Blockchain: Securities market infrastructure players in the contra-attack

| 7-4-2017 | Carlo de Meijer |

 

Blockchain technology has long been viewed as a threat to CSDs (Central Securities Depositories) and their role as intermediaries for securities transactions. Blockchain and distributed ledger technology may make the role of many intermediaries in the post trade market infrastructure obsolete. In one of my blogs (Blockchain and the securities industry: future eco-system) I was one of those who think that players such as custodians, CCPs, CSDs and others would disappear when blockchain would be used in a massive way.


“It however is not expected that there will be a complete disintermediation of service providers. While the role of custodians would greatly disappear and those of clearinghouses and CSDs will drastically change in a blockchain environment, the rest of the value chain in the securities industry may remain largely intact. The functions associated with tracking, reconciling, and auditing enormous amounts of data are not going to be disintermediated away. They have to continue to exist, but just need to be done more efficiently, at lower cost and with fewer errors”- Carlo R.W. de Meijer

But these players are going in the contra-attack. 15 CSDs from developing and emerging markets, including Strate and NSD, have agreed to form a consortium to explore blockchain and DLT technology in a post-trading environment. The partners say that“financial market infrastructures need to embrace the technology and identify opportunities that will add value to their current clients”.

Let’s look what they are all doing.

CSDs aim to build distributed ledger for mobilising scarce collateral (January 2017)

A coalition of four central securities depositories are collaborating with Deutsche Börse on an initiative to use blockchain technology to ease cross-border mobilisation of security collateral. The members of the so-called “Liquidity Alliance” include The Canadian Depository for Securities Limited (CDS), Clearstream (Luxembourg), Strate (South Africa) and VPS (Norway). Via this initiative they want to overcome existing hurdles when moving collateral across various jurisdictions, making the transfer faster and more efficient. The Alliance’s ‘LA Ledger’ will initially be implemented as a prototype based on the Hyperledger Fabric. Validation by regulatory authorities and market participants will start in the second quarter of 2017.

DTCC taps blockchain to rebuild its platform (January 2017)

The Depository Trust & Clearing Corporation (DTCC), a US post-trade provider, has announced plans to use blockchain technology in 2017 to rebuild its platform. It aims to create a credit derivatives post-trade lifecycle solution built using a distributed ledger platform. Blockchain can simplify the process by automatically maintaining a shared electronic record of the security which is visible to all relevant parties.  This new DTCC’s platform – Trade Information Ware house – will keep track of the security throughout the lifecycle of the associated bond.

IBM, Axoni, and R3 CEV, two technology startups have been selected to work on the project which is set to kick-off in January 2017. DTCC expects the new blockchain-enabled Trade Information Warehouse to go live in early 2018. Furthermore, the project has been developed with input from market participants and infrastructure providers including Barclays, Citigroup, Credit Suisse Group, Deutsche Bank, JPMorgan Chase, UBS Group, Wells Fargo, IHS Markit and Intercontinental Exchange, DTCC said.

SWIFT creates blockchain application to simplify cross-border payments (January 2017)

SWIFT has begun building a blockchain application to simplify cross-border payments. The global platform is integrating open-source blockchain technology with its own products to build a proof-of-concept that might “one day” replace the so-called “nostro” accounts its members keep filled with cash all over the world – just in case they need it. A successful test of distributed ledger technology (DLT) could enable banks to optimize their liquidity globally and SWIFT to reduce the costs of reconciliation between independent databases maintained by the inter-bank platform’s members, reduce operational costs and free up liquidity for other investments.

Euroclear pencils in 2017 for bullion on blockchain roll out (December 2016)

Euroclear, the securities market depository, is set for a 2017 go-live for the application of blockchain technology in the London bullion market after completing its first pilot trades. Over 600 OTC test bullion trades were settled on the Euroclear Bankchain platform over the course of a two-week pilot. A number of leading market participants in the London bullion market – all part of the Euroclear Market Advisory Group – were involved in the test run, including Scotiabank, Société Générale, Citi, MKS PAMP Group and INTL FCStone. The Euroclear Bankchain Market Advisory Group set up in June this year now includes 17 participants working with Euroclear and blockchain platform provider Paxos in the roll-out of the new service. Another market simulation will run early this year in preparation for a production launch later in 2017.

