Where does America go from here – what are Trump’s policies and how will they affect the economy?

| 14-11-2016 | Lionel Pavey |

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Infrastructure – a massive investment programme (a trillion dollar rebuilding programme).Trade – renegotiating NAFTA, opposition to TTP AND TTIP. Increase in tariffs on Chinese goods. Taxes – reduce and simplify taxes for individuals. Reduce corporate tax to 15%. Repatriate corporate cash held overseas with a one off 10% tax and then close all the existing loopholes. Spending – increase in Defence spending. Reduce current Government spending through efficiencies. Economy – increase annual GDP growth to 4%.

 

 

So how does it add up?

Investment in infrastructure is a positive – it leads to extra jobs and improvements in the country. Taking a more restrictive stance on trade treaties, whilst protecting America, could lead a reciprocal trade wars. Simplification and reduction in direct taxes will increase wealth and should lead to higher expenditure. Would be perfect if that money was used to buy American goods. Increasing annual GDP by 4% is very ambitious – has rarely been achieved in the last 40 – 50 years.

These policies would lead to a large increase to the Budget deficit – it would be a huge risk to expect increases in American productivity to be more than enough to cover the gap. We could expect to see interest rate rise, though the market was already expecting that.Trade wars would have a negative effect on the dollar.

The big problem is that Trump is a “known unknown”, a maverick and not someone that can be easily read by political experts.

If his actual stance is as strong as his political campaign then there could be serious consequences for global growth and trade. Interest rates will rise and the dollar will be volatile for the foreseeable future, and things will change. Whether it leads to improved growth in Europe – we shall have to wait and see.

Lionel Pavey

 

 

Lionel Pavey

Cash Management and Treasury Specialist – Flex Treasurer

 

International direct debit, the one true advantage of SEPA

| 11-11-2016 | Jan Meulendijks |

photo-1456930266018-fda42f7404a7-1At its introduction time SEPA seemed to be just another (more complicated) payment method, more imposed by EU-regulations than a market requirement. For international for exporting companies however, there is a very interesting bonus in the form of SEPA’s possibilities in the field of direct debit. Foreign bank accounts can be debited (for receivables) in the same way as Dutch bank accounts.

SEPA has contributed a lot to the awareness of using international direct debit. Before SEPA, companies had to to go through a complicated process in order to be able to process international direct debits:

– Set up multiple foreign bank accounts, in every country you export to
– Include these accounts in your cash pool and electronic banking environment
– Use unfamiliar local IT-tools and file formats
– Expensive to use and set up, lots of documentation required
-These were reasons for international operating companies not to apply the instrument of international direct debit.

All that is not necessary anymore. The main things are to arrange a SEPA Direct Debit contract with your own Dutch bank and obtain a direct debit mandates (one-off or recurring) from your foreign clients, similar to getting one from Dutch clients.

The mandates are sent to the debtor’s bank for registration. The transactions themselves can be included in your regular direct debit SEPA-batch alongside with your Dutch direct debits and presented to your bank for processing.

The result will be a better grip on your international receivables, cash planning, working capital management, all at low costs.

Your bank will be able to explain the procedures to follow.

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Jan MeulendijksJan Meulendijks – Cash management, transaction banking and trade professional

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Could blockchain bring the EU Capital Market Union forward?

| 10-11-2016 | Carlo de Meijer |

blockchainThe European Commission recently launched an update report on the state of the Capital Markets Union (CMU) project. A comprehensive program of actions set out a year ago to put in place the building blocks for this CMU by 2019. Aim is to create deeper, and more integrated capital markets across the EU to lower costs and make the market more resilient. One year later this project is still “lacking an organic and coherent set of actions to bring down cross-border barriers and create a single market for capital, which could support the effectiveness of monetary policies”, according to the Commission.

It however is important that the CMU project moves forward with greater speed. A financial market infrastructure that would permit more funding via the capital market is however not yet in place. Besides under CMU categorisation, post trade issues are considered long(er) term actions.

An intriguing question is: Could blockchain play a role in bringing the EU Capital Market Union forward?

Existing inefficiencies

But first, why a European Capital Market Union? The free movement of capital across the EU is one of the three key freedoms enshrined in the Treaty of Rome. This however is still far from its realization.

Over-reliance on bank financing

Europe’s businesses cannot fully exploit the opportunities of an efficient EU capital market. They are over-reliant on bank financing such as bank loans. Many small and medium enterprises (SME) have limited access to the financial markets, especially to venture capital and capital markets. Access to capital markets in Europe is unequal and varies significantly across member states. Investments in shares and corporate bonds occur mainly domestically, where different rules and standards apply.

 “The proportion of European company finance that comes from banks is high, around 80 per cent. Less than 20 per cent comes from investors. Figures from the US are the opposite. While the European economy is as big as America’s, bank loans in the US account for less than 30% of total funding for businesses, Europe’s equity markets are less than half the size, its debt markets less than a third”, according to Deutsche Bank Research.

Fragmented market infrastructure

In Europe, we have a very fragmented capital market infrastructure (unlike in countries such as US and Japan). Though there has been some moves towards consolidation, mainly at the exchange level, there is even more fragmentation now despite the efforts taken by the industry since 2000.

