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.

Europe's Plight Under Scrutiny: Global Corporate Treasurers Forum Europe Preview

Publication: gtnews.com

100 senior treasury professionals will meet at the Grosvenor House hotel in London next month to discuss the major issues corporates are currently facing. This preview commentary looks at what the main talking points could be. 

For four years, the Association for Financial Professionals’ (AFP's) Global Corporate Treasurers Forum in North America has brought together senior figures in treasury and finance to tackle the most significant issues facing the profession. Now this established event is moving to the next stage, with a new conference in London for a European audience, organised by gtnews. 

Global Corporate Treasurers Forum Europe (GCTFE) will take place at the Grosvenor House hotel in London across 23-25 June, giving the 100-strong assembled group of senior treasurers the chance to hear from some of the key protagonists in the payments, banking, and regulatory worlds. In addition, the Forum has a focus on smaller breakout groups, with time specifically given over to workshops on issues such as funding, setting up a payment factory, risk management, and IFRS. This preview commentary looks at a few of the talking points that could dominate conversation at the event next month. 

Forum Proves Timely For European Issues 

The post-credit crisis financial landscape in Europe is possibly just as uncertain as it was during the crisis itself. The Greece debt and bailout has been the lead headline, with debt troubles in Ireland, Spain, Portugal and the UK, among others, also generating concern within the financial community. One of the main players in the attempt to stabilise the financial situation in Europe has of course been the European Central Bank (ECB), and delegates at GCTFE will have the chance to hear from Paul Mercier, principal adviser, market operations at the ECB in the closing keynote speech of the Forum. Mercier will be discussing the ECB’s reaction to the financial crisis, from the effect the crisis has had on monetary policy, to the strategy the ECB is pursuing on its quest for economic growth. 

One action that has come under attack in some quarters is the suspension by the ECB of the minimum credit rating required for Greek government-backed assets used in its liquidity-providing operations. By doing this, the ECB has taken away the risk of Greek government bonds being excluded, should the credit ratings agencies react unfavourably towards the rescue programme. The action, which is due to remain in force “until further notice”, has come under fire for seemingly going against the stance of ECB president, Jean-Claude Trichet, who has stated that the bank would never show preferential treatment to any individual country within the eurozone. The counterargument is that the benefits this provides for the financial markets are good for both the eurozone and Greece - this programme effectively tells banks that Greek assets can continue to be used to access ECB liquidity. 

SEPA - Continuing, Stuck, or Reversing? 

So with all the turmoil in Europe, where do things stand with the single euro payments area (SEPA)? The future of the euro has been called into question by some of the continent’s most senior politicians - from French president Sarkozy’s apparent threat to pull France out of the euro in a row with Germany’s president Merkel, to Merkel herself using comments such as “the euro is in danger”. While the currency is once again being used as a political football, where does this leave innovations such as SEPA? SEPA Credit Transfers (SCTs) and SEPA Direct Debits (SDDs) have been brought in and the Payments Services Directive (PSD) ratified, all of which has taken a large amount of political will and financial commitment - not only from the eurozone countries but also from the banks, who’ve needed to invest in replacing their payment infrastructures. 

Speaking at GCTFE, Gerard Hartsink, chairman of the European Payments Council (EPC), will provide his perspective on the current expectations of the regulators, the commitment and deliverables of the EPC, and how a co-operation model can be established so that corporates can realise the business benefits of SEPA. 

But what of the banks? A pragmatic view was given by Werner Steinmuller, head of global transaction services at Deutsche Bank, during major research on SEPA and the PSD undertaken by the Financial Services Club last year: 

"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 instigated the spend banks have had to make on their infrastructure - but if the SEPA systems, or even the euro, are repealed, the banks still have efficient transaction solutions in place. 

Bank Relationships Under the Spotlight 

The credit crisis has added great stress to the relationships between corporates and their banks. Banks see the corporate’s cash management business as an attractive proposition and so are beginning to bargain for part of this business in return for continued credit lines. In addition, as the banks have shrunk in size as a result of the credit crisis, large multinational corporates are faced with the prospect of not having one global bank capable of managing all their activities worldwide, and so are reassessing their bank relationships, post-crisis. 

