9DL UNITED KINGDOM Tel: +44 (0) 208 080 9167 Fax: +44 (0) 207 084 7783 sales@gtnews.com news@gtnews.com

3


SEPTEMBER/OCTOBER 2016


E D IT O R ’S L E T T E R

G L O B A L T R E A S U RY B R I EFI NG

5

EDITOR’S LETTER

D

ear GTNews subscriber, Attending a series of conferences for finance professionals can obscure the fact that they sometimes think rather differently from the typical man, or woman, in the street. This summer’s UK referendum on the country’s membership of the European Union (EU) was a case in point. Ahead of the referendum on June 23, corporate treasurers and CFOs attending events such as the Association of Corporate Treasurers (ACT) annual conference were asked if they were for or against Brexit. On each occasion, around 80% to 85% of the audience indicated they were in the ‘Remain’ camp. Admittedly, opinion polls suggested a more even division of opinion among the general public and much of the British press advised their readers to vote for leaving. Nonetheless the announcement in the small hours of June 24 that the UK would leave the EU after 43 years was still a shock. Nearly three months on from the bombshell, the shape of postBrexit Europe is still far from clear - although the economic apocalypse predicted by some Remainers is looking as exaggerated as the Outers claimed. In this issue we look at what corporate treasury departments can expect once the UK severs its ties. Many organisations, ranging from the International Monetary Fund (IMF) to the Confederation of British Industry (CBI) have weighed in with their own forecasts. Interestingly, the European Association of Corporate Treasurers (EACT) has so far offered no more than a terse ‘no comment’ on Brexit. Elsewhere in this issue, we offer a focus on the fast-evolving world of financial technology that centres on four central issues: robotics, cybersecurity, tech expertise and big data. Each of these poses massive challenges to treasurers - in particular, robotics tends to trigger fears about job security - but we also look at the opportunities they are opening up. Even cybersecurity has offered the insurance industry the chance to develop new products and services. In the latest in our series of interviews with treasury professionals, Rebecca Brace gets the lowdown from Giacomo Baldi of GE Power Conversion on what his job entails, while ANZ’s Emma Davine and Kamul Day report on the competition between Hong Kong and Singapore - both keen to gain the credentials of Asia Pacific’s leading financial hub and the location of choice for a regional treasury centre. Last but not least, my thanks to readers for their compliments and comments on the content and design of the relaunched Global Treasury Briefing. Our next issue is in December but we’re already hard at work planning the contents for our editions during 2017. Your feedback - and suggestions on topics that you’d like us to cover continue to be much appreciated. Best wishes, Graham Buck GTNews editor SEPTEMBER/OCTOBER 2016


6

GL OB AL TREAS U RY B R I E F I NG

W OR LD FO CU S

BATTLE ROYAL: HONG KONG VS. SINGAPORE FOR REGIONAL TREASURIES AS COMPETITION HOTS UP BETWEEN ASIA PACIFIC’S TWO MAJOR FINANCIAL CITIES, WHAT ARE THE MAIN ATTRACTIONS OF EACH LOCATION FOR CORPORATES SEEKING TO ESTABLISH AN ASIAN REGIONAL TREASURY CENTRE? EMMA DAVINE AND KUNAL DEY ASSESS THE RESPECTIVE STRENGTHS.

T

he battle in Asia to entice multinationals to set up regional treasury centres is becoming more intense, now that Hong Kong and Singapore’s new tax rules have taken effect. In terms of sheer scale, it seems that Singapore has won the battle thus far. Singapore has approximately 4,000 registered regional headquarters while Hong Kong only has 1,400, according to the Financial Services and Treasury Bureau HK. Earlier this year Hong Kong halved its tax rate from 16.5% to 8.25% for corporate treasury centres, and Singapore responded by dropping its already favourable rate of 10% to 8%. Since Hong Kong implemented its new rules in June, it won’t be long before we can see whether this was enough for the southeastern China city to rival Singapore in attracting more regional treasuries. The benefits of setting up a regional treasury centre include: • Group treasury is able to manage regional liquidity through intercompany lending and borrowing. • Leveraging technology and banking structures for greater visibility and control of funding. • Efficiency from through economies of scale.

SEPTEMBER/OCTOBER 2016

• Maximum flexibility both regionally and locally - and in particular being the eyes and ears for group treasury on the ground in Asia. • Local teams retain responsibility and ownership of results, while regional treasury can often play the role of being an advisor to the business. • Centralised liquidity risk management and coordination of banking relationships. For corporates taking advantage of these benefits, the competition between Hong Kong and Singapore is good news. If you are considering setting up a regional treasury centre, the big question is ‘Where’? CHOOSING A LOCATION: WHAT TO LOOK FOR Tax incentives are just one of the draws, and there are many other considerations. Your regional treasury needs to be in a location that: • Is close to your key business operations - ideally also considering both your current and future corporate footprint. • Allows you to manage the time zones across your business effectively. • Is in a cost-effective location.

• Is in a location where it is easy to do business. • Is politically and economically stable. • Has a well-established banking and regulatory environment. • Has a strong legal framework and structure. • Doesn’t have a high amount of foreignexchange and cross-border restrictions that will reduce your effectiveness. • Preferably has a favourable tax regime. • Allows efficient access to the currencies and clearing systems that you need. • Allows you to attract and retain high quality treasury expertise - here you will need to consider time zones and socioeconomic factors, as well as the cost of living and environment. • Allows for ease of communication with your broader teams. • And lastly, will not expose your people to an unacceptable safety threat, or exposure to corruption. Every company is different and will have different answers to each of these questions. Further, the relative importance of each factor will vary company by company.


G L O B A L T R E A S U RY B R I EFI NG

WORLD FOCUS

7

HELPING WITH YOUR DECISION In coming to your decision, it is important to weigh up your objectives and ideal model against each location you are looking at: HOW MUCH CENTRALISATION DO YOU SEEK?

WHAT ARE THE KEY OBJECTIVES FOR YOUR RTC?

WHAT ARE THE POTENTIAL CHALLENGES TO THESE OBJECTIVES?

Repatriation of surplus

Regulations goverging onshore / offshore accounts

Reducing funding costs

Domestic and cross-border liquidity management remains restricted in many Asia-Pacific jurisdictions

Decentralised Treasury / Local Banks

Improve operational efficiency Taxation and reporting considerations Improving return on investment

Treasury Centre / Payment & Collection Factory

Increasing volatility in Asia-Pacific currencies Meet long-term debt obligations Lack of liquidity in some FX markets

Meet local acquisition / divestment opportunities

In-House Bank Lack of convertibility in some FX markets

Manage regional FX risks

Source: World Bank Report – Ease of Doing Business 2015

SO HOW DO THE TWO LOCATIONS SQUARE OFF? Location

Hong Kong

Singapore

Value Proposition

Established Greater China financial hub with recent tax incentives catering to companies with strong economic links to Greater China and North Asia due to its integration with China.

Established and mature market with existing incentives catering to companies with strong links to ASEAN and South Asia.

Tax Rate

8.25%

8%

Cross Border Funds Transfers

No Restrictions

No Restrictions

Foreign Exchange Controls

None

None

Ease of Doing Business

#5

#1

Cost of living global ranking

#1

#4

Foreign labour Restrictions

Minimal

Yes

Language

English Cantonese Mandarin

English Mandarin

Climate

Seasonal

Hot all year round

Pollution

High

Good, except seasonal haze

Crime rate

Low

Low

Airport logistics & hub access to region

Excellent

Excellent Source: Mercer July 2016

SEPTEMBER/OCTOBER 2016


8

GL OB AL TREAS URY B R I E F I NG

W O R LD FOCU S

ALTHOUGH HONG KONG AND SINGAPORE ARE OFFERING TAX INCENTIVES, THE COSTS OF DOING BUSINESS - IN PARTICULAR, THE COST OF RELOCATING STAFF - MAY OUTWEIGH THESE BENEFITS WHAT TRENDS ARE WE SEEING – HONG KONG V SINGAPORE? Over the past 12 months, we have been seeing a leveling of the playing field between Hong Kong and Singapore - with competitive tax and corporate incentives, as well as measures to improve the ease of doing business. We see very little movement of existing regional treasuries between the two financial centres, except in limited cases where treasury strategy has changed.There has been a slight shift in newly established corporate treasuries opting for Hong Kong rather than Singapore. Reasons for this include: • Hong Kong’s proximity to China’s trade and capital flows and in particular the ‘One Belt, One Road’ strategy that China is embarking on to create an economic zone across Asia and into the Middle East and Europe. To complement this, the recentlySEPTEMBER/OCTOBER 2016

launched China-led Asian Infrastructure Investment Bank (AIIB) has as its focus to promote development and financing of the projects in renminbi (RMB) positions, with Hong Kong as a primary financial centre due to its large RMB liquidity pool. • Added to its position, HK offers: o access to experienced resources fluent in English, Cantonese and Mandarin; o the foundation of British law; o ease of access to business and trading partners in China via high-speed rail and other new infrastructure. • The impact of tightened foreign labour restrictions in Singapore is becoming more evident. A concerted push on the hiring of local talent has resulted in increased recruitment complexity and higher costs for those companies that require foreign labour.

LIVING COSTS Although Hong Kong and Singapore are offering tax incentives, the costs of doing business - in particular, the cost of relocating staff - may outweigh these benefits. In fact, Hong Kong tops the annual Global Cost of Living Survey issued by Mercer, and Singapore comes fourth. In addition, according to some estimates, the monthly rent for a three-bedroom apartment in Hong Kong (US$10,000) could be twice the price of a dwelling the same size in Singapore (US$5,000). According to ANZ Mobility, which draws on data from ECA International, if an employee relocates from Melbourne, Hong Kong is an estimated 1.62 times more expensive than living in the Australian city, whereas Singapore is 1.45 times more expensive than living in Melbourne. Add to this the cost of relocating increases for families with school-age children. Hong Kong is also more expensive


WORLD FOCUS

G L O B A L T R E A S U RY B R I EFI NG

9

SINGAPORE IS GEOGRAPHICALLY BETTER PLACED THAN HONG KONG FOR ASEAN than Singapore for school fees, according to ANZ Mobility. Secondary school fees, for example, are approximately A$33,000 in Hong Kong, compared to A$30,000 in Singapore. Hong Kong schools are also more difficult for expatriate children to get into, compared to Singapore. DIVERSITY AND INCLUSION For those companies that have Diversity & Inclusion policies, Hong Kong is considered to have a relatively more liberal stance on lesbian, gay, bisexual, transsexual and intersex (LGBTI) rights. It tops the list in Asia for workplace inclusion and diversity, according to Randstad’s quarterly Workmonitor survey for Q3 2015. Hong Kong also has a self-regulated code of practice for sexual orientation discrimination and in 2015, Community Business published its inaugural Workplace Inclusion index.

