MANAGING MARKET PRICE RISKS OUTSIDE OF PURCHASE CONTRACTS

|4-4-2017 | Sjoerd Schneider |

 

As commodity prices have become more volatile over the past decade, many procurement departments have been feeling the need to somehow manage market price risks. The most frequently used strategy to mitigate commodity price risks by such departments is using physical purchase contracts: fixing prices over a long term horizon. However, there are more subtle and dynamic ways to manage price risks, which can lead to significant savings and tactical advantages. These can be achieved when dedicated market price specialists get involved.

Market price risks

Product specialists and buyers are well aware of all specifics concerning their products but are often not skilled in managing market price risks. Nevertheless it often happens that they are the ones in charge of mitigating market price risks in the form of negotiating the pricing paragraphs within purchase contracts.

There are several reasons why having buyers in charge of mitigating price risks merely through purchase contracts is not optimal:

  1. Buyers often don’t have the expertise to assess whether the premium charged for fixing prices is decent
  2. Buyers don’t have the right overview of company-wide commodity risks. When one buyer micro manages his exposures within purchase contracts that does not mean overall risks are managed optimally
  3. The counterparty in a physical deal might know that the buyer doesn’t have other means of fixing prices. This leads to a weakened negotiating position regarding the overall contract.

Mitigate FX risk

To draw the parallel to a traditional treasury issue: when a European company is a buyer of American machinery and services, would it be the buyer fixing the USD rate with the suppliers’ sales team for just that deal? That would not be the optimal strategy to mitigate FX risk. Hence the same counts for commodity price risks. Hedging through the supplier (let alone by the buyer) should never be the only available option. Literally having more options on the table to mitigate price risks than just asking suppliers for long term fixed prices gives substantial benefits:

  • Flexibility:
    • being able to hedge at any moment, without having to request or consult the supplier
    • after a price decrease it might be interesting to fix prices for a much longer term than purchase contracts usually stretch
  • Savings:
    • not paying too much premium to the supplier for executing hedges or for taking over price risks
    • having a larger pool of potential suppliers as there is no longer a requirement for them to sell at fixed prices

Conclusion

Companies of any size should investigate how large their potential savings could be and how much the increased flexibility will help them. The advantages should outweigh the time and manpower that need to be invested.

Sjoerd Schneider

Founder of Insposure

 

 

 

 

More articles from this author:

Commodity price risks deserve a spot within treasury management

 

Treasurers to be the strategic super-heroes for their CFO

|3-4-2017 | GTNews | Lionel Pavey | Udo Rademakers |

Treasurers to be the super-hero for their CFO? We found this article headline on GTNews.com so intriguing that we asked our experts Lionel Pavey and Udo Rademakers to comment on it. According to the article the role of the treasurer has to be re-evaluated due to the fact that deal-making (figures of mergers and acquisitions have increased) is high on the global agenda. Traditionally treasurers focussed on informing the C-Suite and the board and integrated systems and processes after decisions about a deal were made.  Treasurers started to address this issue, which led to a new role of the treasurer, in fact a much more strategic role. The treasurer was no longer a risk manager, but also a ‘business change enabler ‘.  GTNews states: ‘The treasurer who opens this door is truly aligning themselves to the needs of the chief financial officer (CFO).They’ll be a superhero.’

Expert Lionel Pavey added some valuable information on the 4 different stages of a M&A proces.

Targeting

  1. Examine the different methods of payment – cash, debt, equity
  2. Discretely ascertain interest rate levels if using debt
  3. What are the effects of additional debt on the existing bank covenants and financial ratios
  4. Complete takeover or just buying a business unit or division?

Negotiating

  1. Examine the cashflow forecast of the target
  2. Examine any documentation on outstanding loans
  3. Existing pledges – Letter of Credit, Bank Guarantees, financial contracts, contingent liabilities
  4. Outstanding debtors, creditors, taxes etc.

Closing

  1. Detailing the bank accounts
  2. Either merging the bank accounts or creating new accounts at the time of closing
  3. Agreeing all bank balances and outstanding claims
  4. Receiving detailed cashflow forecast for the first 2-3 months after closing date
  5. Combining the new cashflows with the existing forecasts
  6. Arrange any agreed financing

Integration

  1. Close all existing facilities and services that will be no longer used
  2. Ensure the new data is present in the book keeping system
  3. All counterparties are informed of new bank accounts
  4. All authorized personnel have access to new banking systems

Expert Udo Rademakers states:
The posting at gtnews.com  points out where treasurers could add value in M&A activities. Unfortunately, in too many cases, treasurers had been brought into M&A transactions rather late: at a stage where the acquisition already had been concluded and where the treasurer only gets involved in “getting the deal done”.

As pointed out in the article, this is often a missed chance for the company and also for the treasurer of not adding more strategic value. Apart from that, the sooner the treasurer gets on board, the better the company can prepare for this kind of rather complicated transactions. It enabled the treasurer as well to act on a tactical level in order to support the M&A transaction in a cost efficient and well documented way.

