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Understand Banking Asset & Liability Management

| 23-8-2019 | treasuryXL | Financial Training Hub

The management of Assets & Liabilities, known as ALM, is key to potential success of banks. The ALM strategy is set by the Board of Directors that has to decide about different financial activities in connection with two risks: interest rate and liquidity risk. This interactive course introduces you to Asset & Liability Management and the world of finance. Several workshops are included. This training is available for English and Dutch groups.

Key Takeaways

This training will learn you:

1. Yield curve impact on Asset & Liability Management
2. Gaps as basis to determine ALM exposure
3. Duration to manage the ALM mismatch
4. The use of interest rate swaps to change equity at risk
5. Basel regulation impact on capital management
6. How the new liquidity ratio’s will affect ALM

Who can do this course

The course is suitable for people that (want to) work in the financial sector. It is not necessary for participants to have specialized finance experience or education. (Duration: 1 or 2 days depending on participants experience)

Program

This training is a mix of presentations, discussions and workshops.
Topic overview:

Introduction of assets & liabilities of financial institutions
Bank risks in general
Specific bank risks
− Interest rate margin and risk
− Liquidity risk: why?
Reading the yield curve
− Short and long term interest rates
− Forward rates
Gap analysis to measure ALM exposures
(Modified) Duration for interest risk management
− Money Duration
− Basis Point Value
− Equity at risk and supervisor minimum requirements
− Interest rate swaps and ALM
Basel Supervision on risk management
Capital requirements in general
Liquidity ratio’s workshop: NSFR and LCR

MORE INFO HERE

Can you still see your banker as a trusted advisor?

22-08-2019 | by Pieter de Kiewit | treasuryXL |

Is your banker a trusted advisor or just another sales representative?

The times that you, entrepreneur or CFO, could just accept the advice of your banker is over. Understand that your banker expects you to have more knowledge than before. Do know there are alternatives. And do not forget that your banker has a target (hard or soft), just like others selling products or services.

When I accompanied my father to meet his doctor, it was clear we are of different generations. He listened and accepted, I was looking for dialogue and had questions. The attitude my father showed towards his doctor, I often see with CFOs and owners of smaller businesses. Is this a problem? Where does it stem from? Should relations change?

Your relationship with your banker has changed

Decades ago there was a knowledge gap between what bankers and entrepreneurs knew about financial markets and products. The number of local banks was limited as were funding sources. The interest was higher than it is nowadays (not too hard with current rates). All this led to a power imbalance between banks and their clients. You had to listen to your banker and accept. In those days bankers showed a different attitude than they did later. I often hear remarks about the former ABN boss Jan Kalff, he apparently was trusted like a medical doctor. I am afraid the bankers’ oath does not make current bankers a similar Jan Kalff.

Over time bankers and their clients have, together, changed their relationship. Starting with the one between banks and large corporates with treasury teams. These increasingly bigger teams gained knowledge and opened relations with alternative banking partners. On top of this, banks started rewarding their employees increasingly in an Anglo-Saxon way with an aggressive connection between performance and bonus. Treating your banker like a doctor was not appropriate anymore. Between large corporates and banks a new equilibrium was reached.

Between smaller organisations and banks a lot went well, regretfully not everything. One of many examples is that in The Netherlands sales of derivatives was done wrong in two obvious ways. First, clients bought products without understanding what they bought (and did all bankers really understand?). Second, bankers did not sell these products because their clients needed them to increase their bonus. A lot has been written about this.

Regretfully, a lot of entrepreneurs and also their auditors think they have full understanding of banking products and costs. I have seen too many treasury experts prove them very wrong. This new equilibrium has not yet been set.

An important extra development that has an impact on this topic is that banking services substitutes are being offered. Facebook can facilitate your payments, you can buy currencies cheap from Privalgo and there is a wide variety of extra funding sources coming up. All these solutions do not (yet) have an established market presence.

New banking relationship management

This is not a call for bank bashing. We do not bash the car sales guy for trying to sell a car. I do want to invite you to consider threating your banker as you would like any other supplier. Always remember he has a sales target. Understand that bankers have to balance their oath with this target. On top of this they see many of their colleagues being let go. For them these are no easy times.

Find out if you have the expertise to have a balanced meeting with your banker. Can you oversee your risks, do you understand the products and do you really know what you pay your bank? I have had more than one meeting with a banker in which I learned that banks themselves often do not know what they make on their clients. The amount mentioned on your bank statement about their costs does not cover everything your bank earns on you. Do you know the spread they take on your FX deals, the margin on insurance products? They and you often do not know the product alternatives and their rates. You can get low threshold expertise or send your employees to get relevant education or have them visit events. The expertise is available.

Times are changing

Changing relationships with your bank are only a problem if you ignore the change. The banks did not ignore and have changed. In my opinion these changes are good. Bear in mind that corporate treasury is not rocket science. Spend the time on this topic it deserves. Times are changing, so keep an eye on what is happening. It will save you cost, create opportunities and help you avoid risk. Good luck and drop me an email if you have questions.

Pieter de Kiewit
Owner Treasurer Search

Transform Intercompany Trade with Multilateral Netting

| 19-8-2019 | treasuryXL | BELLIN

Legacy tools yield legacy results

Too many international companies are manually reconciling and netting intercompany invoices. These companies may lack a clear and structured workflow for this process, leading to a host of potential risks and issues along the way including:

High volume of intercompany transactions
Too many invoice and expense disputes
Shadow bookkeeping
Lost productivity
High bank fees and fx costs

According to a recent Deloitte poll of finance professionals, reconciliation is the biggest intercompany hurdle. With only 9.2% of finance professionals saying their organization has a holistic, efficient, and clear intercompany reconciliation process, there is a clear need for a solution.

When asked what poses the greatest challenge to the implementation of intercompany accounting:

21.4% of participants claim disparate software systems are their biggest challenge
16.8% claim intercompany settlement
16.7% said complex intercompany agreements
13.3% said transfer pricing compliance
9.4% said FX exposure

Introducing a multilateral netting solution

With a centralized multilateral netting solution, companies can boost profit and productivity by gaining global visibility and control, automating processes, settling disputes locally, and reconciling and netting transactions seamlessly.

