Request PDF

The word ‘transformational’ can cause much rolling of the eyes, even in the mildly sceptical, when referring to technology. But the treasury space is different. Today, the opportunity exists to call upon a multitude of digital services provided by banks, vendors and other organisations that not only automate many core processes but, in so doing, convert the role into one that demonstrably adds value to the business.The emphasis here is on progress through partnership. No treasury is an island, least of all when it comes to deriving positive results from technologies that can only have been forged through years of close-at-hand and yet wide-ranging specialist experience that few treasurers have the time to amass.

Against a backdrop of widespread digital transformation, Niall Cameron, Global Head of Corporate and Institutional Digital, HSBC, sees the pace of development in most sectors picking up “at a rapid rate”. Whilst some companies are being forced “reactively” to adapt to the new world order, the real leaders are pro-actively changing their business structures to fit. Regardless of approach, companies are increasingly expecting to see the provision of digital financial services evolving in synchronisation. In essence, digitisation is one of the great movements of our time.

Influencing the sea-change in and around the commercial space is the way in which personal relationships with technology have evolved in the past decade, notes Cameron. Now, with the adoption of mobile devices, he believes that the rise of social media and the seemingly inexhaustible use of the internet having permeated individuals’ professional lives, that clarion call for corporate digitisation is inevitable. “It is a trend that is not about to stop as the so-called ‘millennials’ move into senior roles, bringing their digital expectations with them.”

The direct impact of change on the corporate treasury community can be seen as mobile banking, cash pooling and web platforms have all made it easier for treasurers to handle larger volumes of activity across multiple geographies and jurisdictions, comments Brian McKenney, Global Head of Innovation and Business Management, Global Liquidity and Cash Management, HSBC. “And they do so more efficiently and effectively than ever before.”

“Combined with advancements in data management and analytics, these developments are allowing treasurers to spend more time providing meaningful insight and advice to C-Suite decision-makers, ultimately informing strategic direction.” This, McKenney adds, enables businesses to rethink legacy business models, to consider new opportunities, to redeploy excess capacity created through digitisation, not just for cost-savings “but also for sourcing new opportunities and revenue streams”.

As information flows from data, consideration must be given as to how vast repositories of data may be harvested and interrogated in order to provide useful intelligence, notes Cameron. “Although from a technological perspective this is a relatively straightforward process, the real challenge is to know what you are trying to find,” he explains. “With today’s ‘big data’ analytics effectively offering both a periscopic and a microscopic view, corporates can access an impressive depth and breadth of understandings, from the structural to the granular.” Indeed, from this standpoint, he observes that a series of tiny incremental improvements can help to deliver major successes at the corporate level “as companies are able to stand back and critically appraise aspects of their work that they would not normally see”.

As a practical example, McKenney explains such a view could help optimise working capital management by facilitating wide-ranging visibility over, and subsequent action on, all liquidity positions – from debt, investments and cash positions, to the impact of foreign currency and interest rate movements. In the security and fraud detection realm too, he has seen clients interested in exploring ways to absorb bank data to better enable the detection and pre-empting of events.

Multiple drivers

In considering how to remodel treasury processes to best effect, it is important to know that it is not just technological innovation that is driving change; there is also a regulatory imperative. This is intent on delivering transparency over great swathes of corporate and banking data structures, and is likely to have even greater impact going forward. This twin advance is none more evident than in the payments space.

With today’s ‘big data’ analytics effectively offering both a periscopic and a microscopic view, corporates can access an impressive depth and breadth of understandings, from the structural to the granular.

Niall Cameron, Global Head of Corporate and Institutional Digital

With strategic opportunity in mind, McKenney draws attention to advancement in Application Programme Interfaces (APIs). These technical protocols define how computer programmes talk to each other, providing corporates and other institutions with, amongst other things, far easier access to banking systems and infrastructures. “A major driver behind this – and evidence that the regulatory piece is working to the greater good – has been the arrival of PSD 2 [Payments Services Directive 2]. This is changing how banks interact with customers and other providers within this space.”

Related to this is the adoption of real-time payment infrastructures, with a number of markets already offering or actively implementing new solutions, including Singapore, Australia, Hong Kong, Europe and the US. Furthermore, the rise of distributed ledger technology (also known as blockchain) is, McKenney feels, ushering in a new way of thinking about payments processing, tracking and security, both domestically and cross-border. “Together, these changes could have a major impact on corporate cash management and wider operations, especially in terms of how they facilitate automated payments initiation and customer collections.”

What’s more, McKenney believes that derived from the increased adoption of, and adherence to, innovative technologies, the corporate user-interface and experience within the realm of financial services will persist in being influenced by the standards expected by personal users of modern technologies. “The level of product sophistication offered to businesses will need to at least match that of the consumer and this is now a focus for HSBC. Customers are expecting a much higher standard.”

This returns the notion of digitisation to the need for collaboration. Just as no treasury is an island when it comes to thinking ahead of the curve, no bank can stand in isolation either; the most progressive are working with the best-in-class providers (as HSBC’s recent partnership with Kyriba attests). “Collaboration is a very positive way forward for us,” states Cameron. There is a “fantastic array of partners out there”, he feels, from the classic fintech start-ups to the more established players. And whilst he says HSBC can innovate, he candidly accepts that if it restricts itself only to in-house development, it risks limiting what it can do for clients.

HSBC is acutely aware of how the collaborative approach helps to bring to the surface the real-world view of what is likely to meet client needs; it is not, states Cameron, about technology for its own sake.

Ultimately, all digital technologies must gain strong momentum to survive. An embodiment of this notion is data visualisation technology which had struggled to gain ground over the years but is now quickly moving up the agenda as corporate professionals, subject to global volatility, demand information from multiple sources at their finger tips.

Join the race

For some corporate treasurers, the pace of digital development may at times feel like they have unwittingly entered a race and as a result may feel daunted by the prospect of keeping up. There is no single answer as to how to deal with ‘future shock’, says Cameron. However, he reports that common ways of thinking are emerging. One of these is the concept of ‘agile technology’. This requires every stakeholder to be consulted – often in the same room at the same time – regularly and often so that development takes place with short, sharp bursts of energy. This agility is starting to impress upon the way business decisions are taken too, he notes. When approached collaboratively with the technologists it is, he reports, possible to reduce a process that once took months, or even years, down to a matter of weeks.

Compression of timelines is one of the key changes likely to arise from digitisation. But to achieve this, Cameron warns of the need for a willingness to accept a higher percentage of failure. “In the digital economy there is an understanding that a low failure rate often means teams are not pushing hard enough,” he says. “This is not easy to accept but it will become an important part of managing the digital future.”

There will also be a challenge for larger companies trying to promote digitisation, particularly as the experimental nature of the digital economy does not always sit well within a rigid structure. One approach has been to ring-fence teams of talent, but within HSBC the model has focused on total organisational engagement. Regardless of tactic, corporates and banks are going to have to learn different ways of doing business in the future, cautions Cameron. “We all need to become far more adept at dealing with change and we must also accept that digitisation is increasing that rate of change dramatically.”

When adopting transformational technology, collaboration is key. A global player such as HSBC will have its finger on the digital pulse and be well-positioned to cross-pollinate ideas from multiple client types and locations. In so understanding the dynamics of the market, its proactive banking approach will, says Cameron, keep delivering the kind of digital experience that treasurers need.

The post What’s next: the evolution of digitisation first appeared on Treasury Today.

Back in 1965, Intel-founder Gordon Moore wrote about his vision for the likely progress of the humble silicon chip. He believed that it would double in power every two years and cost less each time. He further predicted that chips would be put to work in a multitude of devices – with applications in homes, cars and even “personal portable communications equipment” – and that this growth would be self-propelling. He was right. For some time now technologists have referred to this exponential phenomenon as ‘Moore’s Law’.

The dimensions of silicon chips have shrunk to almost virus-like size and their use expanded to almost every conceivable walk of life. But a recent article in the much-respected Nature magazine suggested that the viability of Moore’s Law is nearing its end; scientists have pushed the limits of what is feasible and that the real creativity must start now.

According to a report by McKinsey and Co, up to 40% of the global productivity growth during the last two decades has been put down to the expansion of technologies made possible by chip performance and price. Tiny chips have been squeezed onto minute circuits and we have all benefited from this progress in one way or another. But the heat that is unavoidably generated by cramming so many hyperactive chips onto a tiny circuit means manufacturers have hit a practical and economic wall. And despite extensive research efforts, Nature states that “there is no obvious successor to today’s silicon technology”. McKinsey’s report concludes that reducing the size of transistors even further will – because of the tools needed to fabricate them – make chip design up to 50% more expensive. But this is not a problem.

Why? Large and powerful computers for individual use are no longer necessary. In today’s on-the-go world we use multiple mobile devices that we carry, wear or that are embedded into just about every device we own. As Nature points out, raw computing power is simply not needed for general use because “most of the processing and data storage is done in the cloud…rather than on the device itself”.

This is as true for the corporate treasurer as it is for other technology users, even if the pace of change may not seem quite so hectic. But consider how far processing speed has advanced in the past few years, how hyper-speed global connectivity is enabling companies to check positions at a moment’s notice, and how data analysis and presentation tools have enabled rapid response times that just a few years ago would have been impossible. Consider too how cloud storage and processing has taken the strain from internal teams and how it has made vast computing power available to so many more. And think about the security and peace of mind that distributed ledgers can bring: blockchain is definitely not a gimmick anymore and even ‘old school’ treasurers can be part of the story now as it feeds into areas such as trade finance and payments.

Moore’s Law may have reached its peak but now it is time to see just how far all that speed and power can really go.

In this Treasury Today Best Practice Handbook, ‘The Treasurer’s Guide to Digitisation’, we look at some of the inventive products of computing science through a treasury lens. We consider how the technologies utilised to deliver so much in the way of time, space and cost efficiencies, in such a short time, have become commonplace to the extent that many justifiably take this progress for granted.

Indeed, the democratising effect of technology is clear to many. But for the cynic, even the apparent tyranny of ‘being in the office when you are out’ has enabled a different way of working that can blend in with modern lifestyles if it is managed sympathetically.

In viewing the digital world of treasury under the microscope in this way, it becomes apparent that resisting progress, at least for a large and complex business, is a risk in itself. For the majority though, the need is simply to be aware of what is available and to ask how such offerings might help their organisations to thrive in a complex and volatile world.

By working through the checklists, interviews and case studies included within this Handbook it will hopefully assist treasurers in understanding what technology can and can’t do, to see and manage the risks, and to place the tools available today in the context of what might be available in the future as the new creative surge rises. We hope, in some small way, to help readers appreciate and prepare for a world that would perhaps surprise even Moore himself.

The post The Treasurer’s Guide to Digitisation 2016 first appeared on Treasury Today.

In a period of ongoing regulatory upheaval and ultra-low – in some cases negative – interest rates, corporate treasurers are being encouraged to review and update investment policies to allow them the flexibility they require to operate in the new short-term investment paradigm.

In 2015, for instance, Fitch Ratings published a report suggesting that if treasurers are not already looking at a policy review in this context, then they really should be. The report said that it is high time for “a proactive, strategic update of investment guidelines” and that corporate investors should give particular thought to future changes in cash management products and ratings coverage.