A panel of treasurers from Europe, Asia-Pacific and North America will discuss how they are managing their banking relationships in the new ‘normal’ business environment in a key panel discussion at GCTFE, moderated by Gillian Tett, US managing editor of the Financial Times. One topic that may well come up during the discussion is the use of SWIFT for corporates, and the possibilities for bank independence that this can provide. 

SWIFT’s corporate offerings have gained an increasing take-up in the past couple of years, but it would be hard to say that it has yet made a significant breakthrough in the northern European market. Again, it is easy to see the influence of SEPA as a reason for this. While taking an overall look at their payment infrastructure, corporates are asking whether SEPA is something they should invest in, or whether they should wait to see how the first-movers in this area perform. If anything, corporates are still waiting for the business case for SEPA to be put to them, before they’re willing to invest time and resource into becoming SEPA-ready. Where SWIFT for corporates may well see its best growth this year will be with organisations in countries that aren’t as sophisticated, in terms of formats, processes and clearing. 

Translation Risk a Major Concern 

Risk takes on a variety of different forms in treasury these days, such as liquidity risk, counterparty risk and foreign exchange (FX) risk. When it comes to FX risk management, translation risk is one of the key challenges for corporate treasury. The greater the FX swing between quarterly financial statements, the greater the risk to corporates - something that is all too clear in today’s volatile currency markets, where the euro, US dollar and UK pound have proven to be fragile. 

Best practice for managing translation risk is the theme of one of the many workshops that are key to the GCTFE programme. Sander van Tol, partner at Zanders, and Gary Williams, general manager treasury at Mitsubishi Corporation, will drill down into best practice for managing translation risk, asking questions including: 

• When is the best time to hedge your translation risk? 
• Whose responsibility is it to set the budget rate - treasury or management? 

In these smaller workshop groups, delegates will have the chance to drive the debate, share personal experiences and interact with peers. Other workshop topics at GCTFE cover how to maximise sources of finance, the treasurer’s role in the management of risk, the impact of IFRS, why corporates should care about pension risk management, and the benefits and pitfalls of shared services.

Political, Economic and Regulatory Concerns Top the UK Corporate Agenda

Publication: gtnews.com

As treasurers, bankers and vendors met at the Association of Corporate Treasurers (ACT) Annual Conference last week in Manchester, a variety of converging forces were giving the UK financial services industry cause for concern. 

The UK economy dominated discussions and presentations at the Association of Corporate Treasurers (ACT) Annual Conference last week, as it seemed to be under attack on a series of fronts. Politically, there’s a real possibility that the UK general election on 6 May will result in no clear victory for any of the major political parties, and there are concerns that any form of coalition government may be too weak or divided to tackle the country’s debt and budget deficit. On the economy, the recent downgrades to the sovereign ratings of Spain and Portugal, along with the ongoing problems in Greece, have served to worry investors that the UK’s AAA sovereign rating may itself be under threat. On top of this, the regulatory fallout from the credit crisis is still in full swing, with the prospect of the big banks being split up into their constituent parts and the reeling in of hedge fund activities are both still real concerns for many of the delegates. 

For the sake of balance, Matthew Hurn, deputy president of the ACT, and executive director, group treasury at Mubadala Development Company, did open the conference by announcing that, for treasurers, the future is looking better than expected, saying that there’s never a better time to be a treasurer, in terms of demonstrating the value the role adds to the business. However, in a nod to many of the other presentations at the conference, Hurn added that he wants a healthy and effective, not over-regulated, banking sector. 

Has the Dust Settled and What Does it Mean for the Corporate Treasurer?

The economist and author, Professor Tim Congdon, CBE, opened the main keynote presentation by posing two questions to the audience: 

1. Are bankers members of the human race? 
2. Do they deserve to be treated as such? 

Happily for many in the audience, Congdon’s answer to both questions was “yes”. But when addressing the question in the title of the presentation, he pointed out that a legacy of the crisis is the higher capital ratios in the banking sector - issues from the crisis are enduring and, no, the dust hasn’t settled. 