Average BELLIN clients savings with our multilateral netting solution:

2 days of work per month
$250,000 to $1,000,000 on an annual basis from banking and FX fees

Average industry savings figures:

15% year over year growth
50% labor cost reduction
€13 saved per invoice through automation
1hr of labor saved per day

Would you like to learn more about BELLIN’s multilateral netting solution? Just reach out to BELLIN for a tm5 demo, or visit tm5 page.

Embracing technology to deliver value from treasury

| 16-08-2019 | TIS |

Join Giancarlo Laudini, SVP Global Sales & Marketing Operations, TIS and Ernie Humphrey, CEO, 360 Thought Leadership Consulting to discover what fuels career success in treasury in today’s world. We will discuss the evolving role of technology in treasury success, how to leverage technology it your advantage, and how to embrace business partnering to impact decisions across the enterprise.

Register here!

Date: 11th September 2019

Timing: 5 PM CET

Why Bouke decided to explore the World of Treasury

| 15-08-2019 | by treasuryXL | Kendra Keydeniers

Bouke Weijmans graduated as Register Treasurer (RT) in 2014. Bouke has a strong interest in process optimization and building treasury departments from the start. He currently works at Aalberts Industries as a Cash and Treasury Manager.

Aalberts Industries is a Dutch manufacturer that engineers mission-critical technologies for ground-breaking industries and everyday life.

We asked him 7 questions about the RT program:

What was your main reason to start a career in treasury?

Actually I rolled into the field of treasury when working at Flow Traders. During my study business administration at the VU I always believed I would develop my self in the field of process optimization. About 6 months after I joined Flow Traders the person in charge of treasury left the company and I was asked to pick up the role.
Why did you start with the RT program?

Eager to learn more about my new role in treasury I started looking for opportunities to develop myself. As a former VU student I found following classes of the RT program was the best way for me to do this.
What are key words that you would use to describe the program?

The program is small scaled and interactive, which allows active discussion between teachers and students touching issues treasurers run in during their day to day work.
Which topics covered were most interesting?

I was still a little green in the world of treasury when I started. Therefore, the topics about treasury, cash management and corporate finance where really useful.
What surprising elements did the program hold that you did not expect?

I liked the fact you also get schooled in the field of fiscal law. It gave me a better understanding how transfer pricing works and what implications this can have for a company.
Are you still in touch with your peers?

I’m not in active WhatsApp groups, however the world of treasury is quite small and you run into each other from time to time. It’s always nice to catch up at such occasions.
Did following the program influence your relation with your family, friends and/or colleagues?

Following and preparing classes takes some time and planning which means sometimes you have to say no to social events. This can be difficult from time to time but no permanent harm has been done.

We have more RT stories to share with you. Read the RT story of Michel, Jarno, Mathieu and Richard and/or read more info about the RT program here.

The post-graduate Executive Treasury Management & Corporate Finance programme combines two finance disciplines: Treasury Management and Corporate Finance. These disciplines largely overlap and are inextricably connected.

After a successful completion of all required modules, the title of Registered Treasurer (RT) is conferred by the Registered Treasurer foundation.

As of last year the Register Treasurer (RT) program at the University of Amsterdam is taught in English. This is an important change as the program used to be in Dutch.

The course will start on 1 September 2019. Why wait? Apply today!

The Role of Netting in Cash Management

|13-8-2019 | treasuryXL | BELLIN

Increased cash flow efficiency, faster cash allocation and optimized FX management

Cash management is every company’s bread and butter. Considerably fewer companies make use of netting, despite its many advantages for cash management.

Netting supports companies in making their cash management more efficient and less costly by:

Boosting cash flow efficiency,
Consolidating invoices and enabling faster cash allocation,
Allowing companies to better calculate their FX exposure and hedge it strategically.

Cash management

Through cash management, companies ensure they can always meet their financial obligations. It allows them to allocate the required liquidity to the right entity, at the right time, in the right currency. For treasury to achieve that, all incoming and outgoing payments as well as account balances and forecasts must be visible. With access to complete and up-to-date information, treasury can monitor processes, plan liquidity based on forecasts and strategically manage cash in different currencies.

Netting

Companies that have implemented netting offset cash flow obligations between two parties and consolidate them to a net payment. Most companies use netting for balancing intercompany trade flows. However, it is also possible to integrate other parties as netting participants. Using internally-agreed conversion rates, companies can engage in cross-currency netting.

More information on netting: Netting: An Immersive Guide to Global Reconciliation

Videos on Reconciliation and Netting and Cash Management

The impact of netting on cash management

Netting takes a specific proportion of all cash flows and places them within the framework of a dedicated and structured process. This process, the netting run, is repeated at regular intervals. It can be divided into four steps:

Data import
Data is imported from the ERP system to the netting system.
Data reconciliation
The netting system automatically matches and consolidates submitted payables and receivables based on pre-defined parameters and creates a netting statement.
Data sharing
Once data has been matched and invoices consolidated, the netting center communicates the net amount to every netting run participant. It can be issued in their currency of choice.
End of cycle
The netting center makes one single payment to participants with a positive balance. Participants with a negative balance make one net payment to the netting center.

netting run

Netting boosts cash flow efficiency

By offsetting payables and receivables, netting reduces the number of transactions. In turn, this reduces cash-in-transit. And reduced cash-in-transit and minimal transactions make for reduced efforts when it comes to procuring liquidity, interest burden and payment processing.

In addition, the schedule of the netting run means payments are made on a specific date: instead of having to monitor countless different dates, treasury can lean back and wait for the end of the netting cycle.

Netting makes the lives of cash managers much more linear: they can plan accurately and allocate the exact amounts of required funds to accounts. This means that the company can keep floating assets to a minimum. Netting lends structure to complex processes and ensures opitmal allocation of cash flows.

