Blockchain hyperledger Project: Collaboration pays off

| 1-6-2017 | Carlo de Meijer |

Recently, I wrote that smaller blockchain consortia are needed. See my blog: Towards smaller and more focused blockchain consortia in  27 February 2017. The Hyperledger Project however may be the exception.

Umbrella

Things look quite good for the Hyperledger Project, described as being an “umbrella” for the developer communities to work on creating open source blockchain and related technologies. The Project receives even more interest from different organizations and industries than ever before since the start of this year. Their collaborative effort seems also to be paying off as the Hyperledger Project recently announced the upcoming release of its first production-ready blockchain: Fabric. And Hyperledger feels “there are still plenty of use cases waiting to be explored”.

The Hyperledger Project

Hyperledger Project is a global collaborative cross-industry effort created to leverage the emerging blockchain and distributed ledger technology. The Hyperledger project, that announced its first members in February 2016, has grown to more than 120, making it the largest blockchain consortium in the world today. These span various industries including finance, banking, technology, manufacturing, healthcare, and the Internet of Things, among several others, with big names such as IBM, Cisco, Intel, JP Morgan, Deutsche Bank, Wells Fargo, The London Stock Exchange and Accenture. Its latest members reflect all of these different areas as well, indicating the future for blockchain looks even more viable than ever before.
Hyperledger aims to enable its member organizations to build robust, industry-specific applications, platforms and hardware systems based on blockchain technology to support their individual business transactions by creating an enterprise grade, open source distributed ledger framework and code base. The goal is to advance blockchain technology’s use in business by developing both a cross-industry open standard and an open-source development library that would allow businesses to build custom distributed ledger solutions.

New Members

The Hyperledger Project continued its strong momentum in 2017. Early March Hyperledger announced that eleven new members have joined the project. The latest members include: Bank of England, Bitmark, China Merchants Bank, Federal Reserve Bank of Boston, Initiative for CryptoCurrencies and Contracts (IC3), Kaiser Permanente, Kubique S.p.A., MadHive, Monax, OSCRE and RadarWin Cyber Technology. Hyperledger also announced American Express and Daimler AG as Premier members earlier this year.
“Growth and interest in Hyperledger remain high in 2017. We’re now at 122 members and seeing even more diverse organizations across industry sectors invest their energy and resources in understanding how blockchain technology can strengthen their own business processes. This new set of members’ combined backgrounds and experiences will be invaluable to the community, as we strive to increase production deployments through this year,” Brian Behlendorf, Executive Director of Hyperledger, stated.

Central banks

Interesting is that now also The Bank of England and the Federal Reserve Bank of Boston are among the new members of the Hyperledger blockchain initiative. They are the first institutions of their kind to become part of Hyperledger, underlining the big interest of these institutions in the new technology. The Bank of England has already pursued a range of applications, including the potential issuance of a digital currency.

Working Group China

The Hyperledger Project, has now also set up a working group in China, mirroring the strong interest in the country. Hyperledger revealed that over 25% of Hyperledger members are from mainland China.
As a result, Hyperledger announced the Technical Working Group China (TWG China) to “help bridge and foster a working relationship between the global Hyperledger community with local technical teams in China”. The TWG China aims to facilitate interactions between Hyperledger members around the world and contributors and technical users in mainland China as well as other regional countries including Taiwan and Hong Kong. The Working Group is also tasked to grow the Hyperledger developer community in China by encouraging technical contributions to the project. TWG China will host and organize meetups, hackathons, training sessions and other community efforts to help push blockchain education, research and development.

Hyperledger Fabric

After the Technical Steering Committee (TSC) of the Hyperledger Project announced the promotion of its “Fabric” blockchain project to an active phase, early March, its first production-ready distributed ledger code base, was released at the end of last month.
“Hyperledger’s TSC agreed to grant the project team’s request to advance the Fabric’s status from Incubation to Active. As a reminder, we see Hyperledger as an “umbrella” for software developer communities building open-source blockchain and related technologies. Fabric falls under that umbrella and is the first of the five Incubator projects to graduate.”

Hyperledger Fabric is thereby the first project to graduate incubation to production-ready status. It was originally proposed by Digital Asset Holdings (DAH) and IBM as a result of the first hackathon during which a merge between the IBM’s proposal and DAH’s proposal was started. A group of developers from 20 different member companies has been instrumental in making the Hyperledger Fabric a reality.
“In the year since the project entered incubation, the diversity of contributors on Fabric-related projects has grown from nearly no diversity of contributors to 45 percent of the contributors – representing individual contributors or developers working for one of nineteen other companies, be they exchanges, banks, large ISVs or start-ups.” Behlendorf

The goal of Hyperledger Fabric is to supplement large-scale commercial operations of companies with a robust network. It is designed to enable confidentiality, scalability and security in business environments through a modular architecture. It allows components, such as consensus and membership services, to be plug-and-play. Fabric, will be utilized as the base protocol and platform for its member banks and companies looking to use blockchain technology in building both decentralized and private applications.

Various industry leaders and large corporations have expressed their interest to implement Hyperledger Fabric once the codebase is deployed and released. Community members including the London Stock Exchange, DTCC, and Fujitsu, said “they will allocate their resources in maximizing the potential of Hyperledger Fabric by showcasing its use cases in a wide range of applications”.

