Home and Away: Making Your Cash Work

Publication: gtnews.com

BNP Paribas' fourth annual Cash Management University looks at how corporates can optimise their working capital, post credit-crisis. 

The fourth annual BNP Paribas Cash Management University began today at the grand location of Le Pré Catelan in leafy Paris. Matching the ambition of the venue was the line-up of speakers for the morning of the event. Delivering the welcome address was Baudouin Prot, the chief executive officer (CEO) of BNP Paribas, and it was an impressive sign of how the bank view their cash management business that the CEO was in attendance. 

Prot emphasised the fact that he views cash management as not being an ancillary business, but rather that the management of flows on time is a high value, high stakes business. He said that the bank wants to continue developing and improving its cash management offerings, particularly throughout Europe and Asia. 

Looking at the recent financial crisis, Prot explained how BNP Paribas had ridden out the downturn in good shape, having been profitable in every year of the crisis and, since 4Q08, increased both the number of clients it works with and the share of the wallet of these clients. This is emphasised by the fact that, since the Fortis acquisition, BNP Paribas now has a global network with a local presence in a large array of countries. Given this premise, it was interesting to hear his thoughts on the proposed reform and regulation of the banking system, triggered by the collapse of other financial institutions. Prot explained to the delegates that he broadly supported the reforms, but that he believed the emphasis should be placed on better and stronger supervision, rather than the focus favoured by the Basel Committee of increasing capital ratios. The 7% capital ratio requirement (10% in the old terms) is five times higher than previously, something that Prot is wary of. He made the point that if capital ratios are set too high, the price of credit to corporate clients will inevitably be affected. 

Earlier in the morning, Prot hosted an executive breakfast, where he spoke a little more about responses to the credit crisis, as well as the ongoing problems in the eurozone. Regarding the euro, he brought in an outside perspective, citing a recent visit he had made to China. Prot told the assembled breakfast audience that China is not so worried about the future of the euro - they see the difficulties that EU members are facing, but also see that in Europe actions are being taken to tackle these issues. Living and working in Europe, it is perhaps easy for some to think that everything to do with the euro is doom and gloom, so it was interesting to hear this perspective. 

Coming back to the theme of regulation and during the executive breakfast, I did detect a slight tone of concern from Prot regarding how some are tackling what needs to be done. He cited examples of countries where banks had failed and that, despite this, the regulators that oversaw the banking collapse were still in the same role and were very vocal on what additional regulation is required for the banking industry. He couldn’t really see how these regulators could tell countries such as Canada and France (whose banking sectors emerged from the crisis in much better health) what they should be doing to regulate their banking industry better. I have to say, this is quite a persuasive argument. 

Making Cash Work 

Following the welcome address from Prot, two senior treasury professionals from large global corporates provided examples of their approaches to cash management, in a panel moderated by Jack Large, partner at J&W Associates. First up was Yves Gimbert, group treasurer of GDF Suez. GDF is a huge global utility - in 2009 the company had €79.9bn in revenues - and invested around €30bn net between 2008 and 2010. 

Gimbert began with a truth - that cash management is the least ‘sexy’ part of the treasury function. It’s administration and project management, and as such it can be hard to justify budgets. This can particularly be the case with long-term projects and implementations. But today treasury is operating in a fast-moving business world that demands returns, so he advised that projects which take years to accomplish need a lot of drive, consistently over their life cycle. 

GDF is a mix of large business to consumer (B2C) entities. Regarding project times, Gimbert explained that long-term projects in large companies could actually be simpler than working with smaller companies. One of the reasons for this is that global costs tend to rise when the size of the company decreases. 

In Gimbert’s treasury, there is a culture of internalising strategy, IT architecture and project management. He said that an upstream investment is necessary to save time, control projects and make sure that all parties involved in a project are coordinated. He was also able to justify having his team in-house, as the projects they are interested in are defined by having a long-term evolution. 

Thinking philosophically about treasury management, Gimbert explained that cash pooling and other cash management techniques are only tools, not objectives. They are not fashion items in this way - just because another global utility might be pooling in a certain way, this does not mean that GDF will suddenly start copying this method. Gimbert said that it is important not to forget the basic needs that your company has in this area, including: 

• Cash concentration and short-term funding - looking for improved liquidity and funding or investment costs. 
• Communication with banks - standardisation, automation and processes under scrutiny, particularly with regard to costs and security. 

Gimbert advised the assembled delegates to think of solutions first, and products only as a tool. As he said, “a product without an optimised process is not a solution.” 

International Cash Management Evolution 

Following Gimbert, Ernie Caballero, vice president (VP), Eurasia treasury and mergers and acquisitions (M&A) for UPS, presented a case study of his work at the company, the decision to move to a centralised treasury in 2002, and how he and his team had gone about achieving this. Considering the confusing, unstructured picture that treasury had over the company’s cash in 2002, it is remarkable that UPS had US$45.3bn revenue in 2009, and US$3.7bn free cash flow that year. Due to its international shipping network, the company is also the world’s seventh largest airline, which underlines its global scale. 