Money market funds (MMFs) and bank deposits remain the most important short-term liquidity products for corporate treasurers. But as we learned in Section 1 of this handbook, there is now a growing interest amongst corporate treasurers for less conventional products. In this section we will provide an introduction to the staple instruments used for short-term liquidity management before moving on to consider some of the alternatives where, by accepting an additional degree of duration risk, an investor might be able to secure higher returns on liquidity surpluses.

Short-term investments

To align the company’s cash with its investment policy and diversify risk, treasurers typically invest their cash into high quality, short-term instruments and investment products, including:

• Bank deposits.
• Money market funds (MMFs).
• Treasury bills (T-bills).
• Certificates of deposit (CDs).
• Commercial paper (CP).
• Separately managed accounts (SMAs).
• Repurchase agreements (repos).
• Tri-party repos.
• Exchange traded funds (ETFs).
• Medium-term (MTNs) and floating rate notes (FRNs).
• Short-term bond funds.
• Enhanced cash funds

Bank deposits

Types of bank deposits used by corporates include:

• Deposit accounts.

  Deposit accounts are interest-bearing, typically at a fixed rate (although it may vary over time). They provide greater yield than current accounts, although this is still potentially lower than most money market instruments.

• Term/time deposits.

  Cash is placed in term (or time) deposits for a fixed period. Alternatively, a bank may require an advance notice period to withdraw the deposited funds. A minimum deposit amount is usually required. Interest is typically paid on maturity or, for longer deposits, at interim periods.

• Call deposits.

  Also known as on-demand or instant access deposits, they provide immediate access to funds without applying a penalty. This convenience means interest rates will be lower than for term deposits, but are usually better than current accounts. Spreading short-term wholesale deposit business around the market enables counterparty risk to be diversified and can improve returns. But, it can be counter-productive, particularly where there is no obvious bank relationship angle and the improvement in returns for short-dated cash might be marginal at best. It can also be highly time-consuming for any thinly-staffed treasury.

In Europe and North America, bank deposits remain the primary investment vehicle for corporate cash holdings, a trend that looks likely to continue for the foreseeable future. According to the 2016 Association for Financial Professionals (AFP) Liquidity Survey, more than half (55%) of all US corporate cash holdings are still maintained at banks, the second largest share of cash holdings held at banks in the ten-year history of the survey. The report notes that, in 2008, treasurers were keeping approximately half of their short-term liquidity in the capital markets, by way of MMFs, T-bills, and other such instruments. Around one-fifth meanwhile was being stored in traditional bank deposits. Now we are seeing the reverse.

Depending upon the jurisdiction and the funding mix of a bank, the pricing of corporate deposits will have natural breaks at one month, three months and one year. For corporates, overnight deposits have traditionally yielded only minimal returns – especially so in an era of historically low interest rates – near whereas longer-term time deposits will offer higher yield but restrict the availability of cash.

The most impactful change for the corporate treasurer is that it’s no longer the company that defines which of their deposits are operating versus non-operating, rather it’s now a result of a quantitative measure which can be substantiated in line with the regulations.

Lori Schwartz, Head of EMEA Liquidity, Treasury Services, J.P. Morgan

Overnight deposits are being priced higher or paying lower interest because banks are trying to hold onto cash for longer, giving themselves more certainty and increasing their capital ratios in accordance with Basel III rules. “Basel III has introduced an additional level of scrutiny to what defines reliable, quality funding for banks. With its introduction, banks are now required to establish and be able to justify quantitative measures that classify deposits as operating or non-operating, or reliable funding versus less reliable funding. Typically these measures relate to the intended use of the deposit, specifically the relationship to upcoming payments,” explains Lori Schwartz, Head of EMEA Liquidity for Treasury Services at J.P. Morgan. Effectively, banks are finding overnight deposits less attractive and longer dated deposits – such as 35-, 65- or 90-day term deposits – much more attractive.

A cash investor looking to maximise the return on its liquidity portfolio must understand the nuances of Basel III and consider a bank’s likely treatment of its cash balances. All else being equal, deposits deemed to be non-operating cash will be less attractive to banks than operating balances. For that reason, properly segmenting cash balances into operating and non-operating pools and making investments that maximise returns on both pools is key. For treasurers, “it’s important to consider the distribution of their cash management business and the increased importance of aligning payments with deposit placement”, says Schwartz.

Over the past two years, as Schwartz explains: “The most impactful change for the corporate treasurer is that it’s no longer the company that defines which of their deposits are operating versus non-operating, rather it’s now a result of a quantitative measure which can be substantiated in line with the regulations. As a result, the market has changed and as appetite for non-operating deposits continues to reduce the demand deposit account is no longer an unlimited home for excess cash.”

Against the backdrop of a negative interest rate environment, she adds, it’s a key focus for banks to understand corporates’ cash management and currency needs with a view to identify opportunities to optimise as well as leverage new market solutions to increase efficiency. “For companies, it’s important to ensure that investment policies are reviewed and reflect the considerations of negative interest rates.”

As the banks’ appetite for non-operating deposits continues to decline, corporate treasurers with non-operating cash will be best placed to consider off balance sheet alternatives, says Schwartz. “The traditional option of money market funds (MMFs) and others will have separate considerations as countries implement their own regulatory reforms in this space, though.”

Money market funds (MMFs)

An open-ended mutual fund that invests in short-term debt such as money market instruments (fixed income securities with a very short time to maturity and high credit quality). MMFs are run by asset management companies which are either bank-sponsored or independent.

Money market instruments traditionally include treasury bills, commercial paper or certificates of deposit. The original concept of the money market fund thus was one based on mutual investment in pool of securities with the aim of delivering a highly liquid short-term investment that gave higher yield than might typically be found in bank deposits.

Indeed, in order to preserve their capital, corporates in Europe, the UK and the US have traditionally turned to MMFs, as a means of avoiding losses on principle without, importantly compromising safety or liquidity. The three key attractions of MMFs for treasurers, therefore, are: capital protection, daily liquidity and the ability to account for the investments as cash on corporate balance sheets.

According to the 2016 AFP Liquidity Survey, MMFs are storing 17% of corporate short-term investment balances, up two percentage points from the 15% reported last year. How the incoming regulatory changes alters this picture remains to be seen, but some impact is certainly to be anticipated. According to the same AFP study, the majority of treasurers (62%) say their organisations are likely to make significant changes to their approach in light of the incoming SEC rules.

You can read more about choosing and using MMFs, as well as the latest on regulation, in the subsequent sections of this handbook.

Treasury bills (T-bills)

Said to be the ‘backbone’ of the money markets, Treasury bills (T-bills) are short-term instruments issued by national monetary authorities through dealers that participate in regular primary auctions at a discount to par for maturities up to one year (most commonly, maturities do not exceed six months). The value to the corporate investor comes from the difference between the discounted value originally paid and the amount received back.

Investors typically acquire bills through the dealers and settlement would be into a depositary or custodian account. In the UK, the minimum investment is £500,000 and issuance is aimed at institutional and corporate investors. In contrast, the US market encourages retail level access with bill denominations as low as $1,000.

T-bills are considered (credit) risk free in their national markets and, as a consequence, are the first option of any treasurer wishing to minimise risk at times of market stress. Equally, markets for all the leading countries’ bills are deep and liquidity is never in doubt. The downside is low yield which, although designed to mirror official rates, can be negative.

Certificate of deposits (CDs)

CDs are widely used by corporates – particularly in the UK and Europe – in place of fixed-term bank deposits. They are issued by banks and are typically fully negotiable (ie transferable by delivery), which enables them to be bought and sold in the secondary market with relative ease. For this reason, they will normally be issued at yields below those available for term deposits.

Generally fixed rate, CDs can also be floating rate and even pay returns geared to external reference rates. They can be issued bilaterally or under established note programmes. The majority of CD issuance is now in non-materialised form and deliverable electronically though securities depositories such as DTCC and Euroclear, although it is still possible to request physical (security printed) primary issuance.

As with any instrument that can be traded, secondary market pricing can be affected – sometimes dramatically – by market sentiment. This means that negative news events for any bank issuer can result in withdrawal of demand for, and an increase in supply of paper in the secondary market.

A corporate investor intending to trade the paper prior to maturity should be concerned with secondary market pricing. In this instance, auditors may require market valuation of the instrument, which would otherwise be accounted for as a deposit with a maturity value of par.

Apart from a possible yield differential, the main drawback of CDs, compared with term deposits, is the need to be able to accept delivery of the dematerialised form of the CD. This poses no issue for a treasury operation that has a regular custodian holding accounts with a group like DTCC or Euroclear. But for those investors that are without this, custodial arrangements will need to be made, managed and paid for.

Commercial paper (CP)

CP is an unsecured, short-term debt instrument that can be issued by non-financial corporate and by banks. Bank issuance is most regularly associated with securitisation programmes, where bank assets are transferred into a conduit vehicle and from which CP is issued to investors. Whilst there may be little direct name association between a bank and its conduit(s), CP issuance is generally considered to carry full faith and credit of the bank sponsor, not least given credit, servicing and liquidity undertakings by the sponsor to support an external credit rating. That said, such asset-backed CP (ABCP) programmes have to be explained (and understood) and secondary market liquidity can be patchy.

However, for corporate investors that have the capacity both to assess and manage such assets and that are willing to live with the possibility of constrained liquidity, investment in ABCP can generate improved investment returns.

Most highly-rated non-financial corporates have active CP programmes, whether in the US or offshore. In the US, the domestic CP market is highly developed and is a mainstay of short-term money markets. In contrast, Europe is not so well placed. France and the UK both have relatively modest domestic CP markets and the concept of non-domestic, cross-border issuance (ie euro commercial paper or ECP) is well established.

Maturities on CP range from one to 365 days, however in the US they are rarely longer than 270 days because after that date it must be reported to the SEC. The debt is usually issued at a discount, reflecting prevailing market interest rates.

Separately managed accounts (SMAs)

Various banks and asset managers offer a short-duration strategy within SMAs, a product that is essentially a portfolio of assets under the management of a professional investment firm. SMAs are typically used by large institutional cash investors who wish to place significant sums of cash, typically above €100m, directly into a basket of investments that suit their risk, liquidity needs and performance objectives. Smaller sums can be invested but the fees may outweigh the benefits due to the cost of running a diversified and well-managed SMA mandate.

One or more portfolio managers are responsible for day-to-day investment decisions, supported by a team of analysts, operations and administrative staff. SMAs differ from pooled vehicles like mutual funds in that each portfolio is unique to a single account (hence the name).

SMAs provide an attractive option for those investors in search of higher yields. In order to fully embrace this tailored portfolio approach, however, corporates would be well advised to ensure they have a good, strategic hold over their available liquidity from the outset.

For those corporate investors who have the flexibility to consider a broader scope of relative-value opportunities across slightly extended time horizons, a bespoke SMA can be constructed to capitalise on a wider range of strategies, sectors, and securities than those available through constant NAV vehicles.

Table 1: Separate accounts at a glance

Repurchase agreements (repos)

A repo is the sale and contractual repurchase of qualifying securities for cash with delivery and settlement though a central clearing counterparty (CCP) on a delivery-versus-payment (DVP) basis. Collateral provided is typically government securities or other assets subject to an agreed additional collateral margin (or ‘haircut’).

Repo maturities can be overnight or term and, depending upon the agreement reached, collateral may be substituted during the course of a transaction. The key feature is that underlying collateral is legally owned by the investor who would have a right of sale if the repurchase counterparty were to default. The risk is that the collateral haircut is insufficient to cover market risk at a time when the counterparty has defaulted on its obligation to repurchase the securities.