Loyyal Platform as an example

IBM Blockchain partner Loyyal became the earliest tester of Fabric and joined the Hyperledger Project soon after. They have built a handful of prototypes on Fabric, from the first release of Marbles to the most recent Fabric Composer release. And now they are building out an enterprise-grade loyalty platform utilizing Fabric and its newest features. Loyyal is thereby using blockchain and smart contract technology to reduce loyalty program operation costs through efficiencies and increase revenues through targeting capabilities. The Loyyal platform, built on blockchain, is transforming the loyalty and rewards industry by offering interoperability, multi-branded coalitions, superior liability management and dynamic issuance and redemption options.

 Other Hyperledger Projects

The Hyperledger Project has a special procedure to initiate blockchain projects. Any community member, contributor or partner company can propose blockchain projects or ideas to the Hyperledger Project and once approved, the development for the project will be pursued shortly after that. For Hyperledger projects like the Fabric to be deployed and introduced to the public, the foundation’s Technical Steering Committee (TSC) must unanimously agree that the codebase is production ready. The TSC thereby looks into the technical viability of the code, as well as its adaptability, flexibility, security and functionality to ensure that large-scale service providers will be able to utilize the blockchain technology without any boundaries.

Next to the Hyperledger Fabric, Hyperledger Project nowadays hosts multiple blockchain technologies. Hyperledger’s incubated projects include names like Blockchain Explorer, Cello, Iroha and Sawtooth Lake.

  • Blockchain Explorer

Hyperledger Blockchain Explorer is a “project in Incubation” that was proposed by IBM, Intel and DTCC to create a user-friendly web application for Hyperledger to view/query blocks, transactions and associated data, network information (such as name, status, list of nodes), chain codes/transaction families (view/invoke/deploy/query) and any other relevant information stored in the ledger.

  • Cello

A second project is Hyperledger Cello. This is a toolkit for deploying a Blockchain-as-a-Service, that reduces the effort required for creating, managing, and terminating blockchains. Hyperledger Cello aims to bring the on-demand “as-a-service” deployment model to the blockchain ecosystem, to provide a multi-tenant chain service efficiently and automatically, on top of various infrastructure, e.g., baremetal, virtual machine and more container platforms.

  • Iroha

Hyperledger Iroha is also a “project in incubation” that was proposed by Japan’s Soramitsu, Hitachi, NTT Data, and Colu. Hyperledger Iroha is a distributed ledger project that is designed to be simple and easy to incorporate into infrastructural projects requiring distributed ledger technology.

  • Sawtooth Lake

Hyperledger Sawtooth Lake is a modular blockchain suite. It supports both permissioned and permissionless deployments. Sawtooth Lake includes a novel consensus algorithm, Proof of Elapsed Time (PoET), targeting large distributed validator populations with minimal resource consumption. Transaction business logic is decoupled from the consensus layer into so-called transaction families that “allow for restricted or unfettered semantics”. Hyperledger Sawtooth Lake is contained in a single repository.

Hyperledger Project appears more promising

“Success of ‘clubs’ or consortia depends on the set up and governance, the stated aim, and also on the degree of alignment of interest of member organizations”. ”Models such as the open-source collaborative Hyperledger effort ultimately appears more promising when the aim is mainstream, commercial adoption”.Milan Salaba, partner at Deloitte

 

Carlo de Meijer

Economist and researcher

 

From Fintech to Regtech… from potentially disruptive to leaner compliance opportunities

| 31-5-2017 | François de Witte |

On 18/5/2017, I attended a seminar covering the topic “From Fintech to Regtech… from potentially disruptive to leaner compliance opportunities” organized by The Finance Club of Brussels, the Free University of Brussels (ULB), the Solvay Finance Society and Thomson Reuters.

Introduction

Fintech describes a wide range of innovation in financial technology, going from payment systems to lending and trading platforms.
Fintechs are seen in many cases as potential disruptors of the traditional intermediation of heavily regulated banks and other financial institutions See also my articles on PSD2 further down.
However Fintechs can also be enablers, helping banks and financial institutions to streamline their regulatory reporting and compliance, or help the disruptors in coping more easily with compliance in the future.

Setting the scene

Fintechs are playing an increasing role. The investments in Fintechs exceeded EUR 25 billion in 2016, and they bring a real digital revolution. Fintechs are perceived to foster the Digital Revolution, but equally to increase the digital divide in our society between the skilled and/or wealthy and those who are not.

Regulatory compliance is time-consuming and expensive for both financial institutions and regulators. The volume of information that parties must monitor and evaluate is enormous. The rules are often complex and difficult to understand and apply. There is a lot of data to be analyzed. Much of the process remains highly labor-intensive, or still depends heavily on manual inputs.

The Regtechs can be considered as an outgrowth of Fintec. Regtech use digital technologies— including big data analytics, cloud computing, robotics, behavioral analysis, blockchain technology and machine learning to facilitate regulatory compliance. Amongst  other things, Regtech applications automate risk management and compliance processes, enable companies to stay aware of regulatory changes around the world, facilitate regulatory reporting and support strategic planning.

In recent years banks have seen opportunities to ask Fintechs to solve their large regulation and compliance issues. They can change the paradigm of banks from heavy IT releases to agile sprints, from integration to standardizing protocols, from static functions to workflows.

Hence financial institutions are more willing to consider using Fintechs for getting more efficiency. During the seminar, somebody of the panel mentioned: “Collaboration is the best innovation”. Banks can also help Fintechs thanks to their experience in managing large databases, managing risks and providing the required critical mass.

We have seen some applications recently in areas such as the KYC (Know Your Customer) domain.