Euroclear report: “CSDs matter in blockchain settlement system” (December 2016)

A new report by Euroclear has looked at the regulatory and legal aspects of the use of blockchain technology in post-trade settlement in a European context. The report, Blockchain Settlement: Regulation, Innovation, and Application, with support from Slaughter and May, found that central securities depositories (CSDs) would play an important role in a blockchain-based settlement system. It added that as ‘custodians of the code,’ CSDs could exercise oversight of, and take responsibility for, the operation of the relevant blockchain protocol and any associated smart contracts. CSDs will continue to perform an important role as trusted, centralised FMIs, providing gatekeeping services and oversight of the relevant blockchain. While the Euroclear report states that CSDs are trusted central entities that facilitate the settlement process, it is believed that the distributed ledger technology system would be a natural evolution of this facilitation role.

SWIFT deploys PoC for bond trading based on blockchain (November 2016)

SWIFT has unveiled a proof-of-concept for managing the entire lifecycle of a bond trade based on blockchain technology. SWIFT, that has been targeted in the press as “a legacy incumbent that will be doomed by DLT”, is determined not to be left behind “in the wake of the revolution that is unfolding in the finance world” with the adoption of blockchain or Distributed Ledger Technology (DLT). SWIFT believes “it can leverage its unique set of capabilities to deliver a distinctive DLT platform offer for the community.”

At the beginning of 2016 SWIFT and Accenture released a paper investigating how blockchain technology could be used in financial services. As a technology assessment, SWIFT and Accenture identified gaps between existing DLT solutions and industry requirements.

SA Strate to launch block chain based e-proxy voting in 2017 (October 2016)

Strate, South Africa’s central securities depository (CSD), plans to launch an e-proxy voting system based on blockchain technology in 2017. The body, responsible for clearing and settling all transactions that take place on the Johannesburg Stock Exchange (JSE), has partnered with Russia’s National Settlement Depository (NSD) to develop and test systems aimed at simplifying shareholder voting. Both CSDs plan to launch the e-proxy voting system in 2017, as such they are looking to partner with an international service provider whose product is around 70% to 80% complete. In South Africa, the planned e-proxy voting system will be rolled out on a client-by-client basis, with an eventual goal to have the entire market take up the system.

The decision to partner with NSD, taken at the Sibos Conference in Geneva last year, is rooted in the fact that both CSDs have conducted independent proof of concept studies and are at a similar stage in understanding and developing an appropriate voting solution. The NSD was also one of the first financial organisations in the world to announce the development of a blockchain-based prototype for e-proxy voting. Strate and NSD will share information regarding standards, regulations and DLT technologies; explore mutually beneficial ideas; and look to make savings through the sharing of technology and development costs. They are claiming that several other CSDs have expressed interest in joining them.

Innovation in CSD space session at SIBOS: “ a slow burn for CSDs” (September2016)

During the “Innovation in CSD space: What about distributed ledger technology?” session at SIBOS, some panellists argued that the technology would “hail the end of CSDs” while others said there would be no revolution, just a “natural evolution” of what exists.

The message from the CSDs was that they are “open to innovation with blockchain, but will test it out in safe places first”.   

WFE Survey “Financial market infrastructures piling into blockchain” (August 2016)

More than 84% of trading venues and clearing counterparties (CCPs) surveyed by the World Federation of Exchanges (WFE) are either investigating or actively pursuing the applicability of distributed ledger technologies in financial markets.

WFE says that the poll of 24 members indicates that firms are at different stages of evolution in their DLT initiatives, with one having already deployed a DLT-based application, some at proof-of-concept, and others on the spectrum of evaluation, design, and proof-of-technology. Clearing and settlement provided the most obvious use case for respondents, but with regulatory, legal and technical risks an issue there was little consensus on a viable time frame for live production.

Strate, global CSDs to collaborate on blockchain use (August 2016)

Strate, the South African body responsible for settling transactions concluded on the Johannesburg Stock Exchange, met with 20 other central securities depositories (CSDs) in Switzerland in September to discuss how blockchain technology can be used across global financial markets. Aim is to form a group of CSDs to share information and knowledge. The group of CSDs would try to determine an ideal model for putting clearing settlements and the transaction of shares on to a blockchain.   And as opposed to each going and developing their own technology, the group could potentially get a vendor to develop something for all of them or develop something their selves and share it and share in the costs.

