2010 EuroFinance International Cash and Treasury Management Conference: Blog

Publication: gtnews.com

Post 1: A Big SEPA Step Forward? (6 October 2010)
As EuroFinance opens, Ben Poole hears the latest on the announcement of an end-date for the single euro payments area (SEPA) and talks to an insider about the excitement gripping the payments community as a result. 

The first sessions at the EuroFinance International Cash and Treasury Management conference in Geneva revolved around looking to the future, with many of the great and the good from European banking and finance offering their thoughts on what could be coming up in 2011. Following this lead, I had a conversation with Tony Richter, head of business development, payments and cash management at HSBC Europe, about the state of the single euro payments area (SEPA), what it has in store for the year ahead, and why corporates should care. 

Richter told me of the anxious excitement that is gripping the European payments scene currently, with the European Commission (EC) very close to publishing the draft regulation specifying a SEPA end-date. This was due at the end of September but, as seasoned SEPA watchers will know, deadlines are there to be broken. However the good news is that the delay shouldn’t be too long, with the third week of October now pencilled in for this announcement. 

The lack of a SEPA end-date has long been a source of consternation for corporate and banks alike - without a clear plan as to when projects need to be finished, it is inevitable that different parties will approach the task in hand at different speeds. This disjointed approach has hardly been the best advert to corporate for them to embrace the SEPA payment instruments. The announcement of a SEPA end-date can change all this. 

Or, perhaps that should be, the announcement of a SEPA end-date can be the start of a process aimed at changing all this. Once the draft regulation has been announced, all parties with a vested interest in SEPA will be scrambling to interpret what this means in practice, and how the EC will regulate it. 

Once published, the draft will have to be passed by the European Parliament. How long this will take is up for debate - Belgium currently holds the presidency of the EU, and it would undoubtedly be a coup for the country to pass the draft regulation while it is ‘in office’. However, the Belgian presidency expires in December, so this would require an uncharacteristically fast turnaround by the European Parliament. The prospect of the draft dragging through the parliament will dishearten some, but once it does get passed, it is likely that the SEPA Credit Transfer (SCT) will become fully active 12 months after this date, with the SEPA Direct Debit (SDD) following suit a further 12 months after this. 

This will bring the focus that the SEPA project has for so long struggled to achieve. But, in the meantime, there are still challenges ahead - there’s a need for governments vocally to support SEPA migration. The recent example of France switching the vast majority of its public finance payments to SEPA instruments is a lead that others around Europe should be looking to follow in order to boost the scheme. In addition, for many corporates, especially small and medium-sized enterprises (SMEs), SEPA just isn’t as tangible as, for example, the change to using the single currency of the euro was 10 years earlier. The banking and payments industry needs to work hard in order to connect with these companies and make the business case for SEPA. 

One thing is for sure - the draft regulation on the SEPA end-date will be a big talking point at the Sibos conference in Amsterdam later this month.

Post 2: The Rise of Corporate Asia (7 October 2010)
On day two of EuroFinance, treasury practice in the rising Asian economies comes under scrutiny. What are the challenges for western treasurers operating in Asia and how are Asian treasury departments 'leapfrogging' their western counterparts?

Asian market opinions were the order of the day in a panel discussion on the second day of the EuroFinance International Cash and Treasury Management conference in Geneva. Hajeet Kohli from Bharti Enterprises, David Blair from Huawei and Damian Glendinning from Lenovo - based in India, China and Singapore respectively - provided their thoughts on the rise of the Asian economies and corporations. 

Picking up on a theme common in some of the previous day’s sessions, Glendinning made the point that many of the delegates in the hall may find themselves working for a Chinese or Indian company in the near future. This is one example of the rapid corporate growth taking place in Asia. And it’s not only in the talent pool where this growth and competition is being found. Glendinning pointed out that a large number of western corporate are viewing Asia, and China in particular, as a ‘honeypot’ and there is a scramble to become involved and create a presence in these markets. Faced with this competition in their home market, an increasing number of Asian corporates, led by those from China, are rising to the challenge and taking the fight to the west by competing aggressively in these traditional western home markets. Glendinning used this example to illustrate the point that delegates need to understand the fact that perspectives in Beijing on the global economy and corporate world can differ from the perspectives held by those in London or Paris, for example, and that entities in the western world would benefit from trying to gain an insight into these alternative perspectives. 

Blair described some of the challenges of being a western group treasurer of a Chinese corporation. “They call us the ‘grey hairs’," he joked, referring to the young and ambitious domestic workforce that are driving innovation in Chinese corporations and their thoughts on working for slightly older western treasurers. Blair explained how Huawei has to have a very tight set of financial controls in place in the company, with most cash being centralised and not ‘in the field’, something he described as being very necessary when the workforce is young and eager. 

The experiences shared by the panellists painted a picture of a vibrant and fiercely competitive corporate culture rapidly emerging in Asia. Added to this exciting newness of the corporate world, Glendinning related a personal experience of how technology ‘leapfrogging’ is enabling treasury departments in Asia to gain an edge over their western counterparts. Leapfrogging refers to the fact that by and large treasury departments in Asia are unencumbered by legacy systems within their treasury and can implement a brand new cutting-edge system from scratch. When acquiring a part of the IBM business, Lenovo found that, unlike their out-of-the-box SAP system, IBM was hindered by legacy systems. Some of these legacy systems are still being removed today - highlighting how the history of longestablished western corporates can prevent them accessing the best technology available, which can inevitably lead to a lack of competitiveness compared with the new Asian challengers.

Evolution in Corporate Transaction Banking

Publication: Global Treasury Briefing, Volume 3 Issue 2

The world of corporate transaction banking is changing. Why are corporates striving to gain greater visibility over their cash and how are pressures on banks post-credit crisis affecting corporate bank relationships? 

The globalisation of the economy has had an immense impact on the way large corporations are managing their cash and liquidity. Many corporations have reacted by taking steps to standardise and harmonise their finance processes across entities and regions by establishing regional shared service centres and implementing centralised back office systems. 

What were once payment factories simply offering a hub for processing payments, are now evolving into holistic corporate transaction banking systems that can offer corporates a holistic means of managing all transactions that flow to and from their banks. What has precipitated this change, and what are the wider trends in the corporate transaction banking area? 

The credit crisis has sparked a major rethink within corporates of how and where they put credit facilities in place. Corporates are looking to use internal cash more efficiently and get more visibility over their cash. One area that treasuries can find challenging is when it comes to gaining access to their cash once it has been identified. The situation is exacerbated in 'difficult countries' that have prohibitive tax regimes preventing the easy movement of liquidity outside of the country. An opportunity exists here for the large cash management banks with presence across countries such as this to advise their clients and leverage their network to provide value-added services in this regard. 

In addition, with the global economy in a fragile state post-crisis, corporate treasurers are placing a greater emphasis on having an overall visibility over their cash position. Achieving this visibility, together with the ability to access this cash, directly affects an organisation’s bottom line. Investing in this process can allow corporates to reduce their short-term borrowings by up to 30% - a figure that is bound to be attractive in the current climate. 

“Access to external capital still cannot be taken for granted,” explains Mario Tombazzi, senior vice president, regional liquidity product management, HSBC Asia-Pacific. “The importance of a company's working capital is especially important: liquidity risk can force large corporations into bankruptcy, and counterparty risk is also increasingly on the agenda. As a result, the opportunity cost of the internal sources of funds has increased. It's not only important to have enough funds, but also to manage them in a way that keeps them accessible and visible.” 