Netting accelerates cash consolidation and allocation

All transactions between two parties result in accounts receivable for one company and accounts payable for the counterparty. The respective journal entry must show a zero balance. However, without a structured process in place, consolidation efforts are often far from straightforward. The different parties pursue different interests – either receivable- or payable-driven.

A good netting process seeks agreement between the parties and allows them to clarify any disagreements within a structured and automated framework. Agreement-driven netting encourages participants to submit accurate data. This makes for a much faster reconciliation process and makes it possible to automate several steps of the netting cycle. A speedy reconciliation process is followed by swift payment processing – directly in the system and with one click – and makes for greater efficiency.

Faster consolidation has a positive impact on cash flows. At the same time, netting saves treasurers valuable time when it comes to monitoring invoices. Conversely, accountants no longer need to waste hours matching invoices. On average, time savings amount to 1-2 man-days per month per entity. For a group consisting of 10 entities, this equals 10 to 20 days per month and 240 days per year – a full-time position that can be dedicated to other tasks that add real value to the company.

Netting saves time

Netting optimizes FX management

Netting makes it easier for companies to manage their FX exposure, i.e. to optimize their FX management.

The payment terms defined as part of the netting cycle govern the timeframe between issuing an invoice and paying it. Companies that use cross-currency netting also set internal conversion rates for the currencies in question that apply to the respective netting cycle.

Having defined dates and rates, treasurers gain insight into an entity’s hedging requirements for a specific time period and can consolidate this sum to one hedging transaction. The netting center also defines the settlement price that is used to convert each entity’s FX payments to the respective settlement currency. This creates implicit hedging. The netting center can post and settle the transactions for each netting run participant without impacting the FX result. Entities transfer their actual currency exposure to the netting center, where it can be hedged strategically.

How netting optimizes FX management – an example:

As part of a monthly netting cycle, a company defines a payment term of 30 days. An entity issues and posts an invoice in March, which is paid in April. In February, the netting center defines the FX rate for March, and the March rate is identical with the settlement price for April. The netting center has complete visibility of currency requirements and can hedge the FX exposure centrally. Transaction and conversion costs are reduced to a minimum.

Netting FX-Management

Netting and cash management in a nutshell:

Netting is a powerful tool for companies to optimize their cash management. Netting lends structure to offsetting cash flows and puts them into a clearly defined timeframe, the netting cycle. This has the following benefits:

Very precise account planning
More efficient cash flows
Faster consolidation
Option to automate processes
Speeding up of the cash allocation process
Visibility of FX requirements
Strategic FX hedging

Interested in finding out more about whether netting is the right solution for you? Give BELLIN a shout or check out tm5, our intuitive treasury management system.

CSDs have a role to play in a blockchain environment

| 12-08-2019 | Carlo de Meijer | treasuryXL

There is a broad consensus amongst the post-trade industry that blockchain technology will revolutionise the securities post-trade world and could radically change how assets are maintained and stored by custodians and central securities depositories (CSDs).

Blockchain technology may enable real-time settlement finality in the securities world. This could mean the end of a number of players in the post-trade area, such as central counterparty clearing houses (CCPs), custodians and others. For a long time, also central securities depositories (CSDs), as intermediators in the post-trade processing chain, thought they also could become obsolete.

This idea however is changing. While CSDs are making up their mind on their future position in the blockchain world, they are increasingly considering blockchain as enabler of more efficient processing of existing and new services, instead of a threat to their existence. But what will be their future role?

Complex/fragmented post-trade infrastructure

As we all now, the current post-trade infrastructure is highly complex and fragmented. Much of this complexity and fragmentation is the result of the various intermediaries needed in the post-trade process. They include players like banks, brokers, stock exchanges, central counterparty clearing houses (CCPs), central securities depositories (CSDs), real-time gross settlement (RTGS) systems and custodian banks.

In the current set-up of the post-trade environment, important record-keeping functions, such as those relating to the issuance, settlement, registration and safekeeping of securities, are performed centrally by different specialist intermediaries. Intermediaries also perform the post-trade servicing of assets, such as crediting dividend payments or bonus issues to client accounts, or managing rights issues and takeovers.

They are thereby dealing with siloed outdated legacy systems and technologies each having their own ledger that are not good communicating with each other. Consequently, they spend much time and resources on reconciliation and risk management. As a result settlement currently takes two or more days in many places, involving high risks and high costs for transacting parties.

The present role of CSDs

Situated at the end of the post-trading process, CSDs are systemically important intermediaries. They thereby form a critical part of the securities market’s post-trade infrastructure, as they are where changes of securities ownership are ultimately registered.

CSDs play a special role both as a depository, involving the legal safekeeping and maintenance of securities in a ‘central depository’ on behalf of custodians (both in materialised or dematerialised form); as well as for the issuer, involving the issuance of further securities by issuers, and their onboarding onto CSDs’ platforms.

CSDs are also keeping a number of other important functions, including: dividend, interest, and principal processing; corporate actions including proxy voting; payment to transfer agents, and issuers involved in these processes; securities lending and borrowing; and, provide pledging of share and securities.

Blockchain: disruption in securities post-trade

Prospects
DLT offers the prospect of rationalising and combining post-trade activities in one single action, offering safer and cheaper record-keeping, as well as more seamless securities issuance. They thereby may create significant cost savings and efficiency gains across the securities market’s post-trade infrastructure.

Blockchain is linking trading partners directly. That means everything will be in place in the ledger at the time of the transaction.

With DLT, all of the complex systems and processes to transfer cash and equities from one account to another are not required. Everything can be embedded into the blockchain.
Institutions will no longer have to maintain their own databases, as with DLT there will be only one database for all participants in the transaction (so no more fragmented islands of information).
This will heavily ease the reconciliation process, allowing increasing transparency and efficiency in a presently highly fragmented industry.
It could permit the direct or real-time settlement of transactions between accounts, the simultaneous verification of transactions and the registration of ownership, and the direct and automated payment of entitlements to accounts.
As a result, buyers and sellers can match transactions in seconds and all parties are aware a transaction has been done.

