Blockchain and the Hyperledger project: beyond the hype

| 27-09-2016 | Carlo de Meijer |

blockchainWho is not yet convinced of the potential of blockchain? Here is another example that shows blockchain is beyond the hype. Early September, the Hyperledger Project, a collaborative cross-industry effort to advance blockchain technology, announced that 17 new companies and organisations have joined, bringing the total number of members to more than 80. And expectations are that this number will see a further growth, to beyond 100 at the end of 2016.

Let’s have  a look how this collaboration platform performed! But first, what is the Hyperledger Project, and what is their goal?

What is the Hyperledger Project?

As they describe themselves on their website:

“The Hyperledger project is an open source collaborative effort created to advance blockchain technology by addressing important features for a cross-industry open standard for distributed ledgers. It is a global collaboration including leaders in finance, banking, Internet of Things, supply chains, manufacturing and Technology. The Linux Foundation hosts Hyperledger Project as a Collaborative Project under the foundation”.

Goal
Main goal is to build an enterprise grade, open source distributed ledger framework and code base to drive blockchain innovation. This should enable organisations to build and run robust industry-specific applications, platforms and hardware systems to support their individual business transactions. All of these innovations will work with an open-source code and distributed ledger architecture.

Through the creation of a framework that integrates different components for different use cases, the consortium is seeking to bring cohesion to a number of independent blockchain efforts that are in the process of developing protocols and standards. The collaboration should help identify and address important features and currently missing requirements for a cross-industry open standard for distributed ledgers.

Codebases
The Hyperledger Project is made up of different codebases donated to the Linux Foundation, contributed by several of its members including IBM, Digital Asset Holdings, Blockstream, Ripple and others to further the Project goals. IBM alone donated 44.000 lines of codes. In total, there are now 160 code contributors (including individuals that may not be working on behalf of any company). It provides a vehicle for companies to collaborate on features.

Members
The Hyperledger Project has gained a lot of industry support in advancing blockchain technology. Since its formal launch in February this year, with original 30 founding members, this number jumped to 80 in  a half year time.

New Hyperledger members thereby come from all over the world, including Europe, the US and Asia. They have joined a rapidly growing and diverse group across various industries, including finance, banking, trade finance, supply chain management, manufacturing, technology etc.

The Hyperledger Project has backing from many big corporates. Amongst its members there are a large number of established names from technology giants like IBM, Intel, Cisco, Accenture; to financials with names as JP Morgan, BNY Mellon, ANZ Bank, HSC, Wells Fargo; exchanges such as London Stock Exchange, Deutsche Borse, organisations like SWIFT, CLS, DTCC, Digital Asset Holdings, as well as the bank-backed blockchain consortium R3CEV.

Incentives
Why are they all joining the Hyperledger Project?
There are various motivations and reasons why companies are joining this Project. But in general, Hyperledger is seen by many as being “at the cutting edge of blockchain”. Major institutions are increasingly viewing the Hyperledger Project as a venue for further engagement. International collaboration cross-industry, organised effort plus local experience are thereby looked at as key to ensuring the scalability and the adoption of distributed ledger technology.

For them the Hyperledger Project is uniquely positioned to foster the collaborative approach needed in order to advancing the blockchain ecosystem and promoting blockchain’s extensive application to serve as the future credible infrastructure. They hope, by working with this growing community, to further Hyperledger’s vision and open blockchain development efforts. This by sharing ideas, experiences, expertise and knowledge in an effort to bring blockchain’s emerging technology to market

“A key factor of the project’s success will be member expertise and guidance” – Brian Behlendorf

Recent developments

The Hyperledger project has been rapidly moving forward since the start. Next to the announcement of a growing number of organisations joining their collaborative platform, we have seen a number of interesting developments surrounding the Hyperledger Project.

Election Technical Steering Committee
The governance structure has been further strengthened. The Hyperledger Project recently elected a new Technical Steering Committee (TSC) consisting of 11 members. The members include representatives from names like R3CEV (the other blockchain consortium), Digital Asset Holdings, IBM, London Stock Exchange, and DTTC. The composition of this TSC reflects the importance of these players in the Hyperledger Project, from both a technology as well as a business point of view.

Hyperledger Project and SIBOS Innotribe
Hyperledger Project announced it will sponsor the Innotribe Networking event at Sibos 2016, on Wednesday, September 28.  The conference will be held on September 26-29 at PALEXPO in Geneva. As the world’s premier event for financial services, Hyperledger Project is  looking forward to discussing open source distributed ledger technology and its potential to transform the industry with leading companies and experts.

Trade Finance Proof of Concept
The Hyperledger Project as well as the bank-backed blockchain consortium R3CEV announced initiatives to develop blockchain prototypes for trade finance innovation on the same day. Both initiatives were exploring how distributed ledger technology could streamline the existing old-fashioned, paper-based and expensive world of trade finance, using letters of credit. They thereby tried to tackle trade financing challenges via this technology.