What strategic value could the Treasurer bring?

  1. value the target company or the combined entity as a whole based on CF projection models
  2. evaluate the capital mix (cash, debt, equity)
  3. evaluate borrowing capacity/credit lines (low risk, best price)
  4. evaluate the country risk
  5. creating the funding flow overview and analyze this (timing of transactions)
  6. evaluate credit- and forex risk (natural hedging possibilities, consider to pay as much as possible from     “restricted countries” in order to decrease your restrained cash)

If the treasurer has been on board for the strategic part, he is well informed and able to manage the tactical part systematical as soon as the effectuation of the transaction takes place.

The treasurer needs to arrange (if applicable):

  1. temporary limit increase with banks
  2. forex transactions (increase of in- and external limits if needed)
  3. time critical payments to agencies, funding parties, seller, capital injections etc. : validate account information, prepare correct timing of the flow (cut off times, correct payment details and descriptions, etc.)
  4. documenting of all transaction in a systematic way and liaise with all in- and external parties involved.

Especially in high demanding environments where one transaction takes place after the other, mistakes will be made and processes might not be well documented. Obviously this could lead to higher risk and additional costs and lots of additional (correcting) work afterwards. Having a well prepared, skilled treasurer on board could avoid this.

Hence the comparison with a superhero…

Conclusion

Involve the treasurer from the first step
Draw up a detailed project plan for M&A and ensure that it is signed off by Board of Directors
Implement project plan for every M&A
Identify all costs linked to M&A
Highlight any cost savings and/or efficiencies

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist

 

 

 

Udo Rademakers

Independent Treasury Consultant & Interim Manager

 

 

 

 

Instant payments for treasurers

| 31-03-2017 | Alessandro Longoni |

Building on the ideas shared in a previous article about Cash Conversion Cycle on treasuryXL, this piece focuses on the developments that new European laws will bring in the areas of Instant Payments and how this will affect Treasury.

As part of further standardization within the union, European regulators mandated the industry to develop an “instant payments” product aimed to making the funds available on the receiving side “within a maximum execution time of ten seconds”. The SCT Inst scheme has been developed to allow for consumer payments (C2C, C2B) in Euro for the SEPA and will be an optional scheme – meaning that PSPs and Banks are not obliged to join.

Practical Use Cases

From a cash management perspective, Instant Payments open an array of new possibilities for merchants, especially for those operating eCommerce operations. Currently if a customer places an order on a friday late afternoon, the funds are made available (earliest) on monday evening, while the order is most likely processed and delivered by Saturday afternoon. With SCT Inst, if the order is placed on friday at 21:00, the funds will be received (maximum) at 21:00:10 and already available to pay suppliers if needed.

From a treasury perspective, Instant Payments will also allow for more transparency on transactions and easier reconciliation, but time needs to be devoted to update the current tools to facilitate for this. As Instant Payments will gain customer adoption, the incoming payments cash account will be filled with hundreds or thousands of transactions per day, as opposed to one per day coming from your Payment Service Provider. Having direct access and insight in each single transaction will make it easier to reconcile it with the relative order, check the amount and book it in the general ledger, but the sheer number of lines in the system requires current tools to be updated to cope with the increased volume and speed.

Pros and Cons

There are several benefits this new payment method brings to the table, including a strong reduction of working capital trapped to fund operations, however, in order to extract all the benefits, ERP systems need to be updated to check the status of transactions in real-time instead of intervals. Without investing in developing the current tools further, companies risk missing out on the new opportunities to deliver better customer service and create additional efficiencies in cash management.

 

Alessandro Longoni 

Managing Consultant at Proferus

 

 

Basel III and the impact on cost of hedging

| 30-3-2017 | Arnoud Doornbos | Treasury Services |

Corporates will save hedging costs and administrative costs significantly if they shift their hedging activities to exchanges such as CME (Chicago Mercantile Exchange).
In the summer of 2007 a large number of defaults on U.S. mortgage loans did arise. The banks were hit hard by the global domino effect that resulted. A major financial crisis which was followed by an economic crisis led to a revision of the capital requirements of Basel I and Basel II.

New Basel III

The core of Basel III is that many banks have to hold more capital and liquidity to their outstanding investments than they used to in the past. The rules are implemented as from 2013 and should eventually be fully effective in 2019.

Basel III will be a huge challenge for banks in the coming years. The impact on the pricing of financial products and transactions between banks and their clients will be significant.
Since July 2008, the Basel Committee for Banking Supervision has been working on Basel III for all banks worldwide. The European Commission has introduced three Capital Requirements Directives which contains concrete actions and requirements in terms of risk, capital and liquidity management within a bank. The new requirements, part of Basel III, aim to improve the quality and level of capital reserves of banks.