Regtech – some other considerations

However, as mentioned during the seminar by Antonio Garcia Del Riego, Head of EU Corporate Affairs at Banco Santander, in Europe there remain obstacles in using Fintechs. The Bank Regulators in Europe expect the banks to deduct the goodwill from the core capital of the banks. This implies that software investments cannot be capitalized and need to be written off immediately in the P&L. A second challenge is the ability to attract digital talent, given the fact that the regulators limit the way in which the remuneration can be paid, whilst startups can be very creative here.
For the regulators, there also remain challenges. Once banks will have automated their reporting, the regulators will have to follow. They also will have to attract digital talent, to treat all these data in an automated way. If they do not succeed in this, they might challenge the use of Regtechs, and this is not what we want.

Regtechs can potentially offer similar benefits to regulators as they do to financial institutions. We recently observed that some (quite few) Regtech providers have emerged to serve the significant needs of regulators. There have seen recently some examples in Fintechs bringing behavioral models to the regulators, or new cognitive technology or the use of Blockchain technology (smart contracts), to trigger automatic alerts for the regulators when the banks exceed some thresholds.

Some regulators are taking initiatives to foster innovation. In 2016, the FCA (US) created its “regulatory sandbox,” a space where financial services companies are encouraged to test new products without regulatory consequences. Recently the Australian Securities and Investment Commission also created its regulatory sandbox, suggested to establish a new regtech liaison group, comprising industry, technology firms, academics, consultancies, regulators and consumer bodies, and announced that it would host a Regtech hackathon later in 2017.

Other countries have also taken steps to support Fintech and Regtech innovation. The Monetary Authority of Singapore is in the process of developing a regulatory sandbox. We might expect other regulators to also take similar initiatives.

Conclusion

Thanks to their digital technology, Regtechs enable banks and other financial institutions to reduce the burden of compliance. However some steps need to be taken to create a level playing field and some topics will have to be clarified.
One can ask oneself the question how far these innovations can become game changers, awakenings for the banks, or even force them to more transparency and predictability towards regulators.

 

François de Witte – Founder & Senior Consultant at FDW Consult

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More articles on this subject:

PSD 2: A lot of opportunities but also big challenges (Part I)

PSD 2 : The implementation of PSD 2: A lot of opportunities but also big challenges (Part II)

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Nieuwe spelregels voor valutahandelaren

| 30-5-2017 | Erna Erkens | treasuryXL |

Wij hebben onze valuta-expert Erna Erkens gevraagd om te reageren op een artikel in Het Financieele Dagblad over de nieuwe gedragscode voor valutahandelaren. Zij geeft een reactie in de voor haar zo typische manier zonder een blad voor de mond te nemen.

Vrijwillige gedragscode

Ik schaam me inderdaad dat dit nodig is maar ik schaam me er niet voor dat ik 35 jaar als valutahandelaar met veel passie gewerkt heb. Gedeeltelijk voor rekening en risico van de bank, maar meer als sparringpartner van klanten. Zoals ik dit nu nog ben. De genoemde gedragscode is een vrijwillige en ik denk niet dat deze snel invloed zal hebben. Eigenlijk is het zoiets als de eed die bankiers moeten afleggen.

Mindset

Het moet een begin zijn van een mindset verandering. Maar als we nu kijken dat banken teveel boeterente rekenen bij de oversluiting van hypotheken, dan blijkt dat bij alles wat niet transparant is voor klanten de mindset ‘klant centraal’ even wordt vergeten. Dit moet veranderen. Er moet een andere motivatie komen om dingen te doen en vooral om dingen te laten. Dus geen focus meer op….. aandeelhouderswaarde. Hoge budgetten die gekoppeld zijn aan extra salaris in de vorm van bonussen. Maar, dit moet komen van bovenaf. Dus moeten het bestuur en de commissarissen het goede voorbeeld geven. Zij bepalen de richting van de bank. Mensen zijn hebberig en dit gedrag wordt nog steeds gestimuleerd. Maar niets doen is ook niet goed. Dus het is een zeer bescheiden begin.

Taak voor het bestuur

Dit begin moet samengaan met de besturing van de banken (of bedrijven). Besturen moeten budgetten vaststellen en bonussen uitdelen als collega’s eerst elkaar en dan klanten helpen. Het bestuur moet beginnen om te zorgen voor een veilige arbeidsomgeving waar wordt aangeven dat werkzaamheden zullen/ kunnen veranderen, maar dat er niemand ontslagen zal worden.  Dat managers instaan voor hun afdeling (mensen) en niet aan de kant van hun bazen uit angst. Zorgen dat de afdeling een goedlopende machine is met als centrum een gezamenlijk belang en geen individueel belang. Verzet tegen kennis is macht en politiek gedrag. Samen staan we voor onze club en we zorgen voor elkaar. Dat staat bovenaan. Het klinkt misschien soft, maar dat is het niet. Als mensen zich veilig voelen geven ze bloed zweet en tranen en heb je weinig ziekteverzuim en voelt iedereen zich goed. Mensen werken harder en zo krijg je vanzelf meer en beter resultaat en veel loyaliteit voor elkaar en het bedrijf. Mensen zijn dan trots op waar ze werken. Als er angst is of onveiligheid dan werken mensen voor hun geld en van 9 tot 5 met geen of weinig loyaliteit.
Zonder politiek gedrag en als mensen eerst voor elkaar zorgen en mensen voelen zich veilig gaan ze automatisch voor de klanten zorgen. Verkopen is transfer of trust. En dit begint in de top van de organisatie.