Repos can be administratively burdensome which is why investors are typically institutional market participants with an infrastructure to suit. Repo pricing tends to mirror the underlying cash market for the term of the repo with adjustment for collateral quality. Accordingly, for example, overnight sterling investment in repo collateralised with general collateral (ie government securities) would normally trade around 0.05% per annum below LIBOR.

Tri-party repos

Repos are often perceived as difficult to administer by the inexperienced user: this is almost certainly criticism levelled at bi-lateral deals where a corporate must find a custodian, manage a complex contract and have valuation, settlement and variation margin capabilities. But as an antidote to such issues tri-party repos are gaining ground as a short-term investment instrument.

With tri-party repos, an appointed collateral agent does most of the background work so that beyond fine-tuning the standard contract (the Global Master Repurchase Agreement or GMRA), establishing any policy restrictions and preferences, and issuing instructions to go to market, the operational involvement of the treasurer is minimised.

The agent may seek to manage a number of counterparties on behalf of its corporate client to make it worthwhile. In policy terms, this may in any case be desirable, as not only will treasurers feel more comfortable lending more to counterparties with covered cash than without, it also means they can lend against the quality of collateral, not the borrowing institution, and this in itself may generate more scope for deals.

This may even open up safe non-bank financial institutions as viable deposit counterparties – insurance companies and pension funds sitting on high quality securities from time to time need short-term cash. At least one London broker has software enabling these transactions.

Since tri-party repos offer means of diversifying investments without degenerating credit quality, interest from the corporate investor has understandably been growing in recent years. As long as there is full understanding of what is being done, and that it does not conflict with policy, then arguably any collateral is better than no collateral in risk management terms. Some treasurers have in the past complained, however, that the process for setting up tri-party repo arrangements remains lengthy and convoluted and that the yields on offer are not too different to what they are receiving for their MMF investments.

This is due to the fact that repos and tri-party repos originated in the interbank market, says Gösta Feige, General Manager & Director, Euroclear. Therefore, in the beginning, tri-party agents that look after collateral management, like Euroclear, had not adapted to accept corporate clients, he admits. But, corporate treasurers began to question “why, when we are cash long, should we deposit our cash in a classic unsecured money market, while in the interbank market, it is largely done in a secured way?” Agents like Euroclear have now adapted, however, in order to ease the onboarding process so that corporates can enjoy the benefits of tri-party repos which, Feige says, include:

• Better protection.

  Securities collateral back up the trade and, as such, there is reduced counterparty risk.

• Better returns.

  Better returns than can be expected in the unsecured money markets. This is due to regulations and funding pressures on banks to refinance themselves secured on a longer term.

• Improved onboarding procedures.

  In addition to Euroclear’s own internal simplification, the company has worked with the International Capital Markets Association (ICMA) to come up with a simplified and standardised version of the GMRA to ensure treasurers only have to go through it once.

Exchange traded funds (ETFs)

Amid all the uncertainty created by the forthcoming regulatory changes to MMFs, corporate investors may wish to consider short-duration bond funds or exchange traded funds (ETFs) as an alternative. As Beccy Milchem, Director, BlackRock Cash Management, says: “Upcoming US MMF reforms and eventual updates in Europe are prompting many corporate clients to review their investment policies. Those that are able to bucket stickier portions of operational and core cash balances have looked for additional solutions to add to their investment toolkit.”

“Beyond the spectrum of traditional short-term MMFs, there are a number of ‘ultra-short’ and ‘short’ duration bond funds and ETFs that can be the next step for an investment policy,” her colleague Ashley Fagan, Director, iShares, BlackRock, adds. ETFs are securities that track an index, a commodity or a basket of assets like an index fund, but trade like a stock on an exchange. Due to this, an ETF does not have its NAV calculated every day in the way a MMF does.

ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. This isn’t to say ETFs are for everyone, though, as Fagan explains: “This universe is much more diverse, with variances across credit and/or duration, so it is critical that investors understand the funds’ objectives, permissible securities and maturity limits and select those that meet their investment requirements.”

Beyond the spectrum of traditional short-term MMFs, there are a number of ‘ultra-short’ and ‘short’ duration bond funds and ETFs that can be the next step for an investment policy.

Ashley Fagan, Director, iShares, BlackRock

Indeed, to date, MMFs are still much more popular with European corporate treasurers. One reason, perhaps, is that these types of fund typically assume greater levels of risk, compared with traditional MMFs, in order to secure marginally higher yields. Another significant difference is that the shares of short-duration ETFs, unlike CNAV MMFs, fluctuate during trading hours – much in the same way as stock prices.

Therefore, as Milchem says: “Short-term MMFs will most likely remain the most appropriate solution for operational cash with daily liquidity requirements. Ultra-short duration bond funds and ETFs often offer liquidity in terms of T+1 to T+5 settlement but investors will need to be mindful that these products are typically designed for longer investment horizons and more frequent trading may result in losses. Many corporates hold the core values of capital preservation, diversification and active risk management throughout their investment strategy and thus look for strategies that have low volatility in the NAV and low value-at-risk (VaR) figures.”

Medium-term (MTNs) and floating rate notes (FRNs)

MTNs are bonds and other types of debt notes that have a maturity period somewhere between five and ten years. This type of financial note may include a term that is very different from the period of maturation, ranging anywhere from a single year to 50 years. An MTN may be structured as a fixed-income security or as some type of floating coupon, and is usually made available for purchase through a dealer.

Asset-backed MTNs could be collateralised by mortgages, equipment trust certificates, amortising notes issued by leasing companies, or subordinated notes issued by bank holding companies. However, most MTNs are based on the creditworthiness of the issuer.

Floating-rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a quoted spread. The spread is a rate that remains constant. Almost all FRNs have quarterly coupons, ie they pay out interest every three months. At the beginning of each coupon period, the coupon is calculated by taking the fixing of the reference rate for that day and adding the spread.

Issuance is dematerialised (as with CDs and T-bills) and delivery is through a CCP such as DTCC or Euroclear, with a requirement to enter into a custody agreement either with the dealer/vendor or separately with a dedicated custodian.

Most note programmes permit the issuance of a variety of instruments and can be designed to accommodate note issuance tailored to individual investor requirements. In some cases, they can also provide for the issuance of short-term CP, although maturities tend to be longer (say 180 days plus) than for regular CP.

Short-term corporate investors in MTNs or FRNs are unlikely to be participating in the primary market in view of the longer-term nature of the issuance. Instead, they will be looking to invest in secondary paper offered by the programme dealers that maintain a market in the issues or by holders/vendors directly.

Short residual life bank-issued FRNs that are into their final fixing period tend to fare best in the secondary market since the repayment obligation has, by this time, the same status as a bank deposit (ie fixed maturity and fixed rate). Generally, however, paper with a short residual credit life is difficult to find and, where it does exist, would not necessarily offer yields superior to that when the bank bids directly for cash. For short-dated FRNs, secondary market liquidity may be less than for CDs issued by the same obligor depending upon market conditions.

For corporate investors with a suitable risk appetite and credit process, longer-term bank – and even non-financial corporate – issuance can offer a significant yield pick-up but secondary liquidity (if required) could be an issue.

Short-term bond funds

Fund providers are devoting considerable effort to the development of their short-term bond fund offerings as a response to investors’ demand for higher yielding short-term investments and the inevitable disruption by regulators of the more traditional CNAV MMF product. They are hoping that the fund price volatility (and some capital losses) experienced in the aftermath of 2007/08 will be accepted as part of the story; however, investors will be wary.

In 2007/08, some AAA rated enhanced cash funds that had been heavily promoted as a treasury investment (but VNAV product) were caught in the wake of the failure of a number of short-term bond funds – in particular the French ‘dynamique’ funds (which had taken losses on mortgage and other structured securities).

With the prospect of variable fund pricing looming in any event, investors are showing renewed interest in accepting (through the fund) greater market and liquidity risk in return for increased yields in short-duration bond funds. In the process, they will experience daily yield volatility (as fund holdings are marked-to-market) and longer exposure to a wider range of credits. Depending on the fund and its rating, the portfolio could include tier-two names and more ‘illiquid’ securities. Whilst the funds are priced daily, investors also must accept that settlement might not be the same day, as with CNAV MMFs.

Investment in an ultra-short bond fund is a different proposition to investment in a CNAV MMF despite the fact that a fund provider may position its bond funds such that they and CNAV MMFs appear in a single continuum. In particular, fund providers are emphasising the potential for investors to exploit the yield and credit curves by investment in longer duration products. The question is whether investors can rationalise reduced portfolio liquidity and less certain returns in exchange for higher yield potential and whether their investment horizon can be long enough to ensure that the impact of any daily price volatility is mitigated.

Enhanced cash funds

A number of fund managers offer enhanced cash funds alongside their top-rated funds and, although the product suffered following the market turmoil of 2007 and 2008 (when they experienced very significant outflows and some losses of principal), it can be an efficient means of creating market exposure for those investors with longer investment horizons (say six months or more) and more predictable liquidity requirements but lacking market access. Such funds can be described in lots of ways. Confusingly, under the ESMA definitions, they may be termed ‘money market funds’ and additionally they may be branded as:

• Enhanced cash.
• Liquidity plus or Libor plus (both less common terms than previously).
• Ultra-short cash.

These all try to offer a better yield.

It is important to note however that, although they may be marketed as enhanced liquidity funds (the implication being that they suit treasury liquidity investment), these funds are in reality ultra-short bond funds with VNAV fund pricing that will only suit investors with a longer investment horizon (ie those that can invest for long enough to ensure that the effect of increased day-to-day price volatility in the underlying assets is absorbed by the time shares are redeemed) and with the ability to understand fully the nature of the assets in which the funds are investing.

All these funds have extra risk in one way or another. There are two main ways of increasing return in an enhanced cash fund:

1. Take more credit risk, so if the enhanced cash fund you are offered is rated AA rather than AAA you will know that the fund is investing in slightly lower-rated/higher-risk and potentially less liquid credits.
2. The second way to get additional return is to invest a greater proportion of portfolio in longer maturities and thus extend the duration and reduce the liquidity of the fund. As a bond fund, this will be reflected in the volatility rating.

Arguably there is a third way and that is to invest in less liquid instruments. But many see this as a variation of the first and second options, investing for longer in lower-credit quality instruments.

The important thing for investors to realise is that once there is a move away from the top-rated short-term funds there is more risk, although the additional risk may be small. Different funds offer different maturity/duration, credit quality and liquidity combinations and, in contrast to the more standardised short-term MMFs, cannot readily be compared directly. Nevertheless, in light of forthcoming regulation of MMFs, fund providers have come more active in developing enhanced cash products.

The starting point for most investors in enhanced cash funds will be internal policy agreement on credit, market and liquidity risk appetite, willingness to accept VNAV fund pricing and deferred settlement (normally one day) and the need for cash equivalent pricing (which is less clear than for a short-term MMF).

Perhaps the most difficult element to rationalise will be the volatility of yield and, potentially, principal. Despite being positioned as ‘ultra-short’, these funds are still bond funds. They have a longer duration and would typically be permitted to invest in less well-rated names implying greater market risk.

Accepting of the risks, corporate investors are making increasing use of these funds as they search for improved returns. The portfolio nature of a fund makes the proposition less risk than a single investment.