The capital requirements of certain products have increased and banks are encouraged to create additional capital buffers during good economic times so that they are better positioned to absorb losses during periods of economic stress.

Impact of Basel III on liquidity management

Besides sharpening the capital requirements Basel III has a major impact on liquidity management. The new liquidity standards are based on a stress test. In addition Basel III also introduces new long-term liquidity standards that reduce the mismatch between the maturities of assets and liabilities.
Banks will have to increase their reserves sharply in the coming years. Previously, banks only had to keep 2 % capital to their outstanding investments. Now with Basel III this capital requirement has been increased to 7 % (4.5 % hard buffer and an additional 2.5 % margin in bad times) . As a result banks will probably not distribute their profits in the coming years but will add to their capital buffers. Furthermore many banks will have to issue new shares in order to attract extra money in order to meet the new demands.

Counterparty risk

Within Basel III it has been determined that capital must be held for the credit risk on a counterparty a bank is exposed to in OTC derivatives or equity financing transactions. In addition, market participants are encouraged to take one central counterparty (clearing houses) for OTC derivatives. Any time a bank takes a risk against another party the probability of default exists. To offset this concern, and to support on-going stability within the interbank market, banks have long emphasized the importance of measuring and managing counterparty risk. Now banks have becomes noticeably less comfortable trading with other counterparties including other banks.

The recent deterioration in credit ratings that has hit many U.S. and European banks has led to a heightened sensitivity over counterparty risk. These apprehensions may not be voiced directly, but they become evident when front office trades that would have cleared in the past, no longer do because credit lines have been reduced. There is increasing focus on limiting exposures, even among global banks. And that is starting to affect the way we do business.
CVA (Credit Valuations Adjustment) desks have grown in popularity, as banks seek more effective ways to manage and aggregate counterparty credit risk.
The market has changed now in terms of how counterparty credit risk was calculated. Now, no client is assumed to be truly risk free. Different prices are now expected for different clients on that same interest rate swap, depending on variables including the client’s rating and the overall direction of existing trades between both parties.
On all new interest rate, FX, equity, or credit derivatives, CVA desks price the marginal counterparty risk for inclusion into the overall price charged to the client. CVA is a highly complex calculation.

CVA looks at default through the spread of the counterparty. A swap facing a single B credit that trades at 1200 in CDS is going to be charged a lot more than the same swap facing a AA counterparty. The CDS spread is normally a core input of CVA pricing.

What we see in practice is that in the manual process, the CVA desk team of a bank often passes along suggestions to the salesperson for improving the credit risk in a trade and enabling the sales person to offer the trade at a lower credit price. Examples of that would include improving the collateral agreement with a client, or inserting a break clause.
In the traditional CVA approach, a bank accepts a new trade, takes a fee and uses that fee to buy good hedges for all the risks in that trade. These hedges should eliminate all of the bank’s risk, but this is not necessarily the case once Basel III is taken into account.

Basel III does not recognize all types of hedges that the bank might want to use. Therefore the regulatory capital for certain trades will not be zero, even if the bank has used the full CVA fee to hedge all its risks.
The first impact Basel III has on CVA desks is on pricing. Pre-deal pricing needs to be reviewed to ensure the costs of imposed regulatory capital are covered. If not, additional pricing may need to be added. And the decision on which risks are efficient to hedge also becomes affected not just by strategic or business reasons, but also by the regulatory capital impact.
As part of Basel III’s updated regulatory capital guidelines, a new element has been added: V@R on CVA. Regulators have specified very precisely how the underlying CVA must be calculated for this charge. Banks will therefore need to decide whether to adjust their pricing and balance sheet CVA to match the Basel III rules, or to use different CVA calculations for pricing and regulatory purposes.

EMIR / Dodd-Frank

The Dodd-Frank / EMIR financial reform bill gives a new set of derivatives rules that either will clean up the market or send the world spiraling off the deep end. The truth is probably somewhere in between. The crux of the derivatives regulation is the requirements that standardized swaps be centrally cleared and traded on a Swap Execution Facility, or SEF. This moves derivatives from bilateral agreements between bank and client to centrally cleared products where credit risk is no longer bank-held, but is centralized in a clearinghouse where daily margin is managed. Once clearing is in place, customers no longer are locked into a single dealer, long and short positions can be netted, and SEFs can begin to match buyers and sellers without having to worry about the credit lines of each counterparty or dealer.

This will begin the migration of the derivatives business from a principal-based OTC market toward an agency-based bid/offer SEF market.