Hyperledger Project trade finance proof of concept
The Hyperledger Project trade finance proof of concept comprised HSBC, Bank of America Merrill Lynch and IDA (Singapore). Aim of the various parties was to use a blockchain prototype to streamline global trade. The application mirrors a paper-intensive letter of credit (LC), whereby participants could execute a trade deal automatically through a series of digital smart contracts. They thereby used the open source Hyperledger Project blockchain fabric, thereby supported by IBM Research and IBM Global Business Services.

R3CEV blockchain trade finance initiative
R3CEV and 15 of its blockchain consortium members have “successfully” completed two prototypes using distributed ledger technology for smart contracts. The banks designed and used so-called smart contracts on R3’s Corda distributed ledger platform to process accounts receivable (AR) purchase transactions, invoice financing or factoring, and Letter of Credit (LC) transactions.

The involved member banks in the trials include: Barclays, BNP Paribas, Commonwealth Bank of Australia, Danske Bank, ING Bank, Intesa Sanpaolo, Natxis, Nordea, Scotiabank, UBS, UniCredit, US Bank and Wells Fargo.

Competition or collaboration?
HSBC, involved in the Hyperledger Project trade finance PoC, but also member of the bank consortium R3CEV, asked if there was no duplication, and if so, expressed the view that “we will all have to come together, because this has to be industry-led”.

According to HSBC “… now we need to get the technical teams together to understand the pros and cons, because part of what we have learned is also the technical limitations of distributed ledgers, in terms of the number of nodes you can have or the quantity of data you can have on it. So now may be the time to share those and see how we can put our heads together to take this to next level.”

“R3 is a member of the Hyperledger initiative and as such we will continue to explore ways to utilise the code being developed by its open source community in the real-world products we are developing with our consortium members”, said HSBC.

Hyperledger hackaton Amsterdam
ABN Amro, IBM, Holland FinTech and Linux Foundation are to run the first-ever Hyperledger hackaton, inviting coders to develop new financial applications capable of running on distributed ledgers. This one-and-a-half day hackaton will take place on 11-12 October in Amsterdam and is open to developers, tech students and fintech companies that are experimenting with blockchain technologies.

Hyperledger Project to address academic lecture ISITC
Leading members of the Hyperledger blockchain Project will address the European branch of ISITC, the International Securities Association for Institutional Trade Communication. The academic lecture to be held at the London Metropolitan University is intended to give the members an idea of what differentiates the Hyperledger Project from other blockchain projects.

This event that will be held in London is the latest effort by ISITC’s newly formed Blockchain DLT Working Group to lay the foundation for a global effort to standardize distributed ledger technology. The DLT Working Group that emerged earlier this year was invited to create a list of 10 blockchain standards for future development. It has changed its task slightly to focus on a cross-industry framework from which a modified list of benchmarks might eventually emerge. The Working Group prioritised working with other standards bodies and consortia like the Hyperledger Project to minimise overlap.

Hyperledger Project “ Blockchain Explorer “
As more companies like Bank of America and HSBC begin to unveil proofs-of-concept (PoC) using the Hyperledger protocol, a more standardised way to search its data is just part of what it will take to scale. Even beyond building out standards, creating common codes may allow organisations to focus on creating industry-specific blockchain applications.

The Hyperledger Project is now building an open-source tool that will let anyone explore the distributed ledger projects being created by its members. Instead of overlapping efforts and of launching competing open source services, unified effort emerged the blockchain explorers being developed by the likes as IBM, Intel and DTCC. The joint project has been named the “Hyperledger Explorer”. Creating common code will allow organizations to focus on creating industry-specific applications that enhance the value of this technology.

This tool would make it easier to learn about Hyperledger from the inside, while still protecting the privacy. When completed, the Hyperledger Explorer is expected to give Hyperledger developers and non-technical users access to block information, transaction data, network information (such as a list of nodes) and chain codes or transaction families. The Board and the recently newly formed Technical Steering Group will be working on these code proposals in the coming period.

Standardisation

The Hyperledger Project thinks it is still too early to strive for a technical standard for a general purpose inter-chain communication protocol (or even data format). Instead, they would like to encourage the different ongoing proposals to converge towards common architectures and or/even common tech stacks or set of reusable modules. This could serve as the starting point for the development of standard APIs, enabling the inter-chain communication and thus start the discussion around the technical realisation of such a protocol. Parts of this common code could also be reused by other projects, thus contributing to a standardisation of the blockchain technology overtime.

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

Commodity price risks deserve a spot within Treasury Management

| 26-09-2016 | Sjoerd Schneider |

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Market price risks traditionally managed by a central Treasury department cover company-wide interest rates and currency risks. Commodity price risks have many of the same characteristics, however only few companies manage these risks within Treasury. Shouldn’t commodity price risks also be addressed by a central Treasury department?

Commodities are typically handled and processed throughout multiple departments, resulting in their price risks also being run in many different sections and locations. These risks are consequently almost always initially managed locally. When production companies centralize their Procurement departments, central management of price risks often follows within a few years.