It takes a good level of cash management to keep this sort of operation in check. Caballero explained how cash is a corporate asset at UPS and that treasury’s job is to protect this asset and enhance shareholder value. He described how there is a centralised approach but decentralised execution for the company’s treasury operations, with strategic direction coming from corporate treasury, with tactical execution coming via one of the company’s three regional treasury centres (RTCs). Below the RTCs sit the operating business units, managing day-to-day issues. 

For its cash management strategy, Caballero described how UPS has what he called ‘four pillars of operational success’. These are: 

1. Visibility and transparency. 
2. Sound control structure. 
3. Centralised liquidity management. 
4. Information technology. 

Picking up on a theme from Gimbert, Caballero explained how it is impossible to do the ‘sexy’ stuff in treasury without these four bases covered, likening it to what would happen if you tried to put the chassis of a Formula 1 car onto the body of a Renault Clio - you’re not going to win any races. 

UPS began developing its global treasury intranet portal in 2002, and today is rightly proud of its global treasury management system (TMS). Developed initially by Caballero and an intern, MT940 SWIFT messages are loaded onto the platform every day that provides treasury with cash balance visibility. Every business unit that has access to the company’s global notional cash pool report their daily cash needs in this way, and are then serviced by the TMS. 

Turning to liquidity, and Caballero explained how the UPS international liquidity is self-contained. The objective is to maximise returning funds to the US while maintaining working capital requirements. So he is able to use money from the global cash pool, when not investing, to buy things - giving his treasury the ability to grow organically. 

Looking to the future, Caballero outlined the main points that his team is focussed on: 

• Extending the use of technology to drive processing efficiencies. 
• Simplifying account structures as payment systems become more standardised. 
• Consolidating banking relationships into regional banks. 
• Leveraging the UPS network and banking relationships to drive global trade finance solutions for UPS customers. 

These are an aggressive set of goals, but as Caballero has proved over the past eight years, his team are capable of achieving success on a large scale. 

Conclusion 

Overall the first morning of the 4th annual BNP Paribas Cash Management University has given the delegates plenty to think about. The two case studies provided examples of what treasury can achieve within the organisational structure, becoming a driver of business change and best practice, at a time of economic uncertainty, which Baudouin Prot gave a fresh perspective to in his addresses. Still to come today are panel discussions around key issues such as best practice while operating in a low interest rate environment, optimising liquidity through cash flow forecasting, a look ahead at the next 12 months for SEPA, and to manage operational and compliance risks. The range of topics here prove that these are busy times for treasury departments around the world, but that there are also a number of opportunities for treasurers to make their mark.

2010 AFP Annual Conference: Blog

Publication: gtnews.com

Post 1: Multichannel Bank Account Management (9 November 2010)
Electronic bank account management (eBAM) was in the spotlight at a session during the first day of the AFP Annual Conference 2010, with a panel discussion providing corporate, bank, and standards association perspectives.

One of the most compelling sessions on the first day of the AFP Annual Conference 2010 in San Antonio looked at the topic of electronic bank account management (eBAM). A buzzword of the past 18 months, eBAM can be a confusing topic due to the large number of players in the market and the fact that the concept itself is evolving. This session provided a corporate perspective from Barbara Quiroga, director, cash operations, lead, Delta Airlines; a bank view courtesy of Hilary Ward, certified cash manager (CCM) global product manager, global transaction services, Citi; and the thoughts of an international standards organisation thanks to Stacy Rosenthal, head of corporate and payments strategy, SWIFT. 

The session set out to demonstrate how the use of eBAM can help corporates be more efficient in their global banking relationships, particularly in areas where paper and manually intensive processes exist. 

Corporate Approach 

Quiroga began the session by illustrating the challenge that Delta faces in managing over 100 banks, operating in 80 countries and dealing with around 20 legal entities. Managing this number of relationships can be time consuming and challenging, and so the prospect of simplifying processes through eBAM was appealing to the Delta, particularly as their treasury structure is heavily centralised. To start the process, Quiroga explained the eight-point checklist that Delta drew up, listing what the company wanted out of any eBAM process that it entered into. These were: 

1. To eliminate paper. 
2. Control bank accounts in a centralised way. 
3. Track the progress of bank account requests internally and across the company’s banks. 
4. Search for and request changes to a single signatory across all applicable bank accounts. 
5. Use search capabilities to generate reports. 
6. Update the corporate address, contact data, legal structure and any other data and/or information associated with a bank account. 
7. Create a virtual signature card for each signatory that is legally binding and regulatory compliant. 
8. Provide authoritative reporting for corporate compliance needs. 

Quiroga reported that Delta had started implementing their eBAM programme in February of this year, and that it is ahead of schedule. The Delta case study is a great example of how corporates should approach eBAM - by having a clear idea of what they want to achieve with the implementation of eBAM and using these points as a way of measuring progress and the success of an implementation. However, it is worth noting that an eBAM project will only truly be successful - and indeed worthwhile - if the corporate implementing it already has a firm grip on their existing bank account management programme. This was a point emphasised by Citi’s Ward in her presentation. 

Bank Perspective 

Ward described how traditional bank account management was limited by issues such as: 

• A reliance on paper. 
• Manual processes. 
• Long cycle times. 
• Unreconciled records. 
• Embedded risk, such as numerous hand-offs and resolutions subject to interpretation. 
• Country- and bank-specific processes. 