Corporates Hedging Bank Counterparty Risk 

While there is this good interest among corporates for setting up payment factories, shared service centres and the like, the attitude seems to be that if they’re going to go down this route, they will also split their business between a number of banks in an effort to reduce exposure and hedge counterparty risk. 

Corporate treasurers that embark on discovering how many banks and accounts their organisation uses can find themselves facing quite a painfully slow task, especially if this includes many overseas entities. Some business units may appear to be unwilling or unable to supply the information in the first place. This could be because these units either do not keep an up-to-date list of their various banking relationships or they see the exercise of listing them as one of group treasury interfering on their patch. Once the most accurate list has been compiled, treasury then needs to understand the reason for the amount of bank relationships and accounts and then see if there is a chance to reduce them. 

The first step in this process is to establish what an account costs to set up and manage. This can be a difficult exercise to complete due to the number of variables involved in the cost structure. These include: 

• Bank charges - set up, maintenance, etc. 
• Internal administration - reconciliation, etc. 
• Costs of linking to account structures - pooling, etc. 
• Reporting of account transactions. 

Once the cost has been established, it is then possible for the treasurer to set a realistic saving goal for bank charges. 

The question can arise as to whether group treasury should be responsible for managing cash management bank relationships within an organisation. This is usually the norm, but can find disagreement from other areas of the organisation. Treasury can make considerable savings through bank consolidation and the continuous review of accounts, but it also needs to be aware of the effect this can have on other business units within the organisation in terms of the change in relationships that these units have with their existing banks. Any change driven by treasury has to be handled sensitively. 

Figure 1: Changes in the Transaction Banking Landscape 

While corporates are reassessing their bank relationships, banks are also looking at how they leverage their corporate contacts. From a bank perspective, they want to ensure they are getting a slice of the profitable transactional business. One way to achieve this is by including part of the corporate cash management business in the terms of any credit agreement offered. Corporates understand this ‘linkage’ that banks are focussing on, but any forcefulness in the bank’s approach, particularly with the linking of the credit relationship to the cash management business, is another driving factor in making treasurers question how they share their business across their credit banks. Amol Gupte, head of treasury and trade, North America at Citi, says: 

“The market practice of rewarding credit with transaction business is not a new concept. However, in the wake of the recent financial crisis, banks are under immense pressure to optimise their credit extension with cross-sell business - to generate fee income and attract liquidity. As a result, non-bank providers are experiencing higher attrition rates, driven predominantly by clients moving transaction business to their primary credit bank(s).” 

Despite this, Gupte points out that the banks have to be innovative and offer competitive advantage in order to attract and retain corporate clients. “With that said, it is important to note that the key drivers for decisioning for our corporate clients continue to be product quality, pricing, etc. As such, there is no significant “free lunch” business that is simply gifted to banks due their extensions of credit. To be successful, banks must continue to invest in innovation and technology,” Gupte advises. 

Payment Regulations Squeezing Banks 

New regulations, particularly in Europe, are forcing banks to review their payment offerings and decide if they still want to, or can afford to, remain in the business. For banks, cash - their most liquid asset - is now more valuable. Regulatory requirements now require banks to not only prove that they have enough cash and liquidity to continue trading, but they must also be able to prove that they have enough to meet their ongoing obligations. While regulators around the world are still putting the finishing touches to the new areas of compliance, it seems clear that at least some financial institutions will need to provide the regulators with sufficient data to allow for various stress and scenario tests. On top of this, the credit crisis has led to a return to ‘back to basics’ transaction banking as a main source of profit for banks. This, in turn, is likely to continue to drive increases in transaction volumes. This means that banks need to ensure that they are putting their cash to good use, leading to a greater focus on counterparty and nostro account management. 

Large banks can have millions of transactions from myriad sources moving through their nostro accounts. The balances of these can change hundreds of times a second at peak times. Cash flow volumes have also risen, a trend set to continue with greater increases in electronic and algorithmic trading. These increases add pressure to the process of hitting target balances and regulatory demands, and squeezes nostro balance netting, reconciliation and forecasting processes. However, if financial institutions can successfully manage these processes, they can increase their opportunity to maximise the efficient use of cash in the money markets and foreign exchange (FX) markets, both regionally and globally. 

While this opportunity exists in nostro account management, this is also an area where banks can lose money. If an institution does not have sufficient funds in its nostro account at the time of closing, it will incur penalty interest and charges. As this is short-term and unexpected, the interest rates - which are based on the current Libor rate - are high. It is a common occurrence that nostro account balances fall so short that banks are severely penalised, possibly losing them hundreds of thousands of dollars on individual trades. This can also impact their liquidity buffers, which will soon be specified by the regulators. For example, if banks in the UK fall below their threshold, they will have to submit daily liquidity reports to the Financial Services Authority (FSA) and may also be issued heavy fines. 

The methods that financial institutions use to manage their nostro accounts look compromised when you compare them to the planned new regulatory requirements. For example, many banks hold complex hierarchies and nostro accounts structures, while using a multitude of manual processes and systems to maintain target balances, sweep funds, make cash flow projections, execute trades and manage risk. For global banks, these challenges are multiplied by trading a broad mix of asset classes across different time zones. Liquidity risk and operational risk increase exponentially, which leads to huge challenges in determining what the institution’s cash requirements are for its day-to-day counterparty obligations. However, with the impending liquidity regime and the return to transaction banking, banks are now recognising that this is a challenge they need to overcome. 

It’s estimated that the single euro payments area (SEPA) alone which will eliminate cross-border fees and float income will result in direct revenue loss of €20bn for banks. So does it only spell bad news for financial institutions? Not according to Citi’s Gupte, who told gtnews that, “While SEPA should reasonably precipitate the exit of thin-margin players who are not able to absorb the overall revenue decrease, it will also increase trade flows within the eurozone. Well-positioned banks will intermediate in these higher flows to offset the loss of float and cross-border fees.” 

One criticism of SEPA implementation is that it is happening far too slowly, as it is a regulatory-driven, not market-driven, change. Most payments within the SEPA framework are domestic with existing systems that are inexpensive and already proven - so why would an institution want to alter this process and spend money on a new infrastructure when the volumes of cross-border payments are so low? Currently most banks and corporates, and even agencies of the governments that ratified the PSD, are doing the bare minimum to meet SEPA requirements for cross-border transactions. In addition, domestic transactions are left largely unchanged. There are a number of reasons given for this – countries say that their systems are already SEPA compliant and therefore no action is required, banks say the SEPA Direct Debit (SDD) or SEPA Credit Transfer (SCT) volumes will be so small that they can process them without actually implementing any major changes, just the minimum to comply. Does a bank with six million mandates in one country want to modify each and every one of these for domestic SDDs? The answer, and common sense, would suggest not. As SEPA is a regulatory-driven change, the only way to make this happen is to increase the regulatory pressure to force financial institutions to comply. 

The prevalence of bank legacy systems is another issue that needs to be addressed before SEPA can be properly implemented. Most banks aren’t keen at building a new model as again this is not a cheap proposition. SEPA was dreamt up long before the credit crisis, and banks now have different priorities. Post-crisis, many have slashed their investment budgets in order to conserve funds for their operational budget. The received wisdom is that a bank can stop investment in infrastructure and systems for a period of six months to one year and won't lose anything in the meantime. In reality this is negative short-termism - at some point the bank will need to start investing again, and will find itself at a disadvantage to its competitors at this time. The ‘wait and see’ approach is another reason for the slow implementation of SEPA, as too many banks are waiting to see what the viable market model is before they invest in the process themselves. 

