1 year to Brexit – the banking exodus?

| 09-04-2018 | treasuryXL |

If all goes as stated, then the United Kingdom will be leaving the European Union on 29th March 2019. There has been fierce competition within the EU to entice banks away from London and to settle within the Euro zone. In London there is a fear that there will be a banking exodus –  an industry that has prospered and made London a global centre. At till now banks have been able to sell their services into Europe via London, that this is envisaged to change. So, how are the major European cities faring in their campaigns?

What is at stake?

The scenarios of job losses are varied – 10,000 job in banking, 20,000 in further financial services. Others speak of job losses totaling more than 200,000. The large US investment banks retain more than 80 per cent of their European staff in London. The main target appears to be the Euro clearing role – a settlement service mainly in financial derivatives denominated in Euro’s that is now performed in London.

The Netherlands has certainly tried to attract interest from foreign banks and has many good qualities. Most of the population speak English, and there is a good infrastructure. Tax incentives are offered to qualified foreign workers, together with a global port in Rotterdam. The Netherlands Foreign Investment Agency is actively engaging with foreign companies, extoling the virtues of the country. Recently, Unilever took the decision to place its headquarters in Rotterdam – even though they have had a head office there for close on 100 years. Whilst there is already an appreciable physical presence of foreign banks on Dutch soil, there have yet to be any big announcements about a bank moving from London to Amsterdam or Rotterdam.

Germany, and specifically Frankfurt, have also been hard at work. The economy minister for the state of Hesse, claims that more than 20 financial institutions have chosen for Frankfurt. As of today, their names have not all been revealed. Frankfurt is an established financial centre, though discernably smaller than London. As well as banks, there are also regional corporate treasury centres, prime brokers, legal services and other ancillary groups.

Paris – that has been chosen for the European Banking Authority – is also in the picture but does not appear to be attracting the financial institutions. If banks follow the London model, then they would rather be closer to the central bank – the ECB – and that is headquartered in Frankfurt.

Relocation of the financial industry from London to Europe will be good for local employment. It is not just the direct banking industry that will be of benefit to the local communities. The support services are very significant and must also be factored into any equation.

With now less than 12 months to go till Brexit, the race will be heating up to woo the banks as the prize is very enticing and the gains to local economies very large!!

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State of the nation – the future looks bright

| 06-04-2018 | treasuryXL |

Last week, the Centraal  Bureau voor de Statistiek (CBS) released their year end data for 2017 regarding the Dutch economy. The recovery is strong – for the first time since 2008 the Netherlands complies with 2 of the important Euro criteria at the same time; the government debt is below 60% of GDP and the annual budget deficit must not exceed 3% of GDP. Furthermore, Dutch GDP grew at an annual rate by 3.2% in 2017 – this is higher than in 2016 when the growth was 2.2%. This is the strongest growth since 2007. We take a look at the data and the contributing factors.

Debt

At the end of Q4 2017, government debt was reported as EUR 416 bn. This is 56.7% of GDP, compared to 61.8% in 2016. There was a reduction of EUR 18 bn in the total debt – the largest annual fall recorded. As recently as 2014, this ratio stood at 68.0%

Budget surplus

At the end of Q4 2017, the government had a budget surplus of EUR 8 bn – a surplus of 1.1% of GDP. In 2009, this was a deficit of 5.4% of GDP. Expenditure increased by EUR 7 bn in 2017, but this was offset by an increase in revenue of EUR 12 bn. Tax revenues increased by EUR 15 bn. There was additional income of EUR 8 bn from the sale of state shareholdings in ASR and ABNAmro among others.

Inflation

There was a rise in consumer prices – CPI showed an annual rise of 1.4% in 2017. This compares with a rise of 0.3% in 2016.

Labour

Wages in 2017 increased by 1.7% and unemployment fell in 2017 – at the end of 2017 the rate was 4.1%. Shortages of available labour are being observed in the market – employers have stated that they are finding it increasingly hard to find appropriate employees. The latest reports suggest that there are 1 million vacancies, but that employers are having difficulty finding qualified people. Most of this growth appears to be coming from the small and medium sized enterprises (MKB) – large organisations are still in a round of cost-cutting and down-sizing.