The question for production companies without a dedicated Trading department is whether commodity price risk management belongs to Procurement or to central Treasury? Treasury classically lacks insight knowledge of commodities, but does have a company-wide view on price risks. In contrast, Procurement is far better informed on commodities but less on market prices. In any case, either part of the company will need to invest in building expertise.

Many mid-sized and large production companies I have spoken to in recent years have chosen to add risk management to their Procurement department. The main reason is keeping know-how of commodities close to the associated (purchase) contracts. The main drawback of this construction on the other hand is that these price risks are managed in a different place and possibly with a different strategy than interest rate and currency risks.

Managing highly correlated comparable risks in separate departments will lead to sub-optimal behavior: inefficiency, incorrect risk (VaR) numbers, inferior hedges and possibly even contrary hedges. For example, a separate approach to a USD position and a Copper position for a EUR based company would result in different hedges than a combined centrally managed approach. That is why, from a portfolio perspective, I strongly recommend funneling all market price risks to one central Treasury department. Diversification effects will be fully appreciated when all positions are managed as one portfolio. To be successful it is essential to create continuous interaction between the treasurers and purchasers: Treasury shall need to be much more embedded in the business than they are accustomed to.

When all price risks are managed centrally and internal collaboration is optimized, the company shall reap its rewards by having one single source of full insight into its exposures and by being able to swiftly manage all of them. This will lead to enhanced risk management and lower overall transaction costs.

sjoerdschneider150x150

 

Sjoerd Schneider

Founder of Insposure

Cash is king. Profit is an opinion.

| 23-09-2016 | Lionel Pavey |

business-361488_960_720Afgelopen week stuitten we op het bericht dat ruim 20 miljard aan liquide middelen vast zit in het werkkapitaal van toonaangevende organisaties in Nederland en België. PwC deed een werkkapitaal onderzoek en ontdekte dat er nog genoeg mogelijkheden zijn om de werkkapitaal situatie van deze organisaties te verbeteren.(Bron: creditexpo.nl) treasuryXL vroeg expert Lionel Pavey naar zijn visie op dit onderwerp.

Het is zeer belangrijk voor bedrijven om liquide middelen vrij te maken. Meestal concludeert men dat dit leidt tot een verbetering wat betreft de openstaande posten op crediteuren en debiteuren.

Echter, er zijn veel meer voordelen: Operationeel gezien leidt dit tot een verbeterde relatie met klanten, hogere waardering van de data rapportages en vaak een goed inzicht in de juiste processen, die ook efficiënter worden.

Qua geld gezien, wordt minder vreemd vermogen nodig in de vorm van leningen, bestaande leningen kunnen sneller afgelost worden, geld komt vrij voor eigen investeringen en het behaalde rendement op eigen vermogen kan hoger liggen.

Om dit allemaal te realiseren moet er een goed plan komen met directe input van inkoop en verkoop afdelingen, voorraden, crediteuren en debiteuren administraties. Hierna moet er 1 eigenaar zijn van het hele proces die input krijgt van controllers, business managers en inkopers.

Nil volentibus arduum – of – niets is onmogelijk voor hen die willen

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist – Flex Treasurer

Treasurer en controller; een paar apart ?

| 22-09-2016 | Jan de Kroon |

collaboration-1106196_640De treasurer en de controller zouden twee handen op dezelfde buik moeten zijn, maar de vraag is of dat in alle, of zelfs de meeste, gevallen wel zo is. Enkele uitzonderingen daargelaten, zijn de verschillen groter dan de overeenkomsten.

Kort door de bocht zou je kunnen stellen dat de treasurer zich met het financieren van de operatie bezig houdt aan de passiefzijde van de balans. De controller houdt zich dan bezig met vooral de operatie waarvoor die middelen aan de actiefzijde zijn aangewend en zorgt ervoor dat die cash ook weer beschikbaar komt voor de verschaffer van die middelen. Beiden spelen een belangrijke rol in de cash conversion cycle en als het goed is, stemmen ze hun belangen onderling goed af. De praktijk leert echter dat het in veel gevallen niet zo rooskleurig verloopt in de afstemming.

De treasury functie onderhoudt een brug tussen de financiële belangen van de eigen organisatie en ontwikkelingen op de financiële markten er buiten. Hij zorgt voor blijvende toegang tot bronnen van geld, beschermt vermogen en resultaat tegen financiële risico’s en beheert een superieure en kosten-efficiënte financiële infrastructuur. Daar is weinig op tegen te hebben; voorwaar een nuttige rol die op begrip van iedereen kan rekenen. Althans, dat zou je denken.

Toch gaat het in de relatie vaak verre van soepel. Meestal omdat ze niet alleen een andere taal spreken, maar ook elkaars wereld niet echt lijken te kennen; laat staan echt begrijpen. De treasurer heeft een groot belang bij juiste, tijdige en volledige positie informatie en verwacht die van de controller te ontvangen. Zich niet realiserend dat de controller het belang vast wel onderschrijft maar in zijn eigen business unit met een vergelijkbaar vraagstuk worstelt; hoe krijg ik in des hemelsnaam tijdig betrouwbare informatie uit de lijn en het primaire proces. Voor eigen gebruik in het veld, maar ook om een collega op het hoofdkantoor een plezier mee te doen.