Disruption
On the other hand, DLT has the potential to heavily disrupt existing post-trade processes in financial services. Shared ledgers of ownership promise to revolutionise the post-trade infrastructure, Thereby impacting the business model of a number of intermediaries.

Use of a blockchain network would automate the process further, with completely integrated authentication and transparency of the transfers themselves. As a result, clearing and settlement can be transformed into a single process, in which digital and digitised assets are delivered against payments instantly, thereby removing the need for a market infrastructure provider to hold a security, or token in its own physical or electronic vault.

The extent to which blockchain will disrupt existing processes in financial services is still unsure. Some say a complete disintermediation of middle and back office processes is under way, removing most (or even all) intermediaries from the post-trade processes.

Others however say the impact of this emerging technology will be less forceful, with a (limited) number of existing intermediaries to play an important though somewhat different role.

CSDs changing attitude

What is sure is that for some actors in the securities post-trade world, DLT will completely replace their businesses or even make the work of some intermediaries such as CCPs and custodians redundant. Others will still be needed, but they should question what will be their added-value within future DLT services, such as CSDs.

CSDs are changing their viewpoint on DLT including blockchain. Instead of seeing blockchain as a threat to their existence, they are now also considering them as (potential) enabler of more efficient processing of existing and new services.

“CSDs could have an important role to play in a blockchain-based settlement system. As ‘custodians of the code, CSDs could exercise oversight of, and take responsibility for, the operation of the relevant blockchain protocol and any associated smart contracts.” Euroclear Report

CSDs are believed they will continue to perform an important role as trusted, centralised financial market infrastructures (FMIs), providing gatekeeping services and oversight of the relevant blockchain.

How are CSDs reacting?

Recognising the threat as well as the opportunities of blockchain to their current services, a group of CSDs across the world has been working together and with regulators to define their future role in the blockchain post-trade environment. By working together they will ensure that CSDs from each region are represented, potentially unleashing (unimagined) network effects.

Aim of this cooperation is to explore how blockchain could be used for post-trade processes, identify, define and develop use cases in the securities depositories’ industry (including smart contracts and digital assets), and identify how existing standards could support it.

Another group of 30 central securities depositories (CSDs) in Europe and Asia are researching possible ways to “join hands” in developing a new infrastructure to custody digital assets. The CSDs will attempt to figure out how to apply their experience in guarding stock certificates to security solutions for crypto assets.

“A new world of tokenized assets and blockchain is coming. It will probably disrupt our role as CSDs. The whole group decided we will be focusing on tokenized assets, not just blockchain but on real digital assets.”

These CSDs clearly see an opportunity to apply their knowledge and skills to the crypto currency space, where “losing your private keys means losing your coins forever”. The group’s focus is looking at how to protect these keys for crypto investors, and how the tokenization of “everything stands to change everything”. The next phase of the research will also involve some large custodian banks.

CSDs future role in a blockchain environment

There are various reasons why CSDs may continue to play a role in the post-trade bklockchain environment. That is not that strange as the primary functions of CSD may run parallel to many of those that emerge from the blockchain technology. CSDs are aware that some of those roles will neatly fit into their natural infrastructure. But there will also be some activities that will become obsolete.

Looking at the roles that could be suited for CSDs, those would be anything around safety, notary and governance.

1. Notary function
Blockchain may enable tokenisation of assets and the use of smart contracts. All these are new components in the value chain. This may mean that a digital actor will be needed to manage this tokenisation, and creation and maintenance of smart contracts, overseeing the entire securities token ecosystem. CSDs could fulfil this notary function.

1a. Asset tokenization
Asset tokenization is the representation of assets on the blockchain in the form of tokens, which are designed to be unique, liquid secure, instantly transferable, and digitally scarce – and therefore impossible to counterfeit.

In a world where securities and other assets become tokenised, some have argued that an intermediary will still be needed to issue them and create rules. Tokenised assets exchanged on a distribute ledger may still require CSDs to hold the equities, which the token represent. They would thereby fulfil the crucial notary function, both as tokenising agent and as operator of the escrow accounts in which the real assets are hold.

1b. Custody of private keys
There may also be a need for secure maintenance of personal encrypted keys. Adopting blockchain technology would allow individuals and companies to have complete control over their assets and data, accessed through a set of private keys that must be kept secure.

Emerging technologies like decentralized key recovery will allow more and more individuals to secure custody of their own assets, thereby removing the artificial and expensive separation between legal and beneficial ownership in most asset markets.

Some will choose to take that responsibility themselves, but many investors may choose to outsource the custody of their private keys and token wallets to the companies and CSDs that can provide an independent and secure safekeeping service for these private keys.

2. Record of title for securities
CSDs could also be of value to record of title for securities. In many cases, the law mandates how title to property transfers. EU regulations state that for “any financial instrument to be transferable and tradable”(i.e. takes place on a trading venue, exchange or multilateral trading facility), securities must be recorded (registered) in book entry form in a CSD.

Under the current law, to enable having a blockchain-based system of transfer of title to securities, the blockchain would need to be the system that the CSD operates, which is not truly distributed.

Or one would need to create a new legal regime that recognizes that the transfer of title on a blockchain is effectively a transfer of title to the relevant property, and allows that in the context of securities trading. But that would take a lot of time to realise.

As a solution, the blockchain technology can be implemented through a hybrid model in which the CSD can either operate a blockchain platform itself to perform the book entry role. Or it can continue to perform this role off-chain, with the third- party blockchain platform accessing those records held by the CSD via an API (application programme interface).

3. Governance
CSDs could also play the governance role in a DLT based system – to ensure that what happens within their systems is unchallengeable. The movement from a post-trade system based around the existing infrastructure to a DLT-based system, without updating the regulatory and legal regime, could introduce a new systemic risk into the financial system. Regulators and legislators are unlikely to be comfortable in allowing the wholesale replacement of the existing infrastructure with DLT-based solutions.