Conversely in Singapore, recent pro-family activist campaigns pressuring multinationals to stop sponsoring events such as the annual LGBTI “Pink Dot” event has led to a perceived lack of inclusion in the city state. These are just some of the factors to consider when choosing a regional treasury centre. Ultimately the decision of where to set is up should be based on proximity to the company’s core growth area, regulatory and tax environment, the cost of doing business and availability and the sustainability of core talent. Importantly where we do see value is setting up direct or bank facilitated discussions with the relevant regulators to determine the best fit and approach for your organisation.

Emma Davine is head of client solutions, transaction banking at ANZ and is responsible for capability commercialisation and delivery of bestpractice cash management solutions. Kunal Dey is director of regional sales, transaction banking at ANZ, responsible for managing the regional treasury centres and clients with multi-country transaction banking requirements. FURTHER READING: KPMG: The Structure, Role and Location of Financial Treasury Centres: A Process of Evolution. PwC Hong Kong: Hong Kong drives to become a Corporate Treasury hub with new policies and incentives

SEPTEMBER/OCTOBER 2016


10

G L OB AL TREAS URY B R I E F I NG

I N TER V I EW

THE ITALIAN JOB: MANAGING A GLOBAL TREASURY AT GE POWER CONVERSION

BY REBECCA BRACE

GIACOMO BALDI, GLOBAL TREASURER AT FLORENCE, ITALY-BASED GE POWER CONVERSION, HAS BEEN RESPONSIBLE FOR THE COMPANY’S TREASURY FUNCTION SINCE 2014. AS WELL AS LOOKING AFTER BANK ACCOUNTS, CASH MANAGEMENT AND TRADE FINANCE, THE TREASURY TEAM ALSO MANAGES THE COMPANY’S FOREIGN EXCHANGE RISK AND HEDGING PROGRAMMES. SEPTEMBER/OCTOBER 2016

C

ould you give me an overview of your role? I’ve been with GE since 1994, when the Italian business I was working for, Nuovo Pignone, was acquired by GE to become GE Oil & Gas. Then. in late 2014 I moved to GE Power Conversion in the role of global treasurer. My role is to manage the treasury function in areas such as bank accounts, cash management,


INT E R V IE W

trade finance - including bank guarantees and export letters of credit - and FX risk and hedging programmes. The HQ treasury team consists of three people reporting to me. We also have people with treasury responsibilities - and ‘dotted line’ reporting to me - in France, the UK and Brazil. How has the UK’s Brexit vote, and the associated volatility in the markets, affected your strategy? The risks associated with volatility in the markets - and dealing with them - is a perennial concern for a treasurer. Although it seems to have increased after the Brexit vote, volatility is something that treasurers always have to manage in order to safeguard the future of the business. This is particularly important for long-cycle businesses such as ours. In respect of the mark-to-market (MTM) of the derivatives we buy, we attempt to mitigate the quarterly volatility coming from the market and hedge our economic exposure. So there is always an attempt to maintain a good balance between the upfront hedging of any new sales and purchase contracts and the fight against quarterly volatility deriving from MTM. When it comes to our foreign exchange risk, we may have to adjust our strategy every quarter, or even every month, depending on the cross-currency rates that we need to hedge. Just to give you an example, over the last year the Brazilian real had been strongly declining. However, in recent months - despite forecasts from the analysts - it started to strengthen, which presented us with some headaches with the outstanding derivatives having a very negative MTM in the last two or three quarters. On the other hand, the Brexit vote and the associated volatility around the British pound means that sterling has touched its lowest level for over 10 years. With our UK entity operating in sterling, and having hedged sales in euros and US dollars before the Brexit vote implications came up in the market, the hedge now has a very negative MTM. We are trying to manage the new deals using a mixed approach, forwards and stop loss orders, to see whether we can mitigate the negative impact for this quarter and the following quarter. The weakness of sterling is unlikely to improve anytime soon. How easy - or difficult - is it managing a treasury team remotely? A strong treasury team is a great resource, but managing and motivating

a global team remotely can present a number of challenges. It is important for those who work remotely from the headquarters to not feel isolated. The part that the headquarters team can play in this is to help motivate them and ensure that they are able to keep in sharp focus all the areas of treasury they are responsible for, as well as supporting them with any local initiatives they are involved in. It is all about the personal interactions, personal support, and giving the remote treasury staff the reassurance that they are part of the team. With my extended team I have monthly staff meetings using our telepresence rooms, as well as weekly calls to share the main items with them plus soft skills, related issues and that kind of thing. And of course whenever the team needs to touch base with me, my door is always open. Recruiting in overseas locations can present some challenges. Treasury is a very technical function and it can take time to find the right people for the job. Logistical issues do not help. For example, it is easier to find someone with good treasury skills in Paris, London or Milan - but in smaller locations like Rugby, UK, there are not as many experienced people available. What are your thoughts on centralising or de-centralising the treasury function? The world is continually changing. There are certainly good reasons for decentralising, but it is a fact that corporations need to maintain a certain degree of control. So it’s a question of attempting to be global, but at the same time being local, as well to be able to manage local peculiarities effectively. What GE has been doing has been to create hubs across the world. I wouldn’t want to call them shared service centres, because although that may have been the original intention, if the teams in these hubs only have responsibility for the transactional activities it is hard for them to have much of a career path. The purpose of creating these hubs in the treasury area is to not only have people doing the transactions but also managing the relationship with the business units there. This allows them to understand the flows they are managing, which in turn means they can challenge the business units on specific cash flows if there are signs that they could be treated in a different manner. Are all of these hubs up and running? There are five regional hubs that are up and running. At the moment they are functioning for other enterprise standards

G L O B A L T R E A S U RY B R I E FI NG

11

like buy-to-pay, record-to-report and things like that. We are building the treasury function in Latin America and North America and hopefully we will extend it to our other three hubs in Budapest, India and Shanghai in early 2017. What other challenges are you currently looking at? The one that comes to mind right now is trade finance, which in my opinion is still too paper-based. I am working with a few banking partners to figure out how we can reduce the volume of paper in the process using bank e-platforms and the exchange of digital data, utilising PDFs or blockchain or something similar. It seems also that software houses are focused on creating an environment where all the stakeholders, including chambers of commerce, forwarding agents and anybody who is required to generate documents, are willing to dematerialise these documents. It is hoped that this will create more security over the documents themselves, as well as speed up the collection times. Do you have a sense of where that development might be of most interest? You mentioned blockchain - are you looking at other developments such as bank payment obligations? Yes, I have been working bank payment obligations (BPOs) for some time. I think both my banking partners and I have come to the conclusion that although it might be a beneficial instrument for exporters there are currently very few benefits for the importers. I would say that BPO is still at a too early stage. E-presentation looks much better, because it maintains the guarantee for the importer. The documentation and data that are used for the letter of credit (LC) are really secure, and can be used to obtain their goods. Blockchain - and likewise any e-presentation platform - seems like a good compromise and a good way to satisfy all the stakeholders. The problem is how to connect all the stakeholders and how to get them on board and using the platform quickly and safely. This is really what we expect the banking industry to work on very heavily, and businesses such as ours continue to make ourselves available for any testing or discussions, roundtables, to share our needs and what we see as issues rather than opportunities. Rebecca Brace is a freelance financial and business journalist, who contributes regularly to GTNews. SEPTEMBER/OCTOBER 2016


12

G L OB AL TREAS URY B R I E F I NG

B R EX I T A N A L YS IS

BREXIT: REASSEMBLING THE PUZZLE

A

global financial crisis; deep and prolonged recession; banks’ funding freeze; historically low interest rates; and now Brexit. For corporate treasurers it may not quite be the case that if you’ve seen one crisis you’ve seen them all, but once over the initial surprise over the UK’s decision to quit the European Union had been ingested, you could almost hear the sound of treasurers in the UK and Europe rolling up their sleeves and doing what they do best: getting on with it. One European treasurer told GTB that he hadn’t really been paying much attention to planning for Brexit, but had issues closer to home to worry about. He said: “We may be the one odd animal out there, but given everything we have on our plate at the moment.” On his plate was a significant merger and corporate restructuring. Nonetheless, he admitted to having done some pre-vote planning before the June 23 referendum; “Obviously we kept our sterling exposure short ahead SEPTEMBER/OCTOBER 2016

of the vote.” His treasury department had also been ‘deep diving’ and keeping a close eye on a pension fund, which had significant indirect investment in London real estate. However, apart from that he noted: “there hasn’t been much going on.” The lack of apparent and immediate activity is driven by uncertainty of what to do: Dino Nicolaides, who leads corporate treasury services in banking and capital markets at Deloitte is talking to working group treasurers as Brexit planning gears up across the board. He says: “There are likely to be significant changes in the financial landscape, in politics and the legal, tax and regulatory environment. At present it is difficult to assess these changes but they will no doubt have an impact on treasury functions.” In terms of immediate actions, firstly group treasurers need to focus on foreign exchange (FX) volatility. “Since the referendum result the pound has weakened, making British imports more

expensive and exports cheaper,” says Nicolaides. “That will impact corporates in different ways and budgets created before the referendum may need to be revised, as they may no longer be accurate. If they hedged cash flows which are no longer happening treasurers may end up being over-hedged. So they should re-check their hedging positions.” He adds that treasurers should reconsider cash flow forecasts in the light of new circumstances of a weakening pound to make sure they are still accurate and still happening. Do company FX policies need to be amended in light of the weakening pound? RELUCTANCE TO COMMENT Apart from work on FX policies, most of the other ‘action’ is speculation on what might happen once the UK’s exit negotiations start in earnest, with the date for that still uncertain. It means that there is still in the cautious world of


B R E XIT A NA L YS IS

G L O B A L T R E A S U RY B R I E FI NG

13

MORE UK TREASURERS ARE THOUGHT TO HAVE VOTED TO REMAIN IN THE EU THAN FOR BREXIT IN THE JUNE 23 REFERENDUM, BUT THEY MUST NOW COPE WITH THE REPERCUSSIONS OF THE UNEXPECTED RESULT, REPORTS PETER WILLIAMS treasury a reluctance to speculate too far, particularly where there is a perception of business and politics mixing. For instance, when asked by GTB after the result of the referendum, for its view on the implications of Brexit for treasurers, Richard Cordero, chief operating officer, of the Paris-based - European Association of Corporate Treasurers (EACT) responded: “The EACT does not intend to comment on Brexit.” One can understand the caution but one sector that is sharing its Brexit planning - and is particularly relevant for treasurers in their risk management role - is insurance. Insurance broking and risk management giant Marsh is suggesting corporate treasurers scenario plan to help formulate long-term strategies. Options emerging from this work would be identifying new opportunities; addressing newly-identified threats; and reviewing business continuity management plans. In particular Marsh suggests a review of the corporate risk register looking at the range of risks to which the company

is exposed, their potential impact and mitigation strategies. Charles BeresfordDavies, managing director, UK risk management practice leader at Marsh said: “We have already started to see a new risk environment with the pound depreciating against the dollar and we expect more market volatility over the coming months.” Marsh is summarising three key areas in this new environment for those who, like treasurers, are charged with managing corporates risk: it points out that GDP growth and regulatory uncertainties could deter foreign direct investment (FDI) to the UK in the short-term; corporate strategy may have to be recalibrated if passporting rights - the ability of financial service firms based in one EU country to operate in another without setting up a new legal entity - are not resolved: and it suggests that employment mobility constraints may influence how multinationals operate. Funding is another issue highlighted both by Marsh and Deloitte. Marsh points out that in the UK in 2016 between Q1

and Q2 initial public offerings (IPOs) fell by half, while globally they almost tripled. For those group treasurers working for multinational corporations (MNCs), insurance giant Aon warns that the Brexit ripples could spread far across the globe. Should confidence falter in the UK and in Europe, and demand for goods and services falls, this could also start to affect countries in other regions. As Tapan Datta, global head of asset allocation, Aon Hewitt, says: “The shape of Brexit is important. Capital markets don’t quite know what access to the single market will look like for UK-based businesses”. GOOD NEWS FOR PENSIONS? The US is an important example of how far the impact of Brexit will reach. It has contributed to the rising dollar since late June, as investors have sought a safe haven. This is likely to hit US exports. In turn, markets could fall further, stocks decline, and volatility rise. Some are even talking SEPTEMBER/OCTOBER 2016