Treasury Services’ analysis:

  • Hedging is penalized decreasing the liquidity in the markets leading to increased costs to hedge financial risks for corporations. This is further emphasized by the penalization of the interbank markets through requirement of more capital, and additional constraints on liquidity on interbank transactions.
  • There will also be an increase in administration costs for corporates costs due to EMIR.
  • Corporate credit by banks is penalized: More capital is required in general. For back-up facilities on commercial paper programs it is required that banks will have to have 100% of liquid assets whilst these facilities are fully undrawn. The cost of carry will obviously be invoiced to the client. The ability of the bank to borrow long term will determine the availability of back-up facilities.
  • Restrictions in maturity mismatch (including for repayments) are introduced. This may mean that the risk of borrowing short term to finance long term investments will be transferred to the corporate sector.

The advantages of the OTC market compared to exchanges has become questionable. High cost savings can be achieved by shifting your hedging activities to exchanges such as Chicago Mercantile Exchange (CME).
Shifting hedging activities to an exchange such as CME requires changes in your risk management function. This supplies the possibility to bring the cost of hedging back in your control.

 

Arnoud Doornbos

Associate Partner

How to combat Payment Fraud

| 29-3-2017 | Mark van de Griendt | sponsored content |

 

Payment Fraud is one of the biggest threats to a treasurers’ reputation and career path in an organization. One of the most common ways to reduce payment fraud is to reduce human intervention and to increase the levels of automation in payment structures. With cyber-attacks and payment fraud regularly making headlines, treasurers must be vigilant in safeguarding financial assets. Only 19% of treasurers list cybersecurity as a critical concern. By contrast, 45% of CFOs name cybersecurity as a priority, pointing to a significant misalignment in CFO and treasury agendas in this regard (PWC Global, 2017).


That is why it’s really important for treasurers to know what they can do to reduce payment fraud. There are two ways to lower the risk of payment fraud in payment processing:

  • Increase the level of Straight Through Processing
  • Implement a Payment Hub

Higher level of Straight Through Processing
Corporates sometimes have hundreds of banking relationships and thousands of bank accounts, all managed manually on spreadsheets. Redesigning these treasury processes based on STP creates an integrated treasury workflow that streamlines processes effectively and provides treasurers with timely access to financial information. No more manual entries, no more errors.

Implementing a Payment Hub
A centralized payment platform combats payment fraud while also ensuring treasurers of having the money they need to manage day-to-day business obligations.

Some key benefits include:

  • Centralized monitoring and control
  • Flexibility and efficiency in payments
  • Reduced banking costs
  • Global Visibility
  • Easy access and more transparency

Please refer to our company page on treasuryXL or contact Mark van de Griendt if you’d like to receive more information about reducing payment fraud by a corporate payment hub.

 

Mark van de Griendt

Cash Management Expert at PowertoPay

Banker to corporate treasury transfer – A topic as relevant as ever

| 27-3-2017 | Pieter de Kiewit | treasuryXL

In July 2016 our expert Pieter de Kiewit wrote an article about bankers who want to make a transfer into corporate treasury. With all the news about major banks laying off huge numbers of staff and the recent news that ABN AMRO asks 30 top managers to leave the bank or accept demotion, we believe that this topic is still very relevant and worthwhile to be published. Pieter de Kiewit wrote his blog based upon his observations working as a treasury recruitment consultant having meetings with many of them.

The transfer has been made many times successfully, even more it appeared to be impossible.

You have to ask yourself: “why do I want this?”. If this is your lifelong dream your application strategy will be different from the situation where your employer asked you to leave. Be honest with yourself, you know the answer. I will describe the consequence of both scenarios.

If your dream is working in a corporate treasury, you have acted upon this. Your studies included the right topics, you visited the relevant events and in your communication with clients you showed a sincere interest what their tasks involve. You projected yourself in these tasks and are able to tell why you would be good at it, why you prefer them over your banking tasks. You already knew there will be a pay cut and that is no problem. Your story is sound and the hiring manager will notice. It will be authentic and most likely you will not apply from unemployment.

If you were made redundant and will try to convince the hiring manager you always wanted to be a corporate treasurer, you will fail. Why didn’t you try before? What did you do to prepare for this step? Can one notice you understand their job?

Just tell it like it is: you studied to be a banker, you loved the job and were great at it. Times have changed and regretfully you have to recalibrate. But there is a silver lining: you have a valuable skill set your potential employer might benefit from. But here is where it gets a bit harder: it is your job to find out what the (potential) problem of you future boss is and why you can solve it. He/she will not take the effort to find out. So ask questions, match them to your skill set and do not use banking lingo. Ask your friends if they think you have an old school banking attitude (“you might receive our funding”). If so, ditch it. You do not have to beg for the job but you might mention you look forward to working together and being successful.

Good luck out there!

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

Blockchain regulation in the securities industry: Still many unanswered questions!

| 24-3-2017 | Carlo de Meijer |

One of the obstacles for massive adoption of blockchain technology is the lack of clarity from regulators. Regulators world-wide have long time taken a wait-and-see attitude towards blockchain and distributed ledger technology (DLT) (see my Blog “Blockchain and Regulation: do no stiffle …. April 4, 2016). But that is changing. Regulators across the globe have turned their attention and are now considering how existing regulations may (or may not!) accommodate the development of new distributed ledger technologies. This growing interest shows that it is becoming all the more serious for regulators in the securities industry that blockchain is coming to reality and that this asks for a more closer look a this technology.