CSDs are best placed to retain a ‘policing’ or governance role in a blockchain framework. This role should be the management of an insolvency of a party, particularly if there is a position that is not settled and the relevant contract is not yet completed. The involvement of CSDs in a governance and operational role could help increase trust of investors, and raise the quality of the blockchain ecosystem infrastructure underpinning these new asset classes.

4. Trusted gatekeeper: Authorisation and administration
CSDs could also be of help as trusted gatekeeper to DLT networks. While regulators will set the standards for admission to the network, the admission tests are likely to be administered by other parties. The most likely candidate for that role of trusted gatekeeper to DLT networks are the CSDs.

They are already the “first home of financial assets issued, and guardians of the integrity of every issue they accept”.

“The regulators are unlikely to want to immerse themselves in the operational details of the authorisation process.” “They will sub-contract that work to a trusted intermediary (read CSD).”

5. Other roles

A. DLT proxy voting system
One role in the post-trade environment that is already intensively investigated by CSDs is the management of a DLT-based e-proxy voting system. This would include providing general meeting services and give shareholders an easy, user-friendly and secure tool for voting remotely.

There is potential for improvement for instance in respect to the depots of voting rights. The system would automatically allow (or disallow) voting privileges for members based on what voting rights they had within a particular organization.

By using open source blockchain technology the efficiency and integrity of the Annual General Meetings and shareholder voting processes can be increased. Given that it is an end-to-end solution – from the time a meeting is announced and all the way through the voting process to the publishing of results – it means that all stakeholders will truly benefit within the process.

“By leveraging blockchain, we are able to reduce friction in the voting and proxy assignment process and also ensure that all information is transparent to stakeholders when required and with the proper security, governance and risk procedures in place.”

B. Elective corporate actions
CSDs could also have a role to play at elective corporate actions. Corporate actions recorded by the ledger may include paying out dividends, splits, issue of rights, warrants, pay-ups etc.

The user group for a permissioned blockchain network can choose who should validate these actions. They could simply give validation rights to every node. Getting issuers to publish elective corporate actions, such as rights issues and proxy votes, directly onto a blockchain, however might be a difficult step to realise.

Alternatively, this could be the role of a trusted third party, or a combination of both a trusted party and the nodes. This would imply a logical role for CSDs, creating a common registry of ownership associated with an ID.

C. Reconciliation
CSDs could also be of help in the reconciliation process. Blockchain may certainly help automate other components of the settlement process, such as reconciliation. A DLT-based reconciliation tool, with multiple trading firms participating in a record-based system, however could still occur within the CSD, which may act as the single point of reference for reconciling the various records.

D. Cross-border collateral mobilization
A final area where CSDs could play a role is in cross-border collateral mobilisation. Leveraging blockchain technology could overcome existing hurdles when moving collateral across various jurisdictions, making the transfer faster and more efficient.

“Designed to simplify cross-border collateralisation away from using multiple complex and non-standardised links towards smooth movement across various jurisdictions.”

By using CSDs it could enable a centralised, faster and more efficient allocation of fragmented security positions to cover financial obligations of market participants in multiple jurisdictions.

Concluding remarks

CSDs are likely to play an integral role but important role in any blockchain environment. Their role however will look quite different from we know them today. They can be the logical center of the system, custodying the standards, processes and governance of the system.

CSDs will have the opportunity to be agents of change. CSDs however need to adapt to meet new demands asking for delivering added value services in the new blockchain environment.

But they are not there yet! There is clearly a gap between the long-term opportunities presented by blockchain and the challenges involved in making progress.

Several blockchain initiatives in this area have failed, or are just ended their pilot stage or are very limited in scope. CSDs are also not currently building a single solution. Rather, each group is building its own platform designed to interoperate with the others.

There is thus urgent need to leverage existing business standards for the distributed ledger technology application in order to realise a global infrastructure that can smoothly operate cross border.

Carlo de Meijer

Economist and researcher

How to explain what treasury is to family and friends?

| 09-08-2019 | by Pieter de Kiewit |

Your mortgage, credit card, holiday money and current account have business equivalents. They are managed by corporate treasurers. The title question, or variations, is one I have to answer quite often. Even more around the holidays, when I always meet my relatives. I am tweaking the answer constantly. Connecting private and business is my current strategy. Perhaps you (expert in the field or layman) can let me know if this explanation works for you.

You have a current, savings and perhaps other account. You pay the rent, groceries and a beer. You use a debit or credit card, cash, a cheque, paypal or other channel. You take care only you and the people you trust have access to your money. Corporate treasurers build and maintain a banking infrastructure that allows payments. They think about who is allowed to make payments (often they are), who can authorize (not a payment person), what bank to use and potential other payment channels.

You have a mortgage or personal loan so you could buy a house or pay for groceries when at the end of your paycheque the month did not come to an end yet. Corporate treasurers find funds necessary for their company and have a wider set of products available like bank credit facilities, bonds or new equity.

You feel fluctuations in interest and currencies when you cross the border to another currency country. Your mortgage, current account and credit card come with an interest. Both currencies and interest change over time: financial markets are not stable. Many of us just accept these changes. Corporate treasurers think and manage these risks: they think about the currencies in commercial contracts, about the length & price of various funding products and about mitigating the risks, for instance using derivatives.

Of course the above description is an oversimplification of the position. Treasurers have many other tasks and the complexity in a corporate environment is higher than a standard household situation. Furthermore I want to stress is that treasurers are not bookkeepers or controllers: they do not send or receive invoices and do not write the annual report. They manage actual money flows.

Pieter de Kiewit

Owner Treasurer Search

Towards a central bank digital currency?

| 06-08-2019 | Carlo de Meijer | treasuryXL

Since Facebook announced its plans to come up with their own digital currency named Libra, a heated debate has risen about whether central banks should issue their own digital currency.