The positive news surrounding eBAM is that the electronic processes involved have the potential to yield a number of benefits to bank account management, including visibility and control, security - with identity automatically built in to processes - and efficiency. However, Ward continued, “if you don’t know where the ‘BAM’ is, how are you going to get to the ‘e’?” In other words, eBAM isn’t going to fix a mismanaged bank account management programme. 

Standards are Needed 

SWIFT’s Rosenthal also agreed with the point that corporates need a solid foundation from their existing bank account management structure before embarking on an eBAM project. But looking at wider trends in eBAM, she argued that it is necessary for all stakeholders in the eBAM project to collaborate and define ‘common’ market practices. Rosenthal pointed out that standards in this area are evolving and will continue to evolve based on market adoption and feedback. 

The need for common standards is seen in the amount of banks and vendors offering solutions that are being marketed as eBAM. This was picked up by a delegate attending the session, who asked the panel who the ‘real’ vendors for eBAM are. 

In response, Delta’s Quiroga suggested that it depends on the process that the individual company operates internally, and that those tasked with selecting eBAM partners should find the best fit for their company. She also pointed out that there are lots of things that corporates can be doing while waiting for their bank to offer the desired level of eBAM support - the primary of which would be focusing on their current bank account management practice. 

Answering the same question, Rosenthal advised the delegates present to speak with the banks and vendors that they currently work with today, in order to help develop and shape the eBAM offerings of the future. There are around 12-15 vendors in the eBAM landscape at various stages of development, she advised. Looking to the future, it will be interesting to see how this market plays out, in terms of competitors falling away or partnering up.

Post 2: Closing the Gap Between Bank Cash Management Offerings and Corporate Needs (10 November 2010)
A session on the second day of the AFP Annual Conference 2010 examined how to close the gap between corporate expectations and bank solutions in the area of cash management. 

A theme of the AFP Annual Conference 2010 that came up in a session yesterday was the idea that corporates and banks need to work much closer together when developing appropriate treasury offerings and tools. This theme was reiterated in a session featuring representatives from Citi and AT&T, as well as Aite Group who announced findings from a recent corporate survey. 

According to the Aite Group survey, over 50% of the large corporates they polled had business with more than 20 banks. So it would be fair to say that corporate banking relationships are complex, overlapping and also fluid. Within these myriad relations, corporates are hungry for information on issues such as cash and liquidity visibility, risk factors and working capital automation. For the latter topic, many treasurers I’ve spoken to at the conference are particularly keen on learning how to move to straight-through processing (STP) and to eliminate both paper and silos from their organisational processes. 

Returning to the Aite Group research, but this time on the financial institution side, the survey found that one-third of banks described the credit crisis as being a ‘near disaster’ for them. However, as Christine Barry, research director at Aite Group, explained, those banks that had survived the credit crisis in better shape are now finding opportunities in the market through a variety of value-added tools they can offer their corporate clients. These include areas such as fraud prevention tools, more advanced liquidity and cash management tools, account receivables and payables management - an area where corporates are keen for more automation. All of these areas are being driven by new technology, and Barry made the point that technology is critical to future bank success. Technology helps to measure risk, promote accessible data and allow financial institutions to provide strong product offerings. 

Another interesting area of the research looked at the customer service experience corporates had when dealing with their banks. Asked whether they had ever switched banks because of poor customer service, 76% of corporates said they would, which backs up the idea of corporate banking relationships being fluid, as mentioned earlier. Numbers like these mean that banks are placing an ever-increasing emphasis on the client experience, and new technology is allowing banks to respond in, for example, some of the following ways: 

• Customer-driven dashboards. 
• Multibank reporting. 
• Strategic tools for better liquidity management. 
• More granular entitlements. 
• Real-time information. 

And corporates are ready and willing to invest in these new products if they are a good fit for their company. Sherri Bazan, corporate manager, domestic cash management, AT&T, explained that they have been developing a number of different treasury initiatives in the quest for greater automation and efficiencies. Some of the AT&T projects include: 

• Simple IBAN redirection solution. 
• Move from cheque to electronic payments. 
• Counterparty risk project. 
• Future improvements - electronic bank account management (eBAM) and automated clearing house (ACH). 

The overall feeling from this panel, and from the mood of the conference overall, is that corporates are keen to embrace technologies and systems that create financial and time-management efficiencies, but they have to be solutions that are created with the corporate in mind. Corporates are looking for end-to-end visibility and reachability in their treasury management processes, and solutions providers that understand how they can fit into this world will surely be successful in the years to come. However, that understanding can only come through detailed dialogue with their corporate clients.

Sibos 2010: Banking Blog

Publication: gtnews.com

Post 1: Introducing the Payments Maturity Model (25 October 2010)
The first day of Sibos saw the launch of a new tool designed to help financial institutions on the path to an agile payments environment. 

Sibos 2010 has opened its doors in Amsterdam, attracting around 8,300 exhibitors and attendees, according to the organisers. Bankers, corporates and technology vendors attending the event have hundreds of exhibition stands to browse and a wide variety of conference sessions to attend. 