Anders dan de gemiddelde treasurer is echter de controller een vogeltje dat minder goed gebekt is en mede daardoor niet altijd lijneenheden kan overtuigen van nut en noodzaak van tijdige prognoses op basis waarvan de treasurer zijn randvoorwaarden beter kan inregelen. Om dat op te lossen en betere positie-informatie te verkrijgen uit de operatie, is een aantal elementen van belang:

1. Zorg er voor dat treasurer en controller elkaar beter leren begrijpen. Dat kan door meer in te spelen op business partnership dan ‘leverancier-afnemer’;

2. Zorg voor een beter financieel economisch bewustzijn bij de lijn. Dat kan door bijvoorbeeld het hanteren van feedback en feed forward technieken maar ook door het benoemen van lokale treasury referenten in het primaire proces;

3. Zorg dat de verantwoordelijkheden scherp zijn gedefinieerd. Daarmee zorg je dat tenminste iemand zich verantwoordelijk voelt voor de juiste positie op het juiste moment;

4. Een periodieke treasury nieuwsbrief kan helpen bij het vermijden van ‘ver-van-het-bed-shows’ en het verkleinen van de communicatie-kloof.

Zo komen de handen weer op één buik.

Jan de Kroon

 

Jan de Kroon

Owner & Managing partner of Improfin Groep

Budget, een jaarlijks terugkerend fenomeen

| 21-09-2016 | Maarten Verheul |

budgetNa de vakantie is het tijd om de eerste stappen te zetten voor het budget voor het volgend jaar. Toevallig kwam budget ook aan de orde in de discussie over CF Planning. Kosten overschrijdingen in het budget verstoren de CASH. De CF Planning is grotendeels op het budget gebaseerd. Het banksaldo moet aansluiten op de gebudgetteerde balans, want maak niet alleen een budget op W & V niveau, maar ook op Balans niveau. Denk daarbij ook aan uw Investeringsbudget voor de balans, investeringen, desinvesteringen en afschrijvingen.

Pas je niet goed op je budget dan wordt je CASH slechter. Daarom is een strak budget belangrijk met maandelijkse controle van budget en actuals. Met de nodige maatregelen op de vergelijking.

Bij budgetoverschrijdingen heeft dat gevolgen voor de Winst en Verliesrekening, maar vergeet ook niet dat nog belangrijker is, dat de Cash Out scheef gaat lopen. Hoe ga je daar mee om? Dat kan als het budget een flexibel budget is en dus geen zak met geld voor het hele jaar, die je op mag maken. Na het snijden in het budget is het de bedoeling om zodoende alsnog de EBITDA voor het jaar te halen.

Dat de werkelijkheid altijd anders is en dat weet je alleen als je een begroting maakt en real met budget vergelijkt. Weten is meten. Dus binnenkort toch maar weer aan het budget 2017 beginnen!

Nog even waarom het belangrijk is, dit is wat ik schreef voor FP & A( Engelse versie):
“You can’t improve what you don’t measure” – Lord Kelvin” Therefore not only the ratios are necessary, but also monthly statements and analyses and proposals to improve. Also good analyses monthly of budget/ real/ last year, that monthly and cumulative and than again budget/real/last year. With again analyses and proposal to improve. For the analyses go to the details in the GL. Catch the evidence.”

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maartenverheultxlMaarten Verheul – Treasury Consultant

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Blockchain, financial regulatory reporting and challenges

| 20-09-2016 | Carlo de Meijer |

blockchainIt is always challenging to look for new topics worth mentioning related to blockchain or distributed ledger technology. One issue that needs special attention is financial regulation reporting under blockchain. In June, the European Securities and Markets Authority (ESMA) published a consultation (or discussion) paper “The Distributed Ledger Technology Applied to Securities Markets”,  about the relevance of using distributed ledger technology (DLT) for the securities markets (see my blog “ESMA and Blockchain: Governance, how to deal with ,…”, June 27).

They thereby raised various questions regarding regulatory reporting activities using this technology. ESMA asked how blockchain would fit within EMIR and reporting. In the meantime,  Deloitte, one of the “Big Four” professional networks in the world, developed a pilot solution for the management of regulatory reporting in a blockchain environment. This looks very promising.

The reporting challenge

One of the main challenges of financial institutions is complying with existing reporting regulations: EMIR in the EU and Dodd Frank in the US. This puts a heavy load on the industry and consumes substantial resources. The reporting infrastructure currently in place is rather complex due to the myriad of regulatory obligations on securities market participants. These requirements are process intensive and are increasingly needing additional innovative technology infrastructures.