No such thing as a free lunch

One thing is for certain, whether treasurers experiment with new products like the tri-party repo or stick with a more traditional mix of bank deposits and MMFs, today’s regulatory and market environment means a new approach to short-term investment will be needed at some companies. While cash levels are growing on the balance sheets of many organisations, cash segmentation is still not practiced universally in the corporate world.

“Why is this?” asked Alastair Sewell, Senior Director Fitch Ratings and Charlotte Quiniou, Director Fitch Ratings in an article on Fitch’s The Why Forum in 2015. “Until now, money funds have been the ideal vehicle to meet liquidity needs, providing cash managers with a “free lunch” of yield, liquidity and preservation of capital. However, looming market changes means the free lunch is over and the cost of same-day liquidity will go up. Corporate treasurers may well have to rethink their investment priorities as they come to terms with the changing cash management environment.”

Best practice: investment policies

All of a company’s investments should be governed by pre-determined criteria, designed to balance risk and return in a way which meets the company’s risk appetite: in other words, by an investment policy.

The investment policy sets out who has permissions to carry out certain investments, which funds, banks and other counterparties are permissible and in what amounts (percentage limits can be set), the credit ratings, returns and maturity lengths which are acceptable and how the policy may be updated in future as the company’s risk profile changes, new investment products become available or counterparties change. Rules like Sarbanes-Oxley (SOX) and IFRS place responsibility for internal controls on the senior management team. In line with this, the board, CFO or a specially constituted treasury committee may have roles in determining the investment policy and keeping it up-to-date. It is generally approved at a senior or board level.

If a treasury investment policy has not recently changed to reflect the ‘new normal’ of regulatory reform, market volatility and low interest rates, then it will almost certainly need to in the near future. There are three areas treasurers may wish to focus on when revising policy, says Hugo Parry-Wingfield, EMEA Head of Liquidity Product at HSBC Global Asset Management. These are:

• Are policies still fit for purpose? Companies should not simply adjust their criteria downward in response to ratings agencies reviewing – and downgrading – banks, says Parry-Wingfield. “Rather there should be a deep analysis to decide whether they have the right – and sufficient – counterparties.”
• Are new investment instruments needed? If the ability to place some short-term deposits with banks is becoming limited, then perhaps treasury needs to explore if other instruments are needed, such as those listed above.
• How much liquidity is needed to run the business? In light of Basel III and the introduction of the Liquidity Coverage Ratio (LCR), corporates should also be thinking about how their investment policies define their liquidity profile. “The treasurer should now be reviewing what liquidity they really need to run the business. There is always an opportunity cost to holding too much liquidity but we believe that is going to be accentuated in the months to come,” says Parry-Wingfield.

Keeping up

The combination of a stressed global economy, divergent monetary policies and the leveraging of technology has seen a tentative shift by some corporate investors away from traditional investments towards those that might yield a greater return whilst upholding their policies of security of principle.

The changes to short-term investment strategies necessitated by new realities such as negative interest rates will in some cases mean treasurers will need to go to board to propose changes to investment policies. Whether a treasurer expects to maintain or revise their current investment policy, either by choice or necessity, there are a number of steps treasurers might wish to consider to ensure they remain on the right investment track:

• Talk to your banks and fund providers to understand the implications of regulatory change for your business.
• Talk to your treasury committee, internal and external auditors to check that your policies and processes are consistent with the changing regulatory environment.
• Talk to your system providers to make sure that your systems and processes support the full range of instruments that are permitted within your treasury policy.

The post Introduction to short-term investment instruments first appeared on Treasury Today.

Request PDF

Beccy Milchem

Director, Head of International Corporate Treasury Cash Sales

Beccy Milchem, Director, is Head of the International Corporate Treasury Cash Sales team within BlackRock’s Trading, Liquidity and Investment Platform. The team is responsible for distributing liquidity and short duration fixed income solutions to multinational and regional companies primarily in EMEA.

Prior to joining the Cash Management team at Barclays Global Investors in March 2008, Ms Milchem was a Marketing Communications Manager at CLS Group and began her career as a Publications Editor for IFA communications at Skandia.

Ms Milchem graduated with a 2.1 BA (Hons) in Industrial Economics from Nottingham University in 2002, holds the Investment Management Certificate, the Chartered Institute of Marketing Professional Diploma and is a member of IMMFA’s Investor Education and Promotion Committee.

Damien Donoghue

Managing Director, Co-Head of International Cash Management

Damien Donoghue, Managing Director, is Co-Head of International Cash Management, based in London, joining BlackRock as part of the Barclays Global Investors (“BGI”) acquisition in 2009. Mr Donoghue is responsible for the business development, marketing, sales and client service of BlackRock’s Cash management capabilities within EMEA. Mr Donoghue’s team remit is Financial Institution and Corporate Treasury coverage, which encapsulates a diverse range of sectors such as insurance, private equity, hedge funds, custody, private wealth and collateral management.

Prior to joining BGI in 2008, Mr Donoghue spent over 10 years within Corporate Trust and Securities servicing. He joined First Chicago NBD in 1998 on their graduate programme. Following the acquisition by Bank One, he became the Product Manager for the First Chicago Clearing Centre, before moving into a series of sales positions at Bank One and then The Bank of New York. In 2006, Mr Donoghue joined ABN LaSalle as the Head of Corporate Trust. Mr Donoghue earned a Bsc in Management Science with a Diploma in Professional Studies from Loughborough University in 1998.

The negative interest rate environment has been a reality in the Eurozone for several years now. What sort of impact are we seeing from that?

The post Liquidity investing in a new era first appeared on Treasury Today.

The post crisis world

The financial world changed considerably following the global financial crisis. At the heart of this change has been a comprehensive review of the regulatory landscape, led chiefly by the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS), to ensure another such crisis could not occur again. The result of this review was an unprecedented period of new banking and financial regulation that is still ongoing.

Aside from this regulatory upheaval (which we will explore in more depth later in this section) the post-crisis world is also defined by financial uncertainty and slowing growth around the world. Aside from a few bright spots – most notably emerging Asia – growth has stagnated. And this is despite the best efforts of governments around the world who have initiated quantitate easing (QE) programmes, and various other strategies, that have pumped liquidity into the market at record levels. Highlighting the still fragile state of global economy, the IMF recently downgraded its outlook for growth for a number of regions in early 2016.

According to the IMF, we are in a new era; one with few historical parallels: “Experts have been confounded since the financial crisis by trends that in some ways have defied economic history,” state the IMF. “Wages haven’t risen significantly in advanced economies even though unemployment has fallen. Inflation has remained dangerously subpar despite ultra-low borrowing rates engineered by major central banks. And those historically low loan rates have yet to encourage businesses to step up investment meaningfully.”

Cash on hand

In the face of rising economic and geopolitical uncertainty, corporates around the world have been increasing their holdings of cash. The 2015 S&P Global Corporate Capex Survey, for instance, revealed that globally companies are now holding some $4.4trn of cash and equivalents on the balance sheet.

This growth of cash on the balance sheet presents concerns around what to do with it all. Regulatory change has created significant challenges with respect to the way that treasurers invest surplus cash and manage their investment priorities and policies.

Chart 1: Global non-financial corporate cash holdings by region and cash/total assets

Source: S&P Capital IQ

The reason for this is twofold. Firstly, the deterioration in the credit quality of many banks post-crisis has led to a shrinking of the universe of financial institutions that fit within the parameters set out by many corporate investment policies.

However, even when a corporate’s policy allows them to invest cash with a bank certain types of deposits may no longer be welcomed by that bank. The banks are increasingly seen to be encouraging investors to move deposits off their balance sheets, a move driven by the demands of Basel III. Under the Liquidity Coverage Ratio (LCR), introduced as part of the Basel III regime, the value of different types of cash to the banks has changed. Operational deposits (general working capital and cash held by depositors for transactional purposes) is still welcomed by banks, non-operational deposits (which include other cash balances not immediately required by the corporate), have been assigned a higher run-off rate. This is due to such balances being viewed as less stable and there more requiring more capital to be set against them under the new rules – making them a far less attractive prospect for banks to take on to their balances sheets.

As a result of these regulatory changes, investing cash with banks has become more challenging, and often more costly. But despite this, banks remain key to corporate short-term investment activities. Indeed, in some regions the banks appear to become even more integral. The 2016 Association of Financial Professionals (AFP) Liquidity Survey shows that US corporates are now investing 55% of their short-term investment portfolio in bank deposits, and only 17% in money market funds (MMFs). Before the 2008 crisis, these numbers were approximately the reverse.

Regulatory upheaval

So why, with bank deposits apparently becoming a less desirable or in some cases achievable investment option for corporates, is the instrument actually becoming more popular? In the US this might be accounted for by the fact that corporate treasurers are now feeling a little more confident about the health of their banking partners, which amid a new regime of annual “stress tests” coordinated by the Federal Reserve, are now said to be the strongest they have been in decades.

However, another factor may also be at play, namely the changing regulatory environment around the money fund industry and the capital markets. Although MMFs did not play a causal role in the financial crisis, the industry’s systemic importance together with its perceived vulnerabilities in times of severe market stress have led to regulatory initiatives on both sides of the Atlantic. And the challenge for treasurers presented by these proposals is that they altogether threatened the existence of one of their preferred short-term investment vehicles: the constant net asset value (CNAV) MMF.

The US: setting the standard

In the aftermath of the 2007/2008 global financial crisis, the Securities and Exchange Commission (SEC) in the US tabled a series of regulatory changes as a means of bringing more resilience to the market, reducing the interest rate, credit and liquidity risks of portfolios. More was to come. In 2013, an SEC committee voted unanimously in favour of proposing further measures to reform the way that MMFs operate under its guiding Rule 2a-7 of the Investment Company Act of 1940.

MMFs are deeply interconnected with the money market as a whole and with the banking sector. Any disorderly failure might cause broader consequences, therefore, such as contagion to the real economy and bail-out risks for their sponsor and, ultimately, public authorities.

The key valuation figure of a MMF is its net asset value (NAV) which is the market value of the fund’s assets. The main change proposed was for the imposition of a floating or variable net asset value (VNAV) for prime institutional MMFs (where the NAV can fluctuate). For prime funds, the incumbent CNAV model (where NAV is targeted at a constant or near constant $1/£1/€1 per share) can only be continued by limiting asset purchases to government securities.

In normal circumstances, to avoid a fluctuating share value, a CNAV MMF uses amortised costs to value its assets. The buffer was deemed necessary to offset the possibility of the CNAV dropping below $1 – known as ‘breaking the buck’ – the fear being that a major MMF might not be able to maintain the promise of immediate redemptions (liquidity) and preservation of value (stability) leading to market panic and a rush to withdraw funds (a ‘run’), bringing the whole system to its knees. That has happened just a few times in the history of the MMF. A floating valuation would not allow this to happen simply because value is expected to move, regulators have argued.

The other proposals include allowing funds to charge liquidity fees and impose redemption gates in times of stress to try and prevent a run. These rules could either be used alone or together and would effectively make investors think twice before withdrawing their money too quickly because it would cost them to do so or prevent them from doing so all at once. In July 2014, these requirements were formalised by the SEC, subject to a two-year notice period before implementation.

In April 2016, the first range of changes came into effect, with US prime funds reporting a range of new information on their websites. This information includes daily and weekly disclosures of market based NAVs, net shareholder flows and the occurrence of sponsor support. This information is significant for treasurers as it may help them to improve risk assessments.

