Foreign bank accounts, how to include them in your cash pool

| 21-06-2016 | Jan Meulendijks |

janmeulendijksSignificant balances on your foreign bank accounts which are really of better use in the country where your operation is? Include them in an automated cash pooling scheme so that all your funds are available in The Netherlands and no more unnecessary interest is paid!

There are a number of reasons why you maintain bank accounts in other countries (I will explain the advantages of that in my next paper), but once this is the case, you need to control them in the most efficient way and at minimum costs.

Dutch banks who offer international cash management solutions have several tools to achieve this:

1. International Balance Reporting

The banks where you hold your accounts report them daily automatically into your multi-bank internet banking tool (e.g. Access Online from ABN AMRO); balances as well as transactions. With this tool you can also initiate local or cross border payments from this account.

Most ERP-systems can reconcile this account information automatically into your general ledger.

2. Cross Border Zero Balancing (CBZB)

In case your foreign accounts are held with subsidiaries of your Dutch bank, the balances can be automatically swept (daily) to your central cash pooling account in The Netherlands or be supplied with funds in case of shortage.

3. Multi-Bank Cash Concentration (MBCC)

In case your accounts are held with foreign partner-banks of your Dutch bank the alternate MBCC system can be used to achieve the same effect.

Now, once you have the Balance Reporting part in place plus one or both options CBZB and MBCC, not only all account information is made available to you on a daily basis, but also the balances are swept automatically daily into your central cash pooling account in the Netherlands!

Results:

  • Automated reconciliation of account-information in your General ledger; no more loss of time/personnel processing data
  • Interest optimisation (your use of bank credit is reduced with the balances that otherwise are in your foreign accounts)
  • No manual handling

Setting up such an international cash management scheme involves some paper work and time (most of that at your bank’s side) but once it has been set up it is a major cost and trouble saver which you wish you had had 10 years sooner!

 

Jan Meulendijks

 

Jan Meulendijks

Cash management, transaction banking and trade professional

 

Walk the walk into FX exposure: my first baby steps

| 20-06-2016 | Pieter de Kiewit |

Being a treasury recruiter I know how to talk about many aspects in corporate treasury, never having to prove I understand and can execute. Apparently this is not necessary to do a proper recruitment job. As a small business owner I do have my miniature corporate treasury tasks. Below I want to describe the most complex FX issue I encountered so far. Not so much for the readers who are seasoned treasury professionals, but for my fellow entrepreneurs and others not dealing with FX on a daily basis.

A large, listed firm with a presence in various countries asked for my support in finding an interim treasury manager for a transition project. Doing what we do, this task was executed swiftly. The next steps were a bit more complex, given the fact that the assignment will be executed in Switzerland and The Netherlands and the interim manager is from the UK. Our previous cross border, non Euro payments were related to permanent placements, resulting in a single invoice. Most of these can easily be done via electronic banking. I know the bank in that case charges me a fee for the actual transfer and without sending me a quote will earn from making Euro’s out of other currencies. Perhaps I should have asked how much. I suspect I paid over 40 base points.

In this case, there will be many invoices related to one project, resulting in many transfer fees. The interim manager wants to be paid in GBP, if my client would pay in Euro’s this will lead to many Euro-GBP transfers. I am not too keen on that, I expect costs will be substantial. On top of this, the Brexit is in the news constantly creating a blurry situation for me. How to move forward? What is the advise of my bank? What do companies like NBWM or Monex tell me? Spots, forwards, swaps? Without going into detail this is where I stand.

My client is willing to pay me in GBP. With my bank I could open a GBP account quite swiftly. Instead of researching and managing this part of the FX risk I will invoice in GBP, making this a complete GBP project. This way I do not have to think about FX risk during the project. At the end of the whole project I will decide if my bank will convert my GBP in Euro’s or I will ask others. I do have to decide if I will accept the risk of the GBP collapsing or if I will hedge this risk. My costs are in Euro’s, who can predict the future for me?

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

Lionel Pavey about the German Bund Yield. Is there a solution?

| 17-06-2016 | Lionel Pavey |

This week’s headlines were all about the German Bund Yield hitting a historic low. On Wednesday we also published an article about this subject and asked our experts to respond. Expert Lionel Pavey reacts with a full article on the German Bund Yield and asks himself; is there a solution?

Possible reasons:

  • Flight to quality – investors looking to place their money in a safe place
  • Brexit referendum – polls suggest chance of exit greater than ever leading to uncertainty
  • Quantitative easing – ECB policy of buying government bonds pushes bond prices up and decreases the yield

Since 2008 governments have attempted to kickstart their economies using monetary policy – lower rates and quantitative easing. The sellers of government bonds who receive cash do not appear to be either spending it or investing it – a report from Merrill Lynch states that fund managers are sitting on more cash than at any times since 2001 and have reduced their shareholdings to their lowest level in 4 years.

It would appear that all efforts by central banks via monetary policy have not succeeded. If government yield are persistently negative there is a possibility of stagflation and important investment decisions being deferred to a future date, leading to falling prices and a vicious downward spiral.

Is there a solution?

When I studied economics there were 2 schools of thought at the time – Milton Friedman and John Maynard Keynes. I have always felt that Keynes was discarded rather harshly by the monetarists.

Keynes stated that in recessions the aggregate demand of economies falls. In other words, businesses and people tighten their belts and spend less money. Lower spending results in demand falling further and a vicious circle ensues of job losses and further falls in spending. Keynes’s solution to the problem was that governments should borrow money and boost demand by pushing the money into the economy. Once the economy recovered, and was expanding again, governments should pay back the loans.