14

G L OB AL TREAS U RY B R I E F I NG

B R EX I T A N A L YS IS

about a 60% chance that the US will enter recession within the next 12 months. Perhaps one aspect of Brexit which has not been explored well so far is pensions - partly because, as pension experts point out, making broad statements on the sponsor covenant is fraught with difficulty. But for better or worse, Brexit could represent a step change for corporate sponsors and schemes. Helena Mules, a senior consultant at Willis Tower Watson, says: “The scheme already represents a material obligation for many sponsors, so increased deficits will likely further strain affordability and the covenant following a period when some sponsors have already been making material contributions. “However, conversely for those schemes that do benefit from overseas support, the weakening pound could present an opportunity to reduce the relative cost of the UK pension obligation. A longer term view of funding is therefore likely to be key.” SEPTEMBER/OCTOBER 2016

For treasurers Brexit is a further example of the maxim from wartime leader Winston Churchill, who allegedly ended most phone calls signing off with the acronym. ‘KBO’; that’s ‘keep buggering on’ to you and me. Or as Chris Southworth, secretarygeneral of the International Chamber of Commerce (ICC) puts it more politely to GTB: “Brexit has added a layer of uncertainty to the global planning environment, particularly for businesses trading with the UK. However, the benefits of trade remain as does the UK’s position as a leading G7 economy and the UK’s membership of the EU. Peter Williams, FCA is a chartered accountant and financial journalist. He contibuted to GTNews and has edited and written for leading titles in the treasury, accountancy and finance sector over the years.

TREASURERS SHOULD PLAN AHEAD FROM A DISPASSIONATE VIEWPOINT BASED ON THE ECONOMIC FACTS AND AWAY FROM THE DISTRACTION OF THE PUBLIC DEBATE AROUND WHAT BREXIT MIGHT MEAN


FI N TECH : TH E FU TU R E IS NE A R E R T H A N YO U T H INK

G L O B A L T R E A S U RY B R I E FI NG

15

FINANCIAL TECHNOLOGY: THE FUTURE IS NEARER THAN YOU THINK

F

rom Bitcoin and blockchain to robotics and artificial intelligence (AI) the pace of change brought about by technological change is gathering speed. For several years, blockchain and distributed ledger technology was a concept that could either prove a catalyst for change or a passing fad. Today, each week brings news of blockchain investments and initiatives and even by the end of this decade the technology will transform both corporate treasury departments and the financial services industry. In the following pages we examine how Big Data has also moved from being a buzz phrase and how financial professionals are becoming more adept at delving into the huge volumes of data generated to locate the value-added insights that can benefit the business. We ask whether the onset of robotics in treasury departments represents a threat to jobs or a benefit that will free up time for focusing on more rewarding work. We also examine cybersecurity, an issue that has forced its way to the very top of the corporate treasury agenda and threatens to undermine many of the benefits brought about by fintech.

SEPTEMBER/OCTOBER 2016


16

GL OB AL TREAS U RY B R I E F I NG

FI N TECH : TH E F U T U R E IS NE A R E R T H A N YO U T H INK

BIG DATA: DIVING INTO A POOL OF NEW OPPORTUNITIES BIG DATA IS THE CURRENT TECHNOLOGY ELIXIR THAT WILL SOLVE ALL OUR ILLS, WRITES AMBER CHRISTIAN. WE SEE CLEAR BLUE WATERS AND REFLECTED CLOUDS AS WE IMAGINE A PICTURE-PERFECT LAKE OF NEW OPPORTUNITIES.

SEPTEMBER/OCTOBER 2016

A

rms outstretched, we amble toward this water and its promises. Unfortunately, without a clear plan and understanding for how big data can benefit treasury, we wallow in the shallows and miss the clear blue waters called return on investment. This article will focus on opportunities for corporate treasuries to utilise big data. Rapid technology advances within big data, coupled with in-memory technologies, allow new and innovative solutions. Big data alone doesn’t deliver advances without the proper technologies to support its use. In-memory technologies

and new analytical applications and tools complete the transformation for treasury analytics. In-memory databases provide the horsepower to process and analyse millions of transactions, while new analytical tools and applications provide the means to transform the data into useful information for treasury organisations. Properly leveraging big data for treasury departments requires the data, in-memory technology and advanced analytical tools as part of a new framework. Treasury can’t simply expect to put its old Swiss army knife equivalent - the spreadsheet - on top of large data sets and expect innovative


FI N TECH : TH E FU TU R E IS NE A R E R T H A N YO U T H INK

results. Investments in analytics and new processes are necessary to exploit the data already being collected. These should be key components for plans to leverage big data. What are the opportunities for treasury in this new big data world? Where could a treasury organisation start to take advantage of big data? Cash forecasting and risk modelling are two areas for considering new possibilities for analytics. For many companies, these areas will be the easiest to leverage because the detailed underlying transactions are already being captured and can provide the foundation for analysis. CASH FORECASTING Cash forecasting has a heightened focus area for many treasurers in the light of Basel III regulations. The capital adequacy regime makes a distinction between operating and non-operating cash deposits. Operating cash involves the cash needed to support working capital and operating activities. Operating cash deposits must be substantiated in order to meet the classification rules under Basel III. Everything else is considered non-operating. Operating cash is viewed as a stickier deposit, since it is needed on an ongoing basis in order for a company to keep the lights on. However, non-operating cash has a different view within the Basel III framework. Because non-operating cash is not needed for the day-to-day functioning of an organisation, it is less sticky. With the new regulations, non-operating cash deposits are less attractive due to the required liquidity coverage ratio (LCR) for these deposits. Banks may be unlikely to cover their costs associated with holding non-operating cash deposits. Corporates are already seeing a shift in their banking partners’ willingness to hold non-operating cash deposits. As keeper of the cash, the treasurer needs to be able to predict cash flows to ensure efficient use of cash. Treasurers have new challenges and will need alternate options for non-operating cash deposits. Cash forecasts with significant forecast error can further compound these challenges. Forecast error in either direction matters in a Basel III environment. Cash forecasts that are too low could result in excess cash not needed for operations that is now more difficult to deposit. How do you improve a cash forecast? Do you look at your forecast error and simply hope to do better next time? Do you look back at all the data that occurs within your system and see if it matches the projections? How deeply do you segment

the data that supports the cash forecast? Analysing and leveraging big data can significantly improve the analytical activities associated with a cash forecast. Today’s technologies already support looking across the financial supply chain of transactions, not just the accounts receivable activity. Having the ability to analyse the entire financial supply chain makes more sophisticated analysis available for that activity; this provides new insights previously unavailable. For example, cash forecasts often consider payment terms on invoices to determine when the receivables will translate into cash. It’s a simple calculation, but will limit accuracy because other factors that may impact the receipt of that cash have been neglected. For example, how does perfect order fulfillment affect receiving an invoice payment on time? Will a customer’s payment history be factored into the receipt of the cash? The ultimate need to improve cash forecasting and shorten the cash conversion cycle will lead to broader discussions across the Days Sales Outstanding (DSO) process. Improving cash forecasting and the supporting processes can lead treasury to champion broader working capital improvement initiatives. RISK MODELLING AND ASSESSMENT Risk modelling has taken on increased importance since the 2008 financial crisis. Its importance has not diminished in the light of new regulations and occasional market shocks. A concept called ‘mashups’ can be beneficial for building more detailed risk modelling and assessment reporting. Mashups integrate data from disparate sources to clarify or provide new analysis capabilities. There are several ways that this could occur for treasury: • Customer Credit Risk: How you do determine credit risk for customers in developing nations where you do business? Credit risk should include more than simply an individual company’s risk. Deteriorating macroeconomic indicators in a home country can also impact the ability to make payments. By analysing DSO and payment history for a customer along with macroeconomic indicators for a particular country, appropriate adjustments can be made to respond near real time to economic changes and manage risk. DSO and payment history can be analysed for a slowdown in the payment cycle from a customer. Macroeconomic conditions can help explain if it is a broader problem,

G L O B A L T R E A S U RY B R I E F I NG

17

or isolated to particular customers or industries. More nuanced credit risk decisions can be made by having access to disparate sources of data that can now be combined for reporting. • Customer credit utilisation and modelling: What percentage of customer credit is being utilised? If an economic slowdown occurs, how much additional working capital could you have tied up in DSO due to customers fully utilsing their credit before making payments? Furthermore, Days Payable Outstanding (DPO) could be analysed to see how large the gaps could be should you pay your payables on time yet have a slowdown in receipts. In order to get this information, all of the detailed transactions are necessary. Individual transactions can be calculated then aggregated in order to provide an understanding of the overall exposure. • Portfolio analysis: For treasury, traditional portfolio analysis can be automated and simulations built, to replace those managed on many manual spreadsheets. Simple gains in automation can then free up time for new or more complex types of analysis. For example, a portfolio of variable rate intercompany loans could be studied to simultaneously analyse the effects of interest rate increases coupled with FX rate changes that will affect local currency amounts for repayment. Additionally, this information could be paired with macroeconomic indicators for a country to provide an overall perspective of internal lending risk. For a multinational corporation with a diverse portfolio of loans across many countries, this could make modelling and assessment of risk significantly easier and more robust than current modelling. There are many promising opportunities to leverage big data for corporate treasury departments. Utilising the proper tools and technologies, along with a vision for what new insights could be gained will help avoid the shallows and ensure clear sailing among the deep waters of big data. Amber Christian is the founder of Ace LLC, a treasury and cash management consulting firm and has worked on SAP solutions for over 15 years. She focuses on working capital solutions, implementing accounts receivables, accounts payable, treasury and cash management solutions in North America, South America, Europe, and Asia. She is a frequent blogger and conference presenter on a variety of SAP finance and treasury topics. SEPTEMBER/OCTOBER 2016


18

GL OB AL TREAS U RY B R I E F I NG

FI N TECH : TH E F U T U R E IS NE A R E R T H A N YO U T H INK

TECHNOLOGY EXPERTISE: NO LONGER OPTIONAL AT BOARD LEVEL AS CYBERSECURITY HAS FORCED ITS WAY UP THE CORPORATE AGENDA OF RISK PRIORITIES, MANAGEMENT AND THEIR TREASURY DEPARTMENTS MUST URGENTLY GET UP TO SPEED ON THE ISSUE, SAYS JOANNA FIELDS.