The report of the Netherlands looks very rosy, but international events could impact on the health of the economy. There are threats of trade wars; Brexit will impact on trade within 1 year; the EU parliament is asking for more money in the next budget cycle; the composition of the new Italian government could cause unrest within the rest of the EU.

The future does look bright, but caution is advised on the road ahead.

What future role for CSDs in blockchain post-trade environment?

| 05-04-2018 | Carlo de Meijer |

Blockchain technology enables real-time settlement finality in the securities world. This may mean the end of a number of players in the post trade area. For a long time, central securities depositories (CSDs), as intermediators in the post-trade processing chain, were expected to become obsolete. CSDs, but also other existing players in the post-trade environment, are however changing their mind on these new technologies and on their future position in the blockchain world. Increasing regulation, legacy systems and costs pressures, are drivers for CSDs to at least embrace some aspects of blockchain. They are increasingly considering them as enabler of more efficient processing of existing and new services, instead of a threat to their existence. It is interesting to see that some of these actors – who could be potentially big losers in a distributed ledger technology (DLT) or blockchain system – are open to innovation with blockchain and willing to invest in DLT. Last January SWIFT and seven CSDs worldwide agreed on a Memorandum of Understanding to explore the use of blockchain technology in the post trade process esp. e-proxy voting.

Where do CSDs stand now?

Complex and fragmented post-trade infrastructure

The current post-trade infrastructure is highly complex and fragmented, crowded with intermediaries, and dealing with outdated legacy systems and technologies. Much of the complexity and fragmentation of the post-trade world is the result of the various participants (custodians, issuers, registrars, CSDs) holding their own, separate ledgers in order to carry out the processes. Consequently, they spend much time and resources on reconciliation and risk management, in order to ensure that transactions can be (and are) appropriately carried out. The completion of securities transactions is as a result a costly and risky business. This has important consequences, efficiency-wise.

Situated at the end of the post-trading process, CSDs are systemically important intermediaries. In the post-trade process the 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, in materialised or dematerialised form; and for the, involving the issuance of further securities by issuers, and their onboarding onto CSDs’ platforms.

Is there a future for CSDs in a disruptive blockchain world?

Blockchain: disruption in securities post-trade

DLT has the potential to heavily disrupt existing post-trade processes in financial services, impacting the business model of a number of intermediaries. This raises significant questions for the present actors in the post-trade world as their role may change dramatically or even disappear. For some actors in the post-trade world, DLT could completely replace their businesses or even make them obsolete. And others should question what will be their added-value within future DLT services.

With blockchain, that is linking trading partners directly, everything will be in place in the ledger at the time of the transaction. Institutions will no longer have to maintain their own databases in the future with DLT, as there will be only one database for all participants in 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. Buyers and sellers can match transactions in seconds and all parties are aware a transaction has been done. This will heavily ease the reconciliation process. Blockchain could ultimately become the standard for financial transactions and real-time settlements, increasing transparency and efficiency in a highly fragmented industry.

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

Financing your international trade – documentary collections

| 04-04-2018 | Lionel Pavey |

 

Acquiring the right goods at the right price can eventually lead a company to overseas markets. International trade has certain barriers – buyers and sellers have never met and are reluctant to completely trust each other; drawing up documentation can be difficult and time consuming due to difference in law between 2 countries; agreement has to be made on the settlement currency; documentation that implies ownership needs to be sent, but the seller is hesitant to have these released to the buyer before payment has been made. This article looks at 1 of the 3 main financial instruments used in international trade – the documentary collection (DC).

What is the process?

1 – Buyer and seller agree terms and conditions for a trade to take place – the means of payment, the collecting bank (this is usually the house bank of the buyer), a detailed description of the set of documents that have to supplied.

2 – The seller (exporter) arranges for shipment of the goods to the buyer (importer) via a shipping agent and receives a transport document (usually a bill of lading) that is negotiable.

3 – The seller prepares the agreed documents into 1 package and presents these to his bank (the remitting bank). This will include the bill of lading, certificates of origin, inspection notices, a collection order stating the terms and conditions under which the bank can release the documents etc. and a draft.