With few banks providing SEPA payment methods or cash management activities due to the large investments required to keep up with regulations - and some banks will not bother at all - there will be an increase in banks ‘white labelling’ their products to smaller banks. Deutsche Bank are a good example of a provider in this situation. 

As part of a major research project of SEPA and the Payments Services Directive (PSD) carried out by the Financial Services Club last year, Werner Steinmuller, head of global transaction services of Deutsche Bank, provided the following assessment of his bank’s position: 

“Deutsche Bank is in a comfortable situation. We spent quite a sizable amount on SEPA infrastructure and have a brand new system that is extremely capable of doing this that is also highly scalable. Others have not made this investment so this gives us a price advantage. We have built some conversion solutions for handling old volumes and now can run both old instruments and the new SEPA instruments so, if SEPA is coming, we are extremely well positioned. If SEPA fails, I can write off the investments and still win.” 

SEPA has required banks to build new infrastructure and systems, as well as new efficiencies in transaction processing. These systems and efficiencies can be leveraged across the bank’s network – just because SEPA, or even the euro currency, could possibly disappear, it doesn’t mean that these advances in transaction processing will. There is still an issue for corporates to consider here though – with white-labelling on the increase, corporates need to know who is providing their services. 

Turning to the US, and Citi’s Gupte shared some thoughts with gtnews about the regulatory impact there: “The major US regulations that will have an impact on the cash management business are the American Recovery and Reinvestment Act (ARRA) and the emerging financial services industry regulation focused on increased transparency, accountability, and government oversight.” The ARRA, in particular, provides an opportunity for the financial services industry in the US to move towards greater automation. 

And when it comes to white labelling, Gupte is quick to point out that it is not just regulatory pressure that is a key driver here. “Intense price competition for plug and play, plain vanilla services automatically grants advantages to the larger banks with sufficient scale to recover the substantial fixed costs. If this size-based advantage were not sufficient by itself to justify market entrance, white labeling also allows banks to expand their distribution network via indirect channels to areas where their local relationships may not be as strong,” explains Gupte. 

Use of Paper Increasingly Unfashionable 

European corporates are reducing their use of paper from within cash management and payments processes - cheques being a good example of this. SEPA is leading to a natural reduction of the use of paper, and feeds into the general movement to standardise, centralise and automate. All three of these are very difficult for corporates to achieve with paper, as processing paper is comparatively expensive. 

Cheques have traditionally been more popular in the US, but even here the use of cheques is going through an unprecedented period of change. Figures from a recent Aite Group report forecast that cheque payments in the US will comprise merely 68% of all non-cash payments in 2010, compared to 80% in 2006. With stagnating top lines in light of current economic conditions, cost reductions and quests for absolute efficiency are pervasive in corporate goals. As Citi’s Gupte explained to gtnews, organisations are re-evaluating their operational processes and implementing previously disregarded tools - including electronic integration with suppliers - to enable more judicious use of internal resources, reduce cycle times, monitor vendors, capture early payment discounts, enjoy increased transparency and control, and enhance bottom line performance. 

“One of the industries most aversely affected by the inefficiencies and drawbacks of paper based payments is healthcare,” explained Gupte. “The claim submission, processing (including reconciliation and verification), and ensuing payment processes dramatically extend the time between the service being rendered and the provider being able to completely reconcile its receivables. While paper cheques are still the preferred payment method of choice, more secure electronic channels will emerge on the back of new regulations.” 

Asia is also experiencing a growth in the use of electronic payment systems, according to Nolan Adarve, senior vice president, regional payments and receivables product management at HSBC, Asia Pacific. Adarve pointed out to gtnews that the alternatives, such as writing cheques, are not only more expensive to process, but also more time consuming. “However, this doesn't mean that cheques are on their way out. In Asia, thousands of cheques will still be issued and cleared every single day, Adarve explained. “For example, in Vietnam, cheques are still the preferred method of payments given the country's culture and infrastructure. HSBC will continue to invest in the most advanced payments solutions for our customers, be it paper or electronic as cheques will continue to be a significant form of payment for the foreseeable future.” 

Working Capital Key For Corporates 

A trend triggered by the liquidity crunch has been a greater interest from corporates across the world in working capital. The goal is to improve visibility and usage of internal funds. One example of this is that corporates are working on getting their payments as quickly as possible, while finding ways to delay making payments themselves. To improve the organisation’s working capital, treasurers must increase their cash visibility through processes such as cash forecasting, sweeping and netting. By using these standard cash management processes, corporates can gain an understanding of how much cash they have, where it is, what denomination it is held in, etc. With a full view of cash across the organisation, the treasury can effectively act as an in-house bank, providing funding to business units where necessary. 

Amol Gupte says that, over the last year, Citi has seen a fundamental paradigm shift in the priorities of our corporate clients. “Prior to the crisis, corporate strategies were focused on yield. Now, liquidity and risk are paramount, although yield is still an extremely high priority. Organisations are increasingly focused on opportunities to optimise working capital and extract liquidity otherwise trapped internally within the cash conversion cycle.” 

Pooling, either notional or actual, and interest optimisation across one or many currencies are seen as the ‘low hanging fruit’ in this area, given the speed with which improvements can be implemented. Pursuant to local regulations, some enterprise resource planning (ERP) systems are now available with pooling functionality. Previously, this service was predominantly provided by banks. 

“In looking at higher-complexity working capital management practices, corporates are now less draconian in their payment terms for suppliers,” explains Gupte. “At the height of the crisis, the general practice was to impose lengthy terms to generate liquidity. Today, corporates are keenly focused on injecting liquidity into their supply chains through supplier or receivables finance without diluting (or potentially even improving) their days payable outstanding (DPO) or days sales outstanding (DSO). In the present environment of early economic recovery, corporates are again viewing suppliers more as strategic partners with which win-win payment scenarios such as the previously mentioned can be developed.” 

This development within the financial supply chain of large corporates trying to protect their suppliers from the credit squeeze by paying early is particularly interesting, as the corporates are stepping into the role that bank’s usually have. To all intents and purposes, they are becoming the credit manager for SMEs, taking this power from banks. Is this a permanent change, or just a temporary one? Most likely it is not a permanent position for these large corporates to be in, although it is certainly sustainable until the banks get their act together and make credit available at more favourable terms. 

Another credit-related issue to watch over the next 18 months is a rather sensitive topic to some. After the various government bank bailouts around the world, many banks are now state-owned. Is subtle pressure being applied by governments for these banks to only supply credit to indigenous companies, or at least give them more favourable rates of credit? While this doesn’t appear to be an official policy of any government, it is something that some corporates suspect or are at least wary of. If governments were to lean on banks in this way, there’s a real danger of isolationism in credit management. 

Conclusion 

The fall-out from the credit crisis has caused a fundamental shift in how corporates interact with banks and manage their cash. As bank credit has become scarcer and more costly, treasurers have had to look to their own working capital management as a way of providing liquidity throughout the organisation. 

In order to successfully operate a payments factory, treasury needs to have full visibility of cash throughout the business units of the organisation. This starts with accurate and timely cash forecasting, which then informs the treasury of the optimal time to implement cash management strategies such as netting and pooling. To gain this visibility, treasury technology offers many options, but it is also relies on the treasury department educating the business units that they deal with as to the benefits of providing accurate information in good time. 