Euroclear explores use of blockchain in London gold markets (June 2016)

Euroclear is exploring the potential of using blockchain technology to create a next generation settlement service for the London gold market. The clearing is working with blockchain infrastructure firm itBit and market participants to evaluate the use of distributed ledgers to remove the risks and reduce the capital charges related to the settlement of unallocated gold. Euroclear will thereby use ItBits’ Bankchain product, a private network of trusted participants that clears, tracks and settles trades in close to real-time, opening the prospects of providing true delivery-versus-payment in the bullion market.

Rise testing post-trade blockchain tech with banks, custodians and CSDs (May 2016)

RISE Financial Technologies (RISE), a provider of distributed ledger technology for both post-trade settlement and securities safekeeping, has become the first technology firm to launch the second generation of blockchain for the post-trade sector. RISE is testing its solutions with a number of leading financial institutions including banks, custodians, and CSDs.

The core attributes of RISE’s technology are de-centralised ledger qualities and permissioned transparency, which gives access to different types of information depending on who you are. These qualities are applied to ensure any ‘single point of failure’ inherent in many technology systems is removed and guarantees data integrity. So investors have sight and control over their assets but not those of other participants; issuers have a view but no control into final beneficiaries; financial institutions (ledger operators/validators) have access to client information; and regulators have a complete view of the information in their jurisdiction in real-time but no direct control over the assets.


Carlo de Meijer 

Economist en Researcher

 

 

 

 

More articles about blockchain from Carlo de Meijer:

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How can payments improve your working capital? Part I

| 6-4-2017 | Olivier Werlingshoff |

Working Capital is the term for the operating liquidity of a company that can be used and is needed to continue the day to day business. To calculate the working capital you have to deduct the current liabilities from the current assets. By managing your account receivables, accounts payables and inventory you can fluctuate your cash position and optimize your working capital so that the cash “trapped” in the company can be lowered to a minimum while you are still able to meet your payment agreements.

The way you are making or receiving payments can have influence on the trapped cash and therefore can influence your working capital.In a few articles we will dive into the world of payments and explain the influence on working capital. In this first article we will discuss the wire transfers within the EU and cross border.

Wire Transfer

SEPA
With SEPA all payments in the EU are considered as a local payment. To minimize your banking process time with bank transfers you don’t need to open local bank accounts in the different countries in the EU anymore. If you have a customer in, let’s assume Spain and you agreed on a payment term of 30 days, you send your invoice by mail as soon as the  client signed the contract. At that moment your working capital will increase with the amount until the moment the amount is paid into your bank account.

You can mention on your invoice that payments can be done by transfer to your IBAN number in The Netherlands. The maximum processing time will be one banking business day if you send the payment instruction before the cut off time of your bank. This means that if the client is doing the payment on Friday before the cut off time, mostly 3.30 PM, the amount will be on your account on Monday. Otherwise you will receive it on Tuesday.

Risk of non-payment
With wire transfers you still have the risk of nonpayment by you customer. Within the SEPA area you can also use Direct Debits. With this type of payment you can be the one who initiates the payment and if your client accepts, your money could be on your account after the agreed payment term of 30 days. Furthermore Direct debits can’t be reversed by your client when you use the Business variant.

Cross border
If you have a client in the US, you will also send him the invoice by mail to skip the postage process. You can ask him to transfer the amount to your IBAN number. The client will probably convert the amount in his own currency and make an international transfer. With a cross border transfer you will have different costs: the outgoing transfer cost, the incoming transfer cost and also even sometimes correspondent bank costs. Besides the high costs, payments can even take a week before reaching your bank account.

What is the effect on your working capital? Because it takes a long time before you get paid, your accounts payables will increase and the “days sales outstanding” will be longer than the 30 days you agreed on.
When you have a lot of international clients in one specific country you can make a calculation whether opening a local account in the country of your clients could be profitable for you. To avoid correspondent cost you can choose a bank that has connections with your main bank.
After receiving the money on your local account there are some instruments you can use to sweep the balance to your main account in The Netherlands, those products are called pooling techniques.