In October 2016, the final set of SEC reforms were implemented. Now all prime funds are required to publish NAV’s based on the current value of the assets they hold, allowing the funds to fluctuate with market conditions, rather than preserving the value of its investments at $1 a share. In addition, if the percentage of a fund’s assets can be liquidated within one week fall below 30% its managers will be permitted to impose a 2% fee on redemptions, and a 1% fee if that metric falls below 10%. Redemptions can also be prevented completely for up to ten days if weekly assets fall below the 30% threshold.

Europe: an industry in transition

Meanwhile, across the Atlantic, the various policymaking bodies of the EU have been discussing their own regulatory changes for some time, following on from recommendations formulated by the Financial Stability Board (FSB) and the European Systemic Risk Board (ESRB). After several years, negotiations now appear to be drawing closer to a conclusion.

The European Parliament and the European Council of Ministers have each now contributed their own versions of the regulatory proposals. Under the latter, CNAV MMFs are granted a two-year switch-over period to lower risk public debt instruments, or conversion into a VNAV fund. CNAVs could also convert into a newly created hybrid money market fund known as low volatility net asset value (LVNAV) MMF.

According to Reuters, the European Parliament, which has joint say with EU states on the draft law, wants CNAVs to convert once the rule comes into force, with LVNAVs losing authorisation within five years under a so-called sunset clause, unless further action is taken. But under the Dutch EU Presidency compromise, CNAVs would have two years to make the changes, and LVNAV authorisations would not automatically lapse after five. Instead, there would be a review of the rules to see how they affect markets and investors before any further changes.

With no action to take as yet, many providers are adopting a ‘business as usual approach’ but obviously keeping a watching brief on any developments. Most funds in the UK for example are CNAV and an enforced switch to VNAV will see fund managers reassess their operations. There is anecdotal evidence of a likely withdrawal from the market altogether by some fund managers – and indeed some investors – if the decision is not considered to be in their interests.

Industry consolidation

Asset managers in both the US and Europe have made it clear over recent years that they have concerns about the direction of regulation around MMFs. However, while all asset managers are challenged, some providers face bigger challenges than others.

Amid all the aforementioined regulatory disruption, the MMF industry appears to be consolidating, with smaller asset managers being bought up by larger providers (chart 2 highlights the consolidation of MMFs in the euro area). Blackrock’s acquisition late in 2015 of Bank of America Merrill Lynch’s MMF is but the latest example of this trend. Over recent years we have also seen Federated Investors agree to acquire $1.1bn in assets from Huntington Asset Advisors, Aberdeen Asset Management purchase Scottish Widows Investment Partnership (SWIP) from Lloyds and RBS selling its MMF business to Goldman Sachs.

Chart 2: Consolidation in euro-area MMF industry

Sources: BoE, ECB, Deutsche Bank Research

“Industry consolidation is particularly acute in the US,” says Vanessa Robert, Vice President, Senior Credit Officer at Moody’s Investor Service. “Regulation is a key factor,” Robert says. “It is weighing heavily on the already challenging landscape for money funds and it might accelerate this trend. The ability for mid-tier sponsors to thrive has been materially reduced.”

The trend has both positive and negative consequences for corporate investors. Larger asset managers naturally have more resources to tap during stress periods and so are sometimes perceived to be more stable. On the other hand, however, industry consolidation means that assets are inevitably more concentrated and, in the event of another crisis, that could create more mark-to-market NAV volatility.

Dealing with negative rates

The confluence of a sluggish global economic recovery and regulatory pressures on banks and MMFs is exacerbated by another pressure on corporate investors and the fund managers investing on their behalf.

In recent years, unconventional monetary policies pursued by the Federal Reserve and European Central Bank (ECB) have pushed down yields on the short-term debt instruments that MMFs purchase, making it increasingly difficult for fund managers to generate positive returns for their investors. With no directional change in policy at the ECB appearing to be on the cards in the near future, credit ratings agency Fitch says, in its 2016 MMF Outlook, that it expects yields on euro-denominated MMFs to remain in negative territory throughout the course of 2016 (in contrast to its outlook for sterling and dollar MMFs, which it says may see “yields picking up timidly”).

The risk of large redemptions by corporate treasurers unwilling to pay a fund to hold their liquidity would appear to be minimal though. Indicative perhaps of the dearth of good short-term investment alternatives out there at the moment, outflows from MMFs not only stopped in Q315, they actually began to reverse despite the average euro MMF gross yield remaining at a negative 0.06%.

“I think that shows that corporate treasurers are, however reluctantly, now accepting negative yields on euro MMFs,” says Alastair Sewell, Senior Director at Fitch Ratings’ Fund and Asset Manager Rating Group. “We think that is a very material development.”

On the investor side, some corporate policies may have to change. Corporate treasurers are already becoming more active in their forecasting and the segmenting of their cash. As a consequence of this, Fitch expects to see the European market for short-term investment products for treasurers grow significantly. “We are certainly aware of various fund providers having approached us with ideas for new funds targeting yield hungry corporate treasurers, who wish to generate a little bit of incremental return but at the expense of selectively taking more risk.”

Improved accuracy in the forecasting of cash requirements would enable balances to be spread further along the yield curve. Generally, banks’ appetite for deposit maturities is greater beyond three months and their ability to bid competitively for cash improves dramatically where they are able to avoid liquidity buffer charges (eg for balances that are inaccessible within 30 days, such as notice accounts). This applies equally to direct investment and to indirect investment through suitably-rated short term funds along the lines of those offered by the money fund providers.

Naturally, any decision to extend maturities of liquidity investments whether directly or indirectly implies a need to consider the additional credit and market risk that would be part of a longer duration investment.

For most treasurers, a change to liquidity investment practices would require an overhaul of treasury policy since it would need the business entities to refine their planning of cash requirements and, implicitly, accept the risk that cash will be tighter internally. Ideally, forecasting of cash requirements would be daily for the next three months. Where, however, this is impracticable, bucketing of cash maturities might readily be based upon the models used by regulators in the reporting of banks’ own liquidity positions. The maturity buckets could, for instance, be: sight; next day; one week; two weeks; one month; three months. Recognising that planning can never be an exact science, forecasts would necessarily contain an element of contingency which, when taken together with short-term requirements would dictate the quantum of cash that might be directed to money fund investment with the balance allocated to longer-term investments.

Outlook

Amid an economic outlook that remains very uncertain treasurers are likely to remain challenged by the combination of the necessity for large cash balances and a low to negative yield environment.

Treasurers should feel encouraged, however, that new regulatory environment for MMFs is now taking shape in the US and that Europe appears to be not too far behind. In light of the ratings and regulatory pressures baring down on the banks as well as the negative interest rate environment, treasurers may find they need to rethink their short-term investment policies in the near future. However, while better cash forecasting and segmentation may allow some liquidity to be allocated to less traditional products and instruments (see Section 2), both bank deposits and MMFs should remain the treasurer’s principle mechanisms for the deployment of liquidity.

The post Market commentary first appeared on Treasury Today.

Treasury may not need whatever the equivalent is of Bloodhound’s 135,000 brake horsepower to achieve results, but realising competitive advantage in a strategically important profession does necessitate advanced technologies. The first treasury management systems (TMS) arrived in the early 1980s but since then the pace of progress has increased dramatically and we now have more processing power in a mobile phone than those first forays into treasury technology could ever have imagined.

In this section we consider some of the ideas – and, more importantly, the drivers behind those ideas – that could deliver future success.

‘Innovation’ is a word much-used by the banking and vendor community when referring to its own products and services. Often what is meant is “we’ve got a new product but it’s a bit like the others in the market”. Of course, most treasurers understand the need for technology providers to put some kind of spin on such offerings, after all, costs must be recouped somehow and a bit of creative licence is one way to drive sales. But overuse of the word ‘innovation’ muddies the water for when genuine technological progress tries to emerge. Clarity of thought is needed when approaching the subject.

The organisers of this year’s annual ACT conference, cognisant of the need to assist the treasury profession’s expanding remit and strategic importance, placed technology at the heart of its programme of tracked sessions, keynote presentations and panel discussions for good reason: it (or IT) is an essential part of progress. But amidst the evident hype commonly seen at most conferences and exhibitions it saw the need to facilitate sensible discussion as a means of illuminating ‘innovation’ because not all technology is ‘innovative’ per se.

The panels of treasurers and bankers, assembled by the UK’s professional body to tackle this theme, largely spoke of specific tools for the job, which gives a flavour of what is current but does not really tackle the topic of why ideas gain momentum or falter. However, one panellist was afforded the opportunity to do justice to the notion of technological change, which we report below.

And whilst elsewhere in this Section we look at one genuine innovation of vast potential, we do so only in terms of its practical application for treasurers; we will leave the wild speculation for the futurologists.

An agenda for change

With the treasury emphasis on operational efficiency, access to effective processes and procedures is essential to avoid being trapped in fire-fighting mode. It is well-understood that making the right technology choices today sets the scene for automation of the basic functions, freeing up treasurers to handle the more intellect-intensive processes increasingly demanded by modern global trading.

Customer behaviour, regulation and technology itself are key drivers for agenda change. “By 2025, the Millennials (those born between the early 1980s and early 2000s) will constitute 75% of the global workforce,” noted John Lyons, Head of Strategy Design and Change, RBS, at the ACT conference. Tackling the drivers of change head on, he said this represents a significant shift towards the “always connected, fast-paced, tech-savvy, instant-gratification” generation – the generation “two and a half times more likely to adopt new technology” than its forebears. He goes further: treasuries with strong representations of millennials should now be giving them a voice in shaping how the organisation of the future will look.
The continual imposition of regulation is also a point of consideration in the context of technology change. In Europe, the Payment Services Directive 2 (PSD2), for example, is opening up banking services giving treasurers an unprecedented level of provider choice. New entrants, deploying open application programming interfaces (APIs) and data sharing technologies, will be able to exploit lower market entrance costs to access new niche markets and forge interesting non-bank partnerships.

If you think Google, Apple, PayPal, Amazon et al in this respect then it is the power of and familiarity with the smartphone coupled with advancements in telecoms (such as 4G and fibre broadband) that has fuelled the rise of digitisation, said Lyons.

The readiness of treasury to respond to a business environment where services are demanded and consumed electronically by users very much at home with such devices is a defining matter. The speed of adoption of these devices – and their impact on the world – must never be underestimated. The first mass market smartphone arrived in Japan in 1999. Within two years 40m subscribers were on board. In 2016, the iPhone celebrated its ninth birthday. In that period, the app economy has arrived, social media has taken off and long-existing industries have been massively disrupted by new entrants – Spotify, Uber, Airbnb and the like have changed ways of doing business for ever.

By 2020 there will be 50bn connected devices as the concept of the Internet of Things (IoT) – where everything with an IP address is potentially connected to everything else (from a fridge and car to a bank and building) – gains ground. Match this with news that over $10bn has already been invested in fintech and that 40% of this is on payments and 23% on lending, and it becomes readily apparent that these rapid advances will fall right into the world of treasury. “Understanding how these developments can help treasurers, their companies and customers is going to be very important,” said Lyons.

Indeed, these trends are already having an impact. Contactless transactions passed the one billion mark in 2015; a 300% year-on-year increase. And today 51% of all online sales are on a mobile device. Whilst Lyons noted that the optimal working capital model is “digitised receipts and carrier pigeon payments”, he can see that cheque payments, if not already vanished are declining rapidly in many parts of the world. In the UK, cheque payments are falling by 13% per year as Faster Payments grow by the same percentage. As this scheme and its equivalents elsewhere attract more usage, companies can opt for payment by bank account rather than having to pay merchant services fees on debit and card payments. These trends will accelerate. A straw poll at the ACT event revealed that almost one third had not yet considered the impact of these new technologies on their business.