4 – The remitting bank will send these documents to the collecting bank instructing the collecting bank to present the documents to the buyer and to collect the payment.

5 – The collecting bank will inspect the documents and the contract, ensuring that they are in compliance with the collection order.

6 – The collecting bank will contact the buyer stating that the documents are in order, or what discrepancies have been established; and inform the buyer about the terms and conditions of the collection order.

7 – The buyer will be shown the documents and asked to accept them. Acceptance is recognised by signing the draft. When the documents are accepted, and payment is made then the documents are handed over to the buyer.

8 – Release of the documents occurs in  2 ways – documents against payment is when payment is made at sight of the documents; and documents against acceptance is when payment is made at an agreed date in the future.

9 – The buyer takes possession of the documents allowing them to receive the goods from the warehouse or port where they are being stored.

10 – The collecting bank arranges to pay the remitting bank either immediately in the event of a sight bill, or at the agreed future date in the event of an acceptance bill.

11 – The remitting bank arranges to credit the account of the seller.

So it is a letter of credit?

No, a documentary collection is an alternative to a letter of credit. In a DC, the banks undertake no guarantee role – they merely advise, release documents and effect payments. If a buyer does not agree to the documents, they do not receive the goods, the banks do not effect payment and the seller is out of pocket. Therefore a DC is normally far cheaper than a LC.

Why use a DC?

Both buyer and seller know each other and are happy with their existing relationship.

The collections are for a one-off transaction – there is no open account between the parties.

The seller has faith in the economic and political characteristics of the importing country.

A LC is not acceptable to both parties.

Documentary collections are governed by the Uniform Rules for Collections as issued by the International Chamber of Commerce.

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist

 

TIS – the single source of truth

| 29-03-2018 | treasuryXL | TIS Treasury Intelligence Solutions |

On Tuesday 27th March 2018, treasuryXL attended a seminar in Amsterdam organised by TIS. TIS stands for Treasury Intelligence Solutions and, during this seminar, Christian Werling from TIS  gave a very informative presentation about their services which focus on cloud solutions for managing the administration of bank accounts. These solutions offer real-time reporting on all bank accounts – worldwide – and the ability to use just one system to validate and release all payments. In a world where a treasury department might hold more than 100 bank accounts, dispersed over more than 10 banks spread out across different time zones  and having to maintain the possession and custody of numerous bank tokens and log in protocols, a one stop solution is very enticing.

Why?

In today’s world, companies can find themselves with a physical presence in a multitude of countries and locations. In the current environment, a corporate treasury would need to log on to the website of every unique bank where they hold accounts and extract the bank statements for the previous day. Using separate bank tokens and log in protocols, this process can quite easily take up to 1 hour. Furthermore, all the separate data needs to be collated and then uploaded into 1 system, Various subsets of the information need to be given to different internal departments so that they can perform their daily tasks – reconciliation, data input and verification.

The reality

In the modern age, you could find yourself as a Treasurer, within a large complex organisation, consisting of a head office, subsidiaries, legal entities and shared service centres. The underlying platforms can consist of book keeping systems, ERP, HR and different databases. Additional data flows come from e-banking systems, TMS and stand alone projects. The output from all these systems are then used to connect to the banks. Furthermore, all these layers of connectivity can be subject to fraud or attack from outside sources.

TIS provides a single point of contact via a SaaS (Software as a Service) platform that connects to all these systems, thereby offering a simple and effective control over the data flows in real time.

Advantages

  • Real time information
  • Control from a single point
  • Centralised bank account management
  • Centralised bank account mandates
  • Transparency
  • Cost efficiencies

After this we were informed about how the system works in the real world. Bas Coolen is the global head of treasury at Archroma – a colour and speciality chemicals company based in Switzerland. They have a physical presence in over 35 countries and 3,000 employees. Formed 5 years ago, they wanted a minimal  IT solution to their legacy banking operations. These operations stretch from Asia, via Europe to the Americas and involved many different banks.  They concluded that no single bank could provide the service they required within every country and that they needed a solution. By adopting the platform offered by TIS, they have been able to implement a global system that encompasses all their bank accounts – this provides them with a single source of truth. Importantly, the security aspects can now be maintained from one source – all the relevant authorisation matrices are now contained in one platform, along with the capability to perform all global e-banking operations from one location.