Since the start of 2017 a number of regulatory organisations including ESMA (EU), FINRA (US) and IOSCO (Global) have launched reports asking for answers to meet the various challenges of blockchain or distributed ledger technology in the securities industry.

“Regulators prepare to address perceived weaknesses or potential risks relating to blockchains in their regulatory frameworks, and be ready to voice any concerns to, or discuss potential DLT benefits with the relevant authorities”.   

What have regulators been doing up till now

To keep pace with the developments in the DLT space some regulators have already established dedicated Fintech offices, contact points and hubs. Others launched regulatory sandbox frameworks that enable innovators to experiment with Fintech solutions for financial services (see my Blog, “Blockchain: playing in the Sandbox September 7, 2016”). And there are regulators that have set up labs and accelerator programs to explore how new technologies including DLT can help them better achieve their regulatory objectives.

To give some examples:

  • Regulators, such as the US Commodity Futures Trading Commission (CFTC) and the US Securities Exchange Commission (SEC), have attempted to incorporate DLT innovations into existing legal and regulatory frameworks. Also, the French Parliament last June approved a law that lets some securities vouchers be issued and exchanged on a DLT.
  • Others, such as the UK Financial Conduct Authority (FCA), the Swiss Financial Market Supervisory Authority (FINMA), and the Monetary Authority of Singapore (MAS), have created regulatory sandboxes for companies utilizing innovative technologies.

But, as FINRA, ESMA and IOSCO all note in their recent reports, integrating novel DLT products into existing regulatory regimes may prove challenging as DLT continues to develop.

FINRA Report

Early January this year, the US Financial Industry Regulatory Authority (FINRA) published a report titled “Distributed Ledger Technology Implications for the Securities Industry. The FINRA report provides, while structured as only a “request for comments”, an overview of DLT, highlights applications and gives a detailed review of how blockchain technology may impact existing securities regulations affecting dealers and marketplaces.

The report thereby gives a clear picture of the many regulatory considerations for broker dealers that (it says) “market participants may want to consider and regulators will want to have worked out before such infant technologies can be allowed to leave their sandboxes.
US regulatory considerations include issues such as governance, operational structure, network security and regulatory considerations, customer data privacy, trade and order reporting requirements, supervision and surveillance, fees and commissions, customer confirmations and account statements and business continuity planning.

This report is intended to be an “initial contribution to an ongoing dialogue with market participants” about the use of DLT in the securities industry. Accordingly, FINRA is requesting comments from all interested parties regarding all of the areas covered by this paper.

“FINRA welcomes an open dialogue with market participants to help proactively identify and address any potential risks or hurdles in order to tap into the full potential of DLT, while maintaining the core principles of investor protection and market integrity”. FINRA Report

  • More questions than answers!

The FINRA report doesn’t provide specific guidance for many questions, but it does represent something of a practical checklist of issues that will need to be addressed by regulated securities businesses considering implementing DLT networks more broadly.

To give an idea of the many questions raised:
How would the governance structure be determined? Who would be responsible for the business continuity plan, addressing conflicts of interest? How would errors or omissions on the blockchain be rectified? What type of access will be provided to regulators? In the event of fraud, who covers the cost? How will regulated entities deal with DLT transactions? Who is the custodian? Does the DLT network itself affect the market risk or liquidity of the digital asset? How is access to the data controlled? Which entities are playing what roles. Would dealers become clearing agencies? How is customer information updated for changes? How is the process supervised and tested? And many, many more!!

  • Possible implications for existing US regulation

Many FINRA rules, as well as some rules implemented by other regulators, such as the Securities and Exchange Commission (SEC), that FINRA is responsible for examining or enforcing with respect to broker-dealers, are potentially implicated by various DLT applications.
For example, a DLT application that seeks to alter clearing arrangements or serve as a source of recordkeeping by broker-dealers may implicate FINRA’s rules related to carrying agreements and books and records requirements. The use of DLT may also have implications for trade and order reporting requirements to the extent it seeks to alter the equity or debt trading process.

Other FINRA rules such as those related to financial condition, verification of assets, anti-money laundering, know-your-customer, supervision and surveillance, fees and commissions, payment to unregistered persons, customer confirmations, materiality impact on business operations, and business continuity plans, also may to be impacted depending on the nature of the DLT application.
The head of the US Commodity Futures Trading Commission Christopher (CFTC) Giancarlo recently said that US fintech policy should take a “do no harm” approach. He added that US regulators should coordinate to “avoid stifling innovation”.