While corporates are hard at work trying to gain greater visibility over their cash, banks are facing equally complicated challenges. Regulatory changes from even before the credit crisis are removing access to banks from some areas that were previously profitable. Banks are now finding that they have to re-invest in their payment infrastructure in order to stand out in an increasingly competitive market for corporate business. Meanwhile, additional regulations that are being drawn up as a result of the credit crisis look set to have an even greater effect on the way that banks interact with their corporate clients. Transaction banking is evolving, and it hasn’t reached the end of this process yet.

2010 Global Corporate Treasurers Forum Europe: Report

Publication: gtnews.com and gctfe.com

Part 1: Banking Relationships, SEPA, and the Role of the CFO
The opening morning of Global Corporate Treasurers Forum Europe including a free-wheeling discussion on the future of funding, as well as updates on SEPA and the role of the CFO. 

The inaugural gtnews Global Corporate Treasurers Forum Europe took place at the Grosvenor House hotel in London on 23-25 June 2010. The event, in association with HSBC, brought together treasurers from Europe, North America, Asia and the Middle East, to discuss and debate the key global challenges that treasurers face today. This point was summed up by Andy Nash, group treasurer of Ahold and chairman of the Forum’s steering committee of treasurers, as he introduced the event: “We are here to debate global themes - what’s in the news today and what’s going to be in the news tomorrow.” Key themes included visibility and management of cash, the evolution of banking relationships, the treasurers’ role in risk management post-credit crisis, and the burden that future regulatory requirements may place on treasury. The Forum was also designed to bring treasurers closer to their peers, with smaller workshops promoting open discussion and sharing of experiences across a number of topics suggested by the steering committee. 

Breaking Free from SEPA Stagnation 

Gerard Hartsink, chairman of the European Payments Council (EPC) provided the first keynote presentation of Global Corporate Treasurers Forum Europe, and he started with some good personal news - Hartsink has just been reappointed for two more years in his role as chairman, which drew spontaneous applause from the delegates. 

The European parliament has been explicit in stating that SEPA needs a clear end date, and Hartsink praised Commissioner Michel Barnier for being really ambitious to get this done. From his perspective, Hartsink thinks that the end date will be established “during the Belgian presidency” of the European Union (EU), which runs from July to December this year. Underlining the importance of an end date for SEPA, Hartsink stated his belief that “without an end date, there is no SEPA.” As this is also backed by the European Council of Finance Ministers (ECOFIN) and the recently established SEPA Council, it is hoped that the political will is once more focused on pushing through the SEPA project. 

Obviously SEPA specifically deals with cross-border payments in the eurozone but, in Hartsink’s opinion, the standards that it uses should be global and not just European. As such, he welcomed the ISO standards as a global example of this. As such, the latest SEPA Scheme Rulebooks have been aligned with the ISO 20022 standards. Hartsink reassured delegates that the Rulebooks, which cover SEPA projects such as the SEPA Credit Transfer (SCT), the core SEPA Direct Debit (SDD) and the business-to-business (B2B) SDD, don’t just include the standards for these schemes, but also offer advice on how to implement the standards. This is a deliberate effort to ensure that implementation is harmonised across all financial institutions. The advice contained in the Rulebooks is particularly timely, as all banks have to reachable by SEPA by November this year. 

Global Shifts in the Corporate Banking Relationships 

Following Hartsink’s keynote presentation, a panel discussion on the main stage provided delegates at Global Corporate Treasurers Forum Europe with first hand experiences from senior treasury professionals from around the world in how they are managing their banking relationships in the aftermath of the credit crisis. Entitled ‘The Contracting Role of Banks Versus the Expanding Role of the Treasurer’, the panel was moderated by Gillian Tett, US managing editor of the Financial Times, and featured Marcio Barbosa, SVP - global head of corporate finance at Philips; Craig Busch, group treasurer of Worley Parsons; Ernie Caballero, global treasury director at UPS; and David Kelin, partner at Zanders. Each panel member gave an initial five-minute overview of their experiences, before Tett orchestrated a discussion between the panel members and the delegates as a whole. 

When it comes to managing their banking relationships and sources of funding, the huge financial turmoil of the past few years has affected different corporates to different degrees. Philips’ Barbosa made the point that, as a large global company with powerful structures of relationships in place with their banks, Philips has been able to have full access to the capital markets and banks throughout the financial crisis. Indeed, the way that Philips is structured means that, while banks may complement the company’s financing, they certainly don’t rely on the banks for this. Philips also has a varied portfolio of banking partners, with 50% of their banking relationships being with regional banks, 25% with multinational banks and 25% with investment banks. This bifurcation gives Philips the flexibility it needs when it comes to managing its bank relationships. 

Worley Parsons uses bank services for certainty of funding, explained Busch, but they have started to look internally when it comes to cash. The company established a cash management taskforce to review how cash was being used within the company and how these processes could become more efficient. Busch said that they now had a real focus on cash flow forecasting and in tightening up day’s sales outstanding (DSO), and that this review has seen some of their corporate financial metrics increase by around 175%. 

Caballero from UPS also provided an example of a company looking inward at its own cash and maximising this, rather than simply relying on bank relationships. With a cash flow of around US$2bn a year, UPS has a decentralised execution with a centralised approach. The company has a core bank group of around 20 banks that they initially go to with request for proposals (RFPs), but Caballero made it clear that if the core banking group can’t deliver a competitive enough result, UPS does look beyond this group. He also picked up the theme of ‘wallet sizing’ that goes on between banks and their corporate clients, where banks try to match up the funds they extend with the business that the corporate gives them. This can lead to some tough conversations between the two parties, as corporates are going through the same process of review when looking at possible banking partners. 

The linkage of credit with the cash management business of corporates by banks was also picked up by Zanders’ Kelin. While this is a practice that has existed for some time, it is more prominent today as a result of the effect the credit crisis has had on the balance sheets of banks. Interestingly, Kelin argued that corporates can exacerbate this problem - when putting their cash management business out to tender, some corporates will only look at their credit banks, whereas a better deal may exist outside this group. By looking outside their main credit banks, Kelin also argued that corporates could reap the benefits of a more diversified set of bank relationships. 

Worley Parsons’ Busch explained how his company has been looking at Chinese banks for their external loans. "We are seeing increased demand from Chinese, Taiwanese and Singaporean banks for corporate assets," said Busch. "If you are getting funding up to five years, the pricing is well inside the bond markets [or western banks]." 

This is a good example of how treasurers are being flexible and open-minded in their approach to funding as traditional banks become more difficult and expensive to deal with. While the disintermediation undertaken by some corporates was initially seen as a short-term reaction to the credit crisis, the ability to cut out the middle man is an option that could well remain in the treasurer’s toolkit in the longterm, as the natural levelling of the playing field between the emerged and emerging economies continues apace. Another example of this is the process of stockpiling cash that many corporates alluded to during Global Corporate Treasurers Forum Europe. During the panel discussion, Caballero at UPS described how they had recently funded a Polish acquisition completely from internal resources, without any need to raise external debt. 