T

here is something to be said for the publicly-craved 24-hour news cycle mixed with a bit of research on the internet that can make any topic menacing for a 30-second rolling snippet. Cybersecurity is no exception, but how does a member of the board for a publiclytraded company isolate noise from a mandate for action? After all, last night’s news cycle probably also ran an array of stories ranging from Brexit, artificial intelligence and other new technology, the US elections, healthcare, gun violence, someone made famous for posting an explicit video online, wherever the Dow Jones closed (for whatever reason), and a teaser piece on the ease of a new weightloss programme. Yet, in 2016, members of the boards for publicly-traded companies find themselves in something of a quandary. After all, US regulators seldom announce a priority for the year without having a bevy of open investigations in the pipeline. A recent article in the Financial Times highlighted “new” statistical analysis that most publicly traded company board members remain, as they always have - a bit older and well, male. While the FT article focused on SEPTEMBER/OCTOBER 2016

diversity, more important than gender is qualifications to hold these venerated positions. Most of today’s boards simply lack someone with the requisite background in computer science; much less an in-depth knowledge of the latest cybersecurity protocols. As most industries leverage technology and have personal client information, cybersecurity should have clearly been a top down senior management priority for years, if not the past decade. After all, the UK Data Protection Act of 1998 requires the appropriate technical and organisational measures are taken to protect personal data relating to living individuals against the unauthorised processing of personal data and against accidental loss or destruction or damage to such data. Yet, today if one analyses the makeup of most company board members, there remains a clear gap in technology leadership. Financial market firms are no exception. Looking back to 2012, there were a series of cyber-attacks launched against a number of large American financial institutions focusing on retail clients by a hacking activist group, which disrupted banking websites.

On March 24, 2014, the Securities and Exchange Commission’s (SEC) chairman, Mary Jo White stated that cybersecurity threats are of “extraordinary and long-term seriousness”, posing “risks across our economy to all of our critical infrastructures, our financial markets, banks, and intellectual property.” On September 22, 2015, the first settlement agreement was reached between RT Jones Capital Equities Management and the SEC related to the firm’s failure to adopt written policies and procedures related to cybersecurity. News stories on cybersecurity breaches and the regulatory focus have abounded for years across industries. FIT FOR PURPOSE By 2016, publicly traded company boards should have in place a wellestablished approach to cybersecurity, which has become an enterprise-wide risk management issue. Today’s board of directors should understand the legal implications of cyber risks and carefully consider, among other things, whether:


FI N TECH : TH E FU TU R E IS NE A R E R T H A N YO U T H INK

• there is sufficient coordination at senior levels among business and department heads; • the board has adequate access to cybersecurity expertise; • adequate resources are being devoted by management to cybersecurity issues; and • management is adequately prepared for a cybersecurity breach. The board of directors also should decide who in management has responsibility for information security throughout the organisation and across reporting lines. In short, its members should set the expectation that management will establish an enterprise-wide risk management framework. When it comes to cybersecurity reputational risk should be a critical consideration. Outside of the news cycle, there has been a clear shift in the regulatory paradigm for financial firms. In the US, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE), the Federal Financial Institutions Examination Council, the Federal Reserve, the Financial

Industry Regulatory Authority, and the Commodity Futures Trading Commission have all released proposed rules, guidance and/or examination priorities focused on cybersecurity. Global regulatory agencies recognise cybersecurity as a top-priority and have heightened the expectations that firms must implement comprehensive cybersecurity policies, controls and testing, and boards must exercise active oversight of cyber risk vulnerabilities and management. Therefore, it is increasingly important for all financial firms to incorporate cybersecurity into their strategic planning and compliance framework. The alternative is being part of the next 24-hour news cycle.

G L O B A L T R E A S U RY B R I E FI NG

19

BY 2016, PUBLICLY TRADED COMPANY BOARDS SHOULD HAVE IN PLACE A WELL-ESTABLISHED APPROACH TO CYBERSECURITY

Joanna Fields is the founder of Aplomb Strategies Inc., with over 15 years of experience in implementing equity and derivative regulatory, clearing and market structure change. She leverages her regulatory and technology background to develop risk management practices for registered entities and vendor third party technology firms.

SEPTEMBER/OCTOBER 2016


20

GL OB AL TREAS URY B R I E F I NG

FI N TECH : TH E F U T U R E IS NE A R E R T H A N YO U T H INK

ROBOTICS: THREAT OR OPPORTUNITY FOR TREASURY? COMPUTERS ARE MUCH BETTER THAN HUMANS AT PROCESSING DATA, WHICH MEANS-LIKE IT OR NOT-GREATER AUTOMATION IS THE WAY FORWARD AND ROBO-ADVISORY FIRMS WILL PLAY A LEADING ROLE, WRITES ADAM FRENCH.

A

t a recent conference on disruptive technology, hosted by one of the world’s leading investment banks, the audience heard from its chief information officer (CIO) about how the bank had reduced its New York Stock Exchange (NYSE) market-maker headcount from 600 people to just four over the past few years. This was not due to a slowdown in volumes but rather due to the bank’s commitment to automation. Robo, artificial intelligence, machine learning - all buzz words at the moment but what we are really talking about is automation. Some people view it as a threat, while others prefer to see an opportunity. The first camp worries that machines will make their jobs obsolete; the smart algorithms will be able to do all aspects of their job and they have already started to fret about what the future might hold for them.The second camp sees automation as a great opportunity, allowing them to be able to work in harmony with the intelligent machines in helping them do a better job and ultimately add value to the firm. Right now we can’t be sure which is the certain outcome but what we do know is that a change in that direction is inevitable and it seems better to be prepared than to fight it. How does this play into the function of the corporate treasurer? What does it mean for the chief financial officer (CFO)? Software is now able to drive our cars and diagnose medical problems but is it ready to manage the finances of our companies? This writer’s perspective comes from being a co-founder of Scalable Capital, a robo-advisory firm. I left my job at Goldman Sachs in 2014 to set up the firm with a handful of ex-colleagues and a leading academic. Back then we had started to see the advent of robo-advice firms, but firmly felt that we could launch something better. SEPTEMBER/OCTOBER 2016

The first-generation of robo-advisors did a great job at opening up the online distribution channel for investment management. They crafted very slick onboarding processes and elegant user experiences to make the world of investment management more accessible, more convenient and - most importantly - more costeffective. Where the technology seemed to be lacking, however, was in the management of client assets. They still relied on flawed portfolio theory from the 1950s or relied on the views of an individual for placing their bets. Our aim was to use technology in the money management portion as well and make a “true-to-itsname” robo-advisor. The target market for this service was, and still mainly is, private individuals; people who are looking for a cheaper and better money management offered by the traditional world. We call them smart professionals. We found, however, that investment management methodology driven by the use of technology was of interest to institutions as well. Some of these - essentially intermediaries - look to use the service to improve their offering to end clients but others opt to use the service with money they need investing directly into the capital markets. Clearly, it is that group which overlaps with the function of the corporate treasury. Different companies have different problems and as such, there is rarely a one-size-fits-all solution. What we have found is that a number of institutions spend significant resources on placing their excess working capital into capital market instruments, which stay within the risk tolerance of the firm. Many of these smaller firms were holding this capital on deposit, but have started to have to think outside of the box. Negative interest rates are forcing firms into action, which is where we stepped in.


FI N TECH : TH E FU TU R E IS NE A R E R T H A N YO U T H INK

G L O B A L T R E A S U RY B R I E FI NG

21

OPENING UP THE CAPITAL MARKETS Our remit has been to use technology to open up the whole of the capital markets for institutions in a way they have never had access to before, and in a way which means the risk in their portfolio is kept in line with their risk tolerance in all market conditions. We use technology to run cloud-based forward-looking risk simulations across all asset classes (stocks, government bonds, corporate bonds, real estate, commodities and cash) to dynamically optimise client portfolios on a daily basis. This is the type of computational processing that used to happen on the mainframe computers of the investment banks and is now available to use through the advent of cloud computing. The result of this globally-diversified adaptive asset allocation methodology is better risk-adjusted returns than many investing alternatives and at a fraction of the cost. Private investors use the service for a different purpose than corporate clients. Individuals are looking for wealth creation over their lifetime and are therefore able - and willing - to take much more risk in return for better long-term returns. Corporate clients, on the other hand, are looking for easy access and capital preservation. This is the beauty of automation. It is possible to provide both solutions to differing sets of clients with the use of technology; each portfolio is constructed with a Value-at-Risk (VaR) metric attached to it and the asset allocation is dynamically adjusted to keep this VaR constant over time. These portfolios can range from 2% VaR all the way to 25% VaR: that is a portfolio which has a 95% probability of not experiencing a loss of more than 2% all the way to 25% in a given year. It provides the flexibility to cater for clients who want very little risk of loss, clients who are willing to take a lot of risk and everyone in between. The main task is ensuring that the portfolio they have always adheres to this level of risk, no matter what is happening in the capital markets. Right now we are operating at the very beginning of what is possible in the world of investment and cash management when using advanced computational methods to provide us with a roboinvestor. The next steps will get far more complex and are not far around the corner. Computers are much better than humans at processing data. When investing the ability to process vast amounts of data is key to getting an optimal portfolio, which goes above and beyond the old models before we had access to machines that could almost think for themselves, beat us at complex games and even talk to us in a human manner. If your role within corporate treasury is all about data processing or collating data, I would urge you sit up and take notice. Machines are just much better than you at your own job already - your company is just slow to adapt. The good news, however, is that much of this manual processing work is mundane. It won’t be long until you don’t have to ever do this repetitive work again. It will free you up to add more strategic value to your company. Machines can be job-creating as well as long as you are willing to work alongside the robots. That same CIO, who was reducing headcount due to automation, made another comment which should be borne in mind when we hear about technology potentially taking work away from humans. He said that many of the roles he occupied throughout his career, spanning over 20 years, are no longer required and yet he still has a job. Automation may bring its challenges but those who embrace it will prosper and help add real value once again to their companies. Adam French is co-founder and managing director of Londonbased Scalable Capital. SEPTEMBER/OCTOBER 2016


22

GL OB AL TREAS U RY B R I E F I NG

FI N TECH : TH E F U T U R E IS NE A R E R T H A N YO U T H INK

BIG DATA MEANS BIG OPPORTUNITY FOR TREASURERS HISTORICALLY TREASURY PROFESSIONALS HAVE BEEN LIMITED IN THE DATA AVAILABLE TO THEM TO INFORM AND FUEL BETTER DECISION MAKING - NOT ONLY WITHIN THE TREASURY DEPARTMENT, BUT ACROSS THE ENTERPRISE. IN THIS NEW ERA OF BIG DATA, A VAST AMOUNT OF INFORMATION COMING FROM INTERNAL AND EXTERNAL SOURCES AND SYSTEMS IS AVAILABLE TO COMPANIES OF ALL SIZES, WRITES ANIS RAHAL. SEPTEMBER/OCTOBER 2016