ESMA Report

Early February 2017, the European Securities and Markets Authority (ESMA) published a report regarding distributed ledger technology (DLT). In this report named ”The Distributed Ledger Technology Applied to Securities Markets” ESMA summarizes its position on DLT, with a note that it will continue to monitor this “dynamic” technology and consider whether a regulatory response may become a necessity. It sets out ESMA’s views on DLT, its potential applications, benefits, risks and how it maps to existing EU regulation.
ESMA concluded that regulatory action is premature at this stage, but may not be in the longer term. The report anticipates that early applications of DLT will focus on optimising processes under the current market structure, particularly less automated processes in low volume market segments.

ESMA “has not identified any major impediments in the current European Union regulatory framework that would need to be addressed in the short term to allow for the first applications of DLT to securities markets to emerge in a scenario where DLT would be used to optimise processes within the current market structure”.

Longer term, and based on industry responses to the discussion paper, ESMA in its report notes the potential of the technology to support clearing and settlement activities. Potential risks outlined in the report include cyber-attacks, fraudulent activity, operational risk if errors are disseminated, fair competition issues, and market volatility.

Also ESMA “appreciates that broader legal issues, such as securities ownership, company law, insolvency law or competition/antitrust law may have an impact on the deployment of DLT”.

IOSCO Report

The “IOSCO Research Report on Financial Technology”, also published in February this year by the International Organization of Securities Commissions (IOSCO), highlights the increasingly important intersection between financial technology (Fintech) and securities market regulation. It describes a variety of innovative business models and emerging technologies that are transforming the securities industry including the application of the blockchain technology and shared ledgers.

  • Risk assessment

The IOSCO report analyses both the opportunities and risks that these new technologies present to investors, securities markets and their regulators. Though the risks differ depending on the technology, certain risks are recurring across the Fintech sector, such as those arising from unlicensed cross-border activity, programing errors in the algorithms that underlie automation, breaches in cyber security, and the failure of investors to understand financial products and services. Another risk is the failure of financial firms to “know-the-client” for reasons of anti-money laundering and fraud control.

“Financial technology regulators may need to develop “highly automated” surveillance and hire technology experts if they want to closely monitor risks posed by blockchain and other distributed ledger technologies” IOSCO Report

  • Cross border challenge

And there is the cross-border challenge. While tech firms operate globally, regulation is conducted largely within national or sub-national borders. The local nature of regulation may create challenges regarding cross-border supervision and enforcement, whereas regulatory inconsistency across jurisdictions increases the potential for regulatory arbitrage.

“The global nature of Fintech therefore creates challenges that regulators should address through international cooperation and the exchange of information”,according to the report.

DLT and blockchain Regulation: not today!

Regulation of blockchain and distributed ledger technology in the securities industry is not to be expected short term. There are still more questions than answers. Before regulators will be able to address the various issues raised, they must better understand their impact. And that takes time. It is in the securities industry’s interest that they remain in an ongoing dialogue with regulators to get the best of both worlds.

 

Carlo de Meijer

Economist and researcher

 

 

 

More articles about blockchain from Carlo de Meijer:

 

3 tips for a successful accounting- and ERP-system roll-out

| 23-3-2017 | Christian van Ledden | Sponsored content |

 

Cloud based accounting- and ERP-systems, i.e. SAP S4-HANA are receiving a lot of attention these days. The result? – Increasingly more companies are considering cloud solutions in their effort to consolidate IT processes and systems. According to a study by Panorama Consulting, in 2015 the share of such ERP-systems increased from 4% in 2014 to 33%.

Cloud is here to stay

From our point of view, this development is primarily driven by two factors: on the one hand, the amount of mature solutions in the marketplace is growing. At the same time, cloud ERP-systems are being positioned more aggressively by their respective vendors. On the other hand, there is a common acceptance of cloud ERP-systems. This is underlined by a study from RightScale, according to which 82% of companies are employing a multi-cloud strategy in 2015, up from 74% in 2014.

The former can also be observed in the cloud revenue figures of SAP and Oracle: SAP increased its revenue from cloud products and services between 2013 and 2015 by a staggering 229% while Oracle recorded similar growth in its cloud segment of 100% over the same period. Oracle’s strategic focus on cloud business is underlined by its recent acquisition of Netsuite.

This development has major advantages for their respective clients. According to a study by the Aberdeen Group, corporates can improve their operating profit margin by up to 21% through implementation of a modern cloud ERP-system. These improvements are achieved through optimized processes, higher standardization as well as a more streamlined IT environment.

Fast implementation and cost savings by using the TIS payment solution

The majority of finance and treasury departments are in one way or another affected by the roll-out of a new ERP-system. Generally, the aim is to standardize processes and systems. This brings its own set of IT-related challenges. These can be split into three major categories: processes, connectivity, and change management.

Processes: In most companies, processes grow historically through (international) expansion and M&A activities. The result is a lack of transparency and control of worldwide processes for central finance departments, contributing to a company’s vulnerability to payment fraud. What can you do? If you are evaluating the roll-out of a global ERP-system which includes your finance department, one should think about the current and desired state of (authorization) processes and goals – especially for the finance and treasury department.