Mening

Dus wat vind ik ervan? Bestuurders van valutahandelaren: Schaam jullie dat jullie de omgeving maken waarin de menselijke behoefte van hebberigheid belangrijker wordt dan collega’s en klanten.  Jullie moeten beginnen met het geven van het goede voorbeeld. Laat dit een begin zijn, maar vooral bij de bestuurders. Ik heb altijd discussie gehad over dat ik teveel op de stoel van de klant ging zitten. Ik ben daar tot op de dag van vandaag trots op. Dat is wie ik ben. En zo zal ik altijd zijn.  Dat heet empathie en dat geeft vertrouwen. ‘Practice what you preach’ niet alleen op papier in missie en visie maar in gedrag. Altijd! Eventueel tijdelijk ten koste van winst nooit van mensen. Dan komt het met de aandeelhouders ook goed.

 

Erna Erkens

 

Erna Erkens

Owner at Erna Erkens Valuta Advies (EEVA)

 

 

 

Andere artikelen van deze auteur:

Valuta ontwikkelingen en rente – Verwachtingen voor 2017

Valutabewegingen van Euro, Britse Pond en US Dollar: Altijd reuring op de markten

 

Mergers & Acquisitions: The 26 process steps for a corporate treasurer

| 29-5-2017 | Theo Paardekooper |

The main task of a treasurer is linked to cash management and short term funding and investments. This is the common practice in the Dutch corporate market, but this is by far not the right view on treasurer’s tasks and responsibilities. In the UK and USA the treasury function is more based on a position close to the CFO, being responsible for the corporate financial strategy and being an advisor for the financial framework of a company. A treasurer is more than a operational position in the company.
One of the topics on the agenda of the treasurer is the merger and or acquisition strategy of the company. This blog gives you a short guidance in the 26 steps in selling (or buying) a company.

26 process steps

The treasurer will join a team of experts to execute this process.

Step 1. Market research. This research will give a clear view on the market to collect sufficient information for the management to make decisions during this process. Mostly a request for information is launched to candidate advisors that will be used in this sales process. These advisors will give a snap shot on the transactions containing information that is used in the Steps 2, 3, 4 and 5.

Step 2. Track record. Investigate the track record of the advisors involved in this process.

Step 3. Valuation of the company compared to its peers. Valuation can be based on Discounted Cash flow, EBITDA-multiples or Net asset Value.

Step 4. Prepare a Long List of possible buyers (or targets). This list can contain strategic buyers (competitors or companies in the same value chain) and financial buyers (private equity and hedge funds).

Step 5. Negotiate a fee structure for the mandate holders of the transaction, the investment banker, legal and tax advisor.

Step 6. Contact program prepared for the parties on the Long List on an anonymized basis. The name of the selling company is not (yet) mentioned in any contact with parties on the Long List.

Step 7. After establishing the first contacts in the markets a Short List will be prepared containing up to 15 possible candidates

Step 8. Preparing a teaser and a non-disclosure agreement. (NDA)

Step 9. An investment memorandum will be submitted to potential buyers after accepting an NDA.

Step 10. A process letter will be distributed containing the time frame and schedule for the next steps in the buying (or sales) process.

Step 11. Non-binding offer launched by the buyer including a data room request. This non binding offer contains at least: – a price and/or pricing mechanism, – information about the buyer and its representatives, – specification of the deal (buying in cash, shares, earn-out, vendor loan etc.)  and other requests for information that are required to launch a binding offer

Step 12. The bidder will arrange a bank financing agreement or term sheet.

Step 13. Assessment of the bids by the seller. To a maximum of 5 possible candidates will be assessed.

Step 14. Send an invitation to organize a due diligence. This due diligence will be related to the domains of legal, fiscal, financial, Human Resources, intellectual property, environmental and commercial items. A data room will be available for the potential buyers. Management of the selling company and management of the buying company will give management presentations. Also site visits can be part of this process. The due diligence reports will show the risk, the impact of these risks and the possible actions to mitigate this type of risk.

Step 15. Golden parachutes. Offer to key managers in the target company who probably will not “survive” after the transaction but who will be important in de selection process.

Step 16a. Launch of a binding offer including reservation to final approval by the banks and  shareholders of the buyer.

Step 16 b. Presenting term sheet of banks showing the financing capabilities of the buyer to close the deal.

Step 17. Start the approval/advise process to inform formal regulators and the employee’s council of buyer and seller.

Step 18. The seller will send a term sheet/heads of terms to the final preferred bidder (or 2 bidders)

Step 19. The seller gives exclusivity rights to one or two preferred bidders for a period of 3-4 weeks to negotiate a Sale Purchase Agreement (SPA) or an Asset Purchase Agreement (APA).

Step 20. Negotiation of SPA or APA containing:
Price and pricing mechanism about corrections on working capital, debt and cash position and conditions precedent.
Representations (Reps). A declaration of the seller about all the information submitted to the buyer. This information can’t give any reason for discussion or claim after closing.
Warranties, valid for a defined period containing a defined amount to cover certain risks

Step 21. Signing

Step 22. Closing. Transfer of shares from seller to buyer

Step 23. Settlement of share price payment after pre defined calculation of the price as defined in the pricing mechanism.

Step 24. Placing of funds on an escrow account, established to cover the warranties given buy the seller.

Step 25. Closing of accounts that were used for settlement. In the Netherlands a notary public is used in the settlement procedure, but this is not the process in other countries.

Step 26. 18 months after closing. Release of the escrow funds to the seller.