In the environment of rapidly advancing technology, as the banking world opens up and starts to fragment under new rules and regulations, and as new technologies push the boundaries, the options for treasurers will expand, Lyons believes.

By enabling other service providers to enter the financial markets, it will fundamentally change how banks provide services and how customers consume them, stirring up the competitive landscape. It is therefore important that treasurers are able to respond to and leverage these changes, warned Lyons. “There is a danger that some companies will be left behind if they don’t embrace at least some of these opportunities, whether in terms of efficiency, revenue opportunity, or control and risk management.” Indeed, organisations that are both “technically capable and culturally willing” to adopt new ways of working, new ways of handling customers, and new ways of managing their businesses are the ones which will thrive in the future.

As a mark of just how fundamental a change he envisages, Lyons believes that payments and the movement of money will eventually disappear as a corporate finance function. As technology (especially open APIs) allows companies to embed payment services into core business processes – whether in an accounting or treasury platform, a purchase ledger or an e-invoicing system – a separate banking process will not be needed.

This is indeed a major restructuring and it all will be driven further forwards by the closer convergence of technology, customer behaviour and regulation. However, in another ACT straw poll, one third of companies felt they were barely prepared for the technology exploration that lay ahead.

This highlights the need to push for a cultural willingness to move forward. Fundamental changes require across the board buy-in and this is a C-level investment strategy. For it to succeed, it requires “absorption in the world around” to form a culture that embraces different business models and customer values. “It requires time, effort and commitment from the top,” said Lyons.

His vision is one that may see companies move from a profit focus to a purpose focus; from a hierarchical model to a networking approach; from being controlling to being empowering; from planning to experimenting; and from a position of privacy to one of transparency. Co-creation is the key, he notes, “harnessing the power of the organisation internally in order to rebuild itself”.

A new approach to ID

The evolution of treasury technology must have a corresponding evolution of digital identity management to ensure user security. Treasurers have long since bemoaned the fact that multi-banking requires multiple ID devices for access and as such they are seen as a necessary evil. Work is in progress to try to offer alternatives and products such as SWIFT’s 3SKey do go some way to alleviating the problem. However, perhaps something radically different is needed to properly address the problem.

“We are all nodes on the network,” stated James Marshall, Head of Treasury at Virgin Media. Speaking at the ACT event, he said with controlled storage and authentication of data, every individual could in theory sell personal details to companies, as they see fit. The value of such information is huge which is why cybercriminals make such an effort to steal it. However, the adoption of advanced identity tools and the notion of taking control of personal data is entering “uncharted territory”. Building a “retrofitted” system to exploit this world of possibilities is not feasible, argued Marshall. “This is about starting from the ground up.”

The challenge of a total overhaul is not lost on David Rennie, Head of Industrial Engagement for the Gov.UK Verify programme. With the tagline “digital by default”, he knows that digital identity is “fundamental to trust” in the online world and that the more confidence customers have, the greater the volume of business generated.

In partnership with a number of UK companies, the global Open Identity Exchange (OIX) and security technology experts such as IdenTrust, Verify aims at both decentralising the authentication and verification of personal identity documents (via banks, government agencies and other trusted businesses) and centralising access to that verification as a single source of ID. The individual’s “privacy, consent and control” is very much at the heart of it all, explained Rennie, keen to distance the programme from the much-maligned (in the UK) identity card scheme.

The USP of Verify means that personal data can be streamed from multiple sources to a single point of verification (with biometrics planned as a key sign-on aspect) but only with its owner’s consent. The bank, for example, uses the customer’s driving licence as identification but the government data base (the DVLA) verifies that the driving licence is for that individual; this spreads the risk and marks the difference between identity and entitlement. Collaboration is the key here.

Sarah Munro, Barclays’ Head of Digital Identity, posed the notion that a solution such as Verify could give individuals and companies better access to their data. As part of an ACT panel, she said businesses in particular could use such a solution to manage their own bank accounts (especially around account opening and closing, KYC and mandate management).

They could also improve their relationships with online customers by enabling them to supply required personal data immediately, rather than giving up on online transactions in sheer frustration at having to prove their identity yet again (the rate of online shopping cart abandonment is around 68%). Acceptance by the wider market will be the only test of such a solution and for Rennie this will only be achieved when Verify becomes “useable in five different contexts”, such as opening a bank account or buying online.

But maybe this is only part of the solution. For Wells Fargo, based on the doorstep of Silicon Valley, employing thought leader, Steve Ellis, as its EVP and Head of Innovation Group, is clearly an advantage in terms of tackling fraud and cybercrime. The bank claims one of the lowest attack rates in the business.

Whilst Ellis believes that putting the customer in charge of their own data is vital and that the rules of access to that data by organisations must be bound by privacy and opt-ins, identification will always be “the first step to everything you want to do with customers”. But he warns that if “a group of bad guys” is determined to get in, it will get in: to this end, all organisations “have to up their monitoring”.

In this respect, the weakest link is always human behaviour, and business processes need to be subject to rigorous checks and even real-time pattern analysis to help defeat those ‘bad guys’. With the advance of the IoT, every organisation “must now get to know all the doorways in”.

What should be clear by now is that the digital age is unstoppable. Getting ahead of the curve is essential because if companies don’t, they will have a security problem and the ‘bad guys’ will figure out these weaknesses. Ellis urges companies to recognise that the one thing “we could all do better” is working together on cybercrime, and this includes corporates, banks and vendors.

The big one: blockchain – from abstract to treasury reality

The distributed ledger or ‘blockchain’ concept gets so much coverage that anyone would think it had already been used in multiple products and scenarios. It hasn’t… yet. The idea of a decentralised, democratic, fully auditable sequence of indelible actions has phenomenal potential in just about every niche of digital life where tracking is advantageous. Although blockchain explanations of varying complexity abound, the crucial point is that users do not need to know how it works to benefit from any of the likely (or indeed unlikely) success stories that will emerge over the coming months and years.

At Treasury Today, barely a day goes by without the arrival of a press release on how another bank or vendor is investigating blockchain. Of course, their investigative efforts are laudable and will, when more ideas come to fruition, be appreciated. But at this stage, most treasurers want real-world use-cases not abstract notions. Here are some of the possibilities and early day realities.

Supply chain efficiencies

Port of Rotterdam is one of the world’s busiest and most value-adding ports. In fact, the added-value created each year is equal to around 3.5% of the entire Dutch GDP, approximately €21bn. With tank storage firms, biochemical and petrochemical operations, shipping companies and biofuels and energy producers all around, Tim de Knegt, Managing Port of Rotterdam’s Strategic Finance & Treasury team, sees ‘industry’ close at hand. And as a man with a very close eye on corporate finance and investments, he sees an opportunity that is being missed by just about every industrial player in the world: aligning the logistical, physical and financial supply chains.

Yes, every treasurer knows what supply chain finance is since it has been talked about endlessly over the past few years. But de Knegt wants businesses to think differently about their supply chain and its financial services. In the logistics space – perhaps one of the most promising areas of development in this respect – he argues that if the players in the process adopt a more “holistic” approach, the advantages could be significant. “Right now, it is very much point-to-point financing but the holistic approach could dramatically cut costs across the full supply chain.”

Here is an example of how it works. When the various chemical ingredients to make silica travel from China to Rotterdam to make a tyre, and that tyre ends up being fitted to a German car, each step of that process between sourcing, transporting and processing raw materials and manufacturing the finished product can be individually financed and sold to each subsequent partner in the chain. This is a wasted opportunity. “If the whole process could be financed at one point only – so the end customer finances the producer – then multiple individual financing stages are removed,” says de Knegt. If end-to-end supply chain visibility and concurrent financial services intervention could be achieved, he feels that it would afford “huge savings across the entire supply chain”. This could be applied to just about any manufacturing process that involves movement of multiple constituents from different suppliers towards a finished product.

Of course, there will be a host of issues to iron out, not least around the legal framework that defines ownership of goods. But the practical matter of arranging this is more advanced than may be expected and de Knegt has been engaging with industry on this topic already and is keen to open up the discussion.

There is, de Knegt notes, a slowly evolving trend for technology firms to be able to provide the kind of information needed to facilitate single-point, holistic financial solutions across the entire manufacturing process and order lifecycle (including pre-shipment, post-shipment, and post-invoice financing).

In addition to these solutions, it seems that blockchain has great potential here. The biggest challenge in the transition to a holistic model has always been data sharing – but this has been an issue for the past 30 years. “Data has continually been the major issue, no matter if we’re talking about relational databases or blockchain,” comments de Knegt. However, he explains that the benefit of blockchain is that the element of control remains with the data provider. Furthermore, blockchain could also play strongly in the transfer of legal ownership. Indeed, it may even prove to be the perfect solution for monitoring and indelibly recording the progress of the physical supply chain, the accompanying shipping documentation and the parts of the financial supply chain that confirm receipt and release payments along the way.

The difficulty with any supply chain is that there can be a multitude of participants – the tyre example above would have at least 20, says de Knegt. Outside of the initial producer and final customer, each one will benefit from lack of transparency over pricing and so the motivation for change may not be quite so obvious, initially.

But it takes just one enthusiastic newcomer – and the advent of the right technology – to start shaking up the market and make transparency essential. When booking airline tickets, it used to be the case that the travel agent would do the work and the end-customer had no idea of the costs involved; they just paid the price asked. But now consumers have complete transparency, mainly facilitated by the advent of the internet and electronic payments mechanisms. As a result, ticket prices have shrunk significantly in the face of competition (and not least because processing costs have dropped). But that change also required someone brave enough to take on the status quo and for all stakeholders in the chain to accept that change. As de Knegt says, the mechanism needs to be in place but there also needs to be “a coalition of the willing” in order for it to gain momentum. We have the technology; do we have the willing participants?

“There have been small steps in the right direction, but it’s slow,” he reports. “In an environment of negative rates and corporate cash on deposit making a loss, if you can use your cash to finance the suppliers you are going to pay in the end anyway, why not use that cash to get a lower operational cost right across your supply chain?”

From his perspective, de Knegt firmly believes that the savings could be substantial. “Where several hundreds of billion euros-worth of goods flow through the Dutch ports alone, if it is possible to cut out all the trade financing products between the initial producer and the final customer, it could save in excess of 10% of the total goods’ value,” he says. This would be a serious reduction in the cost of goods sold for any manufacturer. If at the same time it assures the supply-chain from start to finish, the holistic model seems like a no-brainer. Perhaps it is time for industry to start talking about this intriguing proposition, especially where financing and financial services players are not the only ones likely to be impacted.

Commodities tracking

Following the launch of its commodities-based consensus computing prototype, GFT, a fintech specialist, claims it is possible to individually track and manage multiple physical commodities assets using a blockchain business model. With blockchain technology also under development for trade finance offerings by the likes of Bolero and also the DBS/Standard Chartered partnership, a new era of commodities cost efficiency, process optimisation and fraud prevention may soon be upon us.