One session of the opening morning revolved around the concept of a ‘Payments Maturity Model’ (PMM). Louis Blatt, chief product officer (CPO) at ACI Worldwide, was joined by Michael Anderson, senior vice president of Union Bank, Nancy Atkinson, senior analyst at Aite Group, and Leo Lipis, founder and chief executive officer (CEO) of Lipis & Lipis, to discuss this work-in-progress model that takes its lead from the Capability Maturity Model/Infrastructure (CMM/CMMI). 

A live poll asked delegates how their payment structures are currently organised. When asked “Which of the following most closely describes how payments are organised at your bank/clients?”, a majority (65%) said that their payments are managed and processed by individual payment type (such as ACH, ATM, cards, wire transfer, etc) and line of business. The next most popular answers, although far behind the lead response, was shared between “payments are managed and processed by consolidated payment systems (such as one ACH system, one card system, or one wire transfer system, etc)” and “payments are managed and processed through consolidation of all payments types, but segregated by retail banking or commercial banking”. Despite being the next most popular responses, both only polled 14% of the session attendees. The least popular response (7%) was “payments are managed and processed as a single line of business from the bank”. A following poll asked which best described the audience's banks'/clients' current situation with regards to their payments transformation. By far the most popular answers were “in the process of implementing changes now” and “planning for payments consolidation within the next two years, and confident about how to make that happen” - each statement chosen by 36% of the delegates in the room. In third place was “planning for payments consolidation within the next two years, and have an established plan for the evolution”, with 21% of the poll. Trailing far behind were the responses “happy with our existing payments structure and systems as they are” and “have given no consideration to payments transformation”. 

In this environment, there's clearly a role for the PMM to play. In its structure, the PMM identifies five stages: 

1. Reliable. 
2. Scalable. 
3. Efficient. 
4. Responsive.
5. Agile. 

The PMM assesses a bank's current position and determines next steps in that bank's evolution towards an agile payments environment. The model is designed to provide direction on the order and types of activities required to progress to the next stage of this payments evolution, as well as helping provide the business case to invest in this move. Both Aite Group and ACI stressed that this model is still in the development stage, so interested parties are encouraged to contact either company to provide feedback on this project.

Post 2: Practical Finance in an Open Account World (26 October 2010)
A session focusing on financial supply chain issues asked the big question: to what extent is collaboration between banks necessary in order to sustain international trade? 

The second day of Sibos saw some morning sessions starting later than advertised due to the sheer amount of people trying to get through security and into the RAI conference centre in Amsterdam. One of this morning’s sessions was a panel discussion looking at financial supply chain issues in the modern world, particularly the balance being struck between open account and letters of credit (LC). 

The global nature of this debate attracted a diverse panel of speakers. The moderator, Alexander Malaket, president of Opus Advisory Services International, encouraged debate and industry insight from Daisuke Kamai, manager from The Bank of Tokyo-Mitsubishi UFJ; Karin Mathebula, director, head of product, transactional products and services at Standard Bank South Africa; Michael McDonough, managing director and head of product management for trade services with BNY Mellon; and Lakshmanan Sankaran, head of trade sales and services at the Commercial Bank of Dubai. 

The four main themes for the debate were: 

1. Risk. 
2. Client orientation/demands. 
3. Collaboration. 
4. Innovation. 

Kicking off discussion on the risk strand, McDonough made the point that there is a very clear need for the development of common standards in open account - something that the more mature LC markets have had for some time. The risks that financial institutions face in this area vary between the obvious and the rather less obvious. McDonough pointed out that credit risk is the most obvious , and while this isn’t a difficult risk to manage, it is managed differently in open account. He added that financial institutions need to ensure that they fully comprehend and adhere to this different management style. Some of the less obvious risks that McDonough listed included cost risk, declining revenues, and the increasing role of non-banks taking clients from banks. This as a big issue in the payments world, so it was very interesting to hear McDonough argue that it is also happening in supply chain finance. 

McDonough also pointed to the systemic/operational/technology risk that banks are now facing in this area, specifically the nervous disposition of those banks who fear they may misjudge the technology that their clients require, and end up in the equivalent position of offering their clients ‘Betamax’ technology, when what they really want is ‘VHS’. Combine this uncertainty with the trouble that some banks are having in getting sufficient capital from their boards for the required investment in technology, and it is clear that technology is a pain point for some financial institutions in this regard. 

Turning to client orientation, Kamai noted that banks, particularly those operating in Asia, need to be preparing their open account solutions for the market, as there will be a surge in demand for these products as Asian corporates grow in size. While there was a growth in the use of LCs in Asia as a result of the financial crisis, the panel agreed that this was a temporary aberration, and that open account will grow as Kamai predicted. 

In terms of the offerings that banks provide in this area, Malaket drew attention to the fact that the threat of disintermediation is actually forcing banks to be very innovative with their products. Mathebula added that it was important to make the distinction between volume and value in terms of client orientation, and the small and medium-sized enterprises (SMEs) are increasingly investigating supply chain finance solutions and open account. 

Collaboration was the third major point under the microscope in this debate, with Sankaran noting that there is a great deal more willingness for global and regional banks to collaborate on their trade finance initiatives. In its best form, this sees the local knowledge and expertise of the regional financial institution being leveraged across the scale of the global banking partner. Looking at Africa specifically, Mathebula added that it is very important to demystify the business transaction world in Africa, country by country, as the continent is not just one homogenous banking market. 