FI N TECH : TH E FU TU R E IS NE A R E R T H A N YO U T H INK

T

he treasury team’s challenge is to extract and leverage data, which delivers value by empowering continuous improvements in operational efficiency and improving the quality of decisions that impact the company’s bottom line. The main source of data extraction comes from bank transactions; data relative to previous day or intra-day company bank account balances and activity is visible to a company via one or more bank platform and/or a treasury management system (TMS). This can, if necessary, be exported into another system for analysis. Bank transactional data can represent a tremendous amount of data, depending on the number of bank accounts and the industries in which a company operates. For example, a major retailer such as WalMart would generate a huge amount of data relative to bank transactions each day. In terms of the volume of bank transactional data there are many factors contributing to the explosion of this data: • Companies see increases when they endeavour to deliver growth by entering new domestic and/or international markets in terms of sales, production and service. • Companies can see increases when they offer more types of payment options to meet customer preferences. • Companies see increases as their business models evolve. The subscription economy is exploding and this means more, lower dollar value transactions for a growing number of companies. • Innovation driven by the Internet of Things (IoT) has created more channels for marketing, sales, and global distribution. The momentum of growth in bank transactional data is evident in a trend our company discovered when examining customer data and tens of millions of transactions. This indicates that on average a treasury organisation managing in the neighborhood of 700 bank accounts can expect a 20% year-on-year increase in the volume of bank transactional data. Growth in bank transactional data on a macro-level will lead to increased availability of cash flow-related industry benchmarks, which can deliver insights to improve a company’s borrowing and investing decisions and impact its business agility relative to market dynamics. REWARDS OF LEVERAGING BIG DATA FOR TREASURY In the context of bank transactional

data, this information in and of itself can be leveraged by companies to deliver value on many fronts: • Facilitating a better understanding of cash inflows and outflows. • Improving the quality of cash forecasts. • Identifying relevant trends. • Defining and monitoring metrics. • Managing metrics used to drive effective financial planning, which optimise both short-term and long- term cash deployment. Sources of big data for an organisation often go beyond bank transactional data. Advances in the functionality of client relationship management solutions, marketing automation solutions and human resources management solutions have driven the collection and analysis of transactional and behavioural data. This data is being collected to understand the behaviours of customers and employees and, more importantly, how to influence them to drive sales and optimise human capital. Treasury has the incredible opportunity to be the steward of this data and how it is analysed, interpreted, and ultimately utilised. This opportunity exists as these skills often fall outside of the “sweet spots” of most marketing, sales, and human resource (HR) professionals. ACCESSING BIG DATA The best way for any company to access bank transactional data almost without exception is a TMS. Once a company gets accounts at even a few banks, the mechanics of accessing this data becomes cumbersome and inefficient at best. The good news is that in addition to a TMS being the best way, it can also be the most cost-effective tool. An important note, I consider access to entail having all the data in one system available for analysis. The relative efficiency of a TMS relative to bank transactional data access is evident in that: • A company managing approximately 100 bank accounts across 10 different companies would need to consolidate about one million lines of data. • Without a TMS it takes this work typically requires one full staff member 21 hours to consolidate the large volumes of data for every 100 accounts. • To run a report similar on the daily data, the manpower required would be approximately one staff member working an entire eight-hour day. • Leveraging a TMS that provides

G L O B A L T R E A S U RY B R I E F I NG

23

100% bank connectivity would bring the manpower down to one person over the course of 20 minutes or less. Furthermore, bank transactional data is a treasurer’s reality. It represents what’s actually happening in terms of cash, not the story you might be trying to interpret from an enterprise resource planning (ERP) system.The company has money or doesn’t have money - an ERP doesn’t always reflect the truth on that front. A TMS acts as a middleware between banks and the ERP; one of its main roles is to reconcile the bank account activity to the ERP. Manually entering bank transactions from multiple banks from multiple countries manually into an ERP is the recipe for a cash fairy tale being conveyed by an ERP. As a simple example, an accounting department issues an invoice of US$2m, which is entered into the ERP. If they base their financial decisions on the ERP position it will appear as if there is US$2m in hand; however, the client may not have paid, or perhaps will only make a partial payment. It is difficult to know. In this scenario, the role of the TMS is to provide the exact cash-in-hand position because it synchronises automatically with the bank. The TMS position will lead management to the right financial decisions, thereby reducing opportunity loss. HELPING DEFINE THE FUTURE OF BEST-IN-CLASS TREASURY Companies of all sizes are leveraging a TMS to unlock the strategic value of their transactional bank data to improve cash forecasts, and to define and manage metrics which improve short-term and long-term financial planning. Innovatory TMS solutions afford companies the opportunity to leverage industry trends in bank transactional data, “industry level big data”, to take the quality of cash forecasts and the effective deployment of cash and working capital to another level. Treasurers have the opportunity to be the stewards of their company’s big data coming from sources beyond bank transactional data, and offer leadership in terms of how this data is analysed, interpreted, and ultimately utilised. The tight TMS offers treasurers a critical tool in taking advantage of this opportunity. It is time for them to take their rightful place at the strategic table, and big data can help print that invitation. Anis Rahal is founder and chief executive officer of TreasuryXpress.

SEPTEMBER/OCTOBER 2016


24

GL OB AL TREAS URY B R I E F I NG

FI N TECH : TH E F U T U R E IS NE A R E R T H A N YO U T H INK

CYBERATTACKS ON THE RISE AS TECHNOLOGIES IMPROVE SPEEDIER AND EASIER FINANCIAL ACCESS MADE AVAILABLE BY TECHNOLOGICAL ADVANCE IS ALSO OPENING UP A HOST OF OPPORTUNITIES FOR THE CYBERCRIMINAL, SAYS YURI FRAYMAN.

I

t is impossible not to notice that banks are offering consumers new ways to save, send, spend and access their money at a bank. This trend - to ease access to funds - extends well beyond the retail banking sector and is equally prevalent among investment banks, private banks, hedge funds, mutual funds, exchange-traded funds (ETFs) and just about any financial institution, large or small. It is arguably the single most compelling commercial driver in the financial services sector. Financial institutions compete aggressively and continuously for dominance in this market and technology is, in all cases, the single most important differentiator across institution, customer, and geography. Unfortunately, the introduction of nascent technologies to improve financial access is also accompanied by increased vulnerability to the very currency and associated details at the heart of the financial services industry. This is the cost of an increasingly open marketplace for financial services and a dynamic that is only further complicated by the growing array of devices and techniques customised for each device to engage in financial transactions. The good news is that technologies and strategies are available that can be embedded within the security infrastructure of financial institution to defensively and prospectively detect and eliminate threats, which vary in scope and nature. SCOPE OF THREAT AND SECTORS AT RISK Financial institutions are ripe for cyberattacks because of the breadth of personal and business data embedded within their networks as well as financial information. An estimated 35-40% increase in cybercrime targeting the financial sector was recorded in 2015 and a staggering record 21m fraud attacks and 45m web bot attacks were detected in the fourth quarter of 2015 alone. Between Q3 and Q4 of 2015 bot attacks increased tenfold and there is little reason to see this trend reversing course. The threat is neither one-dimensional or lacking in sophistication; attacks are SEPTEMBER/OCTOBER 2016

highly organised and are multi-channel in nature. Bots and other complex attacks - for example malware - are structured to behave as authentic customers to circumvent traditional security defenses. The consequences and costs are severe: data loss and its wide reaching proximate impact as well as direct financial losses that can easily reach billions of dollars, pounds or euros for a single firm. The complex nature of financial institutions demands different technological approaches and structures for each sub-sector. This is also the inherent challenge in devising dynamic strategies to protect against cyberattacks across all vulnerability points of a firm or specific categories of firms. Mobile usage, as well as online lending and alternative payment techniques, are primary target areas with perceived weak security infrastructure. Part of this vulnerability comes from the speed of the transaction cycle compared to traditional lending, but also due to the less traditional and smaller lenders who are enabled by online lending to issue loans and who are less likely to have powerful security infrastructure on par with traditional lenders. Vulnerability from a single lender can create systemic vulnerabilities reaching beyond the lender itself. A weakness in a small lender can create a vulnerability that exposes a larger institution on the other side of the transaction. Financial institutions involved in e-commerce are also soft targets for cyberattacks. Mobile transaction volume increased by more than 200% between 2014 and 2015 and is expected to maintain that growth trajectory as more mobile devices, with greater sophistication and applications tied to financial institutions, enter the e-commerce system. With multiple technologies and institutions collaborating to enable e-commerce, the complexion of any approach to cybersecurity must be multi-layered to enable businesses to detect and prevent various attacks such as malware, device spoofing, and mobile bot attacks.


FI N TECH : TH E FU TU R E IS NE A R E R T H A N YO U T H INK

METHODS AND STRATEGIES In an environment where the challenges are not static or one-dimensional, neither should be the solution. Speed and comprehensiveness of a defence and response system is critical to effectiveness in minimising risks and mitigating damages in the event of an attack. Unified risk assessment and threat prevention techniques must be core to a financial institution’s cyberattack strategy. Financial institutions must recognise their central role in core financial services activity as well as e-commerce and mobile payment products. But how should financial institutions with disparate sizes, services, and, most importantly, balance sheets make decisions about cybersecurity? How can varied budget sizes be accounted for in maintaining consistently effective approaches to similar threats? For large institutions the risks are too significant and far-reaching to implement anything short of the most comprehensive systems available in the market. Speed, synchronisation and uniformity should be paramount considerations. Fortunately, there are technologies available that accomplish these objectives while retaining a degree of malleability to adjust with evolving threats and risk points. For smaller firms the solutions that are being implemented tend to be more patchwork - although even larger financial institutions have similar ‘Band-Aid’ approaches. “Cyber-as-a-service” firms are increasingly common service providers for smaller and mediumsized companies as well as concentrated on key risk areas through the utilisation of dedicated computers for sensitive transactions, which can be monitored for unusual activity.

G L O B A L T R E A S U RY B R I E F I NG

25

These methods, while often effective defensively, lack the key elements of speed and comprehensiveness; they are reactionary in nature, but lack the embedded and dynamic technical characteristics to be prospective in their approach to risk. In devising a cyberattack strategy financial institutions should be mindful of four dynamics: • The role that the interconnected nature of the financial services industry, regardless of firm size and scope of services offered, plays in widening the scope of vulnerabilities outside the immediate ambit of a firm. • The value of an integrated and uniform solution to ensuring responsiveness across platforms and vulnerability points. • The importance of speed in detection and responsiveness to preventing attacks and mitigating damages. • The crucial role that comprehensive internal and external monitoring will play in anticipating unforeseen attacks that exploit vulnerabilities in newly-introduced technologies. Yuri Frayman is founder, president and CEO of ZENEDGE, a leading provider of cloud-based cybersecurity and describes himself as a serial venture-capital-based entrepreneur.