At present there are 102 regulated markets, 151 multilateral trading facilities, 20 central counterparties (CCPs), 42 central securities depositories (CSDs) or securities settlement systems (SSSs) and 6 trade depositories.

Insufficient regulation

In the post-crisis environment European financial authorities have recognized the importance of efficient market infrastructures at the trading and post-trading levels. They have introduced  regulations providing guidelines targeting CSDs and CCPs, and aiming to organise their activities in a harmonised way such as CSDR and EMIR. These regulations should bring further harmonisation in the fragmented post-trade area. And there was the launch of T2S,  which aims to eliminate cross-border settlement among participant CSDs.

However: this is a very long process that is still ongoing. These pieces of legislation are either still in planning phase or have only partially been rolled out. Others – namely on settlement discipline – have not yet been proposed. The experience with T2S demonstrates how difficult and lengthy the creation of single market infrastructures is. T2S has gone live, but three more migration waves are needed before implementation is complete. Although T2S only concerns settlement, it should create harmonisation in the custody industry.

Capital Markets Union: the goals

On 30 September 2015 the European Commission launched an action plan setting out key measures to achieve a true single market for capital in Europe. With many obstacles to domestic and cross-border capital movements as well as underdeveloped and fragmented capital markets – especially compared to the US – leading to lower levels of diversified funding for the economy, there is a need for action. In the current political and economic context developing stronger capital markets in the EU is seen as even more important.

An EU Capital Market Union is seen as the logical next step in the integration of European financial markets. The idea thereby is to transform European finance from a primarily bank-based financial system into a system wherein most of the funding is channelled directly to firms and households through non-bank financial institutions and securities markets.

The CMU has three pillars …..

  1. Unlocking investment for companies, including SMEs and infrastructure projects
  2. Attracting investments from outside the EU from
  3. Opening up the EU’s real economy to new investment sources

…… and six goals

  1. Financing for innovation, start-ups and non-listed companies
  2. Making it easier for companies to enter and raise capital on public markets
  3. Investing in long-term infrastructure and sustainable investment
  4. Fostering retail and institutional investment
  5. Leveraging banking capacity to rapport the wider economy
  6. And, facilitating cross border investment

The vision

Through a Capital Markets Union (CMU), the Commission is striving to increase the benefits that capital markets and non-bank financial intermediaries can provide to the economy. By improving the effectiveness of these markets, where barriers and fragmentation will be replaced by deeper and more integrated capital markets. This should contribute to improved stability, capital allocation, business growth and innovation. A single capital market would facilitate improved cross-border risk sharing, more liquid markets and a wider variety of sources of funding.

“This is done by unlocking the capital around Europe, by removing obstacles to the free flow of capital across borders and providing savers cross-border investment opportunities and offering business a greater choice of funding options at lower price” (European Commission, 2016).

The effectiveness of the market could thereby be enhanced with a single rulebook approach, enforcement and competition; supervisory convergence; data and reporting; market infrastructure and securities law; company law, corporate governance, insolvency and taxation; as well as technology.

Challenges

One year after the launch of the CMU Action Plan, the EU faces a number of important challenges that could impact the Capital Markets Union.

Political

The EU is confronted with a number of political issues. According to the head of ESMA, one of these that could really hurt the plans for this Capital Markets Union is Brexit, the upcoming British exit from the European Union. Being the European biggest financial center, London was supposed to play a central role in the CMU and be one of its biggest beneficiaries.

Regulatory

But there are also serious regulatory challenges. Work towards a CMU seems even more complex and politically difficult than the building of the European Banking Union. This given the extremely diverse legislative and regulatory setting of non-bank finance in EU countries, and the resistance of national authorities to release powers to Europe. It is therefore important to progress quickly towards the adoption of forthcoming legislative/regulatory proposals.

Technology

And last – but maybe the most important – there are the technological challenges. The capital markets are currently witnessing a remarkable wave of disruption and innovation, driven by new technologies. Technology has the power to increase the role of capital markets, and bring them closer to companies and investors. It is a driver of competition and helps to create a more diverse financial landscape.

 

Nasdaq: the wrong focus?

In a report by Nasdaq “Capital Markets Union: The Road to Sustainable Growth in Europe” , the US exchange stated that the concrete measures in the CMU Action Plan mainly focus on making it easier for large institutions to invest more and extend their product and service offerings, rather than improving the capital markets themselves.

For Nasdaq that is the wrong focus. Instead, the Action Plan should focus on increasing transparency, making the capital markets more accessible to smaller businesses, incentivizing long-term private investment in listed equities, and above all encouraging the development and use of disruptive technology to improve the post-trade environment.

An independent report by Systemic Risk Centre, co-hosted at the London School of Economics and University College London, also states that a successful CMU must embrace disruptive technologies.

“The EU and national authorities must alter existing regulatory structures if the CMU is to be achieved, encouraging disruptive technologies and allowing market forces to match savings to investment opportunities more efficiently”, according to the report.