Turning to innovation, Mathebula told the delegates about the work Standard Bank has been doing with SWIFT in order to get the trade services utility (TSU) up and running. She explained how there is a desire to offer off-balance sheet solutions and that the banks and industry innovators need to proliferate the level of understanding around the TSU and how to get the most out of it. The challenge ahead, according to Mathebula , is how to integrate the TSU with the supply chain. Despite this, the general mood among the panel was one of enthusiasm for this innovation. The same may be true for corporates, and it was pointed out that SMEs are currently demonstrating more interest in the TSU than their large counterparts. 

Overall the mood of the session was positive towards the open account world, in terms of the current state of the market and the huge potential for growth. There are challenges - for example the need for universal standards and a greater understanding of the risks faced and how to manage them - but the benefits of open account solutions and the innovation in the space provide plenty of reason for optimism.

Post 3: Recovery: Transaction Banking One Year On (27 October 2010)
The third 'Big Issue' debate at Sibos looked at how the global transaction banks have fared since last year in Hong Kong. 

The third ‘Big Issue’ debate at Sibos 2010 shone a spotlight on the world of global transaction banking, its place within the wider organisational structure of financial institutions, how it has evolved since the previous Sibos in Hong Kong last year, and what the future may hold for the sector. The moderator, Jeremy Wilson, chairman Global Councils at BAFT-IFSA (formed by the merger of the Bankers’ Association for Finance and Trade (BAFT) and the International Financial Services Association (IFSA)) and vice chairman at Barclays Bank, posed questions to a panel of transaction banking specialists: 

• Karen Fawcett, senior managing director and group head of transaction banking, Standard Chartered Bank. 
• Marco Bolgiani, head of global transaction banking division, UniCredit Group. 
• Karen Peetz, chief executive officer (CEO), financial markets and treasury services, BNY Mellon. 
• Peter Connolly, executive vice president (EVP) and group head of transaction banking group, Wells Fargo. 

The Role of Transaction Banks 

The discussion kicked off with a look at the importance of transaction banking, with Wilson probing where exactly transaction banking now sits within the industry and within a bank itself. Fawcett led the bullish tone of the panel on this talking point, claiming that transaction services are front and centre for financial institutions today. She cited the turnaround in attitude from two years ago, where transaction services were blamed for many of the problems in the financial services sector, and added that there is now a much greater recognition that transaction banking units facilitate trade flows, the lifeblood of the economy. Unsurprisingly, the rest of the panel were similarly optimistic about the current, and indeed future, position of transaction banking. For example, Bolgiani explained how UniCredit has recently reviewed its strategy for the next five years, and that transaction banking is one of the organisation's core strategic focus points. 

As Wilson drew in a more specific comparison between investment banks and transaction banks, the panel again demonstrated their confidence in the current state of transaction banking, while also pointing out the interrelated nature of the different types of bank structures. Connolly commented that focus has shifted from areas such as debt and equity markets, and that a key driver here has been the emerging economies, which have given a lift to transaction banking through their increase in demand for these services. Fawcett noted that a balance is necessary when making this comparison, noting that investment banks need the liquidity that transaction banking services provide. 

The western world is in a prolonged period of low interest rates, and the moderator was keen to understand what effect this has been having on the panel members' transaction banking organisations. Peetz kicked off this part of the discussion by describing how she sees the effect of low interest rates as being different depending on which product you are talking about and that in fact the effect is distributed by different product. Connolly expanded on this point by explaining how product bundling was enabling banks to manage this situation, by mixing those with low interest with others claiming higher fees to create a value added package. When it came to collecting higher fees, Fawcett suggested that some banks had been lazy with their approach to charging fees in Asia and the Middle East, and that this was certainly an area where banks could find more value. 

Pressures on Banks 

Keeping with the regional flavour, discussion turned to the top pressures on business that both transaction banks and their clients face. A key point picked out by Peetz here was the pressure on revenue growth, noting that, as yet, growth in developing markets are not enough to offset losses felt in the contracting markets of the west. Risk management also came up as a key pressure, specifically around operational and counterparty risk. Connolly argued that banks could have been more proactive with intraday liquidity problems, and also tougher on their client counterparties. Certainly intraday liquidity visibility and cost has been an important topic at Sibos 2010, and SWIFT is vocal about the work it is putting into providing solutions to give banks a much better visibility of their intraday liquidity position. 

Back to the pressures that banks are facing, and the issue of regulation loomed large. Wilson asked the panel whether, in their opinion, the capital requirements that are being discussed - particularly with regard to Basel III - are being set correctly. Peetz suggested that senior transaction bankers should be trying to co-operate and talk with the regulators to explain the unintended consequences of such requirements. She argued that during the formulation of the US Dodd-Frank Act, bankers had gone underground and their voices weren't heard. Fawcett agreed with this point, saying that as the regulations stand, 2% could be wiped off global gross domestic product (GDP), and that the problem actually goes back at least 30 years, not just three. 