Barbosa at Philips described how his company is not just financing its own activities from internal resources, but are also extending these facilities to some of their own suppliers. As previously mentioned, Philips’ access to the capital markets and banks has hardly been touched by the credit crisis, but this is not the case for some of their suppliers who operate on a smaller scale. For these suppliers, access to credit has been scarce and expensive. Stepping in to act as a credit facility for these companies has several benefits for Philips - for example, they have confidence that none of their suppliers will go bankrupt and cause a knock-on effect on their own operations. At the same time, they are building in loyalty from these same suppliers that may be of use in the pricing of future business. 

The panel discussion showed welcome signs of optimism, especially when looking at the ways in which corporates can leverage their internal cash resources to fund operations. It was also noted by Zanders’ Kelin that there are signs of maturity from some banks in the way that they operate, with some choosing not to bid on business they don’t think they would be the best fit for. This is an experience that Caballero from UPS agreed with, sharing with the audience that some banks have turned down RFPs from UPS - owing to the fact that the company list every bank they are putting the tender to in the literature, so everyone knows who the competition is. 

However, there are clearly still huge challenges ahead. The funding climate is not likely to change materially for the better in the shortterm, especially when considering the regulatory updates in the pipeline, such as Basel III. Corporate treasurers need to continue to show flexibility and strive for a transparent view of their own cash positions. 

CFOs and The New Normal 

Many of the issues that treasurers face today are similar to those of CFOs. Ira Birns, chief financial officer (CFO) of World Fuel Services and chairman of the Association for Financial Professionals (AFP) addressed delegates at the Global Corporate Treasurers Forum Europe on the implications for CFOs of the ‘new normal’ in the economy following the credit crisis. He examined the implications for CFOs of the credit crisis fallout, the impact on the treasury department and the future and career implications for both groups. 

“The new normal is profoundly abnormal - and it has come on the heels of a quarter of a century of revolutionary change,” said Birns. He made the point that, consequently, much more was expected of CFOs than ever before. There are five basic characteristics of a successful CFO: 

1. A deep relationship with the board, the market and all other stakeholders. 
2. A broad understanding of the business. 
3. A ‘steady hand at the wheel’.
4. Mastery of all areas of the business. 
5. To be strategic business partner of the CEO. 

Competency and integrity are two important characteristics in a CFO. “The CFO needs to deliver the truth. It’s not a pleasant place to be but it is the right place to be,” explained Birns. Taking a long view is crucial to keep a business heading in the right direction, and CFOs need to have the ability to see beyond today’s market conditions and considering the next phase of the business. He added that although technical accounting experience was important, “most CEOs now need a lot more than technical experience.” In answer to a question from the floor, Birns said that every CFO needed to have been a treasurer - though not a technical accountant - because the role of the treasurer had become so much more well rounded as a result of the credit crisis. Birns emphasised that the five traits listed above could also be applied to treasurers, especially those who wanted to make the step up to CFO. “The best thing about being a treasurer is that it is naturally strategic. CFOs are relying on strong and steady treasurers now more than ever before.” The importance of liquidity is also being felt keenly at CFO level, a point Birns emphasised when he said: “No-one will regard you as a hero if you reduce costs but run out of money.” A clear visibility of the company’s cash position is such an important asset to both treasurers and CFOs in this regard.

Part 2: Workshops Highlight Myriad Risks Treasury is Now Managing
An integral part of Global Corporate Treasurers Forum Europe is the workshops, which allow smaller groups of delegates to compare and contrast treasury processes. This year the many facets of risk management took centre stage. 

The workshops at Global Corporate Treasurers Forum Europe are an important element of the programme, breaking up the delegates into smaller groups to discuss their personal objectives, challenges and successes on a number of topics. This year there was, unsurprisingly, a focus on risk management, with foreign exchange (FX), enterprise and pension risk management issues making up three of the workshops. In addition to these, a workshop on the impact of IFRS and regulations covered a number of risk areas important to treasury. 

Regulatory Update - Corporates Under Threat 

In the regulatory workshop, one of the main concerns voiced was regarding the threats to OTC FX deals. While the purpose of hedging is to remove volatility from profit and loss (P&L) and cash flow, the general feeling was that IFRS focuses too much on credit risk, which in turn is leaving the door open to liquidity risk. In addition, managing collateral for derivatives for non-investment grade corporations is incredibly difficult now, while even those of investment grade are faced by the problem that the credit rating agencies tend to only look at cash flow and not P&L when they are rating corporates. In the same area, some bankrupt companies don’t even bother posting their P&L, just their cash position, which dilutes the risk management level here. While the benefits to corporates trading in OTC derivative market are clear, it is also clear that they are also exposed to an illiquid market. While things are not quite as dire as they were during the height of the credit crisis, much less information is available to price OTC trades. This leads to corporates facing difficulties explaining to their auditors the valuations they are using. In addition, they can’t be certain of the accuracy in posting collateral for their trades. With regulations in the pipeline requiring corporates to account for the collateral they post, the OTC FX market may well be closed off to many. 

Basel III was mentioned in this workshop, as well as throughout many other sessions at Global Corporate Treasurers Forum Europe. The general perception was that this will represent a swing back to an overly cautious regulatory environment. For example, Basel III implies that commercial guarantees such as letters of credit (L/Cs) should have a risk rating of 100% - effectively making them like debt to banks. Workshop leader Mark Kirkland from Bombardier Transportation gave an example of how this would affect his own company - Bombardier has a positive cash position that means that they have to post L/Cs. If these are then required to have a risk rating of 100%, the only way the company could offset these is through credit default swaps (CDS). Certainly, treasurers need to keep up-to-date with the latest regulatory information as it comes through - but just as important is to stay close to the business and ensure that intercompany tensions are not allowed to build if the treasury suddenly finds itself at odds with the commercial team. 

Enterprise Risk Management - What is the Treasurer’s Role in Risk? 

Enterprise risk management (ERM) was the focus of another workshop at Global Corporate Treasurers Forum Europe. This was led by John McAnulty, group treasurer at Richemont, who provided first-hand experience of how his treasury has recently addressed the ERM. 

The PricewaterhouseCoopers (PwC) UK Treasury Survey 2010 found that nearly 90% of respondents think the credit crisis has led to their department gaining increased attention from the board. In addition, nearly 80% said they think the treasury function is increasingly thought of as adding value, while even 60% said that business units are showing an increased interest in treasury. All of these are impressive numbers, but unfortunately on just over 20% said that the level of budget invested in treasury had been increased to match this new position within the organisation - treasurers are effectively being asked to do more but without more resources. This lopsided position brings inherent risk. It is here that an ERM strategy is required. 

Today, audit committees are frequently asking for ERM projects to be demonstrated. These are not like buzzword-projects of the past - such as economic value add (EVA). ERM is based on common sense and look at all elements of risk. The first step in achieving this is to identify the critical risks for your organisation. A risk register can be hundreds of pages long, so the advice in the workshop was to investigate a framework tool, such as the Committee of Sponsoring Organizations (COSO) framework, which can aid the risk identification process. 

Treasurers entering this process need to have a firm understanding of the risk environment in their organisation - are they risk-taking, risk-neutral or risk-averse? Different business areas have different risk profile and treasurers should only take risks that are acceptable to their shareholders - other risks should be managed away. Corporates must understand internal environment that they operate in. Once this has been established and the risk framework is in place, the treasurer will be in a position for objective setting, event identification, risk assessment and risk response. All of these processes should be linked to the budget cycle. 