EMIR

Under the European Markets Infrastructure Regulation (EMIR), all counterparties involved in trade transactions must ensure that the details of any derivative contract – OTC or exchange traded – are reported to a trade repository no later than the working day following the contract. And that is rather complicated. The main challenges faced by financial institutions reporting their transactions are related to data quality, cost of reporting, timing issues and more importantly, data reconciliation. Regulators are pushing trade repositories to improve the EMIR report data that they collect from reporting firms.

New regulations like MiFIR (Markets in Financial Instruments Regulation) and SFTR (Securities Financing Transactions Regulation), are planned to be enforced in the coming years. These will dramatically increase the scope and the volume of transactions to be reported by financial institutions to the competent authorities on a daily basis. This is the challenge Deloitte is trying to address through its DLT solution, which aims to support current and future regulatory challenges when it comes to OTC transaction reporting.

Dodd Frank

But also on the other side of the Ocean, the derivatives industry is still grappling with the post-trade requirements imposed by the Dodd-Frank Act including swap data reporting. Major banks are struggling to get ongoing regulatory feedback if they are reporting correctly. The Dodd-Frank Act requires all swaps (whether cleared or un-cleared) to be reported to swap data repositories (SDRs). However each of the four registered SDRs, has different system architecture and regulating technology.

Non-consistent regulation

Financial institutions have to report enormous “quantities” of data to different regulators. This creates a lot of headache, as reporting is not necessarily consistent between US and EU regulators. Often times, these reports may have a similar purpose (i.e. identifying customers and counterparties, risk exposures, details of trades) but could have different methodologies behind the calculations. Some of the reports may have different formats or definitions, which can occasionally lead to regulatory arbitrage, fragmentation, and often to confusion.

Distributed ledgers and regulatory reporting: the benefits

Distributed ledger technology has the ability to take away a number of  pain points for both financial institutions and regulators. This technology offers various new opportunities when it comes to trade, post trade and related regulatory reporting.

– The distributed ledger would represent a golden source or “single source of truth” on all financial institutions’ reporting.

– With a distributed ledger, the transaction data will be readily available to the trade repositories and regulators in a unified form and there will no longer be any need for time-consuming reconciliation.

– And thanks to smart contracts the quality and transparency of reported transaction data may further increase and the reporting costs substantially reduced.

Financial institutions

Meeting regulatory reporting requirements would be less of a problem for financial institutions. As the distributed ledger would act as both execution platform and as place to store the record of transactions, it would certainly improve, simplify and add efficiency to regulatory reporting.

As all the information would be on the distributed ledger, organisations could make their regulatory reporting obligations in a more efficient way:

– facilitating the collection, consolidation and sharing of data for reporting, risk management and supervisory purposes,

– while enlarging the scope of information available from a single source

As a result, regulatory reporting could be done automatically and in near real-time.

Regulators

Distributed ledgers could also make access for regulators to this information easier and faster. As all such transactions data and information are directly and electronically available on the distributed ledger, regulators can easily access detailed movements of assets. They could keep track of transactions and positions directly on the ledger. As a result less time-consuming regulatory reporting will be needed

Improvements in regulatory reporting

Blockchain technology could contribute to many improvements in regulatory reporting. This especially is true for reporting reconciliation and validation, while it could lead to unified protocols (in the longer term!)..

Reporting reconciliation

Through blockchain more shared data of reports may be used. As a result so-called unique trade identifiers used by counterparties to a transaction, that don’t have a matching counterpart can be more easily identified and fixed. This would replace the current costly and time-consuming system where each independent trade repository sends submitted reports to each other for reconciliation.

Validation

One of the most basic efficiencies to be gained by using distributed ledgers could be in the area of reporting swap transactions. Validating reports is currently a big issue especially in the US under Dodd-Frank’s derivative reporting. Blockchain could create “a window of transparency” into selected classes of swap positions and exposure. By building a blockchain where participants share validation information that they use to analyse reports, it would be able to more properly identify faulty reports across submitting firms.

Unified protocols

Nowadays many individual trade repositories are used, with multiple variations of message type names. As such, even though the EMIR framework requires certain data fields per trade report, the names and explanations of them can be different based on the trade repository collecting the information. By creating a shared report submission platform using blockchain technology, to be used by participants to input market data and benchmark information, that could force participants to adopt industry-wide definitions for naming and definitions of trade fields.

Multi-jurisdiction

Existing laws protecting data privacy of individuals or corporates restrict data storage beyond national borders. Adopting unified trade protocols, would enable to enlarge an EMIR transaction reporting platform based on blockchain to other regulations. Reports that for instance require ‘mark to market’ valuation, could then use the pricing data information to create their reports across multiple regulation types. Also, trades that are cross-border and need to be reported to multiple regulations could be submitted once and sent for each regulation.

Deloitte Proof of Concept

Deloitte Luxembourg has developed a proof of concept for regulatory transaction reporting in a distributed ledger technology environment. This delivers a far more efficient and lean processing of regulatory reporting using proofs of process and tokenized transaction reports, compared to the present situation.