Central banks worldwide have expressed their worries about Facebook’s plan. According to them the prospect of a tech firm (and may be also others in the future) with billions of users launching its own money potentially poses a threat to existing fiat state currencies and especially to monetary stability.

Long-time sitting at the side-lines, this plan may accelerate the idea of a central bank digital currency (CBDC). Though there are no real plans (yet), are some strong arguments for central banks to start issuing their own digital currency.

This however raises a number of questions such as: What sort of digital currency?; What would be the main arguments? What role should banks play in this process? And, what would be the impact on financial stability?

Central banks counterbalancing Libra

Central bank are seriously watching the emergence of a new global digital currency called Libra, introduced by Facebook (see my Blog: Facebook and Libra: a global digital currency, 1 July 2019). The birth of Libra thereby serves as an “alert” for central banks and regulators.

There is growing belief that if Libra could be successfully launched, it would challenge central banks’ monetary sovereignty, posing a long-term threat to central banks control of money. Any role for Libra beyond the payment function could bring changes to the rules of the global monetary system, and regulators should pay close attention to that possibility.

“From the government’s perspective, we pay more attention to its influence on financial services, monetary policy and financial stability.”

Accelerating the launch of their own digital currencies by central banks could be a counterbalance.

Reactions

The initial cautious stance towards a central bank issued digital currency, ranging from wait-and-see to very negative, has firmly changed. Central banks and governments from all over the world as well as international financial institutions like the IMF and BIS are now sounding a much more positive tone.

IMF

It is interesting to find that already last year (November 2018) the International Monetary Fund (IMF) started to examine the potential innovative nature of digital currencies and has supported CBDC proposals more positively. Christine Lagarde, at that time Managing Director of the IMF, urged central banks to consider CBDC since they could satisfy public policy goals, including financial inclusion, security/consumer protection, and privacy in payments.

BIS

While just a few months ago, Augustín Carstens, the general manager for the Bank for International Settlements (BIS), was still questioning the value of central-bank-issued digital currencies, he recently acknowledged that central banks will likely soon need to issue their own ones.

Carstens warns that “big techs have the potential to become dominant” in this area thanks to network effects. Further, the arrival of such products “might just be around the corner if there is clear evidence of demand from the public”.

“And it might be that it is sooner than we think that there is a market and we need to be able to provide central bank digital currencies. If Facebook and big tech companies get their way, however they may have to.” Augustin Carstens

BIS is now supporting the many central banks’ efforts to research and develop digital currencies based on national fiat currencies. At the very least, the BIS concludes in its recent report, new “comprehensive” public policy is needed to “respond to big techs’ entry into financial services so as to benefit from the gains while limiting the risks.”

The potential implications of such a change towards central bank digital currencies for the stability of the global financial system however aren’t entirely clear, according to the BIS.

ECB

Though not taking an official position, a European Central Bank (ECB) official has come out generally in favour of wholesale central bank digital currencies (CBDCs).

Vitas Vasiliauskas, a member of the Governing Council of the ECB and chairman of the board of the Bank of Lithuania, said the question is not if but whether CBDCs should be retail, wholesale, or both. A retail CBDC would be available for the general public, while a wholesale version would be restricted to serve a limited circle, mostly financial institutions. In between these two types, “multiple theoretical sub-models also exist,” he said.

PBoC

The People’s Bank of China (PBoC), the country’s central bank is accelerating its efforts to introduce a government-backed digital currency, aiming at “securing a cutting-edge position in the global cryptocurrency race”. The central bank is organizing market-oriented institutions to jointly research and develop a central bank digital currency and the program has been approved by the State Council.

“A digital currency issued by the central bank can improve the efficiency of monetary policy, and help to optimize the payment system.”

China’s monetary authority identifies the nature of digital currency as “a substitute for cash”, rather than a speculative instrument. The use of cash is declining in China amid booming digital payment systems.

The central bank digital currency could be a new monetary policy tool, or an investment asset that carries an interest rate to satisfy investors’ demand for value. It might also be used as a reference for bank interest rates on deposits. The Chinese digital currency also could be used domestically. But “everything is just under discussion”.

Why CBDCs?

There are various arguments raised to issuing central bank issued digital currency based on DLT. The main are described below.

Towards a cashless society

One of the reasons mentioned is that in the Western world a growing number of people do not use cash anymore. Physical payments are thereby gradually replaced with electronic payments. CBDCs could provide a safe, liquid payment instruments to the general public. They have the potential to reduce cash handling costs since all the transactions can be made using a digital representation of money and are traceable.

…. and a formal based economy

A shift in central bank money from cash (physical money) to digital currency is another way to shift the economy from being informal-based to formal-based so that the economy becomes more tax-based, transparent, and efficient. This is especially relevant for emerging markets.

Increased financial inclusion

Another motivation for especially emerging economies regarding CBDC proposals is financial inclusion. In many of these countries a large number of people are unbanked and/or without access to commercial banks and the internet and thus excluded from conventional banking services. CBDC might promote digitization of the economy and, thus, economic and social inclusion.

More effective monetary policy

Shifting from cash to digital currency through issuing CBDC may enhance the effectiveness of monetary policy (such as a negative interest rate policy under the effective lower bound) because of limiting the scope of cash substitution that could emerge to avoid a negative interest rate.

Implementing CBDCs can allow new monetary policy tools to be used. Alternatively, CBDCs can be used as a tool to increase aggregate demand by making ‘helicopter drops’ of newly created CBDCs to all citizens, making it easier to meet the central bank’s monetary policy target of price stability.

Safer and more effective financial system

And there are the efficiency and financial stability gains to be get from CBDC. CBDC has the potential to improve the existing wholesale financial systems—including interbank payments and settlement systems, delivery versus payment systems, and cross-border payments and settlements systems.

Allowing individuals, private sector companies, and non-bank financial institutions to settle directly in central bank money (rather than bank deposits) may significantly reduce the concentration of liquidity and credit risk in payment systems.