These 26 steps are a framework, but some steps can be merged in one process step. The position of the treasurer in this process is linked to his experience and his position in the management of the company.

 

Theo Paardekoper 

Independent treasury specialist

 

The changing training requirements of banks

| 26-5-2017 | Michiel van den Broek | treasuryXL |

 

Some time ago Treasurer Search published an article of our expert Michiel van den Broek. We believe that the topic of changing training requirements is still relevant – for banks and maybe even in a broader context.
Michiel van den Broek writes: Needless to say that the changing processes and services at banks are driven by the rapid information technology developments. This shift also impacted number and composition of bank staff.

Training

During years of training bank staff, I experience a growing demand for financial basic knowledge, for example:

  • What are core activities of banks and how do these generate different types of income.
  • What are the characteristics of various financial products such as equities, forwards and interest rate swaps.
  • How do I calculate the settlement amount of a financial transaction.
  • What determines the value of a bond.
  • What risks do banks run and how to manage risk.
  • How is the processing of financial transactions structured.

Sufficient financial basic knowledge contributes to better communication and understanding that enhances development & implementation of IT projects. Another important advantage is the lower operational risk: fewer errors, faster identification and problem solving due to better awareness and understanding.

Training online

At the same time I experience lower popularity of traditional training, such as self-study or classroom programs. There is more demand for interactive and easily accessible training via live online classrooms that that can offer next possible advantages:

  • More flexible scheduling.
  • Missed lessons can be viewed (all classes are recorded).
  • Easy access: no need for a training location.
  • Highly interactive.
  • Lower costs.
  • Higher frequency, more participants.

The improved software and increased internet speed reinforce the trend towards live online classrooms.

The changing training requirements at banks is therefore both content and form. There is more demand for financial basic knowledge through online facilities.

 

 

Michiel van den Broek

Owner of Hecht Consult

Risk Management – what does it mean

| 24-5-2017 | Patrick Kunz |

You might visit this site, being a treasury professional with years of experience in the field. However you could also be a student or a businessman wanting to know more details on the subject, or a reader in general, eager to learn something new. The ‘Treasury for non-treasurers’ series is for readers who want to understand what treasury is all about.
Our expert Patrick Kunz tells us more about an important task of a treasurer: Risk Management

Background

One of the main task of a treasury is risk management, more specifically financial risk management. This is still broad as financial risk can result from many origins. Treasury is often involved in the risk management of Foreign currency (FX), interest rates, commodity prices and sometimes also balance sheet/profit loss. Furthermore insurances are often also the task of the treasurer.

Exposure

To be able to know how to reduce a certain risk the treasurer first needs to know about the risk. Often risk positions are taken outside of the treasury department. The treasurer needs to be informed about these risk positions. FX and commodity price exposure is often created in sales or procurement while the interest rate risk is created in the treasury department itself (although this is not always the case). In an ideal world the treasurer would like to know an exposure right after it is created. Often IT solutions or ERP connections with treasury help with that.

Policy

Once the exposure is know the treasurer needs to decide whether it is a risk position or not and whether he wants to mitigate this risk by hedging it. Let me explain this with an FX example: A EUR company who buys goods in USD is at risk for movements in the EUR/USD rate. However, if the company is able to sell these goods at the same time they are bought (a sales organization), for  USD then the net exposure could be lower. Risk Exposure is therefore lower as only the profit needs to be hedged.

Risk appetite of the company determines if the treasurer needs to take action on certain risk exposure. Some companies hedge all their FX exposure. The reason for this is often because FX risk is not their core business and therefore not a business risk. Non-core risk needs to be eliminated. Commodity risk is sometimes not hedged as this is the company’s core business or a natural hedge as the companies is also producer/miner and seller of the commodity. Other companies have more risk appetite and hedge only amounts above a certain threshold. Due to internal information restrictions, delays or accounting issues and the fact that some currencies are not hedgable most multinationals always have some FX exposure. In the profit and loss statements you often see profit or losses from FX effect, either realized or non-realized (paper losses).

Hedging

Once you know the risk position the treasurer needs to determine how to reduce the risk of that position. He does that by hedging a position. A hedge is basically taking an opposite position from the risk. Preferably the correlation of these positions is -1 which means that both positions exactly move in opposite directions, thereby reducing the risk (ideally to 0). For FX the treasurer can sell the foreign currency against the home currency on the date the foreign currency is expected, either in spot (immediate settlement) or forward (in the future), removing the FX exposure into a know home currency exposure.

Certain vs uncertain flows

Important about hedging is the way you hedge. A hedge can commit you to something in the future or a hedge can be an optional settlement. This should be matched with the exposure. If the exposure is fully certain then you should use a hedge which is fully certain. If an exposure is only likely to happen (due to uncertainty) then you should use a hedge that is also optional.

Example1: a company has a 1 year contract with a steel company to buy 1000MT of steel every month at the current steel price every month. The goods need to be bought under the contract and cannot be cancelled. This company is at risk for the steel price every month because the steel price changes every day. The treasurer can hedge this with 12 future contracts (1 for every month) locking in the price of the steel for 1000MT. The future contract also needs to be settled every month matching the risk position. 0 risk is the result.