In this innovative process of transaction reporting, counterparties of the transaction will seal and report their deal using a smart contract, whose terms include all the aspects needed for the transaction reporting. Through smart contracts, transaction reporting becomes even more transparent, reliable, fast and immutable. The regulators will be able to control and monitor the transaction data and their daily updates, which are stored in the distributed ledger. This Deloitte proof of concept will certainly be of great help in assessing the various issues on regulatory reporting raised by ESMA.

The way forward

Notwithstanding the various opportunities’ to be gained from distributed ledger technology for financial regulatory reporting, there are still a number of hurdles and bottlenecks to overcome. Given that this technology is being developed without much (non-consistent) regulatory oversight, it is still unclear how adoption of the distributed ledgers will handle international transactions and data flows.

Some regulatory bodies (such as FCA in the UK) have tacitly encouraged and embraced blockchain technology to help facilitate regulatory reporting. However, issues around a lack of standardisation and the ability of(a number of)  legacy technology systems to handle blockchain will need to be solved before distributed ledger technologies can be properly adopted en masse.

Also setting up a distributed ledger for reporting purposes under Dodd-Frank may prove to be problematic. One of the key mandates of Dodd-Frank is the creation of and reporting of all swap transactions to central databases. Any development of a ledger for reporting purposes must comply with this key statutory fact. Distributed ledgers however are decentralised!

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

Remarkable influx non-Dutch in the treasury labour market

| 19-09-2016 | Pieter de Kiewit |

This week it will be the second time I will give a guest lecture at the Hogeschool Utrecht. They offer a minor treasury management to students with a finance and economy focus. It is my role to describe the labour market they might enter. In preparation I made a quick scan of the treasury labour market and noticed that treasury in The Netherlands, especially in the junior role, is staffed by relatively many internationals. I dug in and have some hypothesises about the why and consequences.
 
The first and obvious is that treasury organisations are by nature international organisations. Possibly treasury hiring managers are not bothered as strong by the bias managers do in other job types. Treasury does not have a prominent place in the Dutch financially focused educational system. This is not different from other countries, the job type is a too strong niche. Graduates are educated in a system where controlling, accounting and audit dominate. Dutch graduates shape their career to what they want and know about, so these three job types (and “onbekend maakt onbemind”). Non-Dutch graduates in the Dutch labour market are bothered by the earlier mentioned bias and shape their career based upon what they can get: a treasury job. Hence both demand and supply strengthen the influx.

Separately from this I want to mention the difference in mentality between Dutch graduates and many non-Dutch ones. I notice that work-life balance, having a rewarding job and an employer with social responsibility are important aspects for Dutch graduates. Many senior and/or non-Dutch managers have a hard time dealing with this mentality. Graduates who came from China or India are often best-of-class, energetic and very dedicated. Work is for them their first priority. This often outweighs their different communication style, especially in more junior positions.

I don’t think there are any dramatic effects of this development. The likelihood of non-Dutch moving abroad is relatively high so a brain drain might occur. Furthermore Dutch post-graduate education like the Register Treasurer program will suffer in popularity in favour of the ACT, CTP or CFA programs. Personally I enjoy the international treasury business environment and contribute in getting the right man or woman in the job. Let’s see what will happen

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

Netting, simplifying your intercompany cash management

| 16-09-2016 | Jan Meulendijks |

nettingcashNetting is mainly used by global operating companies with a large number of subsidiaries; the reach of netting can however also include smaller company structures and save a lot of handling and costs.

A company with a number of (foreign) subsidiaries will inevitably face a lot of internal deliveries, invoices, payables, receivables between all these subs (in multiple currencies).

Of course each individual transaction can be handled on it’s own, but this results in a very large number of ledger entries, payments, transaction costs, currency handing.

A netting system in which all intercompany movements are registered (manually or, preferably, automated by your ERP system) sees to it that on the desired netting date (e.g. daily, weekly, monthly….) each sub is informed about the nett amount to pay or receive to/from the central netting account.

netting

Source: Netting – An overview

Today’s generation of ERP/ledger/treasury software will often provide a netting module. I notice however, that in daily practice only the larger multinationals use this solution. The availability of netting solutions has reached the level that also smaller company structures may profit from the netting technique and that it is worth investigating the efforts and consequences it brings to your company.

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

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How to improve your Cash Conversion Cycle part II

| 14-09-2016 | Olivier Werlingshoff |

credit-card-851502_960_720In my earlier article I wrote about how cash management can improve your cash conversion cycle and more specific the DSO. In this article I will focus on the DIO (Days Inventory Outstanding). This week I heard on the radio that successful retailers have a better DIO than other retailers. The trend to have your product made at low cost in the far East is changing. Companies tried to buy all their trade goods as cheap as possible and to reach this goal buying large quantities at a time was the best option.

What you see nowadays is that the demand of goods is changing very fast. What was “in” a month ago can already have changed. The problem you will have with a large quantity of goods is that it has to be stored and because of the change in demand it will be a problem to sell them for the price your calculations where based on.