SEPTEMBER/OCTOBER 2016


26

G L OB AL TREAS U RY B R I E F I NG

I N V ES TMEN T & F U ND ING

A SWEET ALTERNATIVE TO CASH INVESTMENTS WITH THE ERA OF LOW, ZERO AND NEGATIVE INTEREST RATES LIKELY TO ENDURE AT LEAST THREE MORE YEARS, CORPORATE TREASURERS ARE FACED WITH A LIMITED CHOICE OF INVESTMENT OPTIONS SAYS ANDREW BURNS. SEPTEMBER/OCTOBER 2016

A

uthor Roald Dahl’s Charlie and the Chocolate Factory told the story of Willy Wonka, who had the ability to produce the most amazing results by pulling a lever that would spur a multitude of actions and reactions.The end result was an incredible chocolate experience that left everyone happy. If only the same could be said of central banks and their economic levers.The global economy has been in a malaise for several years, which has spurred central banks to pull on certain levers to stimulate growth. Quantitative easing has now become part of most individuals’ vocabulary, even if the majority do not understand its implications. After QE, the next economic lever that central banks pulled was the creation of negative interest rates. In Roald Dahl’s world, this topsy-turvy, experimental move would be nothing short of normal, but in our world the experiment has started to have consequences. Unlike QE, many people see negative interest rates as something solely affecting

the financial markets - in particular banks that are burdened with the cost of negative rates when placing deposits with central banks. This perception may have arisen through the belief that negative rates would deliver a necessary shock to the system by stimulating growth and then everything would return to normal. That is not the case. It has been nearly two years since the introduction of negative rates, since when five central banks have entered into the experiment - while the Bank of England is edging ever closer. About a quarter of the world’s economies have negative interest rates, and the value of negative-yielding bonds has now swelled to US$13.4 trillion. Yet the global economy is still sluggish. Initially, the gamble was that negative rates would stimulate consumer spending and initiate growth without too much cost for the banks, which were expected to increase the number of loans to stimulate further investment and spending. Yet consumer spending has not increased.


INV E S T M E NT & F UND ING

G L O B A L T R E A S U RY B R I E FI NG

27

LESS THAN ZERO

Percent

Negative rates, once-unorthodox, are increasingly orthodox 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 -0.7 -0.8 -0.9 BOE

BOJ

ECB

Sweden

Denmark

Switzerland

Source: central banks

In fact, a paradoxical liquidity situation has been exacerbated: too much liquidity for corporates with strong credit ratings and too little for SMEs that typically generate the largest portion of most economies. The problem is, in fact, a structural one: in most economies banks are the main source of funding, particularly in Europe where they provide no less than 90% of funding. The introduction of Basel III and the impact of the liquidity coverage ratio (LCR) have meant less lending and higher costs to riskier companies, typically SMEs. If smaller businesses are unable to get access to financing to fund their working capital, they’re unable to expand their operations, hire new people or accept larger orders. It’s no wonder the global economy is stagnant. This situation has also squeezed banks’ margins. The introduction of negative interest rates has further exacerbated that squeeze as banks, caught between a rock and a hard place, are unable to generate more margin through loans to companies already awash with liquidity and unwilling to

pass the costs on to depositors. In Europe, this has cost banks an estimated €2.64bn in the two years since European Central Bank (ECB) rates first turned negative. SEEKING AN ALTERNATIVE Negative rates by most accounts are here to stay, certainly until 2019. Banks have started looking for alternatives, including holding physical cash in vaults - which has been implemented by reinsurer Munich Re and considered by Commerzbank - as well as passing on the costs to corporate deposits. So what does this all mean for corporates and treasurers? From the perspective of borrowing, it’s a feast. With access to so much cheap debt, corporates can lock in very attractive rates for long periods. Vodafone’s recent £800m, 33-year sterling bond was sold with an average yield of 3.4%, the lowest for a triple B-rated sterling issuer at maturity for 30 years or more, according to the Financial Times.

Corporates should be looking to their debt profile to see how they can maximise their positions in the current environment. From a more holistic viewpoint, geopolitical risk, terrorism, Brexit and the sluggish global economy have all contributed to the uncertainty felt by corporate executives. This uncertainty has translated into caution, which has led many companies to strengthen their balance sheets by focusing on both generating cash through working capital and cost efficiency projects, and stockpiling cash, as can be seen in the graph below. Additionally, a recent survey by the Association of Financial Professionals (AFP) in the US showed that cash stockpiling increased in Q2 of 2016 compared with Q1 and is expected to increase again in Q3. Investment by corporates in new projects has not increased, which makes sense if demand is currently saturated. Less risky usage of cash, such as share buybacks or dividends, has proved more popular. SEPTEMBER/OCTOBER 2016


28

G L OB AL TREAS U RY B R I E F I NG

I N V ES TMEN T & F U ND ING

That’s not the type of activity that negative interest rates were supposed to motivate, given that the cash doesn’t get into the real economy. For the most part, corporates are holding their cash. For the treasurer, this causes a headache: how to avoid capital erosion from negative interest rates. There are very few investment options remaining that provide positive returns for risk levels within the treasury policy’s boundaries. Given that negative rates are becoming entrenched, the corporate approach of holding cash reserves with a ‘wait-and-see’ strategy will become increasingly painful as capital erodes. Corporates will need to find more innovative ways to use their cash. Banks have successfully begun to expand on innovation in the form of supply chain finance (SCF). Using the reverse factoring approach, they’re creating liquidity for buyers and suppliers. At the same time, they’re generating income from the capital on their balance sheets in the form of discounts generated from early payment of invoices. Corporates are starting to follow the example of the banks in focusing on the supply chain as an area to invest cash on a short-term basis. More and more companies are adopting the market-based dynamic discounting approach to supply chain financing where accounts payable (AP) is used as a vehicle to invest surplus cash by converting the time value of AP into discounts and paying invoices early. This model solves a multitude of problems. Firstly, from an economic perspective, it sidesteps the structural issues that have created the liquidity paradox. Typically, market-based dynamic discounting has reached SMEs in far greater volumes than traditional SCF and

is therefore more effective in providing working capital cover for the mid to longer tail of suppliers. By leveraging their trade payables through early payment, corporates avoid all the issues that have prevented banks from financing SMEs through debt. A PERFECT SOLUTION To put the situation into perspective, there is approximately US$40 trillion of receivables on the books globally at any given point in time. Banks are currently only financing US$3 trillion. Note that there are only seven economies over US$2 trillion in the world, so the impact of injecting even US$2 trillion more into the global economy where it’s needed most would be vast. Secondly, since the investment instrument is AP, treasurers can choose how much cash to invest and when. This provides them with the flexibility to both invest cash and ensure the balance sheet remains solid. If the balance sheet needs to be strong for quarterly reporting periods, then they can choose not to invest cash over those period-end reporting dates. They gain higher returns on cash intraquarter and avoid capital erosion from negative interest rates while still maintaining a strong balance sheet over quarter end. Market-based dynamic discounting means treasurers can have their cake - or rather chocolate, eat it too, and even share some with Charlie - a seemingly simple solution of which Willy Wonka would undoubtedly approve. Andrew Burns is business development director of C2FO.

LOW INTEREST RATES DO NOT SIGNAL SURGING INVESTMENT. COMPANIES SIMPLY ARE HOLDING CASH AT RECORD LEVELS Cash held on balance sheet at % on GDP 140 120 100 80 60 1987

90

95

Source: ONS

SEPTEMBER/OCTOBER 2016

2000

05

10

16


CA S H MA NAG E M E NT : NO T IO NA L PO O L ING

G L O B A L T R E A S U RY B R I E F I NG

29

WHAT’S THE ALTERNATIVE? NOTIONAL POOLING MAY BE DOOMED AS A POPULAR AND WIDELY-USED CASH POOLING SOLUTION FOR CORPORATES, BUT OTHER OPTIONS REMAIN VAGUE, WRITES JOHN HINTZE.

A

regulatory trifecta appears certain to greatly reduce - if not eliminate - most corporates’ use of notional pooling. It is prompting many of them to return to more conventional physical cash pools, although banks are no doubt seeking to devise alternatives. The Basel Committee on Banking Supervision (BCBS) defines notional cash pooling as combining the balances of several accounts of the entities within a corporate group in order to limit low balances or transaction fees without physical transfer of funds. Instead, balances of different entities are set off within the group, so that a bank charges interest in the group’s net cash balance. The short-term cash management tool is attractive to decentralised treasuries that may lack the infrastructure to initiate and settle physical cash payments. Likewise, for more centralised treasuries that, for example, can use notional pooling’s more passive approach to offset mismatches in multiple currencies, rather than shifting cash across accounts and currencies. The BCBS issued a consultative document in April, however, that could significantly reduce banks’ willingness to provide notional pools. “The Committee proposes that these balances be reported on a gross basis in line with revisions to paragraph 13 (paragraph 11 as revised) of the Basel III leverage ratio framework, which does not allow netting of assets and liabilities nor the recognition of credit risk mitigation techniques,” the document states. Physical cash pooling, instead, combines corporate entities’ accounts into a single master account at the end of each period by physically transferring funds, typically by means of intraday settlement, and BCBS would allow banks to report those balances SEPTEMBER/OCTOBER 2016


30

GL OB AL TREAS U RY B R I E F I NG

CA S H MA N AG E M E NT : NO T IO NA L PO O L ING

on a net basis. “Reporting the pools on a gross basis would significantly increase the capital cost and be a major factor in how - or in some cases if - notional pooling will be offered [by a bank] should regulators make rulings that alter the leverage ratio calculation to look at gross balances instead of net balances in a notional pool,” says Michael Botek, global cash market manager, treasury and trade solutions, at Citibank. Chris Bender, director, regulatory advisory at debt and derivatives solutions group Chatham Financial, notes that many of the Basel III standards aren’t scheduled to be fully implemented until at least 2018. Although banks in many jurisdictions have begun disclosing their Basel III leverage ratios, the full impact probably won’t be clear for another year or so when final adjustments to the leverage ratios have been made. Nevertheless, he says, notional pooling is a relatively low margin business for banks, so the expectation is that banks will likely limit it to larger clients with a broader range of more profitable operational accounts. COST AND REGULATORY PRESSURES The BCBS guidelines must ultimately be interpreted by local regulators. Botek notes that banks “may modify or withdraw [notional pooling services] depending on the specific ruling and implementation of Basel III in their jurisdiction.” He adds that since Citi operates in many locations as a branch of a US bank, it is subject to the Federal Reserve Bank’s implementation, and it looks to US GAAP to determine treatment of the netting of assets and liabilities to determine regulatory capital and leverage ratios. However, even if regulators do not apply Basel III ratios to notional pooling services, other regulatory initiatives appear likely to make the cash management mechanism costlier for the corporates themselves. Daniel Blumen, a partner at consultancy Treasury Alliance Group, said the US Treasury Department’s proposal under Section 385 of the US tax code as well as the Organisation for Economic Cooperation and Development’s (OECD) Bank Erosion and Profit Shifting (BEPS) initiative don’t specifically target notional pooling, “but they chip away at the edges - pretty big chips in some cases.” Notional pooling services can vary by bank provider. In general, however, they tend to require less administration than physical cash pools, in which funds are swept daily and generate intercompany SEPTEMBER/OCTOBER 2016