Peetz argued that transaction bankers need to present fact-based arguments to regulators - for example around areas such as trade and liquidity - but in a way that doesn't sound purely interest led. Fawcett then highlighted how tricky this path can be to go down for the transaction banks, pointing out that heads of global transaction banks do meet with regulators as a group, but that they then also need to deal with a disparate group of national regulators with their own set of individual interests. 

The New Economic Axis 

Wilson then probed the panel on the issues they face with the shifting nature of the global economy. As far as Connolly is concerned, this is an opportunity for the transaction banks. He pointed out that 30% of Wells Fargo's payments go through China, so the current issue is to work out what to do with the renminbi (RMB). He reiterated the point that the volumes in this part of the world are still not overtaking the existing business, but that they will become advanced over time. For Peetz, the key issue is that her organisation is in dialogue in countries where they predict the volumes will be. 

At this point Wilson wondered if the big banks in Asia are going to start eating into this potential growth area for western banks, and Fawcett also drew attention to this point, stating how, with the birth of effectively a new global reserve currency happening as we speak, (with RMB) there are a number of extraordinarily powerful Asian banks that are looking to come west. Looking around the Sibos 2010 exhibition halls, this has felt very tangible this week. As well as the Asian banks, Connolly also identified non-bank payment providers, companies such as PayPal and Google, as future competition for the global transaction banks. Finally, Bolgiani made the point that growth in eastern Europe is also underestimated currently. 

Certainly the past couple of years have been tumultuous for the global transaction banks and, as we've seen, the challenges are only going to get stronger. However, there is a good news story in the way that transaction banks have turned their position around from that they faced two years ago, and this fortitude and dynamism should be a powerful tool for them going forward. Connolly made the point, on the topic of sanctions and anti-money laundering (AML), that all the banks represented on the panel have great individual systems internally but that they don't share. Taking this point wider, a greater collaboration between the major transaction banks would create an even more powerful lobby when speaking with regulators and politicians alike.

Post 4: Banking Blog Review of Sibos 2010 (29 October 2010)

As Sibos 2010 comes to a close, the Banking Blog reminisces about the conference highs from Amsterdam. 

As Sibos 2010 came to a close in Amsterdam, it would be fair to say that the general mood in the RAI conference centre was one of optimism, tempered by the knowledge that there is a lot of hard work ahead. The three 'big issues' of the conference - regulation, rebuilding trust and recovery - provide a useful stake in the ground to see how far the banking industry has come since the dark days of the credit crisis and the collapse of Lehman Brothers. But equally, in each of these cases, the journey is far from complete. 

Looking at the regulatory side of the debate, the tone was set in the opening plenary session on Monday, when Charles Goodhart from the London School of Economics (LSE) questioned why banks were being regulated at all. While this point may have been slightly tongue-in-cheek, he did draw attention to the fact that many in the banking industry believe that the Basel Committee on Banking Supervision should be more concerned about the systemic failures which led to the crisis, rather than on individual institutions. 

Obviously, the regulators have the final intention of rebuilding trust in the banking industry through the measures they are developing, but there was definitely a sense this week that the volume and complexity of what may be in the pipeline will not necessarily lead to this end result, and that perhaps an opportunity is already being missed. Several bankers that I spoke to seemed concerned that the current regulatory approach tars the whole industry with the same brush, whereas an approach that treated financial institutions as individuals, with different risk parameters and model sophistication, for example, would be received in a much better way. 

One feeling at Sibos 2010 was that the approach from the regulators changes almost as regularly as the season - for example last year the focus was all about liquidity, whereas today it is capital that is in the spotlight. In this situation, the best thing that banks can do is make sure that they are focussed on the essentials of the business - such as getting their data in order. Quality of data was mentioned as essential in many of the conversations I had around the exhibition halls. As one industry expert put it: "you've got to compare eggs with eggs." The statistical models that the banking sector have relied on are so intrinsic to the role of the institutions - be it for calculating risk or viewing exposures - that it seems counter intuitive to throw these out purely on the basis that the credit crisis happened 'on their watch'. What a lot of banks are now looking to do is to build on the models they have by revising and stress testing a wide variety of scenarios. By using some of the latest technological advances - for example grid computing - to assist here, banks will be able to regularly refresh their parameters and understand which measures are applicable at any given time. 

The development of technology also speaks to the 'rebuilding trust' theme. The coincidence of the rise of microblog website Twitter and similar social media platforms as the credit crisis was unfolding has created the tantalising possibility of banks being able to listen and respond to their customers in near real time. The challenge for banks is how they analyse, process and respond to what can be, at times, disparate opinions. As one delegate put it, marketing for banks is becoming inbound rather than the traditional outbound, and institutions need to change their approach to this and become a lot more flexible in order to take advantage of the opportunities of social media. 

Overall, I found that representatives from banks at Sibos 2010 are well aware of what is expected of them from regulators and politicians, but also of what they should be striving for as an industry. A number of panel discussions brought together some of the best leaders and thinkers in the banking industry today, and it has been encouraging to see them acknowledge the need for closer co-operation between financial institutions in order to push for change beneficial to the banking industry and its clients, rather than change for change's sake. Delegates from this year's Sibos head back home to their respective 155 countries with a positive message and direction, as well as a lot of work to do before Sibos 2011 kicks off in Toronto, Canada.