TIS were joined at this seminar by Cashforce, who presented their Smart Cash Forecasting and Treasury system – that will be the topic of our next blog.

treasuryXL would like to thank TIS for allowing us to participate in this seminar. If you have any questions, please feel free to contact us.

 

Rainy day funds and moral hazards

| 28-03-2018 | treasuryXL |

Christine Lagarde – the chief of the IMF – stated recently that the Eurozone countries should set up a “rainy day” fund that could be used to protect the countries in a time of economic turmoil. As the IMF is seen as the lender of last resort to the world, her words carry weight. Economies are subject to a cyclical motion – going from bad to good and then back down again. Her opinion is that closer integration is needed between the Eurozone countries to protect them from the inevitable downturn when it arrives.

Closer Integration

To achieve this target, it would require at least the following steps:

  • Closer banking union – more mergers
  • Unified capital market
  • Universal deposit protection scheme that is pan-european
  • Integration towards a common tax system

Her speech closely echoes that of her fellow countryman – President Macron. However, whilst receiving support from Mrs. Merkel when making his remarks, he also met with objections from other member states. Countries such as the Netherlands and Sweden voiced their objection to what they perceived as “far reaching” policies, whilst ignoring the fundamental problems and issues within the Eurozone. Their concerns are centred around the public perception of the Eurozone – there has been a growing tide of populist sentiment expressed at recent general elections, together with the continued fallout from the financial and sovereign debt crises that has impacted on the economic well being of the citizens.

Implementation of this policy – according to the IMF – would entail an annual contribution of about 0.30-0.35% of GDP per member state into a common fund. This fund would then pay out in the event of an economic downturn. Given the aforementioned level of disenchantment among citizens, it would not be easy to implement this policy within every member state. Furthermore, whilst pay outs would be conditional on member states meeting certain criteria, the Eurozone has shown in the past that their criteria has been ignored and no sanctions were enforced.

This common fund, whilst being ring fenced, could have an impact on the functioning of financial markets. Just knowing that there is a fund that needs to earn a return could led to distortions in money markets. Also, who decides when a member state can draw down from the fund – the EU, the ECB, majority decision of member states?

And then there is the potential problem of moral hazard. A country could pursue policies that are imprudent, safe in the knowledge that there was a communal fund to save them. Given the record of certain member states since even before the inception of the Euro to deceive, this is not a matter to be taken lightly. Even when countries have be found to have cheated they have always received the help that they need, regardless of all the stated criteria that are in place. Countries that are performing well will have to pay proportionally more into the fund than countries whose economies are not doing so well.

10 years since the start of the crisis and almost 20 years since the introduction of the Euro, we are no closer to a collective harmony than before.

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Peer to peer lending – just a fad or a change in the market?

| 27-03-2018 | treasuryXL |

 

Almost 2 years ago we reported that KNAB Bank had started a crowdfunding initiative to allow, mainly companies, to access an alternative area to fund their businesses, whilst at the same time allowing investors to directly participate in these loans and lend directly – via KNAB – to the borrowers. An extra incentive was that KNAB would directly participate in all loans – their role was not only as an intermediary and facilitator. Now is a good time to look back on their progress and refresh ourselves with the concept of peer to peer lending (P2P).

What is it?

It is an online service that matches the needs of the borrowers with that of the lenders. As the service is only related to lending and does not encompass traditional banking roles, the service providers are able to provide these services cheaper and more quickly than a traditional bank loan. The P2P service provider takes a fee – a margin on the interest rate and/or an annual service charge. In recompense, they enable the matching service to take place, administer the loan and ensure that the investors receive their money back – in the form of capital repayments and interest.

What are the features of the system?

  • It is an online facility
  • Intermediation is provided by the site owner
  • Borrowers can post their proposals online
  • Lenders can choose which borrowers and loans meet their criteria
  • Repayment schedule is included
  • Loans can be secured on unsecured
  • Credit ratings are applied to the borrower
  • Loans can be tracked and monitored for compliance

What role does the intermediary play?