 

Fintech and blockchain

One area that lies in the center of the technology revolution is the Fintech sector. Next to upcoming regulation, the booming FinTech industry is set to be a strong influencing factor on the planned Capital Market Union. They have the power to seriously disrupt EU capital markets. The technological advances they bring are accelerating, creating new business propositions and revolutionizing the way the financial industry operates. New technologies including blockchain may bring new asset classes to capital markets, but also create inroads for new and currently underserved investors as well as SMEs to access and use traditional financial services.

Blockchain: “el Salvador”?

Of all Fintech trends the most discussed and promising is blockchain– which enables transactions to take place on a distributed ledger that is maintained by a network of computers. This technology is attracting industry-wide interest. The financial industry is now actively looking into opportunities this blockchain technology could bring. They thereby are increasingly engaging with industry bodies as well as clients and blockchain providers to bring more efficiency to the financial industry. Nasdaq is a “big believer” in the ability of blockchain technology to effect fundamental change in the infrastructure of the financial services industry.

 “Changes are afoot that hold the potential to revolutionize the way we think about and interact with the world of finance as businesses, investors and consumers,” states the report, while cautioning that “more needs to be done within the scope of the CMU to explore the opportunities offered by this (blockchain) technology.”

CMU and blockchain applications

The role that blockchain could play in a CMU environment is intriguing. According to a growing group blockchain technology could be a catalyst for greater integration of Europe’s financial markets by helping break down some of the long-standing barriers to cross-border investment. This technology brings both opportunities and challenges. Blockchain technology promises to bring financial markets into the XXI century with real-time settlement, corporate actions and risk management.

There is little doubt about the potential gains this technology could deliver in terms of lower transaction costs, shorter delays and greater convenience. The existing market infrastructure is being challenged by blockchain applications that have the potential to render contracting and settlement between market participants cheaper and faster. It may allow full-fledged real-time settlement, corporate actions and risk management services.

In line with the CMU, the potential of a blockchain/DLT venture capital platform could facilitate the supply and demand for SMEs with regards to funding. Either by debt issuing, turning savers into investors and providing more capital access options to companies.

Or by shares issuing – against a light prospectus regime – turning savers into owners. This could be a type of regulated crowd funding by issuing existing financial market products like shares and bonds, but without the burden of legacy systems and infrastructures.

Transforming market infrastructures

Blockchain could prove to be a perfect use case for a complete reform of the securities post-trade value chain, transforming the market infrastructures. This technology has the potential to wipe out traditional post-trading players. As blockchain removes the need for a number of intermediaries in the securities lifecycle, this may lead to substantial shifts in the role of the different market participants and in the organisation of the post-trade landscape. Large central bodies such as clearing houses (CCPs) and central securities depositories (CSDs) would not be needed in a world where the settlement of transactions is completely reorganized and executed real-time and those activities are greatly taken over bij the distributed ledger.

No complete disintermediation

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. And also the bulk of financial infrastructures dominated by financial institutions will largely remain. As most of their activities in this area are related with the provision of intermediated capital funding.

 

European Commission and Fintech

But how is the attitude of the European Commission towards Fintech in general and blockchain particularly?

“Fintech has the power to increase the role of capital markets, bringing them closer to companies and investors” says the European Commission.

As it bids to push the CMU, the Commission is increasingly backing fintech in capital markets. The Commission is thereby highlighting the role that technology including blockchain could play as a driver of competition that helps to create a more diverse financial landscape bringing more choices to consumers, companies and investors.

However, “at the same time, the rapid development of fintech poses new challenges in managing risks and ensuring consumers have adequate information and safeguards,” warns the Commission

They agree that this innovative potential should be harnessed. In a number of EU Member States, regulatory authorities are already developing new approaches to support the development of FinTech firms, including hubs providing regulatory guidance or teams focusing on policy implications of FinTech. The European Commission supports this development and will continue to promote the development of the FinTech sector and work “to ensure the regulatory environment strikes an appropriate balance between building confidence in companies and investors, protecting consumers and providing the FinTech industry the space to develop”.

The Commission will work with the European Supervisory Authorities (ESAs), the European Central Bank, other standard setting bodies, and the Member States to develop a co-ordinated policy approach that supports the development of FinTech in an appropriate regulatory environment.

Buts!!

There are however still a number of buts!!! The directions that these blockchain related developments will take in the end are not (yet) entirely clear. For example, it will most likely take some years before blockchain will have a real, potentially disruptive, impact on parts of the financial services industry. And what those really will be?

And it is also far from certain whether there is a reason to assume that this blockchain technology would, on the whole, eliminate the prevailing risks of the capital markets. While it is certainly true that the opportunities blockchain are promising, digital finance is not immune to errors, manipulations, hackings and other dishonest practices.

The self-regulation of blockchain technology is no panacea either: legal issues have already arisen and any application involving risks to the financial sector will still require supervision. The Commission has the vision that one therefore should not attempt to create an artificial separation in financial regulation, but should instead treat technology neutrally.

 

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

 

 

Uitgelicht: Europese alternatieve financieringsmarkt groeit.

| 08-11-2016 | Jan de Kroon |

torre-cajasol-786180_640Allan & Overy publiceerde recent een onderzoek waaruit bleek dat de Europese alternatieve financieringsmarkt blijft groeien (bron: FM.nl). Er wordt, volgens het onderzoek, door ondernemingen vaker over de grens gekeken wanneer het gaat om hun financieringsbehoeften. Ze kunnen dan ook kiezen uit meerdere financieringsbronnen. Expert Jan de Kroon brengt ons zijn visie over de toenemende groei van de alternatieve financieringsmarkt. 