McAnulty explained that Richemont initially identified 10 risks, but then realised that this was too many and so reduced it to four or five critical risks that had the potential to knock the company off course. They then produced a very thin executive summary and action plan. McAnulty admitted that lots of groundwork has to be put in at the start of the ERM project, but that this gets easier. A consolidated risk report was also issued to key internal stakeholders, while standard risk action plan templates have been included by the company in strategic plans and budgets and a risk statement is included in the annual report and accounts. To ensure this is clear and transparent to all parties, McAnulty explained how the company uses a common risk language. 

So if you don’t already have an ERM strategy, should you? Quite a few companies now identify and spell out key risks in their annual report. Any treasurer thinking about this will get huge support from non-executives at the moment, as risk management is a big topic of conversation for this group. Additionally, audit committees are increasingly looking at this. However, there are likely to be several challenges within the organisation to tackle on the way to establishing an ERM programme, and the following comments may crop up: 

• “This is just another management fad.” 
• “Risk is good.” 
• “We don’t have time for this.” 
• “This is no difference from internal audit.” 

While this process may take the treasurer outside their comfort zone, the embedded understanding of risk that the treasurer has makes him or her the perfect owner of this project as part of a group management team. 

Managing FX Swings 

Given the volatility in the currency markets, it is no surprise that the FX risk management workshop drew the attention of many delegates at Global Corporate Treasurers Forum Europe. The workshop leader, Richard Roering from consultants Zanders, began by illustrating that FX risk falls into the following categories: 

• Transaction exposure: risk of value changes depending on where the transaction is. Some transaction exposure is not shown in the P&L because it has not yet been recognised, or the contract is anticipated rather than committed to. 
• Economic exposure: future impact on cash flows as a result of long-term FX rate changes. 
• Translation exposure: The FX exposure seemingly most likely to be forgotten by many treasury departments, this occurs when a subsidiary has a functional currency other than the reporting currency of the holding. This concept can be split into two further categories: profit translation exposures and asset translation exposures. 

FX management objectives are linked to company policy - therefore, common FX objectives include: 

1. Reduce the uncertainty of cash flow (protecting short-term cash flow implies a short hedging horizon). 
2. Protect business at budget rate or better in order to protect it within a defined time horizon. 
3. Reduce long-term P&L volatility. Hedging is typically 1-2 years forward on a rolling basis, with layered hedge ratios. 

Current thinking seems divided as to whether multinational corporations (MNCs) should hedge FX profit translation risk. Those in favour argue that translation gains or losses exist only ‘on paper’, while those against counter by saying that translation gains/losses have an impact on the reported profit of the company. So what about in practice? Roehring had three points here: 

1. While they are in the minority, some MNCs can face a risk at the EBITDA level. 
2. Credit ratings are a key determinant in positive hedging decisions. 
3. Larger MNCs are more likely to hedge FX profit translation risk. 

A group treasurer attending the workshop explained to the other delegates that their company had decided not to hedge its transaction exposure. The reason for this was that the company would have had to involve all of its investors, which would have added complexity. It has an impact on reporting - the company would have had to have shown like-for-like figures, and they wanted to protect this information. The factors involved in weighing up whether to hedge this risk or not requires a full evaluation by corporates. 

Pension Risk Issues 

Many western countries are facing severe risk issues in the corporate pensions market. In the UK this is particularly the case with defined benefit (DB) pension schemes, which have total assets of £775bn but total liabilities of £975bn.1 Pension schemes are closing and members of these schemes are aging, meaning that the funding imbalance here will remain for a long time to come. Against this backdrop, Chris Sheppard from professional services group Mercer led a workshop that addressed some of the issues that corporates need to be aware of in their pension risk management strategies. 

Because companies and trustees have different interests at stake in a DB pension, it is important that a model for the risk management process of the pension scheme is agreed upon by both parties. Sheppard produced a basic five-point plan to create such a model: 

1. Define the mission. Is this to provide short-term balance sheet control for the sponsor, or long-term self-sufficiency for the scheme? 
2. Quantify the risk budget. What is the sponsor’s tolerance of cost variability, and what is the trustees’ tolerance of funding level deterioration? 
3. Decide how the budget is spent. Will you target rewarded risks and value creation, or unrewarded risks and value protection? 
4. Allocate responsibilities. What are the roles of the company and the trustees in the governing and executive functions of the scheme? 
5. Establish a process. What events will be triggers in your scheme management, and what will be the responses to these triggers? How can you ensure ongoing monitoring? 

There are a number of market trends that could have an effect on the five points above. Increasingly, swaps are being used to hedge interest rates and inflation at predetermined trigger levels. Longevity solutions are on the rise as mortality reserving increases. Enhanced transfer value exercises will continue and increase as accounting reserves increase (so that P&L impact reduces). There is an increased use of equity derivative solutions to reduce downside risk. Schemes are being closed to future accrual and the search for lower risk alternatives is continuing apace. 

Against the backdrop of these market trends, what action can treasurers take to ensure the best for their organisation? Sheppard made the following suggestions: 

• Understand the risk being taken in your DB schemes. 
• Assess the impact of those risks on the company. 
• Define your company’s tolerance to risk. 
• Set risk reduction triggers appropriate to this tolerance. 
• Ensure that robust risk governance is in place. 
• Establish a process to monitor and take action. 
• Monitor market trends and opportunities. 

Shared Services in Payments 

As the workshops mentioned above showed, risk management has never been as prominent on the treasurer’s agenda as it is today. However, treasury has of course not become merely a financial risk function. This is in fact an addition (or at least an upgrade) to the more traditional treasury areas of cash and payments management, which, as we’ve seen, have themselves evolved as a result of the credit crisis. Shared service centres (SSCs) have come to prominence as part of the centralisation of the treasury function that has been fashionable over the past few years. SSCs for payments was the topic of another workshop at Global Corporate Treasurers Forum Europe, and was led by Stephen Mazurkiewicz, director of eTreasury at Merck, Sharp and Dohme (MSD). Mazurkiewicz shared a case study of implementing an SSC for payments, as his company has recently gone through the process of implementing one, and he picked out the challenges they faced plus the benefits and pitfalls to look out for. 

MSD had four objectives when it set up an SSC for payments: 

1. The desire for a third party supplier payments. 
2. Consistency across European markets they operate in (Spain, Italy, Germany, France, the UK, Ireland and the Netherlands). 
3. To reduce from 99 banks to 1 bank for transaction processing. 
4. Move to SEPA instruments. 

Before it embarked on this SSC project, the company had already outsourced its invoice processing to India and had centralised its crossborder FX payments - so it in effect already had a quasi-payments factory in operation. 

For the SSC, MSD agreed the banking structures with Citi. They decided to use the ISO 20022 XML standard for the SSC but quickly found that there are many flavours and national nuances to the payment data their different business units include. Faced with a choice, MSD decided to send overpopulated data to Citi and, depending on country, the bank could choose what they needed. While the SSC centralised processes for payments processing and settlement, some measure of responsibility was left in different countries. 

Migration to IBAN and BIC was an issue for MSD. It had a mixed result from its third party conversion partner. Italy provided a particular problem in payments matching - there was only a 50% match, which means that half of its payments were failing. This highlighted the need for assessments to be carried out in each country as MSD moved towards the conversion from EBANs to IBANs. They had already converted this process in Ireland and Turkey, and the changeover went well. The company had a good infrastructure and bank structure to start with, and their banking partner showed a good response time. 