In the next articles we will focus on payments by internet, credit – and debit cards but also payment on delay and trade products.

Olivier Werlingshoff - editor treasuryXL
Olivier Werlingshoff

Owner of WERFIAD

 

 

 

More articles from this author:

Managing cash across borders

How to improve cash awareness without targets

 

 

Brexit: It is the economy stupid!

| 5-4-2017 | Theo Paardekooper |

Brexit: It is the economy stupid! (quote van James Carville, adviseur van de voormalig president van de USA, Bill Clinton). Op 23 juni 2016 werd in de UK een raadgevend referendum gehouden waarin aan de bevolking werd gevraagd om steun voor het lidmaatschap van de Europese Unie. Een kleine meerderheid van 51,6% van de kiezers heeft tegen het lidmaatschap gestemd. Op donderdag 3 november 2016 heeft de Hoge Raad in de UK bepaald dat eerst het Britse parlement moest instemmen met het verzoek tot uittreding. Na parlementaire goedkeuring heeft op 29 maart de Britse regering het officiële verzoek tot uittreding uit de statengemeenschap van de Europese Unie ingediend. De vraag is wat de economische effecten zijn van deze Brexit voor de UK en de EU. Om een antwoord op deze vraag te geven, gaat dit artikel in op wat heeft geleid tot een Brexit referendum, de argumentatie van den tegenstanders en de economische effecten op korte en lange termijn.

Waarom een referendum in UK?

Op 27 mei 2015 kondigde de Britse Minister President David Cameron een “in/uit”- referendum aan tijdens de Queen’s Speech (Troonrede). Voordat het referendum werd gehouden heeft Cameron betere voorwaarden voor de UK in Brussel weten te bewerkstelligen. Met betere afspraken verwachtte hij dat het “remain” kamp, waartoe Cameron behoorde, een overwinning zou behalen. Dat het Brexit referendum zeer beladen was, manifesteerde zich een week voor de verkiezingen met de politieke moord op de Labour-politica Jo Cox, behorend tot het “remain”-kamp.

Argumenten vóór een Brexit

Independence Party (UKIP) is in 1993 opgericht met als doel om de UK de EU te laten uittreden. Hoewel in de landelijke politiek de partij geen rol van betekenis speelt, werd deze partij uiteindelijk bij de verkiezingen voor het Europees Parlement de grootste fractie van de UK. De voornaamste argumenten voor de Brexit van deze partij liggen op het gebied van soevereiniteit. Daarnaast spelen met name economische argumenten een rol. Door Brusselse regelgeving wordt de concurrentiepositie van de UK negatief beïnvloed. UK is een netto “betaler” aan de EU. In 2014 werd £8,6 mrd netto aan de begroting van de EU door de UK betaald. UKIP ziet veel meer mogelijkheden om dit bedrag in eigen land te besteden (o.a. aan zorg). Door vrij verkeer van goederen en personen wordt de Britse arbeidsmarkt “overspoeld” met goedkope buitenlandse arbeiders. Officiële data maken melding van 1,1 miljoen buitenlandse EU migranten. UKIP stelt dat de arbeidsmarktpositie van de Britse arbeider wordt ondermijnd door deze concurrenten. Tevens leggen deze arbeiders beslag op publieke faciliteiten, zonder daarvoor een bijdrage te leveren aan deze voorzieningen. Net als in andere Europese landen, vormt de immigratie een heet hangijzer. Bij dit referendum is dit het voornaamste (populistische) item. Naast arbeidsmigratie speelt hier de verdeling van asielzoekers over de EU lidstaten ook een voorname rol.