This is what happened with a few fashion retailers. A large quantity of fashion products, enormous storing cost and because the production was made in the far East it wasn’t possible to be flexible when de demand of goods changed.

Retailers who are more successful, are looking for possibilities to be very flexible with their sourcing and look for opportunities to buy smaller quantities, which are made closer to their business. By doing so they are better prepared for a demand change. They will have lower storage cost and can change their products more than two times a year.

What is the role of the treasurer in all this?

In my opinion the treasurer has to overview the total cash conversion cycle and has to show the company (sales- and procurement department) what the financial consequences are of enlarging the cycle. A second role is that the treasurer can compare the cash conversion cycle with their competitors and also discuss this information with colleagues and the CFO.

Olivier Werlingshoff - editor treasuryXL

Olivier Werlingshoff

Owner of WERFIAD

 

Blockchain: Playing in the sandbox

| 13-09-2016 | Carlo de Meijer |

blockchainA new – but important – chapter can be added to the blockchain story. The World Federation of Exchanges , the WFE, recently urgently called for the creation of regulatory sandboxes for distributed ledger technology. This should help industry efforts “to explore and understand the impact of blockchain-based services in the capital markets”. The Federation added that regulatory bodies should collaborate with the industry on new developments to minimise unintended consequences.

Regulators enter the stage

This is a very important signal to the regulators that they should take this technology serious and needed to enter the blockchain stage in order the give regulatory clarity. Innovations like blockchain should be primaly industry driven, and “not be unnecessarily impeded by regulatory intervention”, said the WFE. (see also my Blog: “Blockchain and regulation: do not stifle ….”, published 4 April).
Collaboration with the industry will allow regulators to understand the technology, how the future infrastructure will look like and what the impact will be on the financial markets. But above all how they could most effectively perform their regulatory tasks. With the insight and knowledge obtained, regulators will be better placed on the changes necessary to evolve the regulatory environment to not only better regulate these businesses, but also continue to ensure that the legislation does not frustrate this innovation.

Regulatory sandboxes

Regulatory sandboxes have proven to be a useful tool for the wider fintech industry in various jurisdictions. “Promising innovations may be stifled and opportunities missed as firms may be unclear on whether a new product or service complies with legal and regulatory requirements, and consequently may choose not to pursue their new product or service further”.

That is where the ‘regulatory sandbox’ comes in. They have been formed to provide a safe environment for businesses to test their innovative products. These sandbox allow firms to experiment with fintech while providing the appropriate safeguards to contain the consequences of failure for the customers.

New entrants to the financial services market, can use the sandbox to test products, services, business models and delivery without first needing to meet all of the normal regulatory requirements and incurring the considerable costs of putting in place the complex structures and processes to successfully apply for regulatory authorisation.

This should allow appropriate collaboration and exchange of information between industry and regulators.

Regulatory sandboxes: an overview

Since this year these regulatory sandboxes have been extended to distributed ledger technology in a number of countries including UK, Hong Kong, Singapore, Australia and Abu Dhabi. And now also other regulators are thinking about introducing such a testing environment.

  • Regulatory Sandbox Open for Play in the UK

The UK regulator FCA launched a regulatory sandbox early May this year. This is a next step for the FCA, the Financial Conduct Authority as part of Project Innovate, which aims to boost competition and growth in financial services. Goal is to help banks and other financial service providers reduce the time it takes to bring innovative ideas to the market.

The FCA’s sandbox will allow business to test disruptive technologies including distributed ledgers in a live environment “without immediately incurring all of the normal regulatory consequences”. The FCA however said that consumer protection will be a significant focus, and will be considering appropriate consumer safeguards.

Application

Fin-techs could apply to the UK’s regulatory sandbox from 9 May till 8 July. The second ‘cohort’ will have an application deadline of mid-January 2017.this year

The FCA uses an inclusive approach to defining potential users. That means anyone from a start-up to a multinational can benefit from the sandbox. For authorised users and suppliers, the FCA has identified  three key tools to businesses on a case-by-case basis (individual guidance; waivers; and, no enforcement letters). Unauthorised business will use the sandbox predominantly to facilitate testing without the need for full authorisation from the FCA.

Accessing the FCA sandbox is however not straightforward. A firm must meet a number of key eligibility criteria including: be in an in-scope business; demonstrate a genuine innovation; deliver a consumer benefit; demonstrate a need for the sandbox; and, be ready for testing. It should also be noted that the sandbox will not be available for activities which fall outside of the Financial Services and Markets Act 2000. For example, payment service providers and e-money issuers already potentially benefit from the lighter touch regimes in the PSRs and the Electronic Money Regulations.