Example2: company X is a EUR company and looking to take over company Y, a USD company. The company needs to be bought for USD 100 mio. Company X has the countervalue of this amount in cash in EUR. The companies are still negotiating on the deal. Currently the EUR/USD is at 1,10. The deal is expected to settle in 6 months. Company X is at risk for a change in the EUR/USD rate. If the deal goes through and the rate in 6 months changes negatively then X needs more EUR to buy USD 100 mio. making the deal more expensive/less attractive. There is a need to hedge this. If this would be hedged with a 6M EURUSD forward deal the FX risk would be eliminated but there is still the risk that the deal is cancelled. Then X has the obligation out of the hedge to buy USD 100 mio. which they have no use for. This is not a good hedge. A better hedge would be to buy an option to buy USD 100 mln against EUR in 6 months. This instrument also locks in the EURUSD exchange but with this instrument the company has the option to NOT use the hedge (if the deal is cancelled) matching it ideally with the underlying deal.

Conclusion

For a treasurer to do effective risk management he needs information from the business to determine the risk exposure. Furthermore he needs to assess the certainty of this exposure; how likely is the exposure to happen. With this information, together with the pre-determined risk appetite (whether or not written down in a policy confirmed by senior management), the treasurer can decide if and how to hedge the position. The certainty of the exposure determines the hedging product that is used.

Hedging products can be complex. Banks can structure all kinds of complex derivatives as hedging products. It is the task of the treasurer to determine the effectiveness of a hedge; a treasurer if often expert in these product and their workings. Hedging could have impact on accounting and sometimes profit/loss consequences but that is beyond the scope of this article.

 

 

Patrick Kunz

Treasury, Finance & Risk Consultant/ Owner Pecunia Treasury & Finance BV

 

“Systems om je bank buitenspel te zetten” – Verslag van mijn Financial Systems presentatie

| 23-5-2017 | Pieter de Kiewit |

Dit is een verslag en korte samenvatting van mijn presentatie die ik mocht houden op het Financial Systems evenement. Afgezien van een gênante vertraging door mijn gebrekkige Powerpoint skills was het een prettige sessie afgerond met een pittige discussie tussen experts in de zaal. Eerst een korte samenvatting:

Als Feyenoord fan ben ik dit jaar gelukkig en weet veel van voetbal, ook al speel ik het niet. Daarin ligt een parallel in mijn werk als treasury recruiter. Maandelijks krijg ik van circa 100 experts persoonlijk college en zie een veelvoud aan cv’s. Ik denk dat ik hierdoor inzicht heb in systemen die worden gebruikt om treasury processen te managen en ik zie de afgelopen decennia interessante ontwikkelingen die de laatste jaren in een versnelling zijn geraakt.

Zonder namen te noemen van leveranciers, ik doe geen software sales, heb ik een lijst gemaakt van diensten en producten die de gereedschapskist van de treasurer kunnen vergroten en afhankelijkheid van zijn bank verkleinen. Toen ik deze lijst opstelde, viel me op dat er tussen de vakgebieden cash & werkkapitaal management enerzijds en funding anderzijds interessante ontwikkelingen zijn zoals bankonafhankelijke betaalplatforms, crowdfunding en het bankkosten inzichtelijk maken. In het managen van risk zie je bijvoorbeeld trade finance in blockchain en partijen die FX transacties tegen ongebruikelijk lage marges bieden.

Banken daadwerkelijk buitenspel wordt lastig en is volgens mij ook niet het streven. Banken bashen vind ik een zeer onsympathieke hobby. Daarbij is de Fintech wereld ook nog niet volwassen met alle bijbehorende consequenties. Voor de drukbezette treasurer, voor de DGA en CFO die maar incidenteel te maken hebben met het vakgebied kunnen deze ontwikkelingen nogal onoverzichtelijk zijn. Helaas is er geen oplossing die snel inzicht verschaft. Wel denk ik dat er mooie kansen liggen voor degene die vooraan wil meelopen in ontwikkelingen.

De discussie die zich ontspon tussen financiële lijnmanagers en treasury experts ging, onder andere, over de vraag of bankkosten daadwerkelijk inzichtelijk zijn en wat de toekomstige rol van de banken zal zijn. De Powerpoint presentatie is onder dit artikel opgenomen. Ik verheug me op verdere events waar discussie rond dit thema kan worden verder gevoerd.

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

 

Klik hier als je de presentatie van de sessie wilt bekijken.

 

 

 

 

How to improve your working capital with Trade Finance instruments

| 22-5-2017 | Olivier Werlingshoff |

Trade finance instruments are developed especially for companies that deal with  export and/or import of goods to reduce risk but also to improve the working capital. Before going into the working capital part first let us refresh the theory.

If you are an importer of goods you would like to be sure the goods you will receive are the same as the goods you ordered. How can you be sure that the exporter sent you the right quality of goods and the right quantity, or that he sent them at all? One of the possibilities you have to reduce that risk is to pay after receiving the goods. If the quality and the quantity do not match with what you ordered, you simply do not accept the goods and do not pay the invoice.

At the same time the exporter of goods is worried that after sending you the goods, the invoice will remain  unpaid after the agreed payment period. What if the client does not accept the goods in the harbor? He would then have to arrange for new transport to return the goods or try to find new clients in a short period of time.

There is a lot of risk for both parties especially when they do not know each other very well or if they are located on different continents.

Letter of Credit

In this case a Letter of Credit could be a solution. With a Letter of Credit you make agreements with the exporter about the quality and the quantity of the goods that you buy, and how, when and where the goods will be shipped to.  Only if all terms and conditions of the Letter of Credit have been met the bank will pay the invoice. A lot of paper work will be part of the agreement for instance a Bills of Lading, a commercial invoice, a certificate of origin and an inspection certificate. As an additional security, the exporter can have the Letter of Credit confirmed by his bank.
In a nutshell this is the basic of how Letters of Credit (L/C) works.