Ik word altijd wat argwanend als een financieringsspecialist van een prestigieus advocatenkantoor plots de resultaten van een onderzoek naar Alternatieve financieringsbronnen presenteert. Heeft toch iets van ‘wij van Wc eend…..

Om tot de conclusie te komen dat de markt voor alternatieve financiering groeit, hoef je geen onderzoek onder 360 (!) Europese ondernemingen en investeerders te doen.

Verschillende en elkaar versterkende omstandigheden en invloeden leiden op zich al tot die toename. Denk aan Bazel voor banken, het krankzinnig lage rentepeil, risico’s op de beurs en het feit dat ook investeerders dientengevolge hun asset mix aanpassen. Het feitelijke percentage doet er niet zozeer toe.

Wat er wel toe doet is dat de groei voor een groot deel in de onderhandse markt te vinden is met bemiddeling door banken. Dat is een markt die al veel langer een alternatief biedt voor veel vooral grotere ondernemingen. Dat is daarmee een redelijk ontwikkelde markt.

Tegelijkertijd ook een markt die minder goed toegankelijk is voor het MKB. Dat wordt wel beter overigens naarmate pensioenfondsen hun asset mix ook naar financiering van MKB uitbreiden. Zij het dat ook hier de aantallen transacties het werk en de kosten, maar minder het rendement veroorzaken. Daardoor ontstaat er ‘near banking’ .

In het artikel wordt melding gemaakt van de gebrekkige kennis van de gemiddelde MKB ondernemer op dit gebied. Dat is ook geen verrassende conclusie; die ondernemer ziet het aantrekken van financiering als een ‘eenmalig event. En gaat zich er dus op inrichten. Zijn bank of een adviseur is vaker op de betreffende markt te vinden en heeft dus meer overzicht.

Wat nu juist aardig is om eens te onderzoeken, is het functioneren van de alternatieve vormen van financiering. Mijn waarneming is dat vooral de bron een andere is. De feitelijke kredietbeoordeling wordt vooral gedaan door voormalig bankiers die op tijd bij hun bank vertrokken zijn. Dat zijn echter bankiers die nog steeds met een wat achterhaalde bril naar cijfers kijken en juist op die manier de gang naar alternatieven lastiger maken voor de gemiddelde MKB ondernemer. Met een goed plan en mooie cijfers aan de basis geeft ook het traditionele bancaire kanaal gewoon ‘thuis’.

De uitdaging zit hem er nu juist in om het toekomstig duurzaam kas genererend vermogen te durven financieren. Maar of al die alternatieve bronnen dat al aandurven; ik vraag het me af.

Jan de Kroon

 

Jan de Kroon

Owner & Managing partner of Improfin Groep

Experts talk about a DIY Approach to Corporate Borrowing

| 07-11-2016 | Douwe Dijkstra, Lionel Pavey |

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Last week we came across an article about DIY Corporate Borrowing (gtnews.com). The author stated that: “A do-it-yourself (DIY) credit application using publicly available information can help corporations better understand how they are seen by lenders and cuts the risk of financing not being available when it’s most needed.” We have asked our cash management experts Douwe Dijkstra and Lionel Pavey to give us their opinion on this approach. 

 

 

douwedijkstrarondDouwe Dijkstra
“I would like to react to the paragraph: “Services, such as cash management, trade finance and other fee-based services, require little or no equity for the bank to sell them and can appear to be much more profitable. From time to time a bank will instruct its sales force to push the products and services that require less capital and restrict sales of capital intensive ones such as loans.”

In my opinion banks nowadays already include exclusive provisions in their loan documentation for additional side business when providing finance to corporates. As a consequence you find yourself condemned to the cash management solution of a bank which is far from efficient for your purposes i.e. they do not have a presence in your area or one of the areas where you are active. The same is true for the “no further indebtedness” clauses in their loan documentation that prevents you, as a treasurer, selecting the best fitting financial product for your company. As an interim treasurer working for several private equity owned companies I am often faced with these restrictions. Regularly private equity companies have already signed the loan documentation without properly assessing side business terms in the contract. ”

lionelrondLionel Pavey
“Money is a commodity that is fungible – it is homogeneous and can be exchanged or replaced by a similar unit of currency and we would be indifferent to this change.

However, loan documentation is certainly not homogeneous – a quick scan through the documentation of different lenders will show different terms and conditions.

A DIY credit application therefore requires the existence of a standard set of documents. There are certain examples, such as the Loan Market Association, who do attempt to make standard documentation.

Up to now banks have traditionally been the suppliers of credit to companies, though there is no law or reason stating that they have the sole right to do this. To open up the loan market to third parties would require clearly defined documentation, along with criteria that must be met to engage with the market – detailed accounts that have been signed off and approved by independent auditors etc.

Lenders would have to submit their audited figures within an agreed timeframe so as not to be in default on their loans.