Risk, Regulation and the Rise of Asia: Corporate and Bank Perspectives

Publication: gtnews.com

This year's EuroFinance Cash and Treasury Management conference was held in Geneva, Switzerland. The three key topics under discussion were risk, new regulation and growth in Asia. This commentary looks at the challenges and opportunities in the year ahead. 

This year the EuroFinance International Cash and Treasury Management conference was held in Geneva between 6-8 October. The economic situation is Switzerland is comparatively healthy when viewed alongside some other European countries, but what of the global economic outlook for the next year? This was the theme of the opening session of the conference, with Daniel Franklin, executive editor at The Economist, interviewed by Anne Boden, head of Europe, Middle East and Africa (EMEA), Global Transaction Services, RBS, on ‘The World in 2011’. 

Boden described how she had found paranoia about emerging markets on recent visits to the US. Franklin pointed to the fact that this is a permanent shift, which was accelerated by the credit crisis. He encouraged delegates to look beyond the BRIC countries of Brazil, Russia, India and China, and also be more discerning with opinions towards emerging market countries. I think this comes from a certain desire in the west to rush to acronyms and paint largely diverse emerging economies as the same. 

Turning to risks for the year ahead, and Franklin’s main concern is protectionism. He used to the US as an example for his fear - unemployment is stubbornly high and some in congress are calling for harsh trade measures in order to protect jobs in the US. The main focus of this ire is China, with the perception that it is manipulating the price of the renminbi in order to have a trade advantage. Franklin stated that China doesn’t respond well to threats, but at the same time would not want a trade war with the US. 

Looking at Europe, and Franklin dismissed the chances of the euro breaking up as no more than a 10% likelihood - believing the political will to hold the euro together will overcome any current disgruntlement in various of the member states. However, the mechanisms within the eurozone for coping with economic crisis need to be much more robust, with the various sovereign debt woes and the value of the euro standing testament to the fact that safeguards were not strong enough in the past. 

Many of the economic themes that Franklin discussed have been subject to direct political influence during and in the wake of the credit crisis. Franklin named political risk as the biggest risk faced over the next 12 months, stating that he believes this gives a 30% chance of the much-touted ‘double-dip’ recession. For example, some tax cuts introduced by former-US president George W Bush are coming up to their expiry date. Looking at the political polarisation in the US, and the possibility of next month’s midterm elections delivering a split Congress, these cuts may be unable to be reinstated, which in turn could strike a blow against consumer spending levels. 

Turning to business, Franklin named three key trends: 

1. Competition from the emerging markets is increasing - even in the corporate world. 
2. The global nature of business is only intensifying, be it in the talent pool, or where business operations are based. 
3. There’s a focus on having both of the key factors that create enduring success for business - scale and agility combined. Many companies are good at achieving one or other of these, but the two together offer a much greater challenge. 

Asian perspectives 

Picking up on a theme common in this first session, a panel discussion on the second day added some extra detail to the Asian analysis. Damian Glendinning from Lenovo, based in Singapore, made the point that many of the delegates in the conference hall might 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. 

David Blair from Huawei, based in China, 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 somewhat 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. And, as Franklin mentioned in the opening session, this competitive nature is something that those in the west are just going to have to get used to. 

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Regulatory Thoughts 

Paul Simpson, Citi - The regulatory framework is unpredictable at the very least - Dodd-Frank, anti-money laundering (AML), emerging payments. A lack of liquidity is enhancing the focus on supply chain finance. Also, global cash flows are changing, which can be attributed to the growth of the BICs. 

Marilyn Spearing, Deutsche Bank - We’re wading through regulations, like it’s a new religion. And this is not just in the US with Dodd-Frank, but in Europe with things such as SEPA [single euro payments area] too. 

Tony Richter, HSBC - There’s a need for European 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. 

Anne Boden, RBS - The impact of regulations on the banks and the knock-on effect on their corporate clients is key. With Basel III, are we regulating the crisis we just had instead of focussing on current issues? Also, many regulations don’t look at the interlinked nature of banks. 

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Risk, Technology and the Role of Banks 

gtnews has published a number of articles about the growth of risks that treasurers are tasked with managing since the credit crisis, particularly areas such as counterparty risk and sovereign risk. It is here that treasury technology can be a key facilitator for treasurers, and this was a topic that I discussed with Vanessa Manning, corporate director, market manager, EMEA, international cash management at RBS. 

Corporates are seeking end-to-end visibility over their value chain, in a way that is synchronised and visible, rather than in the silos that bank offerings can tend to come in. Manning made the point that the technology available today allows this to be possible. And while budgets are tight, the opportunity to outsource these capabilities exist. "Software-as-a-service [SaaS] has never been cheaper, and it is globally available," said Manning. With the options available multiplying in number and versatility, corporates are looking to multibank channels, as opposed to proprietary banking technology. 