The commodities tracker application is a creation of GFT’s ‘innovation incubator’, known as create@GFT and its ongoing ‘Project Jupiter’ development scheme which is seeking to prototype solutions around blockchain technology. With a number of high profile cases of fraud within the commodities market – typically the result of a failure to tightly control physical inventories – Julian Eyre, Commodities Product Owner at GFT, says this latest prototype is intended to showcase the distributed ledger’s ability to create a full audit trail for each and every participant in the movement of physical commodities. And, says Eyre, this will be of particular interest where proof of ownership and location of the physical commodity are essential for market participants.

Warehouse receipt financing, for example, where there may be a number of duplicate and therefore confusing receipts created for a bank’s financing of a commodities deal, may well be de-risked by this type of technology. This will be done by digitally tracking an underlying physical asset by features such as origination, current location, beneficial owner, certain attributes of its quality or grading, and its provenance. Tracking is enabled by capturing data held by a unique identifier for each commodity ‘parcel’ (a consignment of iron ore or wheat, for example).

Because a barcode or QR (quick response) code can be more easily separated from the asset or even replicated, Eyre explains that GFT is planning to test with an RFID (radio-frequency identification) tag. This technology has been chosen because the tags can easily be embedded into the physical asset (perhaps a sealed container or even a single package or item). The data contained in the unique identifier is written into a blockchain record to ensure a clean audit trail. GFT is using a private blockchain, on the Ethereum platform, which Eyre says was identified as “the best option for this use case”. A digital ‘smart contract’ model embedded within this platform captures and enforces the stored data.

To date, the commodities application has been through a theoretical modelling exercise based around internal expertise, and a design and development phase based around a series of assumptions calling upon actual industry scenarios. A third-party developer – Applied Blockchain – was consulted to help steer the work. The test-bed will be a combined user group of asset class and market participants.

The prototype includes a basic permissioning model for different user-types including logistics, warehouse and end-user. “We have modelled different user characteristics, built a user interface that enables each to view and track changes in the status of the asset during its lifecycle,” he explains. The concept of this model looks to improve transparency across a very early stage component of the supply chain but this could have applications in other functions, particularly when interacting with the trade finance function. “It is quite possible that the individual asset identifiers we are able to provide to a trade finance agreement would uniquely identify those precise assets that are party to that agreement,” comments Eyre. However, the level of granularity to which the data appended to a shipment can be deconstructed is a work in progress and its resolution will depend on the use case model that attracts the most interest.

Most likely to benefit from this in the first phase of its release will be industry or asset verticals. For example, a global agri-business might seek a reduction in the paperwork required to administer but certain quality attributes (such as whether a consignment of grain is genetically modified or not, its moisture content, country of origin, or whether or not it has been sourced sustainably) must be captured and locked-down at the point of origination, then each parcel identifier can be tracked and verified at any stage in the lifecycle of that trade. “It would be possible to transfer the parcel ID through the value chain, literally to the ingredients on the packaging of the finished goods.”

The payback of this for the tracking of raw materials in terms of quality control are manifold, as indeed they are for the intervention of the finance function. For treasurers with a group risk function, the increased transparency and visibility into the supply chain is clear; such a solution also has the potential to support the associated cash flow management around the status of different parcels and their asset ownership throughout their lifecycle. A commercial settlement function is not yet included in the GFT prototype but the parallel offerings from Bolero and DBS/Standard Chartered and others that follow may well solve this part of the commodities trade lifecycle.

Although this model has potential to benefit many different functions along the supply chain, the current multiple platform/multiple system technology landscape is complex, warns Eyre. Interoperability becomes the key here, he says, adding that GFT will be looking to align with any interoperability requirements that may arise and that financial participants should do likewise. A further issue might be the regulatory constraints around the cross-border movement of data. At the moment, the consensus appears to be that blockchain will be embraced by the regulators because of the additional transparency it allows.

OTC market clearing and settlement

The uClear blockchain solution for real-time clearing and settlement in financial markets is another real-world offering. The solution, developed by the Indian based open source financial trading technology company, uTrade, is the first solution of its type to reach the market and it has been adopted by UK-based Global Markets Exchange Group (GMEX) which will integrate the solution across its over-the-counter (OTC) segments without existing central clearing infrastructures.

“On any stock exchange or outside the exchange, there is lots of trading taking place which is typically backed by legacy infrastructure that is highly inefficient,” notes uTrade’s Founder and CEO, Kunal Nandwani. “As a result, settlement of these deals typically takes two to three days.” The uClear solution removes need to use the legacy infrastructure, allowing any exchange-matching or OTC market engine to clear and settle trades almost instantaneously post-execution through a private blockchain. This works across equities and futures, with real time risk management, reporting and other financial transfer instructions. To begin with, GMEX and uTrade are working on how it can be used to clear futures products. But the potential is there to use it for any product that can be traded, including FX and bonds.

Whilst the immediate impact on corporate treasurers may be limited and not felt directly, uTrade has plans to develop the product further to assist corporates with their FX trading activities. “At present corporate treasurers typically trade FX OTC and take counterparty risk against each other. A blockchain clearing platform can assist by not only making this process more efficient, but also by creating certainty and thus mitigating some of the risk each party takes,” says Nandwani. “We are firstly testing the water with the uClear solution that we have built, and still learning as this develops,” he continues. “But the FX market is a big area that we have our eye on and we believe that we can make a difference and help corporates in what is becoming an ever more complex space.”

The vendor is too late to be first in this fame though. In early July, membership-based FXCH (the FX Clearing House) cleared the first ever institutional Spot-FX transaction on a blockchain. This means that members (or their clients) can submit trades transacted on any institutional FX platform to be cleared and settled by the new utility. All trades are necessarily bound by member-endorsed rules, a guarantee fund and tightly controlled default mechanisms.

FXCH argue that the state of clearing FX as an asset class is “archaic, expensive and ripe for disruptive innovation”. With every Spot-FX transaction being settled between two banks bilaterally, the risks involved with non-delivery have “all but barred non-bank financial institutions from operating them autonomously”. The use of a blockchain adds transparency to the settlement process, giving it what Franck Mikulecz, founder of the Ireland-based provider describes as “its strongest but most overlooked property: the trust machine”.

The issue at present for all ground-breaking technology firms is that there are so many ideas, use cases and misconceptions in the market. “There is a danger that, because of the hype, there will be failures as companies use the solution incorrectly, in areas where it has limitations,” notes Nandwani. He also believes that adoption may be slow because of regulation, compliance and an inertia that exists in the financial services industry.

But change will happen. “I like to compare the period we are in now with the internet in the mid-90s,” says Nandwani. “At that stage there were few who could predict how this would develop and what it would look like today. The same can be said for blockchain. And just like the internet, the market will mature and companies who have developed compelling use cases for it will rise to the fore. It is just a matter of time.”

And what of bitcoin?

Bitcoin should be mentioned here as the first very public incarnation of blockchain technology, but at what stage of development is it at today? It is supposed to be a virtual currency, without borders, but this looks like it may be changing, according to Australia’s Sydney Morning Herald business section. The paper reported in July this year that four Chinese companies, which have invested heavily in bitcoins and the computer technology needed to create (‘mine’) the currency, now account for more than 70% of the transactions on the bitcoin network. China, it said, has become a market for bitcoin “unlike anything in the West, fuelling huge investments in server farms [or ‘mining pools’] as well as enormous speculative trading on Chinese bitcoin exchanges”. New York Times analysis further indicated that by mid-2016 these exchanges accounted for 42% of all bitcoin transactions.

The Sydney Morning Herald quoted Bobby Lee, chief executive of Shanghai-based bitcoin company BTCC, as saying one of the reasons the Chinese took to bitcoin in such a big way is that the Chinese government “had strictly limited other potential investment avenues, giving citizens a hunger for new assets”. When speculative bitcoin activity in China in late 2013 went stratospheric, it pushed the price of a single bitcoin above $1,000. A concerned Chinese government intervened, cutting off the flow of money between Chinese banks and bitcoin exchanges.

Chart 1: Bitcoin value relative to US

Source: blockchain.info

This led to the massive interest in bitcoin mining and technology investments seen in the country today. The vast server farms used to mine the currency are powered by cheap energy sources found in the country (and less likely to be found anywhere else). The bitcoin mining machines in Lee’s facilities alone use about 38 megawatts of electricity, enough apparently to power a small city. The Australian paper concluded that the bitcoin concept may now be less decentralised than first hoped. As a currency for global trade, the power it seems may yet lie with China, just not as expected.

As an interesting addendum to the bitcoin story, a survey in June 2016 by corporate networking company Citrix, showed that out of 250 IT and security workers in UK companies with 250 or more employees, a third said they were stockpiling the currency so they can pay cybercriminals in the event ransomware – illicitly deployed to lockdown systems – strikes their network. Some 35% of large firms (those with over 2,000 employees) said they were willing to pay over £50,000 to regain access to important intellectual property (IP) or business critical data.

The post Technology: on the edge first appeared on Treasury Today.

Pfizer Inc. is a research-based, global biopharmaceutical company which applies science and global resources to improve health and well-being at every stage of life. Its diversified global healthcare portfolio includes human biologic and small molecule medicines and vaccines, as well as many of the world’s best-known consumer products.

Request PDF

The client’s challenge

Pfizer’s treasury team faced considerable challenges when it came to managing cash operations across Asia Pacific, with a large number of bank accounts across multiple banks in 15 countries where Pfizer has a presence.

Pfizer was looking to embark on a treasury transformation across Asia, with the aim of:

• Centralising treasury operations in the region and shifting operational treasury processes to a shared service center (SSC) model.
• Aligning the enterprise resource planning (ERP) migration along with the SSC migration and regional treasury model deployment.
• Optimising the use of the company’s in-house bank (IHB) in Dublin, Ireland for foreign exchange (FX) management, liquidity and investments.

The team wanted to streamline the company’s bank account structures and pooling mechanisms by moving to a single banking partner. Standardisation would be achieved through the adoption of ISO 20022 as the global payments format. Also, a single ERP system would be adopted to unify business processes.

The J.P. Morgan solution

Pfizer partnered with J.P. Morgan to establish the SSC, also known as the Global Financial Solution Asia (GFS), in Dalian, China which supports the group’s operations across Asia Pacific as well as Pfizer’s global intercompany settlements.

By leveraging a single banking platform through J.P. Morgan, Pfizer eliminated manual processes and optimised the company’s technology infrastructure to achieve greater cash visibility, gain access to real-time information, and develop better cash forecasting and insights into its business operations.

Pfizer’s SSC in China manages its in-country bank account structure and in-country cash pooling, as well as providing forecasts on cash flow and FX exposure. The Dublin treasury centre manages the regional multicurrency notional pool, and with its end-to-end trading infrastructure, is also responsible for executing FX hedging and investment transactions. The treasury team further established the corporate policy mandating FX transactions and in-country liquidity investments.

In China, the opportunity to set up centralised collections and payments with netting and automated cross-border cash concentrations as well as intercompany lending transactions in foreign currency and Renminbi (RMB) became possible following a change in regulations in 2014. Pfizer seized this deregulation opportunity and partnered with J.P. Morgan in an end-to-end submission for approval of their application to the State Administration of Foreign Exchange (SAFE) to set up a centralised facility. Pfizer obtained formal approval in September 2015, and implemented its first US dollar (USD) on-behalf-of (OBO) transaction in record-breaking time in mid-November 2015.

The Result

J.P. Morgan’s solution was well-coordinated among Pfizer’s units including the international treasury teams in New York, Dublin and Singapore; the Global IHB in Dublin; the GFS in Dalian; and the financial teams across the region.