This in turn could reduce the systemic importance of large banks. In addition, by providing a genuinely risk-free alternative to bank deposits, a shift from bank deposits to digital cash may also reduce the need for government guarantees on deposits, “eliminating a source of moral hazard” from the financial system.

Foster fintech sector

The use of CBDCs may promote a technological environment and foster the fintech sector. This is especially relevant for emerging economies. Those economies may find it difficult to develop banking systems and capital markets that are comparable to those in advanced economies. Fintech services are new and innovative.

Encourage competition and innovation

The regulatory framework would make it significantly easier for new entrants to the payments sector to offer payment accounts and provide competition to the existing banks. It would also reduce the need for most smaller banks and non-banks to run their payments through the larger banks (who are able to set transaction fees at a level that disadvantages their smaller competitors).

What sort of central bank digital currency?

When discussing the options of central bank digital currencies we can differentiate proposals into retail CDBC i.e. targeted to the general public and wholesale CBDC issued only for financial institutions. And there are multiple in-between types that may have characteristics of both retail and wholesale.

Retail CBDC

A retail CBDC is one that will be issued for the general public. Retail CBDC based on DLT has the features of anonymity, traceability, availability 24 hours a day and 365 days a year, and the feasibility of an interest rate application.

The retail proposal is relatively popular among central banks in emerging economies, mainly because of the motivation to take the lead in the rapidly emerging fintech industry, to promote financial inclusion by accelerating the shift to a cashless society, and to reduce cash printing and handling costs.

Wholesale CDBC

A wholesale CBDC is for financial institutions that hold reserve deposits with a central bank. It could be used to improve payments and securities settlement efficiency, as well as to reduce counterparty credit and liquidity risks.

A value-based wholesale CBDC would replace or complement reserves at the central bank with a restricted-access digital token. A token would be a bearer asset, meaning that during the transaction the sender would transfer value to the receiver, without intermediaries.

This would be something fundamentally different from the current system in which the central bank debits and credits the accounts without transferring actual values.

The wholesale CBDC is seen as the most popular proposal among central banks because of the potential to make existing wholesale financial systems faster, inexpensive, and safer. The Bank of International Settlements (BIS) also shares the view that wholesale CBDC could potentially benefit the payments and settlements systems.

Some experiments have been already conducted or examined by central banks since 2016—such as those in Canada called “CADcoin” under Project Jasper, Singapore Project Ubin, Japan-Euro Area Project Stella, Brazil, South Africa Project Khokha, and Thailand (Project Inthanon). (See my earlier blogs: Blockchain and Central Banks: A Tour de Table Part I and II, 3 and 9 January, 2017).

Retail versus wholesale CBDC?

Compared to emerging economies, central banks in advanced economies are not enthusiastic about retail CBDC. And that is not surprising. Many central banks do not wish to create competition between central bank money private sector money, taken into account the limited potential benefits from using retail CBDC.

A retail CDBC would be a step too far (or too early) for them. If a central bank issued a digital currency whereby everyone (including businesses, households and financial institutions other than banks) could store value and make payments in electronic central bank money (the r-CBDC variant), this could have wide-ranging implications for monetary policy and financial stability.

Wholesale Central Bank Digital Currency would bring a number of important efficiencies. Besides their retail payments and settlements systems are already highly efficient, almost real time, and always available. Most citizens are banked, while the use of cash in most European countries – with the exception of Sweden and Norway – is still rather high (and not declining in the same speed).

Moreover, wholesale CBDC technology would allow linking to other platforms. Directly linking securities or FX platforms to cash platforms could improve the speed of trades and eliminate settlement risk. Settlement on OTC markets, as well as for syndicated lending and trade finance could speed up considerably if linked live to an instant wholesale CBDC system.

Wholesale CBDC may also simplify (cross-border) payment infrastructure, strongly reducing the number of intermediaries involved. This may improve efficiency and security, minimise liquidity and counterparty risks and reduces cost.

Deploying DLT technology would also allow “smart” features to be added to wholesale CBDC, including earmarking funds, limiting their use in time and place, applying conditional interest rates and others. Such smart features would allow central banks to explore new and powerful operational monetary policy tools, such as tailor-made interest rates.

Finally. real-time monitoring and better track-and-trace options on a unified platform should facilitate both anti-money laundering efforts by banks and supervision over those efforts.

Coordinated CBDC approach

This wholesale approach is a likely first step towards more universal adoption of CBDCs. It is less disruptive and makes global payments cheaper, faster and more secure. But who should take the initiative to build the wholesale CBDC?

Only central banks have the mandate to issue a digital currency or token and call it legal tender. They however lack extensive experience and resources needed to build and maintain such an infrastructure and, build a compliance apparatus to supervise clients and transactions.

The private sector, on the other hand, has the necessary experience and resources to do this. Next to that, commercial banks also have an incentive, as regulation is becoming ever more stringent (KYC, AML), and makes it more costly to maintain a presence in payment systems in multiple countries.

Moreover, the current international payment system, based on correspondent banking, creates various costs such as KYC and handling costs of all banks involved. There are also delays due to opening hours in different time zones while liquidity is trapped in pre-funded nostro-accounts. A single cross-border 24/7 international direct payment and settlement system therefore is very attractive for them.

In order to build a successful wholesale CBDC, one needs the private sector’s experience and the central banks, thereby taking away the various counterparty risks. Moreover, jurisdictional differences need to be harmonised. So international public-private partnerships make sense.

Though this seems controversial, one should keep in mind that the existing monetary system is already a public-private partnership. While central banks determine monetary policy and monitor financial stability, commercial banks actually create most of the money by lending. Central banks (and other government agencies) in turn license and regulate them.

The way forward

Up till recently, not many central banks so far have found strong advantages of issuing their own digital currency at this stage because of several technical constraints.

The potential launch of Libra however has been an important wake-up call for a large number of central banks.

Given that blockchain technology has been progressing fast in the settlement and payment areas (as well as DLT), central banks may now see incentives to increase their interest in wholesale CBDC proposals and consider actual implementation seriously in the near future.