Turning to 2011, Manning described how there will be a continued focus on both standardisation and modularisation, with agility and mobility of systems being key to corporates during this time. Corporates want to track areas such as processing flows and connectivity, and are comparing and contrasting the performances of their different relationship banks thanks to the multi-bank portals that exist today. The user-friendliness of the new technologies will also play a large part in corporate adoption in the coming year, according to Manning. "This has to cover the complete online account," she explained, and pointed to the trial of the SWIFT 3SKey (PDI) in France as an example of the interest in developing user-friendly interfaces. 

User friendliness is a key reason that electronic bank account management (eBAM) is such a hot topic for both corporates and banks right now. Speaking to Paul Wheeler, managing director of Wall Street Systems, he explained how for corporates, eBAM will become a 'must have' utility over the next couple of years and it will be seen as part of the standard treasury kit. On the bank side, the advantage of eBAM is the efficiency it brings - compare having to change the signatory on 300 accounts of one of their corporate customers manually via paper authentification, to the ability to do this online. With pressure coming from both sides of the corporate banking relationship to get this technology evolving, progress will be swift. 

The next development for eBAM revolves around the developing SWIFT standards in this area. Wheeler explained how Wall Street Systems is playing a part in the next trial, which is aimed at getting multiple corporates sending information into a bank, and then the bank responding back to the corporates. In terms of the developing market in eBAM vendors, Wheeler described how this is adding momentum in the move to establishing eBAM. At the same time, he was bullish about his own company's chances of maintaining a strong presence in the market: "At the moment there's lots of noise, but when corporates and banks become more educated about the types of offerings that are describing themselves as 'eBAM', some vendors will fall away." 

A main challenge that Wheeler sees facing eBAM is the difficulty in making it multibank. This is something that Wall Street Systems are counselling the banks about, but the move towards multibank could slow the adoption process. Wheeler commented that SWIFT needs to be strong on this issue to ensure the process doesn't become bogged down.

The Credit Crisis Legacy: Treasury Risk Mitigation and Management

Publication: Global Treasury Briefing, Volume 3 Issue 3

The variety of risks that the treasury function is responsible for increased markedly as a result of the credit crisis. Ben Poole examines the risk topics that were top of the agenda for treasurers attending Global Corporate Treasurers Forum Europe 2010. 

The role of a treasurer within an organisation can vary considerably from company to company due to a variety of factors - size and scope of the company, industry type, location of the business and subsidiaries, etc. Over time, the role of the treasurer has also expanded or contracted in line with economic forces - from a basic receivables and payables focus to a ‘mission-creep’ situation, where functions that traditionally resided in other business units, such as risk, IT and operations, began finding themselves on the treasury ‘to do’ list. 

Then came the credit crisis. When the money markets started to see funds ‘break the buck’ and acronyms such as CDO, CDS and ABS were attracting the attention of corporate boards, treasurers had to focus almost exclusively on shoring up or renegotiating lines of credit and reevaluating investment strategies across the board. The tumultuous market conditions put the treasury department firmly in the corporate spotlight - communication with the board was becoming commonplace and treasurers had an opportunity to demonstrate the added value that their function can bring to the organisation. But with this rise in profile came associated risks - senior management were now expecting much more from treasurers, but in many cases were not prepared to back this expectation with additional resources and staff, creating enterprise risk. And in daily treasury activities, risks were enhanced or even created from scratch - which corporates could have envisaged performing counterparty risk analysis on their banks in case they fell over? Added to the scenario were extreme movements in foreign exchange markets that created severe turbulence for multinationals of all shapes and sizes, while pension funds formed a risk headache in some countries rather than others. 

All in all, the portfolio of risk that corporate treasurers are facing now that the credit crisis is receding is vast and complicated. As such, it is no surprise that risk was the conversation topic of choice for many of the treasurers who gathered at the gtnews Global Corporate Treasurers Forum Europe 2010 (GCTFE 2010), at London’s Grosvenor House hotel. This feature gathers the main risk management takeaways from the event. 

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

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 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 carries inherent risk. It is here that an enterprise risk management (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 looks 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 profiles and treasurers should only take risks that are acceptable to their shareholders - other risks should be managed away. Corporates must understand the 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. 

At the Global Corporate Treasurers Forum Europe 2010, John McAnulty, group treasurer at Richemont, explained that his company 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., McAnulty explained how the company uses a common risk language to ensure this is clear and transparent to all parties. 

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 different 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 

One of the areas of risk management that treasury is used to dealing with, but gained additional exposure as a result of the effect the credit crisis had on western markets, is the management of foreign exchange (FX) risk. 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. Richard Roering, from the consultancy Zanders, illustrated 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. It 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 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 Looming Large in Certain Countries 

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 ageing, meaning that the funding imbalance here will remain for a long time to come. At Global Corporate Treasurers Forum Europe, Chris Sheppard from professional services group Mercer 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. 

Conclusion 

The risk management portfolio that treasurers are responsible for today is considerably greater than it was a couple of years ago. It is too early to tell if this additional burden will subside as the credit crisis fades, but perhaps from the treasurer’s perspective it would be better if it didn’t. The current elevated role of the treasurer provides an opportunity for those in the role to add value to the business and demonstrate the skills that will take their personal careers one step closer to senior management. By taking control of the various risk management functions mentioned in this article, treasurers can demonstrate their overall corporate finance skill-set, and prove to senior management that the treasury function offers much more than merely a cash management functionality.