  • Hong Kong Monetary Authority (HKMA) plans to create a regulatory sandbox

HKMA last week announced plans to create a regulatory sandbox, where start-ups and banks can test solutions and express their ideas before applying for authorisation. The sandbox allows banks to conduct tastings and trials of newly developed technology such as blockchain on a pilot basis. Within the sandbox, banks can try out their new fintech products without the need to achieve full compliance with the HKMA’s usual supervisory requirements.
In a related initiative, the HKMA has set up a ‘fintech facilitation office’ with its own dedicated e-mail account to act as a platform for the exchange of ideas between the regulatory body and banks and tech firms. Industry players, such as banks, payment service providers, fintech start-ups, the HKMA, etc. can get together at this facility to brainstorm innovative ideas, try out and evaluate new fintech solutions, conduct proof-of-concept trials, and gain an early understanding of the general applicability of creative solutions for banking and payment services.

  • ASIC released consultation paper on regulatory sandbox

Also Australia plans a regulatory sandbox for fin-techs technology innovations including blockchain. The Australian Securities and Investments Commission (ASIC) released a consultation paper on this issue, detailing proposals for a testing ground for innovative robo-advice providers and other similar services.  It also highlighted ASIC’s views about some regulatory options already open to fin-techs under the current law.

The sandbox will allow new entrants to test a service for up to 100 retail clients for up to 6 months without holding an AFSL. The service can only relate to advice and “arranging” for dealing, catering primarily to robo-advisers.  Product issuers such as payment facility providers and marketplace lenders are excluded, as is advice about general and life insurance. Start-ups will not need to apply to ASIC to be admitted to the sandbox (unlike comparable sandbox arrangements in other jurisdictions), but may need to be vetted by a “sponsor”, such as a hub, co-working space or venture capital firm.

A final regulatory position is expected by December.

  • MAS proposes regulatory sandbox for fintech

Early June, the Monetary Authority of Singapore (MAS) released a consultation paper detailing guidelines for a ‘regulatory sandbox’. With this sandbox approach the MAS hopes to encourage and help firms experiment with innovative solutions to support their development, and bring fintech solutions to the mainstream.

Any interested firm can adopt a sandbox to experiment within a well-defined space and duration; the MAS will provide the appropriate regulatory support and will relax certain legal and regulatory requirements. This sandbox will however have to meet certain evaluation criteria (technologically innovative; benefit consumers and address a significant problem or issue; intention and ability to deploy the solution in Singapore on a larger scale; report to the MAS on the test progress; major foreseeable risks have to be assessed and mitigated; etc.).

In April, the country expressed its desire to become the leading hub in Asia for blockchain-technology and fin-tech start-ups. MAS aims to provide a responsive and forward-looking regulatory approach that will enable promising fin-tech solutions to develop and flourish. The sandbox will help reduce regulatory friction and provide a safer environment for fin-tech experiments.

  • Abu Dhabi FSRA seek blockchain start-ups for fintech sandbox

The Financial Services Regulatory Authority (FSRA), the independent regulatory authority of Abu Dhabi’s newest financial free zone, has released a consultation paper in which it detailed its plans to create a sandbox environment for fin-tech under which start-ups would be allowed to work under a flexible regulatory framework for up to two years. The FSRA is seeking to promote the development of blockchain start-ups as part of a drive to create new efficiencies in the regional financial sector.

The FSRA’s proposal would seek to limit start-ups accepted into the program to those that “promote significant growth, efficiency or competition in the financial sector”. To give some clarity where they are focusing on the paper goes on to cite examples of technologies that fit this description.

“The advent of robo-advisers that offer lower costs, simplicity and real-time portfolio analytics and monitoring; or leveraging on the application of blockchain technology and distributed databases to facilitate price discovery, smart contracts, settlement of financial transactions, etc that may lead to safer [and] better products, and higher productivity and growth.”

Benefits for startups

The benefits of these regulatory sandbox are manifold. Both start-ups, the whole industry and regulators may profit.

There ought to be clear benefits :

  • First of all from a time and cost point of view.

Most immediately, the ability of businesses to safely test their products and also be engaged in direct dialogue with the regulator without first having to expend time and money on a speculative application for regulatory authorisation should relieve start-ups of high costs they often cannot afford.

  • From a compliance point if view

At the same time, the businesses can adapt their offerings to better ensure regulatory compliance.

  • From an investor point of view

Once through the process, and assuming the road-testing has produced a successful outcome for the business, the task of attracting investors should be simpler as a major unknown will have been removed.

  • From a financial industry point of view

The regulatory sandbox may help to foster innovation in financial services and that is good for the whole industry and their customers.

  • From a regulatory point of view

With the insight and knowledge obtained from that role, the regulator will be better placed to assess the changes necessary to evolve the regulatory environment to not only better regulate these businesses, but also continue to ensure that the legislation does not frustrate the competition that the FCA wishes to promote.

Global regulatory collaboration

Given its global reach, the level of complexity and the interconnectedness of financial markets, and the level of complexity and the interconnectedness of financial markets, regulatory bodies worldwide should collaborate to ensure that no different regulatory environments are created and regulatory arbitrage is excluded. National and foreign regulators must coordinate to create a common principles-based approach for blockchain oversight A special role should be given to bodies like the IOSCO and the G-20 Financial Stability Board.

 

carlodemeijer

 

Carlo de Meijer

Economist and researcher