There are two kinds of problem in banking as Congdon sees it: the need to get cash on the asset side of the balance sheet and the need for positive capital on the capital side. Above all, banks need to be both solvent and liquid. 

In times of emergency, banks have lines to the central bank to get cash out. Congdon explained that central banks react to two things: 

1. Illiquidity. Unlimited loans (‘last resort loans’) for the required period at a high/penal rate of interest and against good collateral. 
2. Insolvency. Emergency ward. Possibly last resort loans but with a view to securing capital injections, or taken over by bettercapitalised institutions. 

Here Congdon was highly critical of how ‘officialdom’ had perceived the credit crisis, treating it as a problem of insolvency. But, he argued, in the UK at least, it’s been a problem of illiquidity. The UK banking system is not bust, but rather the closure of the international wholesale market exacerbated the situation. 

Looking on the positive side, Congdon pointed out that it is highly likely that UK taxpayers will profit from the banking crisis, due to the large public ownership of many of the country’s largest banks. UK banks lost a maximum of £20bn during the crisis, which he argued is comparatively not that bad, pointing out that Ireland’s banks are bust and Iceland too, whereas this is certainly not the case in the UK. 

Looking at the circumstances that were in place to precipitate the credit crisis in Autumn 2008, Congdon doesn’t expect this scenario to return. He cited that very low interest rates will be maintained and/or quantitive easing will be repeated to prevent shrinkage of banking systems and a return to recession. 

So has the dust settled? Certainly some of the fallout from the credit crisis will be with us for years to come. For example, the increases in capital and liquidity ratios required of the banks will go on for 5-10 years Congdon predicted, although he added that he didn’t think the banks need this. Ending on an upbeat note, Congdon also thought that, assuming bank balance sheets don’t contract and money growth is positive, the next few years should be excellent, in cyclical terms, for the UK and global economies. 

Pension Risk Management Strategies 

A key issue that many UK corporates need to address is that of pension risk. A so-called ‘pensions timebomb’ is possibly in the pipeline, as longer life expectancy squeezes pension plans that didn’t prepare for that eventuality. A panel session at the conference, moderated by Danny Witter, head of UK corporate coverage at Deutsche Bank, addressed these issues and provided examples of how corporates can offset their pension risk. 

Looking at the amount of risk that UK pension plans run, Stephen Dicker, senior consultant at Towers Watson, explained that they’re nowhere near as conservative as European regulators want. Value-at-risk (VaR) is approaching £100bn. There’s been a strong move to liability-driven investing (LDI), and treasurers have been leading this move. Dicker outlined the variety of methods that corporates can use to manage pension risk, which are presented in the box below. 

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Ways of Managing Pension Risk 

Past benefits 

• Enhanced transfer values. 
• Pension increase surrenders. 
• Other liability management options, e.g. encourage early retirement, cash commutation, etc. Review policy on discretions, e.g. discretionary pension increases. 

Future benefits 

• Review future benefit design. 
• Capping pensionable pay. 

Investment 

• Choose the right equity/bond allocation. 
• Choose the right bond duration. 
• LDI/swaps. 
• Diversify of return seeking assets to improve return per unit risk. 

Settlement 

• Buy-out/buy-in (full or partial). 
• Staged or risk-sharing buy-outs. 
• Capital market solutions. 
• Longevity hedges. 

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Dicker explained to the delegates that it is possible to hedge longevity risk. Buy in/buy out no longer looks affordable in the short-term, but there is still a desire to de-risk - this was the prevailing view among corporates that he had worked with. 

Dynamic investment de-risking is necessary, but Dicker explained how corporates could get diverted at times - for example, the company could be nearly ready to sell the pension business to an insurer, when suddenly the returns they get are generating business profits. In such a circumstance, a "why sell?” argument can emerge at board level. In this situation, Dicker argued that treasurers need to advise the board strongly of the reasons to sell, backing long-term security over short-term profit. 