Working Capital

Now you can ask the question how could this improve your working capital?

Firstly you will have more security that the payment will be made, therefore the risk of nonpayment will be reduced.

With trade finance you could also set up a line of credit based on your security and overall financial situation.

For the importer, he can finance the gap between paying the exporter and selling the goods to a buyer or use it for manufacturing purposes.

For the exporter, he can fund the gap between selling the goods and receiving payments from the buyer.

If there is not enough equity or there are no sufficient credit lines available, there is another option. Transaction Finance, hence the goods you will sell. [Export L/C] are used to fund [collateral] the buying of these same goods [Import L/C] This is called a Back to back L/C.

There could be a fly in the ointment, however! What happens when there is a mistake made in the paperwork? If this is a small mistake both parties would agree the transaction will go forward. But if during shipment the prices of the goods drop the importer will maybe not be very collaborative and will grab this opportunity to refuse the goods and not to pay the invoice!

Since the credit crisis the use of L/C’s went through the roof. If you need consultancy advise on this topic, drop us a line!

Olivier Werlingshoff - editor treasuryXL

 

Olivier Werlingshoff 

Group Treasury Director

 

 

 

More articles from this author:

How can payments improve your working capital?

Managing cash across borders

How to improve cash awareness without targets

Blockchain and Supply Chain Finance: the missing link!

| 19-5-2017 | Carlo de Meijer | treasuryXL |

Our expert Carlo de Meijer is our blockchain specialist and publishes his articles on a regular basis. We present his latest article about blockchain and supply chain finance in a shorter version.
Carlo writes: Whereas the focus on the use of blockchain long time has been on payments and securities, an important but still undervalued use case has been supply chain finance. But that is changing. The complexity and scale of existing supply chain finance solutions has posed major challenges in ensuring adequate funding and efficient operations. According to some blockchain technology has the potential to be a game-changer for supply-chain finance. Let’s have a look.

Present state

Supply chain finance (SCF) is a generic term for a wide variety of financing instruments, used to finance various parties in a supply chain. SCF refers to the use of short-term credit to balance working capital between a buyer and a seller, thus minimising aggregate supply chain cost. Businesses can use supply chain financing to build stronger relationships with suppliers, decrease currency risk and ultimately improve liquidity.

Financial institutions offer supply chain financing solutions aimed at improving the purchaser’s working capital, and the supplier’s liquidity, by providing an efficient payables platform to streamline the payment process. Compared to the “old-fashioned” Letter of Credit, SCF now also encompasses new trade finance instruments including factoring, reverse factoring, payables financing, and dynamic discounting. Reverse factoring is the most popular and most widely used supply chain finance instrument. In reverse factoring, receivables are sold to a bank at a discount as soon as they are approved by the buyer. The bank then commits to pay the company’s invoices to the suppliers.

It is important to understand that supply chains are complex by nature; various parties are involved from raw goods supplier, producer and distributor all the way up to the consumer. This has posed major challenges in ensuring adequate funding and efficient operations.

Blockchain and supply chain finance

The question is: what can blockchain mean for supply chain finance and how could it be applied?

A blockchain-based supply chain finance solution more specific via so-called smart contracts will essentially enable all parties in a supply chain finance solution to act on a single shared ledger. A supplier and manufacturer, along with every other participant, will solely update their parts of the transaction, enabling efficiency and an “unprecedented” level of trust and transparency on a ledger record that is immutable.

“If you talk to supply chain experts, their three primary areas of pain are visibility, process optimization, and demand management. Blockchain provides a system of trusted records that addresses all three.” Brigid McDermott, vice president, Blockchain Business Development & Ecosystem, at IBM

Blockchain technology can offer great potential for both corporates and banks in terms of increased control, speed and reliability of their supply chain and at a fraction of the cost of their current infrastructure. Payments made via this digital system can be monitored by both parties, meaning that suppliers are no longer at a disadvantaged positon in the buying process while they wait for processing. Blockchain will speed up the process, giving the two companies more control, and in the long-term would ultimately create more robust supply chains.

Because the bank can see both the original contract as well as the order placed with “Company B by Company A”, it can verify both authenticity and provenance. Further, if the contract tracks manufacturing or transportation events, the bank can also know the state of fulfilment at any given time. What should be quite clear is that the visibility and auditability that are main characteristics of blockchain technology allow financial collaboration across supply chain echelons, not just bilaterally.

The time required from initiation to payment can therefore be dramatically reduced. In addition to the reduced transaction time, other benefits for importers and exporters include reduced bank fees (due to less manual activity on the part of the banks), reduced time for loan approval, and reduced risk of fraud. This way of financing a supply chain is radically cheaper and more efficient than the current way of doing business.

Blockchain: the missing link

Using blockchain may provide a simple system of secure record keeping that allows the bank redeeming CFS “to ensure that the CFS presented by the holders has been used to finance appropriate supply chain smart contracts”. At the same time suppliers using the blockchain system may retain the privacy that is need in their financial transactions with their sub-suppliers.

There are still challenges to be dealt with, too, such as the need to implement paperless trade, issues of data privacy, and how to get all members of a supply chain to participate. If global supply chains are to gain the full benefit of this technology for managing payments and related data, all parties that play a role in global trade must be involved!

By providing this missing piece of the information and supply chain management puzzle, blockchain may become the missing link!