De korte termijn economische effecten van de Brexit

Effecten op de valuta markt De korte termijn effecten waren feitelijk al zichtbaar voor het referendum werd gehouden. Marktpartijen houden bij hun investeringsbeslissingen rekening met een Brexit scenario. In welke mate is bijvoorbeeld te meten in Foreign direct Investments (FDI). Door afname van de FDI daalt de economische groei en uit dien hoofde de overheidsinkomsten. Dit effect is direct waarneembaar in de wisselkoers van het Britse Pond. Na de Brexit is de koers van het Britse Pond met zo’n 12% gedaald. Op de valuta markten is een dergelijke koerswijziging zeer materieel. Door afname van de korte termijninvesteringen en desinvesteringen door beleggers, bedrijven en speculanten worden de vrijgekomen GBP verkocht en omgezet naar de eigen valuta. De forse aanbodtoename van GBP op de valutamarkt leidt tot deze forse koersdaling. Paradoxaal geeft een lagere wisselkoers een concurrentievoordeel voor bedrijven uit de UK. De goederen en diensten zijn 12% goedkoper geworden en derhalve aantrekkelijker te exporteren. Het korte termijn resultaat is dus een opleving van de Britse economie a.g.v toename van de export.

GRAFIEK: GBP valuta-koers ontwikkeling. Duidelijk is de waardestijging van EUR en USD na het referendum.

Euro/GBP en USD/GBP valuta-koers ontwikkeling over de afgelopen 12 maanden
Normaliter wordt het valuta-paar in GBP/USD aangegeven. Om de overeenkomsten tussen de koersontwikkelingen beter duidelijk te maken is gekozen voor notatie in USD/GBP

Effecten op de obligatie markt

De verwachte daling van de obligatiekoersen als gevolg van een verminderde belangstelling voor Brits schuldpapier is uitgebleven. De rente op de obligatie markt was al sterk gedaald naar 0,5% voor 10-jaars staatsschuldpapier. De Engelse Centrale Bank heeft na het Brexit referendum haar tarieven laten dalen naar een historisch laag niveau van 0,25% en tevens heeft ze steunaankopen op de obligatie markt verricht. Dit heeft een stabiliserend effect op obligatiekoersen. Door de korte termijn verbetering van de export als gevolg van lagere koers van de Britse Pond wordt een verbetering van de economische groei verwacht in 2017 van 0,8% naar 1,4% . Verdere steunmaatregelen blijven derhalve vooralsnog uit. Per factor kan de impact van de Brexit als volgt worden beoordeeld: Door het ontstaan van handelsbarrières bij uittreding uit de EU kan de exportpositie van de UK worden aangetast. De UK kan bilaterale overeenkomsten aangaan met haar handelspartners, maar daarbij zal ze een veel minder grote machtsfactor kunnen spelen in de onderhandelingen. Immers, de grote economische machtsblokken (EU, China, USA) kennen een veel lagere urgentie om tot een akkoord te komen. Hierdoor is de Britse economie veel vatbaarder voor protectionistische maatregelen, zowel op het gebied van direct importheffingen als van non-tarief matige maatregelen. Na een eerste opleving als gevolg van de waardedaling van het Britse Pond zal naar verwachting een verlaging van de export/import quote tot een afname van de economische groei leiden.

Overheidsuitgaven

De Britse overheid is een netto betaler aan de EU. (£8,6 mrd). Bij een overheidstekort van ca £89 mrd en een totaal GDP van £1870 mrd zal de aanwending van deze middelen maar een bescheiden positieve bijdrage kunnen leveren aan de economische groei. Afhankelijk van het uiteindelijke Brexit scenario zal een deel van deze besparing weer ingezet moeten worden ter compensatie voor enige toegang tot de Europese markt. Tevens zal door de Brexit de overheid worden geconfronteerd met fiscale stimulatie om bijvoorbeeld het investeringsklimaat voor buitenlandse partijen aantrekkelijk te maken. Door het wegvallen van de toegang tot de interne markt van de EU zullen veel bedrijven hun investeringen in de UK heroverwegen. Bijvoorbeeld voor het behoud van de auto industrie, een belangrijk sector in de Britse economie, heeft de overheid al stimulerende maatregelen afgekondigd.

Investeringen

De investeringen betreffen zowel de investeringen om de groei te faciliteren als investeringen van buitenlandse partijen (Foreign Direct Investments, FDI) in de UK. Als de groei afneemt of als er zelfs sprake is van economische krimp, dan zal dit leiden tot een sterke verlaging van de investeringen. De FDI zullen, gevoed door onzekerheid en door beperking van toetreding tot de Europese markt via de UK, naar verwachting verlaagd worden.