  • Process the loan applications
  • Authenticate the validity of the borrower
  • Perform relevant credit checks
  • Process the cash flows
  • Service the loans
  • Ensuring correct compliance and reporting are carried out

What are the advantages?

As the service is an online matching service, it is fast, simple and cost efficient, This leads to lower interest costs for the borrower and allows investors to directly access the loan market and earn a higher return on their money than traditionally obtained at the bank. Also, the administrative processing time can be a lot quicker than by a bank. The system also can appeal to the ethics of a lender – they have the opportunity to directly help a company that is looking to expand or who require finance for major investment. Furthermore, an investor knows exactly who is borrowing their money – depositing money at a bank does not detail how that money is used by the bank. There has been a political and ethical backlash to banks over the last decade in response to the perceived domination they have within the market. As a lender, it is possible to get yields of between 5% and 9% on your investment. This will be lowered by the costs that the intermediary levy – KNAB take a service charge of 0.85% per annum on the outstanding balance.

What are the disadvantages?

As a lender your money is not guaranteed. You bear all the risks and, in the worst case, could lose your investment. Despite all the due diligence that has taken place before the loan request was placed on the platform, it is still necessary to perform your own checks on the potential borrower – your criteria may be different to that used by the platform. You cannot demand early repayment from the borrower – money that you invest must be money that you can miss for the duration of the loan.

 

How is KNAB doing with their P2P?

  • They have arranged funding for 57 loans totalling EUR 9,125,000
  • The average loan is for EUR 160,087, takes 49 hours to complete and charges an interest rate of 7.83% pa
  • There are 4,533 investors with an average exposure for EUR 905 and a yield of 6.98% pa.
  • All loans are based on linear redemption, have a tenor of between 6 months and 10 years.
  • To date there have been no defaults on principal repayments and there are not payments in arrears.
  • Participation can be from EUR 100 per loan – this allows for diversification.

Conclusion

For investors looking for an alternative investment with a longer duration, P2P can appear interesting. The risks are greater than depositing money at the bank, but the potential rewards far exceed the returns offered by banks. Additionally, for investors looking to approach the market more ethically, it does give the possibility of directly participating in someone else’s ambitions – knowing that your participation is having an effect on society. There are considerable risks, but these must be weighed up against the potential reward. Any investor needs to work out how much they can afford to lose on their principal investment against the higher return being offered.

Contact us

 

Credit Default Swap: What is it – good or bad?

| 26-03-2018 | Lionel Pavey |

A decade ago it was one of the financial instruments that was identified as causing the financial crisis. It had been one of the most popular financial products before the crisis with the market turnover growing by more than 50 times over a period of 7 years. It started out as a simple financial instrument to aid bond holders in obtaining protection from the risk of default. So what is a Credit Default Swap (CDS) and where did it all go wrong?

The buyer of a CDS pays regular premiums to the seller of the CDS – expressed in basis points. These payments are normally quarterly in arrears and the total value of the payment is dependent on the nominal value of the contract. This nominal value relates to the par value of the underlying bonds – if you hold bonds with a par value of EUR 5 million and wanted to buy protection for the full amount, then the CDS contract would be for EUR 5 million.

The seller of a CDS would receive these regular payments and would only pay out if the bond issuer defaulted. At the time of a credit event (default), the CDS seller would assume ownership of the bonds and pay the CDS buyer their par value. It can be likened to comprehensive insurance that we buy for our cars – we pay an annual premium and the insurance company covers us for the costs of any damage to the vehicle in the event of an accident.

What is a credit event?

The definitions of a credit event are set out in the contract and defined by referencing terms agreed by the International Swaps and Derivatives Association (ISDA). The major credit events, in European contracts, are bankruptcy, failure to pay on its debt obligations, and restructuring.