Blockchain SCF projects

Since early this year the number of blockchain projects to improve supply chain finance is growing firmly. Especially IBM is very active in this area and partnered with companies in China and India to work on new blockchain-based solutions. IBM also teamed with Danish logistic and transport company Maersk Line, to create a new solution to digitize the global, cross-border supply chain using blockchain technology. Start-ups are at the same time popping up to help bridge the gap to this new technology, such as blockchain-based financial operating network Fluent, which aims to streamline supply chain finance.
“Blockchains built into supply chains can offer trust and accountability, as well as compliance with government regulations and internal rules and processes, resulting in reductions in costs and time delays, improved quality, and reduced risks,”Arvind Krishna, IBM Research Senior Vice President and Director Yijian Blockchain Technology Application System

 

Carlo de Meijer

Economist and researcher

 

 


You can read more about the different SCF projects in the complete article of Carlo de Meijer on LinkedIn.

 

 

Long term or short term debt – your choices

|18-5-2017 | François de Witte |

You might visit this site, being a treasury professional with years of experience in the field. However you could also be a student or a businessman wanting to know more details on the subject, or a reader in general, eager to learn something new. The ‘Treasury for non-treasurers’ series is for readers who want to understand what treasury is all about. Today our expert François de Witte will explain de difference between long term and short term debt.

One of the main tasks of the treasurer is to ensure that the company has the required funds to operate. The treasurer will usually contact the banks for this funding. They can also extend long term loans (LT) or short term loans (ST).

Raising short term debt has several advantages, because it is more flexible, there is a lower cost due to the lower margin (smaller risk profile than long term debt) and usually lower interest, funds can be raised quickly and usually, you can repay your debt without penalty.

However, there are some drawbacks. The required repayment comes quicker than for LT loans, there can be potential difficulties in renewing short term loans, and it will be more difficult to combine ST debt with a fixed rate interest.

For this reason, many corporates take up long term loans. It helps them to improve the financial structure (better liquidity ratio). During the term of the credit facility, there is no renewal risk, and long term loans can be taken up with fixed or floating interest. Many banks will see long term loans as a prerequisite to finance fixed assets and investments.

In that case, the corporate will have to accept a higher price on these loans, a longer set up time and a possible prepayment penalty in case there is a fixed interest rate during the long-term loan.

Financing policy

The classic financing policy aims to match the maturity of the financing with the maturity of the assets. Under this policy, long term assets will be financed by long term loan, and short term assets by short term loans. An area of concern are the working capital needs. Are these to be considered as long term assets as short term assets? Usually the uncompressible part of the working capital need is considered as a long-term asset, whilst the fluctuating part (including the seasonal requirement) is considered as short term asset.

Some companies use a more aggressive financing policy and chosse short term financing to finance all the working capital needs, which can be risky. Others are more conservative and use long term loans to finance also the fluctuating part of the working capital needs.

Bank Financing versus bonds or Commercial Paper financing

Usually midcorporates and smaller corporates will use bank financing, also for the long-term financing, because it is easier to be set up. There is no need to have a complex prospectus or to ask for an external rating and there are less disclosure and reporting requirements. In addition, there is more flexibility in the repayment schedule, and it will be easier to negotiate a floating rate.

However larger corporates, those with an external rating or a large name recognition, will also consider bond or Commercial Paper financing. The bond financing will allow for longer term maturities, and the possibility to lock in the interest rate for longer periods. Bonds and commercial papers enable a diversification of funding sources, and can be traded in the market. In addition, there is no obligation provide side business to the lenders.

Bond financing

The world’s bond market can be divided into two broad groups:

  • The domestic bond market (issued in a country by resident issuers)
  • The international bond market (issued in a country or in the international markets by non-resident issuers). These also include the Eurobonds

Different bonds

The most common bonds are the straight bonds. In this case, the issuer issues securities for a fixed term with an annual or semi-annual interest payment at a fixed rate.

Example: Issuer A issues on 10/6/2017 EUR 100 Million debt at 6 % for 7 years.  In this case, the bondholders are entitled to receive an annual interest rate of 6 % (also called the coupon) on the 10th June of each year from 2018 until 2024, and the full reimbursement of the loan on 10/6/2024.

We also see quite frequently the issuance of Floating Rate Notes. This is a medium term or long term bond with a coupon based upon a floating rate based on a benchmark rate (e.g. Euribor or Libor) plus a “spread” based upon amongst others the credit quality of the issuer.

Zero-coupon bonds that do not foresee for periodic interest payments, but for the full reimbursement of the capital and interest at the final maturity of the bond.

Convertible bonds can be exchanged later or with another instrument, mostly shares.  The coupon is usually lower because of the option granted to the bondholder.

Public bonds are bonds issued by a bank syndicate through a public offering with prospectus. These bonds are focusing both on the retail and on the professional investors. They also must comply with the specific requirements for the prospectus, which sometimes needs to be submitted beforehand to the competent authorities for approval.

A private placement (or non-public offering) is a bond issue through a private offering, mostly to a small number of chosen investors. Private placements have less heavy constraints in term of prospectus.

Since 2000, the global bond markets size has nearly tripled in size. Today it is worth more than $100 trillion

(Source: Bloomberg, June 2016).

François de Witte – Founder & Senior Consultant at FDW Consult & Flex Treasurer

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More articles of this author:

Treasury for non-treasurers: Short term loans from a treasury perspective

Working capital management: Some practical advice on the optimization of the order to cash cycle

Management of bank mandates – EBAM – A lot of challenges

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