However, Mazurkiewicz did also have some negative experiences during the process. Once the payments process had been defined, the company had a six- or seven-step process. This process should then have been standardised across the entire process. However, while it was indeed a centralised process, Mazurkiewicz explained that it was not standardised. It can be easy to pick up different parts from regional/country office through customisation, for example with the ERP. The box below outlines the benefits, pitfalls and items to address that the workshop group sees with SSCs for payments. 

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SSCs for Payments - Benefits, Pitfalls, and Items to Address 

Benefits 

• Cash management - single bank, greater visibility. Can find ‘hidden’ cash. 
• Coherent banking structure. 
• Infrastructure - centralised and moving to standardised. Scalable. 
• When the process is standardised, you can get benefits including immediate transparency; reduce bank fees; failed payments <1%; payment days only two days per month; automated payments out of one single bank account. 

Pitfalls 

• Don’t keep local processes - don’t be too accommodating with local entities. 
• Organisational differences - define scope of project. 
• Wanted one bank but still have relationships with many banks - haven’t ‘cut the cord’. 
• Project sponsorship - getting the go ahead is difficult but need buy-in to proceed. 

Issues to address 

• Technology infrastructure. 
• Cheques - what to do with them? 
• Changes in banking relationships. 
• Controls and responsibilities. 
• Language - need to ensure communication works properly.

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Part 3: Treasury Trends in 2010
A recent treasury survey provided an insight into how corporates are approaching their funding requirements, post-credit crisis. 

The final session of Thursday 24 June at Global Corporate Treasurers Forum Europe featured a presentation by Duncan Turner and Chris Tilbrook from PricewaterhouseCoopers (PwC), looking at the results of a recent treasury survey PwC conducted, with a particular focus on how sources of funding have been affected by the credit crisis. 

In the corporate lending area, banks are demonstrating a cautious appetite towards new lending. However, Turner used the example of a recent refinancing of a public limited company (plc) that had seen a degree of competition between banks, which is a promising sign of those much-talked-about ‘green shoots’ of recovery. In the UK, there has been a continued increase in the lending targets for government-owned banks and maturities are continuing to stretch. There are still negative elements in the system though, as the total new syndicated lending remains depressed due to the relatively low level of activity in the merger and acquisition (M&A) market. 

The bond market has continued to be buoyant, with Q1 volumes this year continuing at the level of Q409. Year-on-year these results were actually down however, so the recovery still has a way to go. In 2010 there has been an increasing amount of high yield issuance. However, the past two months have seen a slowing in new issues, following the pressures in the eurozone. Average spreads have increased significantly in past quarter. The average issue size is around £300m this year, while new issuers tend to start from £200m. In contrast, the private placement market can start from as little as £50m. High yield bonds eased refinancing pressures earlier in the year, but recently this market has dried up and there has been no issue for over a month. However, Turner expects there to be more in the pipeline. 

Turning to maturities, and Tilbrook raised the point that there is currently a maturity war going on - outstanding 2011 maturities have fallen by 70% since December 2008 and 2012 maturities have dropped by a third. In Q1 2010, 43% of high yield bond issuance by volume was to refinance bank loans. New leveraged loans are being used to refinance existing syndicated facilities. Amend and extend arrangements have also been used to deal with shorter-term maturities, such as ONO’s recent forward start facility. Despite this, though, Tilbrook commented that the more highly leveraged corporates would continue to struggle to refinance. 

The survey highlighted a slight disconnect between what treasurers think they are getting from their banking relationships and what is actually happening, as two-thirds of respondents thought that they have a ‘tier 1’ relationship with their banks. Could this really be possible? Or is this perception really down to excellent public relations on the part of the banks? 

At the same time, changes in economic conditions as a result of the credit crisis have meant that the capital markets are replacing banks as a source of core finance for large corporates. Banks are making their money in the working capital arena instead. However, this change in emphasis could potentially spell bad news for small- and medium-sized entities (SMEs) that lack a credit rating and the strength to operate in the capital markets. Sources of core finance will continue to be a key concern for this demographic in the months ahead, unless they are able to foster credit relationships with large corporates in their supply chain, as described by Marcio Barbosa of Philips in the morning panel discussion.

Part 4: Regulation, Standards and Corporate Compliance
The second day of Global Corporate Treasurers Forum Europe featured perspectives on the regulatory and compliance issues facing corporates from two treasury professionals, the chairman of a standards board and a banker. 

The effect that regulations and standards have on corporate treasury departments was a key theme on the second day of Global Corporate Treasurers Forum Europe. The opening keynote presentation came from Ingmar Bergmann, group treasurer at Eneco in the Netherlands, who provided a case study of his experience of politically driven regulation and its effect on corporates. This was a very timely presentation, as Bergmann told delegate how, on Monday, Eneco announced a road show that could have resulted in a benchmark hybrid bond. Overnight on Monday, Bergmann and his team were putting the finishing touches to the presentation. However, on Tuesday, the company announced that it was withdrawing the road show. 

What led to this u-turn within 24 hours? The variable in this particular occasion was a ruling from the Dutch court that finally threw out the country’s Independent Network Manager Operations Act (2006). This Act demands the full separation of network and commercial activities and restricts the permissible activities of network companies such as Eneco to regulated network management. The court overturned the Act because it believes it is at odds with European law. While the timing of the decision was expected at some time this year, the fact that it came just the day after Eneco announced the road show for funding for their unbundling provided both good and bad news for the company. The good news for Bergmann and his team is that this immediate and large funding requirement is now on hold. On the downside, the work that had been put into the unbundling project by Eneco could all be for nothing, and the fact that Eneco had, just hours before the court ruling, made the required due diligence calls for the road show with their relationship banks. Hopefully these same banks have a strong enough working relationship with Eneco to believe the company did not know about the exact timing of this ruling. 

Treasury needs to have a clear and transparent view of the timing and possible outcomes of regulations are likely to be. There are clear benefits to regulation, as Bergmann stated himself, “regulation is good.” However, it is when politicians become overly involved through their own personal motivations that the issue can become blurred. 

Following his presentation, Bergmann joined a panel discussion called ‘A New Age for Corporate Governance and Regulation: Are You Prepared?’. He was joined by Ian Mackintosh, chairman of the Accounting Standards Board, Andy Nash, group treasurer at Ahold, and Nancy Pierce, head of product, payments and cash management Europe for HSBC. The panel was moderated by Mike Hewitt, chief executive of gtnews. 

Mackintosh sympathised with corporates who have a focus on accounting standards, admitting that there is so much going on that it can easily get confusing. He pointed to the G20 meeting happening in Toronto at the coming weekend as a chance to move towards a global standard. The International Accounting Standards Board (IASB) and Financial Stability Board (FSB) have set a deadline of 30 June 2011 to achieve convergence, but they disagree on so much that it is possible this deadline will either be missed, or the ground will shift so much in the next year to try and achieve this convergence that corporates could get caught out. 

If convergence can be achieved, Mackintosh told the European delegates in the room, they should be prepared for a change in approach to standards, warning that the influence of the US could push regulations towards a rule-based approach as opposed to the principlesbased approach that is common in much of the rest of the world. And it is not just the US that will be influential in a new global approach to standards. Reflecting the economical growth in the region, Mackintosh also picked out Asia as becoming more and more influential within the process. There is a perception by some in the west that accounting standards are split down US and European lines, but this is not the case any more, and Asia will continue to gain influence in this area. 