Wholesale CBDC however will still have to compete with upgraded legacy systems. Both central and commercial banks should therefore take a cautious approach when building completely new alternatives. Experimental wholesale CBDC that are cross-border from the start and involve multiple commercial and central banks, should have the biggest chance of success.

A retail CBDC however may be “a faraway goal” because of the potential adverse impact on commercial banks by promoting a shift of retail deposits from commercial banks to a central bank.

Carlo de Meijer

Economist and researcher

Dit zeggen Nederlandse bedrijven over hun renterisico

| 02-08-2019 | ICC Consultants | treasuryXL |

Recent heeft ICC een rente-enquête uitgevoerd onder haar relaties. In deze enquête werd één prangende vraag gesteld: Waarom dekt u uw renterisico (nog) niet in?

Hieronder ziet u hoe deze vraag beantwoord is:

Circa de helft geeft aan op dit moment geen renterisico te hebben. Deze groep bestaat uit bedrijven die geen financiering hebben (19%) en organisaties die hun renterisico al (deels) ingedekt hebben (32%). ICC denkt overigens dat dit laatste percentage aanzienlijk hoger ligt dan het landelijk gemiddelde omdat het hier ICC relaties betreft. Meerdere bedrijven hebben de afgelopen periode gebruik gemaakt van de prachtige, historische lage, renteniveaus.

De overige 50% van de respondenten heeft wel een renterisico en de meningen binnen deze groep zijn zeer verdeeld. Voordat we hier verder op inzoomen willen we u er op wijzen dat de swaprentes recentelijk nog weer verder gedaald zijn. De 10-jaars swaprente staat nu op ca. 0,2%. Aangepast aan de modaliteiten (bijv. 3-maands Euribor en 3% aflossing per jaar) van uw onderliggende financiering zou de ‘kale’ swaprente zelfs rond de 0,1% uitkomen. Tel daar gemakshalve een kleine 0,2% bankmarge bij op en u kunt uw rentelasten voor de komende 10 jaar mogelijk fixeren onder de 0,3%.

ICC geeft hieronder een paar kanttekeningen bij een aantal gegeven antwoorden:

‘Wij willen wel (deels) indekken, maar pas als het Euribor tarief daadwerkelijk gaat oplopen’

Het is een keuze, om te willen wachten en pas te acteren bij daadwerkelijk oplopende Euribor rentes. U krijgt echter, juist nù, de opportunity om zekerheid te verkrijgen van langdurige zeer lage rentekosten. Bovendien is de kans reëel dat de lange rentes (al) zijn opgelopen, wanneer u in de toekomst van een variabele rente naar een gefixeerde rente(last) wilt gaan.

‘Wij dekken niet in, omdat ‘iedereen’ zegt dat de rente nog heel lang laag blijft (geen urgentie)’

Dit zou goed kunnen, maar een aantal ontwikkelingen wijst op meer inflatie in de toekomst. De druk op overheden om meer uit te geven neemt toe en de arbeidsmarkt is krap waardoor de lonen stijgen. Ook neemt het protectionisme toe, wat kan leiden tot hogere importtarieven en minder concurrentie. Als er eenmaal sprake is van (een) hogere inflatie(verwachting), dan zal de ECB daar dankbaar gebruik van maken en de rente gaan verhogen. Hogere rentes betekent voor banken, dat het aantrekkelijker wordt om meer krediet te gaan verstrekken. Terwijl de ECB ‘monetaire munitie’ moet opbouwen – o.a. via renteverhogingen – om daarmee een volgende crisis te bestrijden.

Daarnaast bent u vermoedelijk geen rentespeculant. Als u als ondernemer voor continuïteit gaat, dan is het zo lang mogelijk zekerstellen van de laagst mogelijke operating costs misschien wel een beter beleid, dan het nastreven van de allerlaagste rentekosten op enig moment.

‘Wij willen wel (deels) indekken, maar onze bank werkt niet mee’

De redenen die wij hier voor horen zijn divers en verschillend per bank. Enerzijds heeft dit te maken met de cliëntkwalificatie en de verbonden Mifid-wetgeving, anderzijds met de (vereiste) aanwezige kennis binnen het bedrijf. ICC wordt dikwijls gevraagd om (vooraf) de (on)mogelijkheden hiervan te bekijken; met inbreng van onze kennis & ervaring weet u daadwerkelijk hoe ver u kunt komen en is er vaak meer mogelijk bij uw bank.

‘We dekken niet in omdat we niets meer met renteswaps te maken willen hebben’

Dit is een reden, die we vaak horen. Slechte ervaring vanuit het verleden en daarom doe ik het maar niet meer. Opgemerkt hierbij, dat de voor- en nadelen van renteswaps nu veel beter bekend zijn en u kunt zich hierover laten adviseren. Des te meer een opvallende reden, aangezien men in het verleden ‘massaal’ de rentes afdekte op een renteniveau van rond ca. 5%, terwijl de rentemarkt nu nagenoeg op 0% staat.

Sowieso is het risico op grote negatieve waardes op de huidige lage renteniveaus natuurlijk veel kleiner dan destijds in de periode 2006-2008. Daarnaast zijn er andere mogelijkheden om renterisico’s af te dekken, dan sec een renteswap. Hier liggen vaak interessante mogelijkheden, met meer flexibiliteit en hierdoor voor meerdere bedrijven een optimalere afdekking van het Euribor risico.

ICC RESEARCH

Ongetwijfeld leven er bij u meerdere overwegingen om uw renterisico’s (verder) wel/niet af te dekken. Het advies van ICC is om in ieder geval de renteontwikkelingen goed te volgen. U kunt dit doen door regelmatig de publicaties van ICC Research te lezen. Vraag hier uw gratis proefperiode aan.

Wilt u meer informatie over het afdekken van uw renterisico, neem dan contact op met ons via telefoonnummer: 030-2328200 of via email: [email protected].

Auke Middel
Senior Consultant Market Risks | ICC Consultants