loans. For example, the Netherlands does not require cross guarantees between notional pool participants with the associated legal work and documentation. In the case of BEPS, says Blumen, local regulators are likely to seek clearer evidence of the participants’ arrangements and its relationships. “They’re likely to as questions such as ‘at what interest rate are you calculating the benefits of the notional pool to the participants.” The controversial IRS 385 proposal, expected to be finalised by year-end, is likely to prompt further evaluation of notional pooling and comparative lack of documentation. Corporate users will need to weigh the burden of additional regulatory scrutiny against the perceived benefits. “In many notional arrangements treasury is not required to pay or charge interest to the participants as there is no physical movement of cash,” commented a recent Treasury Alliance Group report. “So the explicit statement that the IRS wants information on ‘applicable instruments that are not indebtedness in form...’ could be ultimately interpreted as applying to notional pooling.” Further complicating matters, the

report notes, the 385 proposal has a threeyear look back requirement, in which one pool participant tagged with a tax issue could “cascade to all of the intercompany borrowers in the pool and then interest expense may be considered non-taxable and would have to be treated as a deemed dividend.” The BCBS clearly prefers physical cash pooling that involves the physical transfer of funds and settlement, along with the necessary documentation. “The Committee proposes to allow banks to report those balances on a net basis if the transfer of credit and debit balances into a single account results in the balances being extinguished and transformed into a single balance and the bank cannot be held liable in case of non-performance of one or multiple participants in the cash pool,” the BCBS consultative document states. THE BEST OPTION For corporates using notional pooling services now and considering alternatives, the physical version - already more common than notional pools - may be the way to go.


CA S H MA NAG E M E NT : NO T IO NA L PO O L ING

“We think it remains an excellent choice,” said Blumen, noting that while it requires more dotting of i’s and crossing of t’s, recent technology relieves much of that burden. “Physical cash pooling remains and will remain a highly effective form of shortterm liquidity management.” Given the slow progression of Basel III, banks have been shy about marketing alternatives to notional pooling. A handful of major financial trade associations, including the Global Financial Markets Association (GFMA) and the International Swaps and Derivatives Association (ISDA), commented on the BCBS’s consultative document in July. They argued that certain cash pooling arrangements are treated as a single unit of account for accounting purposes across the accounting standards, and that should be sufficient. “Under such circumstances, a single amount is owed to or from the client entity (or group of affiliated client entities) subject to the pooling agreement,” the comment letter notes, adding that the leverage ratio treatment “should follow accounting under these conditions to avoid unnecessary damage to banks’ ability to provide these important cash management products to their clients.”

Bender says another option may be relatively new virtual accounts, in which there’s one central account with numerous administrative sub-accounts. For example, a corporate treasurer could establish virtual accounts by business unit, client, accounts payable or receivable, or however the treasurer prefers structuring the account system, facilitating reconciliation and allowing the corporate to allocate cash without physical segregation. “Virtual accounts offer treasurers realtime insight into what’s going on, and since it’s just one physical account, banks should receive more favourable treatment under their Basel III leverage ratio,” he suggests. Botek agrees that virtual accounts could be a solution, but with caveats. He noted that virtual accounts co-mingle funds and so borrowing and lending shifts from the bank to inter-company, incurring extensive reporting and documentation requirements. “If the company can accept that a virtual account creates intercompany lending, and it gives enough upside in managing concerns such as reporting, accounting and tax, then it may be an alternative for it to consider,” he says.

G L O B A L T R E A S U RY B R I EFI NG

31

John Hintze is a freelance reporter and editor, writing regularly for GTNews on business and financial topics including capital markets, regulatory and accounting developments and technology.

FOR CORPORATES USING NOTIONAL POOLING SERVICES NOW AND CONSIDERING ALTERNATIVES, THE PHYSICAL VERSION - ALREADY MORE COMMON THAN NOTIONAL POOLS MAY BE THE WAY TO GO. SEPTEMBER/OCTOBER 2016


32

GL OB AL TREAS URY B R I E F I NG

A N A LY S I S

CORPORATE TREASURY: AN EVOLVING STRATEGIC ROLE THE WINDS OF CHANGE ARE BLOWING THROUGH TREASURY DEPARTMENTS, WHICH ARE INCREASINGLY SEEN AS BEING A STRATEGIC PARTNER TO THE BUSINESS, REPORTS BYRON GARDINER.

T

here is more than sufficient evidence to show that the role of corporate treasury is gradually evolving towards becoming a value-added and strategic function. Companies are capitalising on the opportunities that international expansion yields, while at the same time working towards becoming ever more efficient. As a result, corporate treasuries are being challenged to move beyond performing the traditional transactional financial functions to deliver tangible value to the organisation and operate as a strategic partner to the business. Just as businesses differ in their objectives and ambitions, they also vary in the kinds of support required of their corporate treasuries and in the ways their business models will need to evolve. This article seeks to delve deeper into the changing role of corporate treasury and to assess the key enablers that allow treasury to move from a transactional focus to a more strategic role. So let’s frame our point of reference and define what we mean by transactional versus strategic treasury roles and responsibilities. As we know, the treasury organisation has always been responsible for both SEPTEMBER/OCTOBER 2016

operational and strategic activities. For most companies, HQ level group treasury typically takes responsibility for almost all of the strategic activities; examples include capital structure and planning, and risk management strategy amongst others. The transactional or operational treasury functions are then split across both HQ and regional treasury units. What we are, however, beginning to see is two distinct changes: 1. A level of demand for regional treasury to take responsibility to extend the HQ strategic function in select areas across the global organisation; plus 2. A significant expansion of the strategic treasury function to focus on new areas, specifically around supporting business growth and driving increased revenue performance. SO WHAT STRATEGIC AND VALUE-ENHANCING TREASURY ACTIVITIES ARE WE TALKING ABOUT? There is more than sufficient evidence to show that the role of corporate treasury is gradually evolving towards becoming a value-added and strategic function; however, the question of how to become

more strategic actually starts with the question: How can I do more with less? Faced with this issue, and without additional resources, improving treasury efficiency appears to be the solution. As such, the first priority for treasury should be process efficiency drives to ensure as many of the transactional tasks have been centralised, standardised and automated as possible. THE NEXT QUESTION BECOMES “WHERE CAN A STRATEGIC TREASURY ADD VALUE?” For most, the in-house bank model (IHB) is the pinnacle of treasury sophistication. Indeed, in many ways it can and should be considered a strategic objective if treasury seeks to transform itself and implement this model. These models are highly value-added; providing treasury with an opportunity to significantly simplify account structures, enhance liquidity management and enable increased visibility and control without need for a complex pooling structure. Similarly, the model also maximises the opportunity to selffund internally and to centralise external borrowings at the IHB enabling better credit line management as well as usage


A NA L YS IS

G L O B A L T R E A S U RY B R I E F I NG

33

TREASURY CAN TAKE A MORE STRATEGIC ROLE WHEN THE TRANSACTIONAL TASKS HAVE BEEN CENTRALISED, STANDARDISED AND AUTOMATED

Optimise

Scope of Services

Year 4

Control

Year 3

Year 2

Visibility

Year 1

Strategic Treasury • Working Capital Optimisation • Advise on funding / capital focus • Control and compliance focus • Proactive risk management • Advise on supplier management • Employ strategic treasury consultants

Value Enhancing Treasury • Leverage SSC, trading hubs and netting centres • Standardise bank connectivity (SWIFT/H2H) • Improve collections, optimise costs, risks and returns • Regional / global liquidity solutions

Process Efficient Treasury • Automate where possible • Rationalise account structure • Timely funding and debt admin • Short-midterm cash / WC forecast • Monitor FX and IR risks

Transactional Treasury • Basic policies and processes • Basic funding source, pooling • Short term cash forecast • Control on bank accounts

at lower cost. For many companies a significant saving on FX costs is achieved by internalising FX trades which permits the netting of these exposures. While risk management has always been a focus area for treasury, we are seeing an increasing desire for the department to apply an enhanced level of sophistication to its management of risk. This becomes all the more important as a company expands globally into new regions and potentially complex markets. From a mergers and acquisition (M&A) perspective, the role of treasury is now changing significantly. Unlike the past, where typically treasury was wheeled in just in time for the deal close, the treasurer is now a part of the core deal team. He/she often gets involved with the initial table top due

Time

diligence, and remains engaged to support the entire funding plan for the deal. Another related area of value-add for treasury relates to the expertise and guidance provided in support of organic business growth plans. Treasury’s value cannot be underestimated in this regard, particularly when a business is contemplating a new entry into an emerging market, and could include evaluation of; • Capital and FX controls that influence funding decisions and mechanisms. • Repatriation plans to avoid or minimise trapped cash. • Banking partner availability and market sophistication to determine the treasury operating model, and

• Risk management to ensure suitable trading and contract terms with new customers. An often hidden value-driver for treasury is in the area of bank relationship management. This is becoming an area of increasingly high importance under the evolving regulatory environment, and more so in light of the recent high-profile market exits announced by several banks. Treasury is uniquely well placed to provide a thorough evaluation of each of these areas. This will provide additional clarity to the broader impact of the choice of banking partners and will also assist by providing further certainty that the chosen strategic bank relationships are the right ones for your business. SEPTEMBER/OCTOBER 2016


34

GL OB AL TREAS U RY B R I E F I NG

A N A LY S I S

STRATEGIC BANK RELATIONSHIP MANAGEMENT DRIVES BETTER CHOICE OF RELATIONSHIP BANKS AND SHARE OF WALLET

Solutions

Who offers the most of what I need? • Scoring the quality of RFP responses, presentations & implementation plan • Identify negotiation leverages in terms of time, cost, resources and quality • Bank’s services and capabilities; any industry awards / recognition • Access to value added services, e.g. specialised advisory services

Relationships

How does this decision impact my banking agenda? • Potential change in banking landscape • Bank’s commitment to my business and whether the future plans match my business growth areas; distinguish “maintanance“ from investment • The scope and reliability of partner bank model in the required geographies

Risk Minded

What other risks does this decision involve? • The reliability of banks e.g. Basel3 / regulatory compliance, credit history / outlook • May re-distribute counterparty risk exposures • May nedd to re-balance banking wallet amongst key credit providers • Consult external experts on legal / tax considerations

NEW AREAS OF INVOLVEMENT A further ambition of a strategic treasury is to pro-actively engage in both large procurement and sales initiatives, in order to ensure optimal outcomes are achieved that take into consideration everything from; FX and counterparty risk, efficiency across the cash conversion cycle - days payable outstanding (DPO), days inventory outstanding (DIO) and days sales outstanding (DSO) - and most importantly, that treasury takes the lead in all supplier and buyer financing initiatives to optimise working capital utilisation at the lowest possible cost. SEPTEMBER/OCTOBER 2016

In order to take a lead role in such an expansive area as working capital management, treasury is required to take a collaborative approach in considering the needs and key objectives of many stakeholders across the business and there is a need to align key performance indicators (KPIs) and objectives across the various functions. In doing so, treasury is definitely well-placed to successfully deliver on the working capital efficiency objectives of the organisation. So in summary, it is clear that corporate treasuries are being challenged to move beyond the largely transactional function of years gone by, and to now deliver tangible

value to the organisation and operate as a strategic partner to the business. That said, just as businesses differ in their objectives and ambitions, they also vary in the kinds of strategic support required of their corporate treasuries. If I were to highlight one area of specific focus as a key takeaway, it is that of treasury’s ability to drive the working capital efficiency agenda. As outlined above, treasury is uniquely well placed to take the lead on working capital initiatives and the benefits of such a focus are considerable. Byron Gardiner is executive director, treasury solutions for Standard Chartered.