A contract will contain standard terms and conditions –

  • effective start date
  • scheduled termination date
  • the agreed price
  • payment dates
  • the reference entity (normally a bond issuer)
  • the reference obligation (usually an unsubordinated bond)
  • substitute reference obligations (if the original was repaid earlier than the termination date of the contract)
  • calculation agent

As previously stated, when the CDS market started it was seen as a product to protect bond holders and, in the event of a default, the CDS buyer could deliver the agreed reference obligation and receive its par value. In 2005, the limitations of this system were first recognised; Delphi – a manufacturer of auto parts – defaulted. The par value of their outstanding bonds was USD 2 billion – the sum of CDS contracts was USD 20 billion. As original bonds had to be tendered to validate the contract, a run ensued on the bonds and, whilst defaulting, the bond price went up!

This led to the next phase – cash settlement. Here, in the event of default, the CDS seller paid to the CDS buyer the difference between the par value and the market price – facilitated by an auction process to determine the fair market value.

However, an unintended consequence was the discovery and creation of different trading strategies that had not be envisaged when the CDS was designed. Before the introduction of CDS contracts, if you were bearish on a company you would need to short-sell their bonds. This is a sensitive process as the short position needs to be covered via bond lending to maintain the settlement position. With CDS it now became possible to purchase protection on a specific entity at a relatively cheap price – the CDS premium. It was therefore possible to replicate a physical short position with a derivative position.

It also led to the creation of “synthetic” instruments – synthetic CDS’s and CDO’s (Collateralized Debt Obligations). The sum of actual tradeable financial instruments were limited by their issue – synthetic products allowed banks to create products to meet the demand from clients to gain exposure to entities. It was a this stage that the market truly grew – it was possible to replicate any exposure that the client desired. When the financial crisis hit, all the “over the counter” derivatives compounded the problems. No one knew what the potential exposure of their counterparties was. These counterparties could have easily sold CDS contracts that could have a potential exposure to the par value of the underlying reference entities of bonds, CDO’s etc.

Is there a future?

CDS are useful financial products – most of the trades now take place on exchanges. However, the genie is not yet back in the bottle. There are now lawsuits – initiated by hedge funds – claiming that defaults are now being prearranged (Hovnanian Enterprises Inc.). The main problem is still who holds the potential risk and for how much. The essence of the product is viable and the original demand is still there. But, as with many financial products, as soon as they become commoditised, market turnover far exceeds the actual underlying market.

Lionel Pavey

 

 

Lionel Pavey

Cash Management and Treasury Specialist

 

Ripple is making blockchain waves

| 23-03-2018 | Carlo de Meijer |

Almost a year ago I wrote my blog “Blockchain and the Ripple effect: did it Ripple?”. Now twelve months later we may conclude it did. And even more than that. Ripple is making many waves. A lot happened both in broadening their offerings and in enlarging their network. A growing number of banks and payment providers, increasingly join RippleNet, Ripple’s decentralized global network, to “process cross-border payments efficiently in real time with end-to-end tracking and certainty”. By using the growing set of Ripple solutions they are able to expand payments offerings into new markets that are otherwise too difficult or too expensive to reach. The focus of Ripple therefor has especially moved towards emerging markets.

BROADENING RIPPLE OFFERINGS

Ripple was set up in 2012 to create a streamlined, decentralized global payments system named RippleNet, using technology inspired by the blockchain, to record transactions between banks. RippleNet is an enterprise-grade blockchain platform, that nowadays has over 100-member banks and financial institutions. These partners can use all the Ripple offerings.

Solutions

Ripple makes software products based on blockchain technology and sell them to banks, payment providers and others to be used on RippleNet. These are aimed to make cross border payments truly efficient for these players and their customers. Next to their digital asset XRP, the XRP Ledger, and xCurrent, that helps banks settle transactions, Ripple has added a number of new services/offerings to the platform including xRapid and xVia. This in order to attract more clients to enter RippleNet. Ripple is now taking the next step to help build the Internet of Value (IoV), by establishing an Infrastructure Innovation Initiative.