Connectivity: Connecting the ERP-system to third party systems is an important factor to consider in terms of payments. Insufficiently secured interfaces with banks, a high number of manual processes as well as the lack of straight-through-processing of payment files increases your risks and have a negative impact on compliance. Moreover, in this context one should not forget the connection with your respective banks. They can be connected through communication channels such as i.e. EBICS, Host2Host, SWIFT, or CAMT. In addition, one has to develop individual formats for each country and bank. Working with our clients around the world, TIS GmbH has achieved savings of between 200.000€ and 1 million € p.a. by implementing its flexible and scalable cloud solution to connect its customers’ banks. This is possible, as TIS owns the most comprehensive library of formats and bank connectors worldwide. This library is accessible to all its clients free of charge, so that you can focus on scaling your worldwide operations.

Change management: In order to ensure a smooth roll-out of your i.e. SAP S4-HANA ERP-system, you should embark on the journey together with your employees. Inform all involved stakeholders early and frequently about the progress of the project. Additionally, you might want to evaluate during the business blueprint phase whether it is advisable to include a specialized consultant. This will increase your chances of success dramatically and support the team spirit.

What are your experiences with IT-projects? I am looking forward to reading your comments.

Christian van Ledden

Sales Executive at Treasury Intelligence Solutions GmbH (TIS)

 

 

 

For additional information please visit the TIS company page on treasuryXL.

 

Flex Treasurer – Besparing na een treasury quick scan: Nog meer praktijkvoorbeelden

| 22-3-2017 | François de Witte | Patrick Kunz |

Als je ondernemer bent of als financiële professional werkt in een kleine of middelgrote organisatie die geen treasurer of cash manager in dienst heeft, vraag je je wellicht af of je alle treasury taken wel goed geregeld hebt. Iemand aannemen voor deze taken gaat misschien een stap te ver. Maar dat betekent niet dat je geen kosten zou willen besparen of dat er geen mogelijkheden zijn voor bijvoorbeeld funding. Wij hebben jullie al eerder kennis laten maken met onze Flex Treasurers en de Treasury Quick Scan die zij kunnen uitvoeren in een onderneming. In een eerder artikel hebben wij al praktijkvoorbeelden gepresenteerd. In dit artikel nog twee voorbeelden, waaruit blijkt dat een Treasury Quick Scan grote besparingen kan opleveren.

Onderneming C: Internationaal Handelshuis in voedselproducten

Omzet ca 1 miljard Euro

  • C is handelaar in voedselproducten in de B2B markt. Wereldleider in zijn segment en op alle continenten actief. Producten worden standaard in USD geprijsd. C heeft geen treasurer in dienst, de finance managers deden dit erbij.
  • Een treasury scan in 1 dag liet zien dat een besparingspotentieel op treasury processen mogelijk was van minstens EUR 200.000 per jaar (oplopende tot EUR 1.000.000 op jaarbasis)
  • Door optimalisatie van cash management processen en heronderhandeling van transactiekosten is binnen een maand EUR 300.000 jaarlijkse besparing gerealiseerd
  • Door optimalisatie van interne processen en toevoegen van extra banken en een online handelsplatform is op FX hedging een verdere besparing van EUR 100.000 gerealiseerd. Verder is het proces verbeterd waardoor er minder tijd wordt besteed aan de processen.
  • C heeft inmiddels een eigen treasurer, treasury afdeling en treasury management systeem. De flex treasurer is nog steeds betrokken bij projecten.

Onderneming D: vastgoedbedrijf

Omzet ca 125 miljoen Euro.

  • D had een treasurer in dienst welke met pensioen ging op korte termijn. Een flex treasurer is aangenomen om kritsch te kijken naar de treasury processen welke intern en extern gedaan werden
  • Alle terugkerende treasury activiteiten zijn naar intern gehaald. Dit zorgde voor een besparing van ca EUR 50.000 per jaar.
  • Een treasury rapportage werd opgezet zodat (senior) management en lijn management beter geïnformeerd zijn over treasury activiteiten
  • Cash Management en cash flow forecasting is geoptimaliseerd welke het renteresultaat verbeterde. Besparing ca. EUR 10.000 per jaar.
  • Corporate finance activiteiten werden verbeterd waardoor er zeer scherp in de mark geleend kon worden.
  • Treasury kon uiteindelijk afgebouwd worden van 36 uur naar 8 uur per week. Besparing ca EUR 60.000 per jaar.

 

Herken je een of meer situaties uit je eigen organisatie? Heb je een vraag? Onze experts zijn gaarne bereid om met jou in gesprek te gaan. Zij werken als Flex Treasurer en helpen jou graag verder. Overigens ook als je bijvoorbeeld na een treasury quick scan behoefte hebt, om tijdelijk een (flex) treasurer in dienst te nemen.