S I B OS 20 16 PR E V IE W : INS TA NT PAYM E NT S

G L O B A L T R E A S U RY B R I E F I NG

35

AHEAD OF SIBOS 2016, TO BE HELD IN GENEVA FROM 26 - 29 SEPTEMBER, GLOBAL TREASURY BRIEFING FOCUSES ON TWO AREAS OF PAYMENTS THAT WILL BE IN THE SPOTLIGHT.

NEW PAYMENT METHODS REQUIRE SIMPLE RULES AND CONNECTIVITY INNOVATIVE PAYMENT SOLUTIONS WILL NEED TO OFFER POSITIVE EXPERIENCES FOR THE END USER, WHILE AT THE SAME TIME HIDE THE UNDERLYING COMPLEXITIES AND SECURITY ISSUES OF PAYMENTS, SAYS DOMENICO SCAFFIDI.

R

ecently, I was sitting with two friends at a London Thames-side café terrace enjoying the evening breeze.We were discussing instant payments (IP) initiatives and what new developments the next few years might bring, when our attention was drawn to a neighbouring table. Four teenagers were conversing on how easy it has become to send money to friends and family members or buy goods via the recently-launched services, mentioning the various ways by which they can now make payments. For us, it was almost a ‘real life survey’ and we joined in their discussion. As professionals we soon realised that banks, processors, payment service providers (PSPs) and other stakeholders involved in today’s payments ecosystem and trying to switch to IPs were all doing the same thing:

adapting their internal infrastructure and business model to generate revenue, but also offer clients the services they demand. We concluded that there is no business solution possible without changing both, the existing infrastructure and the business model. Adapting a lean and fast new infrastructure will also require a new business model; keeping the current complex business model in place will not meet customers’ expectations in terms of service level (payment execution time, reachability and payment certainty). Conversation soon moved on to another crucial point, namely security and trust. Our new friends clearly liked the fact that new payments apps and solutions are making it easier to buy services and goods. On the other hand, they were worried about a potential lack of security and trust. SEPTEMBER/OCTOBER 2016


36

G L OB AL TREAS U RY B R I E F I NG

S I B OS 20 16 P R E V IE W : INS TA NT PAYM E NT S

Are the new payment methods really safe, they asked? According to Visa and based on investment driven by stakeholders specialised in credit cards, sophisticated authorisation systems that recognise fingerprints, heartbeats or involve iris scanning are already becoming a new reality. Another trend we are seeing is card organisations getting into IP with the purchase of important automated clearing houses (ACHs) and processors, and partnerships with alternative payment providers previously regarded as competitors. Maybe the future is one big IP network with financial ‘overlay’ services for everything - credit, insurance, payments and more. At this stage, it would be very useful to know if credit card payments will migrate to IP schemes in the next few years or if credit cards firms will abandon their infrastructure in favour of IP schemes. Several start-ups and technology entrepreneurs are already working on this innovation; realising tools and connections to forge the technologies and services that will transform customers’ interactions with payments or even make them invisible. These scenarios could be the alternative for payment and settlement considering the complexity of regional regulations. SEPTEMBER/OCTOBER 2016

Global infrastructure like blockchain also represents a valid alternative. Blockchain is not designed to be local; hence there is no distinction between domestic and global payments. It is not a secret that IP and banking APIs could affect ACHs, cards and SWIFT, giving corporates, merchants and consumers new solutions and options. Banks that promote IP and innovation will be perceived in a positive light by regulators and users. Of course these new scenarios will only be possible if smart financial institutions understand that the Payment Services Directive (PSD2) is not a new monster delivered by the regulator, but a great opportunity for new digital solutions. PSD2 will make it possible to design and offer new value-added services thanks to these new worldwide payment rails. It will also validate new business models and increase revenues coming from the new tailored services, which will be offered to all clients. FAREWELL TO TRADITIONAL BANKING After talking for almost an hour about new these new opportunities, our companions appeared baffled by our fanciful predictions. They were a little confused and did not care about terminology, schemes or regulation.

To relax the atmosphere, I added nonchalantly: ‘Don’t worry guys, you can always go to your favourite bank branch and get all information you need.’ Conversation suddenly froze, they looked at me like someone from the last century. Eventually one responded: ‘I have never been to a bank in my life and I don’t intend to go to into a bank to open an account or inquire about a new service. Everything we do will be online.’ Indeed, that seems to be the key principle for any value-added service a bank may offer to customers in future. Thanks to application programming interface (API) technologies and potentially blockchain, it will be possible to share information using data stored in one entity and make it available for any authorised entity using standard communications. Returning home, I felt like I had just attended an international payments summit. The key message I took away was that for payments technologies to be successful they require simple rules and connectivity and must allow participants to create positive user experiences and products that hide the underlying complexities and security issues. Domenico Scaffidi is principal solution consultant for Immediate Payments at ACI Worldwide.


S I B OS 20 16 PR E V IE W : INS TA NT PAYM E NT S

G L O B A L T R E A S U RY B R I E FI NG

37

SIBOS 2016 EVENT WILL TAKE A CLOSE LOOK AT SWIFT’S GLOBAL PAYMENTS INNOVATION INITIATIVE AND THE PROGRESS MADE SO FAR ON THIS PROJECT, SAYS WIM RAYMAEKERS. TREASURERS WILL ALSO HAVE THE OPPORTUNITY TO HEAR ABOUT OTHER KEY INDUSTRY TOPICS, FROM THE DIGITISATION OF TRADE TO DISTRIBUTED LEDGER TECHNOLOGY.

PAYMENTS AT SIBOS: WHAT TO LOOK OUT FOR T

he theme of this year’s Sibos conference is ‘Transforming the landscape’ - and nowhere is this more relevant than in the area of payments. Corporates are currently facing a number of challenges where payments are concerned. On the one hand, they need to understand the impact of impending regulatory changes on areas such as liquidity management and working capital management. At the same time, treasurers should be aware of a number of different payment initiatives which are emerging across the industry. As well as knowing what these initiatives are, corporates need to understand how

they will be affected by upcoming changes. They also need to know how they can work with their banks and technology providers to leverage the opportunities brought by new developments. TRACK AND TRACE PAYMENTS One area which will be a key focus at this year’s Sibos event is the SWIFT global payments innovation (gpi) initiative, one that has particular resonance for corporate treasurers. For years, the financial community has been debating whether it is possible to track and trace a payment in the same way as with a physical package.

From the corporate treasurer’s point of view, there are many reasons why it might be important to know the status of a particular payment. If a payment does not reach a supplier on time, a company may risk breaching its supplier terms, or may fail to receive a shipment. Relationships with key trading partners may also be adversely affected. Trade is not the only area where it is important to know the status of a particular payment. For example, if funds are not in the right place at the right time, a crucial merger and acquisition deal could be at risk. As it currently stands, if a treasurer does

SEPTEMBER/OCTOBER 2016


38

G L OB AL TREAS URY B R I E F I NG

S I B O S 20 16 PR E V IE W : INS TA NT PAYM E NT S

need to find out where a payment is in the process he/she will need to raise an enquiry with their bank or banks. However, this is not always a straightforward process: if a payment has to pass through multiple correspondents, the bank which initiated the funds may not have the relevant information. This can lead to significant frustration for the treasurer. THE GLOBAL PAYMENTS INNOVATION INITIATIVE The SWIFT gpi initiative aims to address much of this frustration. This industry-led initiative has been developed in response to the growing challenges relating to regulatory compliance, while meeting the requirements of end customers by simplifying the payment process. The goals of the project are to make cross-border payments faster, more transparent and with end-to-end tracking for the end customer. The initiative will enable banks to offer their clients enhanced payments services, driving innovation around the world. Initially targeted at enhancing crossborder payment experience for corporates, the initiative focuses on four key areas: • Same day use of funds. • End-to-end tracking and tracing of payments. • Transparency of fees. • Guarantee of unaltered remittance information transfer.

SEPTEMBER/OCTOBER 2016

The pilot is currently underway, with 21 banks currently participating. Almost 80 banks in total have signed up for the project, representing more than 71% of cross-border payments traffic on SWIFT. Early results of the pilot will be reported at Sibos: with a dedicated session on ‘The global payments innovation initiative: a new standard in cross-border payments’ looking at the progress made so far, as well as discussing the next steps in this project. EMBRACING INNOVATION When it comes to new payment technologies, corporates often take a conservative approach. As demonstrated by the adoption of cloud and softwareas-a-service (SaaS) models, corporations are often not the first movers when it comes to adopting new technologies. That said, many treasurers are curious about developments such as blockchain and distributed ledgers, with a clear appetite to learn about the latest developments and how their businesses can benefit. These topics will also be explored in detail at Sibos 2016. This year’s event will explore how the industry can face the challenges of today while planning for the needs of tomorrow. There will be a particular emphasis on how the industry can innovate within the traditional framework while refreshing current strategies. Topics such as trade digitisation, regulation and blockchain will all be explored in detail.

There are many sessions covering a wide range of topics at Sibos, but corporate treasurers should particularly look out for the following highlights: • Treasury game changer: how can banks help corporates grow their business? • How can technology help in treasury strategy?: what are the key trends and innovations against a backdrop of regulatory change? • Reinventing correspondent banking: where next? • Enhancing the cross-border payments experience in B2B (workshop) As always at Sibos, we’re looking forward to hearing feedback from the industry about where challenges are emerging and how we can work together as a community to address those challenges. Bringing people together from around the world gives us an opportunity for engagement and debate which helps us to find ways of becoming more efficient and effective as an industry. We look forward to seeing you there. Wim Raymaekers is head of banking market at SWIFT. Sibos 2016: Transforming the Landscape takes place at Palexpo in Geneva, Switzerland from September 26-29.


SEPTEMBER/OCTOBER 2016


SEPTEMBER/OCTOBER 2016

Global Treasury Briefing September / October 2016  

Welcome to the September / October edition of Global Treasury Briefing.

Global Treasury Briefing September / October 2016  

Welcome to the September / October edition of Global Treasury Briefing.

Advertisement