Robert West, partner at Baker & McKenzie, then spoke about controlling defined benefit (DB) pension liabilities, how to go about terminating accrual and using de-risking schemes in pension risk management. Using a case study, West highlighted the points to look out for when going through this process. The example he used was of an employer that has a typical DB scheme and wants to terminate accrual to the scheme. The legal issues that the corporate has to be aware of in such a case are: 

1. Pension law - the plan and its trustees It is possible that the employer cannot afford to wind up scheme due to ‘Section 75 debt’. Arising from Section 75 of the Pensions Act 1995, this legislation provides that, when a pension scheme winds up, the scheme's employers are liable to fully fund the scheme so that all members' benefits can be bought out in full with an insurance company (the annuity buyout basis). This also applies to multi-employer schemes if any of the scheme's sponsoring employers cease to participate in the scheme. In such a case, the exiting employer will be liable for its share of the scheme's deficit on the annuity buyout basis - hence the term Section 75 debt. In addition to this concern, can the scheme rules be amended to terminate accrual? The corporate will also need to fully understand the powers that the trustees have, and to ascertain if the trustees will co-operate with the process. 
2. Employment law - changing terms and conditions The employer also needs to establish if their employees’ contracts allow them to change future pension benefits. If they don’t, of course, alternative strategies will be required. In addition, 60 days’ consultation is required for any changes to contract law of this type. Finally, the employer will need to fully investigate whether the employee will have any potential for claims if such a change is made. 

After terminating accrual, should the corporate de-risk its pension plan through buy-in or buy-out? West said that the company in this situation has to weigh up what its objectives are, as well as what’s actually on offer. There are different legal consequences and alternative vehicles involved in both buy-in and buy-out. Additionally, corporates need to assess who will pay for it, and how secure the process is. 

Finally, West highlighted the other interests involved in the process that the employer should be aware of: the trustees, the pensions regulator, and of course the members themselves. The sheer number of issues involved in terminating pension scheme accrual and derisking pension schemes mean that any corporates embarking on such a project will need thorough legal advice. 

Turning to longevity risk management, Martin Bird, head of longevity and risk transfer solutions for Hewitt Associates, explored the different options for predicting life expectancy, as planning for this has a major effect on pension schemes. 

There are four main possible trends when it comes to predicting life expectancy: 

1. Trend accelerates: medical science discovers major cures, for example a cure for cancer. 
2. Current levels: current pace of medical advances is maintained. 
3. Falls away to zero: for example, it is found that cancer just can’t be cured. 
4. Trends reverse to negative: new epidemics occur, maybe the bird flu pandemic becomes much more serious, etc. 

To factor life expectancy into pension risk management, Bird explained that there are two main types of longevity swaps corporates can use: 

1. Scheme-specific 

Scheme-specific longevity swaps cover named lives within the scheme. They protect the scheme against idiosyncratic, basis, and trend risks. Generally they are easy to understand, value and monitor. However, they are only really available for pensioner members, and have a minimum transaction size of around £200m. 

2. Index-based 

Index-based longevity swaps are a derivative whose value is derived from observed mortality experience for a given population. This type of scheme still exposed to idiosyncratic and basis risk, but it is potentially cheaper than the scheme specific model. It is possible to cover younger members with an index-based longevity swap, but this is difficult to do. Index-based swaps also require periodic rebalancing, and there’s a question over whether they will be tradable in the future. 

Bird said that the index-based longevity swap can prove difficult in finding out the goodness of a hedge, but it is a little more liquid than the scheme specific option. 

In February 2010, Deutsche Bank took on the longevity risk of around £3bn pensions liabilities from BMW, a move that nearly doubled the size of the market for this activity. With the advantages this form of longevity risk management offers corporates, and the willingness of banks to enter into this market, it looks set to continue expanding throughout 2010. 