If such a market did come into existence and it was truly open to all contributors, it would also lead to fair greater transparency of the pricing policy that lenders use. The price of debt for each and every level of credit rating could be observed, together with implied premiums for country, industry etc. This is the opaque area where banks have a clear advantage – they have their own internal guidelines and pricing mechanics that no one else gets to see. The pricing should be more transparent – this would enable potential borrowers to have greater insight into price discovery which is a cause of concern for many funding issues as, for many companies, it is difficult to passively see what the potential price of debt for them would be.

An opening up of any financial market should be welcomed and make it easier for other potential lenders to see what risks the rest of the market are prepared to accept and also price changes. This would then allow companies to better manage their external relationships – they can separate their loan relationships from their core banking relationships.”

 

Blockchain: can it be of help for the agricultural industry?

| 03-11-2016 | Carlo de Meijer |

blockchainDuring my economics study in the seventieth of last century (indeed a long time ago!) one of the courses I followed was agricultural economics. Recently I met a Canadian (with Dutch roots) from the agricultural business and we were talking about the opportunities for using blockchain technology in this area. Up till now there has been very little talk of blockchain applications within core agricultural areas. But he told me that this is changing and that the agriculture industry is now increasingly exploring the potentials of using blockchain for the “agri sector”.

This triggered me to write this blog asking myself the question: how and where is the agriculture industry using blockchain and what is the potential for massive blockchain growth in the agricultural economy.

Agricultural business is a complex industry

The agricultural business nowadays is a huge, important, industrialised but very complex industry. The agricultural supply chain is an inefficient one, characterised by a large-scale non-transparent and non-communicating network consisting of many actors, processes, products and data. A big problem here is the great disconnection between supplier and retailer. The lack of transparency and disconnection makes it very difficult to track issues, tracing the origin of products and give a fair price for producers. And that while regulatory pressure, food crises and scandals (such as the mad cow disease (BSE) and cross contamination)) have increased the need for greater supply chain transparency and thus the need for data integration. These days, the public is increasingly embracing the need for transparency in food products and farming techniques.

Retailers want the best quality agricultural products, while also seeking to the lowest prices. On the other hand a growing number of consumers are demanding sustainable food products. They have less trust in existing agricultural products food, increasingly seeking information on authenticity and production practices. Consumers, especially within these niche markets, are increasingly willing to pay for products that provide this information.

“Consumer demand for “clean” food, including organic, is skyrocketing, but producers and manufacturers are often struggling to verify the accuracy of data from farm to table”.

Blockchain can help …

The agriculture industry is now looking for ways to alleviate the complex issues related to farming and distribution. They have a strong need for supply chain intelligence, especially for technology that supports traceability of critical products data through the supply chain across all of affected businesses. Currently, there’s however no easy, accurate and efficient way to identify the exact origin of an agricultural product.

Blockchain could here play an important role. While many of the existing technologies are inadequate or too costly to help, blockchain technology has all ingredients to become a real problem-solver. This technology records information in a distributed ledger in a way that is both secure and immutable. By being distributed among many users these ledgers are resilient with no single point of failure, and they can be (depending on design), transparent to all users. The blockchain technology thereby removes the need for formally identifying both parties to the transaction thus major cost savings can be achieved.

…. to solve existing problems

According to a report from AgriDigital using blockchain could solve many of the existing shortcomings/problems. The use of this technology could lead to improved product tracking and tracing origin of products, efficient supply chain management, fair pricing and decreased transaction fees, etc.

Efficient Supply Chains in Developed Economies  

Possibly the highest potential for blockchain in agriculture is in the developed world, where it can be very helpful in monitoring the supply chain of food products. This technology seems to have the best potential to bring overall provenance and transparency throughout the food supply chain. The blockchain technology offers significant opportunities including increased transparency and data integrity, “with immutable provenance data from farm to table”, allowing a visible assurance of authenticity.

Product tracking

By providing both parties with access to information on similar transactions, as well as on the current stock price of goods, even suppliers in rural areas are able to determine what their harvest is currently worth and sell it to distributors at a price that reflects global market conditions.

Tracing origin

By establishing a blockchain-driven ecosystem for the registration, payment, and transport of crops or other agricultural products, retailers can also verify easily that the product they are receiving is exactly what they paid for (product origins).

“With every step of the transaction process recorded on the blockchain, if a supplier claims that its coffee beans are ethically sourced from Colombia, for example, this can easily be confirmed by tracing the journey from farmer to coffee shop, alleviating concerns about misrepresentation” AgriDigital report.

From a consumer point of view, using transparent distributed ledger could give consumers confidence about where their food comes from and how it was produced. With monitoring the consumer food chain they can have a better idea of the origin of the food, the date on which it was created and the efficiency with which it occurred, instead of relying on the existing systems that can be manipulated easily.

Fair pricing and decreased transaction fees

Blockchain can provide an easy solution for both buyers and suppliers seeking to negotiate a fair price for their product. Using Blockchain, commodity buyers are able to deal with their supplier directly and transfer payment via mobile. This may ensure that farmers receive fair payment for their produce and the retailer pays a fair price as that would save the retailer money in agents. Ultimately, this technology enables farmers, manufacturers, and retailers to justify premiums for certain products.