a. XRP: digital asset

From the outset, XRP, Ripple’s digital asset was expected to be an important part of Ripple’s decentralised payment system. Ripple uses its own XRP cryptocurrency as a payment method to make it easier for banks to move money internationally. Banks and payment providers can use Ripple’s digital asset XRP to further reduce their costs and access new markets. One rationale for using XRP is that unlike Bitcoin, the token has one narrowly defined (payments method!) but clearly useful purpose: to help banks move cash faster and more cheaply, especially across borders. The token could be used as a kind bridge currency between fiat currencies. For example South African rands in Johannesburg could become XRP, which could then be turned into baht in Thailand. That could help banks avoid the time consuming and expense of tying up money in different currencies in accounts at other banks.

b. xCurrent: processing payments

RippleNet is powered by xCurrent, for payment processing. xCurrent is the new name of Ripple’s existing enterprise software solution that enables banks to instantly settle cross-border payments with end-to-end tracking (and bidirectional messaging across RippleNet). It provides real-time messaging, clearing and settlement of financial transactions. The xCurrent messaging platform however does not involve XRP. It includes a Rulebook developed in partnership with the RippleNet Advisory Board to standardise all transactions across the network. That ensures operational consistency and legal clarity for every transaction. The Interledger Protocol (ILP) is the backbone of the solution and makes it possible for instant payments to be sent across a variety of different networks.

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

Unilever’s decision – the Ides of March?

| 22-03-2018 | treasuryXL |

On 15th March 2018, Unilever announced its decision to domicile its headquarters exclusively in the Netherlands. This will lead to Unilever having a single legal base for the first time. Traditionally, Unilever had 2 holding companies – Unilever NV, registered and domiciled in Rotterdam the Netherlands, and Unilever PLC, registered and domiciled in Port Sunlight, England. There were 2 head offices – one in Rotterdam and the other in London. Unilever was formed in 1930 by the merger between Margarine Unie and Lever Brothers and has a dual listing in both the AEX and the FTSE index. The 2 companies operate as a single business. What are the reasons behind this decision and what are the consequences?

Framework

Whilst having a dual listing, 55% of the stock are held via the Dutch NV and 45% by the UK PLC. Liquidity in share trading is 1.5 times higher in the Netherlands than in the UK. After this decision, Unilever will have 3 divisions – food and refreshment based in the Netherlands, home care and personal care which are both based in the UK. Under this split, 49% of operating profit is attributed to operations in the Netherlands, the remaining 51% to the UK. Importantly, 92% of the activities occur worldwide outside of these 2 countries.

Nationality

Unilever has one major issue that must be resolved – it must choose its nationality. This is important in determining on what exchanges its shares are traded. As a major constituent of both the AEX and the FTSE, there are many investors and investment funds who hold shares to track the index. If there is no recognised nationality with the UK, this would imply Unilever leaving the FTSE 100 – compelling tracker funds to sell their stock. By incorporating within the Netherlands, Unilever will have one type of share – common shares with common voting rights. There will be no preference shares with extra voting rights.

Brexit

Was the decision taken because of Brexit? Unilever themselves have stated that this was not the case. It is acceptable to conclude that the free choice of the UK to leave the EU did not promote the option to stay in the UK. However, Relx (former Reed Elsevier and also a dual listed Anglo-Dutch company) recently announced that they had also chosen a single location – but they chose UK over the Netherlands.

Defensive

In 2017 Kraft Heinz (a US conglomerate) made a hostile takeover bid for Unilever. This was beaten, but accelerated the decision process within Unilever. By choosing a single listing and single nationality it would appear to be easier to defend the company. The Dutch model affords more protection to the takeover target, being based on the Rhineland model of stakeholders, rather than the Anglo-Saxon model based on shareholders.

The future

Unilever will gain clarity of oversight – the structure of the company is clearer. As a single legal entity it will be easier to issues new shares etc. It should also place Unilever in a more progressive position with regards to acquisitions. This could be interesting news for Dutch banks – allowing them to more directly participate. However, the City of London is still home to the largest financial market in Europe. It will be interesting to see who wins that battle in the future.

The 15th March is historically known as the Ides of March – a day on the Roman calendar. Traditionally it was the date when debts had to be settled. It was also the date when the emperor, Julius Caesar, was assassinated – a defining day in the history of the Roman Empire, that impacted on its future.