 Consumptie

Gestimuleerd door een lage rente die door de Centrale Bank wordt gefaciliteerd door monetaire maatregelen zullen de consumptieve uitgaven in aanvang nog op peil blijven. Echter, als de export en de FDI zullen afnemen, dan zal dit uiteindelijk impact hebben op het beschikbare inkomen per capita met als resultaat een afname van de consumptie.

De lange termijn economische effecten van de Brexit

De UK staat op plaats 7 van de Global Competitiveness Index. De arbeidsmarkt is na de USA en Canada een van de meest flexibele ter wereld. De beoogde afname van de immigratie zou op termijn een negatief effect kunnen hebben op de populatie en dan met name in de leeftijdsopbouw van de Britse populatie. Net als de andere Europese landen vergrijst de bevolking van de UK. Om de beschikbaarheid van arbeidskrachten te waarborgen en om de zorg en sociale voorzieningen op peil te houden, is een evenwichtiger demografische beeld met een lager vergrijzingspercentage van belang. Er leven vooral veel oudere Britten als pensionado’s in de EU. De vraag is of deze groep na de Brexit zal moeten terugkeren naar de UK. Dit zal extra druk op de voorzieningen geven en leiden tot extra kosten voor het in stand houden van het nu nog gratis stelsel van gezondheidszorg in de UK.

Scenario’s voor uittreding

Als het uittredingsverzoek door de UK zal worden ingediend, dan staan zowel de UK als de EU voor een belangrijk besluit. Hoe wordt de onderlinge (handels) relatie tussen beide partijen in de toekomst vormgegeven?

Er zijn 5 scenario’s denkbaar:

  • Geen handelsverdrag met de EU
    Handel zal geschieden volgens de WTO-regeling als “Most Favoured Nation” (FMN). UK zal hetzelfde behandeld worden als ieder ander land met deze status. Er is een gelijk “level playing field” en geen concurrentie nadeel met betrekking tot de handel met de EU. Ieder MFN lid moet dezelfde markttoegang bieden aan de andere MFN leden.
  • Ondertekening van het EFTA verdrag, net als Noorwegen, IJsland en Liechtenstein.
    Met ondertekening van dit verdrag blijft UK lid van de EEA (European Economic Area) en blijft vrij verkeer van goederen en personen gehandhaafd. De UK zal hier wel een vergoeding voor moeten betalen aan de EU. Tevens moet worden voldaan aan alle wetten een regelgeving die door Brussel wordt opgelegd.
  • Ondertekening van het EFTA-verdrag zonder lidmaatschap van de EEA, net als Zwitserland. Zwitserland heeft toegang tot de interne markt, zonder dat er vrij verkeer is van personen. De bank- en dienstverlenende sector heeft geen vrije toegang tot de EU. Wel is sprake van een financiële bijdrage door Zwitserland aan de EU.
  • Een bilateraal handelsverdrag, zoals het CETA verdrag met Canada. Hierbij wordt meer in detail vastgelegd welke goederen en diensten vrij verhandelbaar zijn en hoe wordt omgegaan met regelgeving die import/export belemmerend kan werken.
  • Ondertekening van een douane-unie verdrag, zoals de EU heeft met Turkije.
    Er is sprake van vrije handel van industriële goederen, maar geen vrije handel van agrarische producten of diensten. Er zijn geen afspraken over non-tarifaire maatregelen als grenscontroles, productstandaarden en veiligheidseisen.

Impact voor de EU

De Europese economie zal ook enig nadeel ondervinden van de Brexit. Met name het signaal dat is afgegeven als gevolg van het Brexit referendum heeft impact op het vertrouwen in de duurzaamheid van het huidige Europese model. Europese leiders zullen gefocust blijven op het behoud van het Europese model en hierdoor zal mogelijk de polarisatie tussen de pro- Europeanen en de nationalistische partijen in Europa toenemen. De EU zal geconfronteerd gaan worden met individuele eisen van landen, onder het dreigement van het houden van een vergelijkbaar exit- referendum.
Als de Brexit een positieve effect zal hebben op de economie of op deelsectoren van de UK a.g.v. deregulering of belastingverlaging, dan zal de roep om dergelijke maatregelen ook te horen zijn in Europa. Zo kan uittreding van de Britten uit de EU de start worden van een verder uiteenvallen van de Europese Unie als economisch en politiek blok.