Minimising Human Error

Blockchain can also be used to minimise physical and financial losses in the agricultural sector caused by human errors. By adopting blockchain technology tasks can be taken from the workforce in many ways and automate them, minimising the amount of resource that is wasted or misused. Also, Blockchain can present information to farmers regarding diseased products throughout their supply chain: what types of crop are they; where were they grown? By drilling down into this data set, the farmer can then minimise future losses.

Use cases

There are nowadays various blockchain use cases that could be adopted by the agriculture industry, ranging from real-time management of supply chain transactions and financing, smart (farm) contracts, data monitoring to reduced human errors.

Management transparent transactions

Blockchain enables both small farm firms and agricultural concerns to be able to keep track of their transactions and contractual obligations with buyers, suppliers and other stakeholders in order to maintain accountability. Thanks to this technology the connection between commodity buyers and farmers can now be monitored more closely, and distribution channels streamlined yet further. This minimises fraud, maximises transparency, and ensures that each link in the supply chain is satisfied.

Efficient financing

But also financial transactions between farmers and buyers, that are nowadays hugely inefficient, could be improved thanks to blockchain technology. As it will enable real-time payment on delivery, this may improve the settlement process for farmers, buyers, and banks. As a result, farmers get paid immediately, industry competition increases and buyers save time and money. Also, adding transparency, trust, and efficiency to settlements can decrease risk and unlock new financing mechanisms for banks.

Smart farm contracts

Another use case is that of smart contracts in the agriculture industry. This especially relates to the provision of agricultural services linked to conditions and rules that could be specified in the blockchain, fulfilment of which is verified via the technology platform, such as pre sales of harvests or trigger compensation for the farmer based on confirmed weather data in real time. Sensors that automatically feed data into the blockchain in real time will provide the basis for smart contracts of this kind. The blockchain will not only be able to verify payments or record ownership properly. Rather it will automatically ensure that contracts are complied with, protecting the rights and obligations of contracting parties.

Data Monitoring

A fourth use case – and one of the most obvious one – is in data monitoring. It allows farmers to capture data in real-time. For instance, wireless sensors can be integrated into fields to monitor crop growth, harvesting, and subsequent yield, with all of the data recorded onto the blockchain. That will help them plan their areal more effectively and maximise the “success rate” of their harvests. Over time, this information would become an invaluable resource to the farmer.

Land registry

Another application of blockchain technology, especially for developing countries is to record land ownership in the country. In many countries in South America, but also Africa and South East Asia, a great majority of land is still unregistered. These countries often struggle with land tittle fraud, leaving the poor, who have most of their wealth in land, vulnerable. There is nowadays a growing number of countries in these regions that are thinking about using a permanent and secure land title record system based on blockchain technology.

Better Finance for the developing countries

Blockchain also has huge potential to create and improve access to finance in the developing world. For many of the farmers in these countries, affordable access to capital remains a huge challenge. Mobile banking creates novel financing opportunities such as micro-financing, but because of a lack of transparency and therefore high risk, the current paradigm is tons of small and costly transactions. Blockchain can — and already is — solving this problem for financiers and farmers. Examples include agri-ledger out of the UK, BitPesa in East Africa, and Rebit in the Philippines.

The concept of Smart Farms

The integration of all these various applications of blockchain technology in agriculture could lead to the concept of so-called smart farms. These are a form of sustainable agriculture that aims to enhance environmental quality, integrate technology with natural biological cycle controls and create economic viability within farm operations. Smart farming thereby involves the collection and distribution of large amounts of data related to different farming methods, weather conditions and animal health. Smart farming employs a lot of digital equipments and remote sensors, to collect the necessary information such as the information in advance so that timely measures can be taken regarding fertilisers, soil mapping, crop yields and machinery used. Smart farming also makes use of sensors for the early detection of animal health and upcoming reproduction events. This kind of livestock data is collected by monitoring the body movements of animals, their body temperature, pulse rate and tissue resistivity. GPS is also used for locating their positions.

Start-ups

Globally, there is a growing number of start-ups exploring the potential for blockchain in agriculture. Some of them already provide practical blockchain based solutions to various food items, to improve the traceability of food throughout supply chains and provide concrete proof of origin such as SkuChain. Other start-ups such as Filament provide blockchain solutions to create concepts like smart farms. Additional start-ups like Provenance and FarmShare are also researching and developing blockchain-based agricultural platforms.

SkuChain (supply chain)

SkuChain Technology is a distributed ledger blockchain-based system in the food industry that relies on its immutable nature to solve the problem of supply chain integrity. They focuses on the creation of direct relations, which simultaneously increases confidence and visibility of flow of goods. SkuChain is nowadays developing a system of improved (next generation) barcodes and RFID tags, with the aim to digitally secure the transfer of goods across the entire global supply chain and protecting end to end supply chains against counterfeiting. They therefor will provide cryptographic proof of each SKU’s origin and supply chain that can be verified all the way from the start to the point of consumption.