Funding Options - Navigating the New Financial Landscape 

Chief executive (CEO) of SVG Capital Lynn Fordham's presentation focused on her experience overseeing the restructuring of the company’s balance sheet. Before 2008, SVG had a long history of strong performance. It had an ongoing relationship with Permira (a general partner). SVG had commitments to successive Permira funds, most recently the Permira IV Fund. 

However, the credit crisis proved to have a huge impact on SVG. The downturn resulted in potential funding shortfall and increased potential funding requirements dramatically: 

• Recycling had historically allowed over-commitment. 
• Expectation that recycling would be dramatically reduced. 
• Distributions slowed down/stopped. 
• Calls were expected to be maintained. 

At the same time, funding available from financing arrangements decreased. SVG’s loan facility became constrained by loan-to-value (LTV) covenants. In addition, falling valuations increased LTVs and so decreased SVG’s ability to access the facility. 

Faced with this combination of negative factors, Fordham explained that SVG then took the following proactive steps to accommodate the effects of the crisis: 

1. SVG relaxed its debt covenants and reduced its debt facility/notes. 
2. The company raised equity via a rights issue and private placement. 
3. Uncalled commitments were reduced (to Permira IV fund). 

Following on from these immediate response measures, SVG continued striving to strengthen its balance sheet in 2009 through ongoing measures to deleverage - the company placed a restriction on new commitments and committed to a reduction and reshaping of its debt. In addition to these measures, SVG also saw its investment performance stabilise, with modest growth in the valuation of its investment portfolio, significant de-leveraging of its underlying portfolio and also general improvements in market comparables. 

When it came to singling out the main cause of the problems that SVG faced, Fordham agreed with Professor Congdon earlier in the day and and explained that the company faced a serious liquidity issue. The example Fordham said that, in November 2008, SVG’s credit had improved, but the company still found itself being charged between 50 to 100 basis points more than usual for its liquidity needs. When faced with the extra liquidity charges, Fordham described her attitude as being “grumpy, but living with it", This is a sentiment that many corporate treasurers can empathise with, as banks have become more selective as to whom they lend to. Fordham’s main tip to the treasurers in the audience is to try to get into the bond market if possible, describing it as being “on fire”. 

A New Outlook for Market Risk 

With foreign exchange (FX) swings and market volatility top of mind for many of the delegates at the conference, David Bloom, global head of FX Research at HSBC, gave a frank assessment of the current market environment and the risks that corporates face. 

With the UK general election coming up on 6 May, Bloom began by highlighting that the political business cycle is back with a vengeance. When an administration of any political persuasion is elected, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. The ruling party might keep these measures up for three years or more, but then, in the year or so running up to the next election, this same party will then adopt an expansive economic policy, in a naked attempt to appeal to voters. 

One worry some commentators have in the UK is that if the result of the election is a hung parliament, where no party wins an outright majority of parliamentary seats and a coalition government is formed, that implementation of a stricter economic policy may be slowed down by inter-party bickering. In turn, could this lead to a sterling crisis? The hung parliament dilemma isn’t a concern that Bloom shares: “If they can do it in Scotland, they can do it in England", was his pragmatic take on the situation. And addressing the potential sterling crisis, Bloom made it very clear that he sees this as a non-issue - and he made the point to the delegates that there’s already been a sterling crisis, there won’t be another one. 

One of the key themes of Bloom’s address is the relative swing in power between the western economies and those of the emerging markets. He outlined how the emerging markets are set for a decade-long expansion. Post-credit crisis, political and economic risks in the more developed nations have increased, whereas risk is now much lower in emerging markets than in previous times. If anything, Bloom suggested that the smart move to hedge against market risks today is to sell sterling, euro and US dollar against the currencies of the emerging markets. 

Overall, Bloom’s message to the mainly UK-based audience was not to panic in these fiscally charged times. On a cyclical basis, he argued that the UK’s prospects, in the short-term at least, looked positive. He added that he didn’t think the UK will find it’s AAA sovereign rating being downgraded in a similar way to Portugal and Spain, as any new government, coalition or otherwise, will implement the tax rises necessary to manage the national debt. 