Andy Nash provided the corporate perspective in this panel discussion, and harked back to the presentation of Ira Birns when he said that he was so glad that he didn’t have to be a technical expert on the granular details of the future of accounting standards. And is this really a new age for corporate governance and regulation? Nash read a long list of regulatory initiatives that both banks and corporates have had to adapt to over the past few decades, and it was pretty clear that what we’ve actually been getting is continuous waves of regulation every couple of years. So how can this constant shift be managed? From his perspective, Nash stated that treasurers need to know what is happening in their own business, and understand where the cash flows are going, in order to stay on the right side of the regulator. Corporates also need to look very closely at the banks, with topics such as wallet-sizing and bank scorecards becoming increasingly important - who are you doing business with and what is their strength? By understanding the business and the external partners that the organisation deals with, corporates will carry out their tasks more efficiently for the good of the business - the use of cash flow forecasting to allow natural hedging is a good example of this. 

Nancy Pierce from HSBC was the only banker on this panel, or indeed in any session of the Global Corporate Treasurers Forum Europe and so could potentially have been facing a tough crowd. Some of the previous sessions and workshops had the topic of bankers’ salaries come up in conversation, so Pierce immediately set about rebuffing some of the wilder theories about bankers’ pay. It was a discussion in good humour and was a useful reminder that, just as no two corporates are identical, it would be a mistake to generically talk about ‘the banks’ as the sole source of all the problems in the financial markets. 

Pierce agreed with Nash that it probably isn’t a new age of regulation and governance, pointing to ongoing anti-money laundering (AML), know your customer (KYC) and data protection initiatives. However, one of the new areas that will require collaboration between banks and corporates, according to Pierce, is intraday liquidity provisions. The measures that the Federal Reserve in the US has put in place to reduce intraday exposures will bring a cost to banks, as they look at measuring exposures for liquidity provisions. Pierce argued that clients will have to pick up some of the cost for these liquidity buffers. 

A delegate put it to the panel that there is little transparency in bank pricing, and that putting the charges upfront and centre (say 6%) as opposed to them apparently being “buried in piles of spreadsheets” would be really useful. Bergmann and Nash agreed with this point, and as Nash pointed out, “if cash management isn’t lucrative for banks, why do they want it so much?” Pierce did agree that banks should be providing transparency of pricing. However, she went on to make the point that, while cash management is stable and profitable as an overall business, within this there will be areas or products that make little or no money for the bank. It is always worth remembering that banks are businesses too, and are driven by profit. 

The box below picks out the key takeaway that each of the panel members wanted the delegates to think about when leaving the Forum. There are clearly a number of issues in the area of regulation and standards that corporates need to be mindful of over the next 12 months. 

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Key Takeaways from the Regulations and Standards Panel Discussion 

Ingmar Bergmann - The unbundling issue at Eneco highlights the need for corporates to have a clear understanding of the regulatory issues they need to manage. 

Andy Nash - The issue of OTC derivatives - can you still hedge in the same way? Also, treasurers need to work on being a good business partner in the organisation. 

Ian Mackintosh - Keep an eye on IFRS, as the year coming up is the biggest there’s been. 

Nancy Pierce - Intraday liquidity - keep an eye on this issue, talk to your bankers and try to work together to bring costs down.

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Part 5: Eurozone in the Crosshairs
The final discussion point of Global Corporate Treasurers Forum Europe looked at the current crisis in the eurozone, as delegates heard directly from a member of the European Central Bank about their actions during the credit crisis. 

The ongoing crisis in the eurozone and the ramifications for national economies, corporates based or doing business in Europe, and the future of the euro are all issues that delegates at Global Corporate Treasurers Forum Europe have a keen interest in. A look back at how the European Central Bank (ECB) dealt with the drying up of markets and eventual credit crisis from 2007 onwards provided those attending the Forum with an idea of how the ECB may position itself going forward with the current problems in the continent. This was provided in the final keynote presentation, delivered by Michel M. Stubbe, head of the market operations analysis division at the ECB. 

Stubbe explained how the ECB had three major features in its operation framework that allowed it to manage the effects of the credit crisis: 

1. Large number of counterparties. 
2. Large refinancing operations. 
3. Broad range of collateral. 

Stubbe explained how these three pillars have given the ECB the ability to channel liquidity to the overall banking sector, as well as provide it with flexibility do respond to ongoing market difficulties. 

As the sub-prime problems of August 2007 cascaded into the collapse of Lehmans just over a year later, the ECB had to move from limited measures (such as the front-loading of liquidity to the banking sector - though not increasing the overall liquidity supply) to effectively becoming the money market and having to provide all the liquidity that the banking sector required. As a result of this, the ECB saw a doubling of its balance sheet in assets between 2007 and 2009, up to €1.763bn. Stubbe admitted that the ECB’s emergency account had essentially become its current account. 

To address this problem, the ECB has been taking non-standard measures (essentially monetary policy apart from interest rates). One example of this is the securities markets programme that the ECB has instigated. Stubbe was quick to point out that this programme should not be confused with credit easing - the idea was not for this to be a substitute for the capital markets, but instead to encourage their recovery. However, there is still a long way to go - despite inroads made earlier in the year, the ECB’s balance sheet in May 2010 was back up to €1.713bn. 

Collateral was broadening, but is to be discontinued by the ECB at the end of this year, with graduated haircuts being introduced in the BBB+ to BBB- range. The initial approach that the ECB showed towards collateral was to avoid fire sales, which it experienced some success with. However, this strategy has had an effect on the ECB’s risk profile in the markets, which is why it is being ended. 

In terms of an exit strategy for the ECB, Stubbe outlined the key principles of this as follows: 

• Maintain, and if possible increase, flexibility to adjust monetary policy as needed to safeguard price stability. 
• Gradualism and reversibility: small and easy to anticipate and to reverse steps. 
• No pre-commitment. 
• Core features of the operational framework prevailing before August 2007 (wide counterparty population, large operations, broad collateral) will be maintained. 

In terms of the timing of the exit strategy, the ECB is keen to avoid premature phasing out in a slowly recovering environment with remaining downside risks, as well as the unwarranted dependence of banking sector on Central Bank financing. 

Stubbe argued that the operational framework of the ECB served eurozone well during the credit crisis and its three-pillar approach (large number of counterparties, sizable operations, broad range of collateral) is to remain unchanged after the crisis. However, some specific refinements will be made, based on lessons learnt from the crisis. For example, as mentioned earlier, while it was good to have a broad range of collateral, the risk this brings into the eurosystem needs to be managed carefully, and finding the optimum position here is important. The presentation made it clear that this and other issues need to be carefully looked at before conclusions are drawn, and that work at the ECB is very much ongoing. There certainly are huge challenges ahead for the ECB - for example the prospect of a double-dip recession remains high. 

And what of the euro itself? The Gala Dinner speaker at the Global Corporate Treasurers Forum Europe, Hamish McRae, associate editor at The Independent newspaper, predicted that the first country to leave the eurozone could go in 2017 (July 2017 to be precise). Whether this would be Germany going out of the top, or one of the PIGS [Portugal, Ireland, Greece, Spain] out of the bottom is “too close to call”, but it seems clear, at least to some economists, that this will happen. The political will has been so strong to hold the eurozone together so far, but at some point, given the current bleak outlook, economic will shall triumph in the end. Given these challenges, it looks as though the ECB will have its hands full for the duration of this decade.