Filament (smart farms)

Another start up is Filament, a wireless sensor firm, that is developing sensors to monitor crop health and recording results in a blockchain. With Filament’s platform, users connect physical objects and existing networks into “wider networks and applications” – making smart farm technology into reliable infrastructure. By monitoring the food supply chain, consumers can get a better idea of where the food is coming from, the date it was created, and how it was produced more efficiently.

Provenance (tracking)

Others such as UK start-up Provenance are using blockchain to improve the traceability of food and provide concrete proof of origin. Provenance uses blockchain to keep a track of food supply chains and makes the information public, secure and all-inclusive. The ledger is used to document the supply chain of materials, ingredients, and products to provide consumers with greater transparency about their authenticity and origin. They provide buyers – in the format of a real-time data platform – with a fully transparent record allowing the end user to see each step of the journey the product has taken: where it is, who has it, and for how long.

Farmshare (community-supported agriculture)

FarmShare, another start-up,  is developing an agricultural system that runs on the blockchain to evolve community-supported agriculture in developing economies. The project is an evolution of the CSA model, which takes advantage of the blockchain’s potential for creating new forms of community property ownership, collaborative labour relationships, and locally-oriented alternative economies. Farmshare has been networking with its local community and within the technology industry. Farmshare thereby uses blockchain technology to buy, sell and trade a local crypto currency (cryptographic tokens) that can be used/exchanged to purchase weekly deliveries of locally produced food from nearby farms within a natural community. FarmShare enable shares in harvested crops to be electronically distributed to members, creating self-sufficient local economies. This in turn generates greater involvement within the community, and ensures there are incentives for local agriculture to be run more effectively.

Real world examples

Tuna industry
Provenance is now experimenting with proving the supply chain of the tuna industry in Indonesia being delivered to Japanese restaurants. Mobile, blockchain technology and smart tagging were thereby used to track fish caught by Indonesian fishermen with verified social sustainability claims. They used information on sensors or RFID tags and local certification, recorded in the blockchain, to track the fish along its journey from “hook to fork”. Its ambition was to demonstrate a solution to the serious need for data interoperability: “for tracking items and claims securely, end-to-end, in a highly robust, yet accessible format without the need for a centralised data management system”. The pilot was successful in tracking responsibly-caught fish and key social claims down the chain to export. It was found that blockchain technology meet these needs and offer an “exciting paradigm shift” necessary for traceability in such vast complex supply chains as the South East Asia fishing industry.

Local grain industry

Start-up Full Profile is starting with an in-market blockchain pilot for the 2016-2017 grains harvest in Australia. Since the grain industry deregulated in 2008, growers have been increasingly exposed to payment risk — not receiving money for their crop once a shipment legally changes owners. Because blockchain records detailed information for every transaction along the value chain, this technology can take out a number of risks faced by growers and traders selling grain. Thanks to this increased transparency buyers and sellers both have access to the information, as well as information about similar transactions, so both parties have a fuller understanding of fair prices. For grain growers and traders, key features of blockchain, such as real-time payments and settlements, allow growers to get paid for their grain the instant they deliver loads of grain at harvest.

Agribusiness trade

The use of blockchain technology could also dramatically transform agriculture across Africa. WakChain is Africa’s first permissioned blockchain for the farmer and the continent’s agribusiness. Wakchain nowadays uses this technology to scale up the transformation brought about in Nigerian agriculture. Existing structural inefficiencies, poor market and transport linkages mean that the farmer is disincentivized from fully reaping the rewards. Blockchain could create the foundation for more seamless intra-African trade especially in the agribusiness value chain. The idea of Wakchain is that farmers and players in the African agribusiness value chain should be able to trade from anywhere in the continent, using blockchain technology and in a manner that maps the distributed nature of agricultural activities. Blockchain can help African farmers by enabling them transact, verify and enforce the provisions of their contracts better.

Future                                               

Though we haven’t yet seen the large-scale commercial adoption of blockchain, and there are still many bottlenecks to remove, this technology has the ability to fundamentally transform the agriculture industry. Blockchain technology has big potential to solve significant problems in the food and agricultural industry. Farmers in the Western world have always been eager adopters of technologies that make sense and deliver real value. It will be interesting to see how lucrative blockchain can prove to be for the present day farming techniques. The challenge now for blockchain, and agricultural technologies in general, is connecting the technology to viable business models and compelling use cases. All the start-ups mentioned above are working hard to do just this.

 

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

Has the Bond bull market run out of steam?

| 02-11-2016 | Lionel Pavey |

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The yield on Dutch 10 year government bonds has increased sharply in the last month (October 2016) –from 0.02% at the start of the month to 0.28% at the end – bond prices of course move in the other direction and have gone down. Why?

Possibility that the Federal Reserve will raise rates in America? Uncertainty over when the ECB will end their QE programme and the knock-on effects in the market?



ECB president Draghi has not said if the programme will end in March 2017 as originally envisaged. As monetary policy has not delivered the boost to the economy that was expected, maybe it is time for Government to look at changes to the fiscal policy via a Keynesian stimulus leading to lower taxes and an increase in direct government spending.

So if the bond market has reached the bottom and prices will start to rise, what will be the consequences?