The Great Re-regulation 

Turning to regulation, Jane Fuller, co-director, the Centre for the Study of Financial Innovation (CSFI), provided an overview of the key trends in financial regulation occurring around the world. Using the motto “we’re all bankers now,” Fuller went through the variety of regulations in the pipeline from various national and international bodies. The UK has variety of regulatory requirements from the Financial Services Authority (FSA), the Bank of England, and the Treasury. However, the structure of the regulators themselves is under intense scrutiny following the credit crisis, and could be set for wholesale change after the parliamentary elections. The European Union regulatory initiatives are two-fold: the capital requirements for financial institutions (something that is also a strong focus of the Basel group) and the Alternative Investment Fund Manager Directive (AIFMD) to reign in the perceived recklessness of certain hedge funds. Some in the UK see AIFMD as a threat, whereas certain other nations see it as a way of kerbing the perceived recklessness of funds based in the City of London. In the US, the focus is on the Volker rule, which is designed to prevent banks from proprietary trading that isn't requested by its clients, and from owning or investing in a hedge fund or private equity fund. 

Add to these national/regional regulations the international efforts the work being done by the Basel committee, the International Accounting Standards Board (IASB), and the International Organization of Securities Commissions (IOSCO), and it is clear that financial institutions have serious change coming their way. But despite all this, international co-ordination has so far been patchy. And this is not the only big test faced in the new world of regulation - Fuller explained that the challenges to the traditional banking model through up other questions: is it actually worth keeping a financial conglomerate together in this environment? Will investors accept a lower return on investment (ROI) in return for less volatility? And how will financial institutions manage to cut costs and raise fees to maintain a healthy balance sheet? It’s clear that, while regulators have made some considerable strides to address the perceived weaknesses pre-credit crisis, they are now in the precarious position of having to try to unify the various approaches to create workable global standards, while at the same time making sure not to over-regulate and risk strangling the nascent global economic recovery. 

Shaping the Future 

Richard Lambert, director general for the Confederation of British Industry (CBI), provided the delegates with the business perspective on the UK’s economic hopes in the times ahead. Perhaps unsurprisingly, the topic of the general election was high on the agenda here also. Lambert started by explaining that the huge range of possible outcomes in a hung parliament has got the business community feeling really uneasy. However, while the appetite for risk in global markets is really low (mostly thanks to the Greece crisis), Lambert said that the prospect of a hung parliament had not spooked investors. Not yet, at any rate. This is good news, and a sign perhaps that the business community is smart enough not to take on face value every scare story that it reads in the media. 

Lambert explained to the delegates that there are two main outcomes that the business community wants to see if the UK does indeed end up with a hung parliament - first, that there has to be a working arrangement from the parliament as soon as possible, and second, that there’s a timely outcome to all the political ‘horse trading’ deals that will be needed to set up the coalition government. Once that is set up, the first thing Lambert said the business community wants to see, from whoever is in charge, is the plan on how to restore the public finances in the UK. Whoever the next prime minister is, he’ll have to sort this out quickly if he wants to retain the job, cautioned Lambert. 

Lambert spoke passionately about the value that banks and the finance industry as a whole bring to the UK economy, arguing that there can’t be a healthy economy without healthy banks. He drew the delegates attention to the point that there’s no consensus on bank policy between the major three parties, with one exception - the fact that they are all very happy to use the banks as political footballs so close to an election, citing the Labour government’s bankers bonus tax as an example. 

Conclusion 

After nearly two years of reactionary debate around the credit crisis, treasurers and finance professionals are in a period of transition. The level of risk has been raised in many areas, as a result of the shifting global economy, political uncertainty, and the impending regulatory changes. These major risks are felt throughout the treasury function, affecting corporate cash management strategies, investment and funding plans, and corporate banking relationships. Managing risk is now a major part of the treasurer’s remit and, while the risks faced are great and numerous, strategic risk management from treasurers can negate these and actually set the organisation on course for a stable and successful growth.