Conclusie

De Europese Unie en haar voorgangers zijn ooit opgericht om een einde te maken aan de al eeuwen durende gewapende rivaliteit tussen de Europese naties. Door de economische barrières te verwijderen is uiteindelijk een grote vrijhandelszone ontstaan met grote aantrekkingskracht op landen aan de grens van de EU.
De impact op de economie na de Brexit zal sterk bepaald worden door het uittredingsscenario. De verwachting is dat hoe “harder” de Brexit, hoe groter de daling van de GDP. Effecten aan de vraagzijde van de economie, t.w. Import/Export, Investeringen en Consumptie zullen hard geraakt worden. Sterke overheidsstimulering in combinatie met een sterk nationaal zelfbewustzijn zal nodig moeten zijn om de UK in staat te stellen om een hard scenario om te zetten in positieve economische effecten. Daar UK een veel kleinere markt is dan de EU, met een beperkte negatieve handelsbalans, maar waar 2/3 deel van de economie betrekking heeft op import of export, zal de uittreding uit de Europese markt de economie flink gaan raken; het effect op de UK zal groter zijn dan op de EU. De Brexit is een feit, maar ook in exit strategieën bestaan veel varianten.

 

Theo Paardekoper 

Independent treasury specialist

 

 

 

Eerdere artikelen over de Brexit op treasuryXL:

Brexit: Winnaars en verliezers

Brexit en GBP: Een historische dag

 

 

 

 

 

 

Dutch FinTech Awards on April 21 – extra discount via treasuryXL

| 4-4-2017 | treasuryXL |

Witness the future of finance at the Dutch FinTech Awards in Utrecht on 21 April. Make sure you register today and join this unique opportunity to meet 300 International FinTech stakeholders. Via treasuryXL you can get this week an extra discount on the Early Bird ticket. Read the article for more information about the event and to discover the discount code.

 

WHAT DOES THE FINTECH AWARDS HAS TO OFFER YOU?

– 3,5 hours of quality networking time
– 300 stakeholders eager to network and explore opportunities
– Decision makers from 200 different companies
– 18 pitches of the best FinTechs
– 3 pitches of the most innovative Incumbent companies

WITNESS THE FUTURE OF FINANCE ON 21 APRIL

Visit the Dutch FinTech Awards and Conference where innovative and disruptive FinTech companies are awarded. Meet 300 innovation heads, entrepreneurs, investors, bankers and advisors, extend your network and develop business. Stay ahead of the game and witness the future of finance.

VISITING THE FINTECH AWARDS IS A ‘NO BRAINER’

5 reasons you should visit the Dutch FinTech Awards:

  1. Unique opportunity to meet the entire FinTech scene in one day. An inspiring day full of learning moments, business development, networking with 300 entrepreneurs, bankers, investors and advisors. This is the best day of the year.
  2. Meet in one day the hottest Dutch FinTechs as well as amazing international disruptors: N26 (Number26), Meniga, Behaviosec, Adyen, Davinci, Backbase, FiveDegrees, Dopay and many more. These companies make thousands of jobs in the financial sector obsolete.
  3. Thought-provoking keynote session of Europe’s biggest and fastgrowing FinTech bank: N26 (Number26): Why is N26 growing like crazy? Why are many banks afraid?
  4. Discover what keeps heads of Digitalisation and Innovation of the most important financial institutions awake. Meet Bart Leurs (Rabobank), Jonathan Webster (Lloyds Banking Group), David Dab (ING) and Menno van Leeuwen (Moneyou) and more.
  5. Meet the largest international FinTech investors with combined funds of over a staggering 1 billion. Meet Eggert Claessen (Frumtak Ventures – Iceland), Richard Brown (Santander – UK), Jurgen Ingels (SmartFin – Belgium), Josh Bell (Dawn Capital – UK), Johan Lundberg (NFT Ventures – Sweden), Iason Nikolakis (Anthemis – UK) and many more.

Early Bird tickets with an extra discount via treasuryXL

We have the opportunity to give you 50 EUR extra discount on an Early Bird ticket. Get your tickets now because the extra discount is only valid until the end of this week.

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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