With an in-depth understanding of Pfizer’s business, J.P. Morgan was able to help Pfizer implement best market practices for its regional treasury operations, provide detailed advice that took Pfizer’s control requirements and treasury objectives into account, and ensure compliance with end-to-end processing requirements.

Pfizer has progressive plans to optimise its treasury management further as it grows its business in China, and the tailor-made USD cross-border centralised payments and collections structure will be fundamental in the development of its future plans.

The integrated and award-winning¹ solutions have provided Pfizer with an optimal structure for its cash and treasury management, streamlined systems and processes, and allowed Pfizer to maximise the efficiency of their global and regional treasury operations.

Footnotes

1. Pfizer Inc. was an award winner in the Treasury Today Adam Smith Awards 2013 ‘Asia Pacific Regional Award for Best Practice’ category

The post Pfizer enhances treasury efficiency through treasury transformation first appeared on Treasury Today.

When seeking a powerful workstation, treasurers typically have two options: a treasury management system (TMS) or an enterprise resource planning system (ERP). In the treasury context, both fundamentally seek to achieve the same goal: improving the work of the treasury function. Yet, both have different methods of achieving this, offering their own advantages and disadvantages. Some treasurers have access to both technologies, and, of course, spreadsheets are still also in the mix, so in this section we explore the key differences between TMS and ERP, before taking a practical look at TMS implementation.

A dedicated technology

A TMS is a dedicated treasury technology solution. The vendor market has consolidated considerably in the past decade with many smaller suppliers having been acquired by the few remaining major players (of which Wall Street and SunGard are the mainstays). The surviving mid-ranking players are closing in fast on the market, helped not least by technological changes in the delivery of their systems, from installed to cloud-based. This list includes the likes of Reval and Kyriba, with smaller international players such as BELLIN, Salmon and Trinity also making an impact.

Vendors commonly claim a wide variety of tools that can be applied to many treasury tasks as part of their offering. The TMS platform typically sits at the heart of a treasurer’s operation – collecting data from multiple sources, processing this data and then outputting it where necessary for both the treasury and company as a whole. The sheer range of functions that a TMS is able to deliver as a core system is one of the main selling points. Modern systems may offer well over 100 modules covering a range of treasury activities including cash management, debt and derivatives, forecasting, hedging and risk management. Typically, a corporate would use around 40 to 50 modules, depending on circumstance.

These might include modules for the following: cash, liquidity and forecasting, debt, internal banking, currency, interest and other derivatives, accounts receivables/accounts payables, equity and funds, bonds and treasury bills, settlement/payments, risk management, scheduled imports and exports, accounting.

This list if far from exhaustive, however, flexibility to customise the TMS using such modules has been one of the major developments in the TMS in recent times. Whereas once there was a worry among the corporate community that a TMS was a relatively monolithic tool, the systems can now be customised to fit current and possible future needs. For example, a multinational corporate (MNC) would be able to select all the FX modules that it requires to carry out cross-border activity. A UK domestic company on the other hand with little use for these can turn these modules off (or, more accurately, just not activate them) and focus on the areas that better suit its business requirements.

And because corporates don’t have to buy the entire system, and many TMSs can now be delivered via the cloud rather than installed on premise, there are potentially benefits in terms of cost, the time taken to implement (and maintain) the system, and also the ability to add on modules when business requirements change – instead of having to deploy a new system. The sheer range of functions that a TMS is able to process, and the increasing flexibility of delivery options, are among the main selling points of such a workstation.

Another area that TMS vendors have focused heavily on in recent years is interoperability of TMSs – whether it be integration with internal systems, or communicating with an external party’s software, such as a financial institution’s e-banking platform or an FX trading platform. This integration drive delivers benefits such as real-time cash positions and improved forecasting, as well as reducing the error rate from manual inputs.

For many treasurers, an additional tick in the box for the TMS is that the system ‘belongs’ to the treasury (unlike a company-wide ERP). For the treasury, owning the solution offers a number of advantages. Firstly, the treasury will have control over the system and therefore – in theory – should have more say over when it is optimal to install updates.

Of course, central sign-off will still be required for this, and budget will need to be allocated to the TMS, but this should be less cumbersome than an ERP treasury module update. After all, updates to the ERP treasury module would normally be driven by IT and be bundled into a company-wide package therefore leaving treasury little say in when this happens. The smaller scale of a TMS upgrade is likely to mean it will also be cheaper and quicker to achieve.

ERP: taking the holistic view

Data published in the last couple of years by consultancy firm Zanders has shown that 70% of corporates who employ a treasury workstation use a specialised TMS system. Yet, the data also suggests that there is a slow drive towards companies exploring and implementing a treasury-specific ERP treasury module. In 2006, 19% of companies were using SAP in combination with SAP treasury. In 2014, this number had increased to 40%, says Zanders. Interestingly though, the driver for this change is not necessarily coming from the treasury department but from the boardroom. In the quest for increased oversight, particularly in today’s volatile environment, the ERP’s promise of a holistic company-view seems attractive.

By its very nature, an ERP system (and typically this will either be a product from the modern stables of SAP or Oracle; there has been market consolidation here too) has a wider focus than a specialised TMS, with modules being available and used across the entire business. As such its treasury module can be seen as a branch of the system and not the heart of the system itself.

Whilst this might sound like a significant disadvantage, this can actually offer the business a number of benefits as treasury becomes fully integrated and on the same platform as the rest of the company – helping to facilitate the consistent passage of data. The capabilities that are provided from a treasury perspective complement the story that the data from the wider finance function and beyond provides. An ERP gives a view of core processes that concern treasury from end-to-end, and allows companies to better collaborate, identify risks earlier, obtain real-time data and bring all the pieces together in one place.

In addition, the ability of an ERP treasury module to retrieve information from other modules reduces integration headaches and ensures that the costs associated with non-ERP TMS platforms, are minimised. It also offers executives and internal audit a greater sense of comfort because all the data is being retrieved from a single platform.

The sheer scale and technical complexity of an ERP system affords it the ability, if supported by the right advisory and professional services support (for SAP, for example, beating a path to Hanse Orga is a common tactic for treasury users), to create a best-in-class architecture. This can ultimately offer the treasury functionality above and beyond what a standalone TMS can offer. Indeed, the major ERP vendors (and to this list we must add Microsoft) often work on economies of scales and have an ability to lower cost on the latest technologies a lot faster than TMS vendors, as their TMS platforms are crucial to a wider sales strategy. Concepts that are considered the Holy Grail for most treasurers, such as organisation-wide, real-time cash management views are, to all intents and purposes, only really available on ERP platforms.

The common consensus, however, is that achieving such an integrated architecture comes at a huge cost and one that the majority of organisations are not willing or able to meet. However, an ERP treasury module project can be a cheaper alternative overall in some circumstances. If a company has already invested in an ERP then installing the treasury module is likely to be a cheaper option overall. This is because these types of systems are almost always architected to integrate seamlessly and haven’t in recent years been layered with the latest open interfacing technologies like Enterprise Web Services.

System selection and implementation

Having explored the differences between the two systems we will now look at what treasurers need to consider before selecting and implementing a treasury workstation. We focus on the TMS since this will fall more squarely under the treasurer’s remit – the choice of ERP is likely to be a broader business decision, as explained above.

Implementing a TMS can, at one extreme, be an exercise in business process reengineering (BPR) or at the other extreme it can be an exercise in software customisation. The BPR scenario is that the buyer adapts its processes to the functionality of the TMS. The epitome of this school of thought is the view that SAP reflects process best practice, so it is better to adapt treasury processes to SAP rather than vice-versa.

The customise scenario on the other hand is when the buyer pays to have the software customised to fit exactly to existing processes. Although this may sound attractive the initial customisation is always expensive and can be disappointing, leaving the treasury with a longer-term maintenance challenge.

Most treasurers will have something in between these two scenarios. So how does treasury decide which processes can be reengineered and which are immutable? One rule of thumb is to map the requirements in terms of external processes in the business. The logic here is that treasury can easily change internal processes within the department but may struggle to change wider order-to cash (O2C) and procure to pay (P2P) processes across the company. This does depend of course on the remit of treasury, and whether the TMS is pure treasury or a CFO level decision.

For this analysis, external financial and market interfaces are also open to reengineering. For example, if the TMS has SWIFT connectivity built in, treasury can choose to go multi-bank without disrupting the rest of the company, likewise for e-FX and confirmation platforms and market data feeds. Regulatory constraints may create exceptions, however – for example, Chinese multinationals will require regulatory compliance and appropriate market practice from their TMS.

Setting the treasury path

Mapping treasury processes is the first task in any exploration of new technology – it is essential to know where you are before you start plotting a new direction. The simplest way to describe immutable treasury processes is to start with the inputs and outputs and then add the actions that have to happen within treasury, in minimal terms. When seeking to describe in this manner, do not forget to include internal control requirements – if the company likes to have ‘eight eyes’ reviewing FX exposures before hedging, then a TMS that only handles ‘four eyes’ will not work. An example description might look like this:

Pay attention to what is not covered in this description. New technology should effect change and as such the following may apply:

• We do not describe processes within treasury (because we are willing and able to change them).
• We do not provide samples of the Excel sheets we currently use (because we want to free ourselves from ‘Excel Hell’).
• We do not describe our current method of calling banks by phone to ask prices (because we are open to eFX as an escape from operational risk and phone pricing).
• We do not provide samples of the FX confirmations that we currently type up manually in Word and fax to banks (because we are open to electronic confirmation).

Proof of concept

Once you have described the immutable processes, it is best to select the ones that are the least ordinary and ask vendors to demonstrate how they will cover these needs in their TMS. Since a live demonstration of an unusual process may be a lot of work for the vendor to set up, select only the processes that are most critical for treasury. The demonstration is not about tripping up vendors but a journey of discovery.

The demonstration process can really set vendors apart. Do not accept a demonstration by PowerPoint; this is not a demonstration at all – it is more like promises which may or may not be fulfilled, and at what cost. An effective demonstration should prove the functionality live on the vendor’s TMS. This should highlight any gaps and allow for a realistic assessment of the TMS’ suitability to the organisation.

There will be differentiation between the live demonstrations. Some vendor’s may stick to the minimal requested functionality. This has the merit of keeping the demonstration simple. Others may try to share what they observe as best practice. This can be a benefit, especially for treasury organisations moving from Excel to TMS. The key is to be in control of the process, not be led by professional sales people who have one overriding objective.

Finding the best fit

The techniques described here are not used in isolation. What works well is a two-phase approach. Start with an RFI (request for information) exercise based on a high-level requirements list. Invite the vendors who seem to meet your requirements (and this may be a list of ten or more) to give a generic demo which gives you a chance to see the system, ask follow up questions and assess each vendor’s fit in terms of personalities and business approach. This phase allows you to scan an extensive part of the TMS market but not waste your own, nor the vendors’ time.

On the basis of the RFI results, you will be able to shortlist the vendors who appear to best meet your basic requirements. This list may contain around half a dozen names to whom you may issue a formal request for proposal (RFP).

With the shortlisted vendors, you will share the immutable process descriptions described above and ask them to demonstrate in more detail, using real-world scenarios, how they can cover your needs with their TMS. You can evaluate whether they cover your needs and also how much added-value their TMS brings to the process for you.

Finally…

The post The evolving world of the TMS first appeared on Treasury Today.