 

François de Witte 
Senior Consultant at FDW Consult

 

 

 

 

Managing treasury risk: Operational Risk (Part VII)

| 21-3-2017 | Lionel Pavey |

 

There are lots of discussions concerning risk, but let us start by trying to define what we mean by risk. In my last article on how to manage treasury risk I will write something about operational risk. The Bank for International Settlements (BIS) defines this as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.  If you want to read my earlier articles on managing the different treasury risks please refer to the complete list at the end of today’s article.

 

Whilst this is the last article in this series, it is actually – potentially – the most significant risk that a company can face, as there are many different ways that a loss could occur, together with the fact that when it happens the amount lost can be very large. Even if the size of the loss could be considered small, there is always the threat of reputation risk which, once identified, is very difficult to erase from the memory.

While it is possible to insure against rogue trading for a company (the risk present in the Treasury function can be quantified and qualified) it is very rare that damage is caused by just one individual – a financial version of the lone wolf theory. Operational risks tend to be interlinked – a fraudulent payment could be initiated by human involvement (either as fraud or human error) and facilitated by weak processes together with insecure technological systems.

There are 2 main areas of operational risk within treasury for a company

  1. Internal
  2. External

There are 3 main categories of operational risk within treasury for a company:

  1. Computer System, Information Technology
  2. Theft and Fraud
  3. Unauthorised Activity

Computer System, Information Technology

A lack of robustness and deficiencies in the technology and systems contribute to circumstances for failures, errors, data losses, corruption and fraud. Internally considerable care and attention should be given to the protocol for Static Data. This encompasses all the relevant reference data for a counterparty and should be subject to at least an input and verification procedure before entering the computer system. Changes to Static Data have to be recorded, together with the proper paper trail and authorization matrix. Externally the risks relate mainly to illegal entry (hacking), together with the complete theft of data.

Theft and Fraud

Both internally and externally main areas include:

  • Theft – both physical and electronic
  • Extortion
  • Embezzlement
  • Forgery
  • Misappropriation
  • Willful destruction
  • Bribes
  • Kickbacks
  • Insider Trading

Unauthorised Activity

From the Treasury point of view, this is an internal activity and mainly relates to 2 types of transactions – unauthorized by transaction and or type; transactions that are not captured in the system and reported. These can lead to monetary losses (though a gain is possible – at the price of an operational risk), together with loss of reputation.
The last category clearly shows where the biggest risk occurs within a company – at the human level. Generally speaking, these are caused by incompetence, lack of knowledge, misuse of power or compulsion to act caused by external factors – extortion.
It is clear therefore that whilst the electronic systems employed by a company can be a liability if not properly programmed or safeguarded, even here, most of the errors can be traced by to human intervention.

So why are the human risks so often underestimated? Naturally a company wishes to have the feeling that its staff can be trusted (within reason). After all, the company felt that the staff were the right people to employ. It is not my intention to formulate the reasoning and thinking of people who perform illegal acts. However certain areas that can be considered include how staff are treated; the demand placed on them; the rewards given; the levels of transparency and inequity within the company; a closed-off attitude (problems in one department are kept within that department and not discussed throughout the company); the role model set by owners, directors and managers; loss of personnel, reduction in morale; disinterested and unmotivated staff.

 Solutions

An effective framework of operational risk management needs to be designed and implemented within the business. This requires input and commitment from all departments within the company, meeting one agreed standard and not being shaped to every individual department’s wishes. The framework has to run and meet the requirements for all different strategies within the company.

I wish to finish with 2 examples of operational risk to illustrate how large they can be.

In 1995 the world’s second oldest merchant bank (Barings Bank) collapsed due to the actions of a rogue trader. Corruption and a lack of internal control led to a loss of GBP 827 million.

Around the same time I was employed as an international money broker working in the interbank market and travelled every day from The Hague to Amsterdam via train. As I knew the route off by heart, I read all the time – magazines, papers, books – anything. I purchased a book called “The Cuckoo’s Egg” as it seemed interesting and would pass the time away sitting on the train.
The synopsis told me that an unreconciled accounting discrepancy of just 75 cents would lead to a world of computer espionage and spies. I highly recommend reading the book to understand how a simple error can grow to show the dangers of ignoring operational risks. If you like acronyms then you will enjoy reading about the FBI, CIA, NSA and KGB – all hacked via a UNIX server at a laboratory linked to the University of California.The story is true and threatened national security.

Trust people – but do not place temptation in their way.

Lionel Pavey

 

 

Lionel Pavey

Cash Management and Treasury Specialist

 

 

More articles of this series:

Managing treasury risk: Risk management

Managing treasury risk: Interest rate risk 

Managing treasury risk: Foreign exchange risk

Managing treasury risk: Commodity Risk

Managing treasury risk: Credit Risk

Managing treasury risk: Liquidity risk