The ECB is holding over EUR 1 trillion worth of bonds – can they unwind this position? Immediate selling would lead to a collapse in prices and a large increase in interest rates – deflating an already fragile economy and withdrawing liquidity from the financial system. Could the debt be monetized – the scale involved has never been seen before, so difficult to say.

But, what will happen to bond prices when yields start to rise?

If the yield on 20 year government bonds in the EU was to increase by 2% from their current levels, this would lead to a fall in price of 25%. If the yield on 30 year government bonds in the EU was to increase by 3% from their current levels, this would lead to a fall in price of 44%.

As the ECB would have to sell their existing bond holding at lower prices, there would be a huge loss on their portfolio – who ultimately would have to bear this loss?

What would be the effects on the equity markets – there has to be a knock-on effect if bond yields rise leading to a fall in equity prices. Is the current fragile market able to absorb these transactions – is there enough liquidity in the market?

Very worrying times ahead – companies will have to review their funding strategies, but this can lead to opportunities.

Lionel Pavey

 

 

Lionel Pavey

Cash Management and Treasury Specialist – Flex Treasurer

Will the Fed kill the EM currency rally, or will Trump?

| 01-11-2016 | Simon Knappstein |

markets1

 

The USD is strengthening again broadly across the range. As it had weakened since Q1 this year versus EM currencies, this trend now seems to have come to a halt. Obviously the expectation that the Fed will almost certainly raise interest rates in December is the major factor for this move. What also may be of importance here is the nascent notion that the expansion in global liquidity that has characterized financial markets for so many years might have come to an end. Both the ECB and the BoJ seem less willing and/or have less room to increase QE.

 

This tends to direct investment flows away from EM currencies, and to a lesser extent from EUR and JPY, into the USD. So expect a stronger USD into year-end. And possibly even more in case of a Trump win, as protectionism will hurt global trade and that will hurt other currencies more than the USD. According to ING MXN, CAD, GBP and AUD would be among the currencies that would be hurt most relatively.

Here is a summary describing the consensus-view on a number of currencies. You can find more information and details on consensus FX forecasts in my latest October report.

Developed Markets

The Fed appears set to raise rates again before 2016 comes to a close. The USD is strengthening broadly; expect this to continue in the run-up to year-end. The USD is likely to peak when rates are finally lifted again in December. With a Fed hike likely to come before year-end and questions regarding Eurozone bank stability looming, the outlook for the common currency is becoming slightly bleaker. Over the remainder of the year, the EUR is likely to fall out of favor with investors.

For GBP, the likelihood of a so-called ‘hard Brexit’ has increased. Such a scenario increases the chances for another rate cut by the BoE during the remainder of this year. Expect downside pressure to prevail for the next couple of months. Oil prices boost the CAD, but still the outlook for a weaker CAD near-term hasn’t changed.

The JPY is not weakening on BoJ measures; only USD strength is pushing USD/JPY higher. External factors are the main drivers for JPY weakness. Stronger-than- expected commodity prices are the major factor keeping the AUD elevated. A weaker AUD looks more likely from here.

Emerging Markets

The RUB seems less sensitive to oil price shifts. High carry is providing support in risk-on circumstances. TRY has weakened on capital outflows on the back of a ratings downgrade. Geopolitical risks will weigh further on the TRY.

Latam

The BRL continues to trade with a positive momentum on the back of fiscal reforms by the interim president Temer and also by a high carry. The MXN has proven vulnerable to portfolio outflows. Rate hikes have given little support. A Trump win might push USD/MXN above 21.

Asia

CNY is weakening against the USD as the Fed is expected to raise rates. PBoC will verbally support the CNY but depreciation trend will continue. INR looks stable through the transition to a new RBI Governor. Still supported by a relatively high carry.

Consider a treasury intern!

| 31-10-2016 | Pieter de Kiewit |

As you might know, I play an active role in the development of the Minor Treasury Management at the Hogeschool Utrecht. This is the second year this program is organized for Bachelor students, not only from Utrecht but also schools from other parts of The Netherlands.

I contribute in three aspects: informing students about why they should choose this minor, describe the relevant labour market to the students who chose the program and connect them with the market. Both guest lecturers as well as internship counselors found their way into the program through my mediation.

As far as I can oversee the Hogeschool Utrecht is currently the only higher education institute in The Netherlands with a structural focus on treasury. All other active in this field offer post graduate / evening study programs. In our recruitment we hardly see young graduates with thorough knowledge of corporate treasury.

In this blog I want to invite you to hire an intern. Perhaps they can offer the solution for the project where you do not know if you want to hire a consultant, ask a colleague or do it yourself. Interns ask surprising questions and present solutions you did not think about. Their recent classes taught them about theories you never heard of before. They can help you tackle projects and you can help them prepare for the treasury labour market. Win-win.

Did you ever hire a treasury intern? Tell us about your experiences in the comments below!

Editorial note

  • The internship for students of the Minor Treasury Management at the Hogeschool Utrecht will start February 2017 and will last for 20 weeks;
  • It is a full-time internship: the students will work for 4 days at your office and can work one day a week on their thesis, other structures can be discussed;
  • They prefer that students take the internship on their own, but in pairs may be negotiable.

 

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

 

 

The end of the Notional Pooling Era: What to do next?

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