It is that last sentence that is pertinent. Keynes’ remedy runs countercyclical to the business cycle –instead of using all the money to buy up Government Debt, Government should borrow the money directly and embark on large projects to improve the infrastructure within a country. When the economy was revived Government should then repay the money borrowed and run a budget surplus.

 

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist – Flex Treasurer

 

TIPCO & TIS Webinar – Streamlining Your Treasury Processes: Trends in Payments and Reporting

| 16-06-2016 | treasuryXL |

tipcotisDear community members, we would like to bring something to your attention: TIPCO and TIS joined forces to organise a noteworthy webinar on the 7th of July: TIPCO & TIS: Streamlining Your Treasury Processes: Trends in Payments and Reporting.

The treasuryXL team works hard to bring you the most relevant treasury events and courses. Are you organising an event or did you run into an event that’s not on our website yet? Please let us know by using the contact form or simply e-mailing [email protected].

Since we have been in close contact to both TIS and TIPCO for some time now, we know this webinar will be something interesting; they have their own solution that can be complementary for the already existing market. TIS and TIPCO have assured us the webinar focuses on bringing you new insights on your treasury processes. So, we would like to emphasize that it will not be a sales pitch.

Content of the webinar:

You’re involved with treasury topics in your organisation daily. You know how important it is to have a handle on your data. However, do you have the right tools and processes in place in order to keep your activities streamlined while also being able to report on the key information? Are you reaching maximum efficiency and accuracy within your department – or is there a better way forward?

You will learn how to:

  • automate and standardise your payment transactions
  • enhance transparency and control through liquidity and cash flows
  • manage banking relationships and complex banking landscapes more efficiently
  • improve your treasury reporting at the touch of a button
  • reduce complexity and easily link subsidiaries

Speakers:

hubertrappoldHubert Rappold, CEO and Co-founder, TIPCO

 



 

joerg wiemerJörg Wiemer, CSO and Co-founder, TIS



Practical info:

Date: Thursday, 07th July 2016
Time: 15:00 – 15:45 CET
Duration: 45 minutes
Language: English

Follow up

Missed the TIPCO & TIS Webinar? Don’t worry we got you the webinar recording.

Find more treasury related events on our event calendar, we also promote treasury related education on our education&training page. 

Stephanie Derkse

Stephanie Derkse

Community Manager

 

Talk of the day: German Bund Yield Below 0%

| 15-06-2016 | Udo Rademakers, Rob Söentken, Douwe Dijkstra & Lionel Pavey |

german bund yield below 0

 

For the first time ever the German bund yield hit negative territory. The ‘Deutsche Welle’ writes: “With the prospect of Britain leaving the European Union looming ever larger ahead of referendum in 9 days, global investors are increasingly fleeing to safe havens such as German debt and Japenese currency. As a result, the yield on Germany’s benchmark 10-year debt fell into negative territory for the first time in its history on Tuesday. ” (DW.com) We asked some of our experts to give their opinion on this news:


Udo Rademakers
“Billions of Euro´s are invested into sovereign debt, even if meanwhile investors need to pay for this. German yield prices can meanwhile compete with Japan and Swiss rates (all below 0). The mainstream media explains this development as “concerns about the economic and political risks of a Brexit” and “concerns about the state of global growth”. However, the longer term trend since the 1980´s has been downwards and we now see a kind of (last?) acceleration in price.

Knowing the challenges Europe (and Germany) is facing, I think it is a matter of time before we could expect a spike in the rates again….. .I would place my bet in other markets.

Every trend is coming to an end…….”

Rob Söentken                                                                                                   
“Not even a month ago markets were discounting the impact of the Brexit referendum. Now in a matter of weeks the odds have swung back from around 25% in favor of leaving to 42%. The increased media attention and figures (true or false) being thrown around are making voters run to register to vote. Apparently it’s mostly younger voters, who tend to be more in favor of staying. It is said that a turnup above 60% is favorable to the ‘remain’ vote. Still both camps are becoming more and more committed.

The downside for GBP vs EUR is probably the biggest risk. If the UK leaves the EUR, UK equities may dip sharply, but will likely recover because of the prospect of more independent monetary and economic policy. Interest rates will probably start rising to incorporate the increased independence risks. But the GBP as a currency may dip an absolute 10% or more, anticipating asset sales from foreign investors. Investors will fear the UK will become like Italy and France in the past: a country that needs to devalue its currency on a regular basis to offset internal rigidities and inefficiencies.”
                 Douwe Dijkstradouwedijkstrarond
“Who would have thought this a few years ago, the interest rate on 10- year German government bonds below zero percent. For some time we hear our banks and advisors recommending to fix our interest rate exposure because its “now or never”.

However, anyone who has fixed already acted too early. For one of my clients I’m busy to Blend & Extend their current IRS contracts, fixing the interest rate for 7 years. Afterwards too early? Nobody knows. I think my client will have no regrets rather ” sooner than later”!”

Lionel Pavey

lionelrond
“Possible reasons:

  • Flight to quality – investors looking to place their money in a safe place
  • Brexit referendum – polls suggest chance of exit greater than ever leading to uncertainty
  • Quantitative easing – ECB policy of buying government bonds pushes bond prices up and decreases the yield

More on this topic in my article which will be published on Friday.”

What’s your opinion on this news? Let us know in the comment section below.

B2B Fintech: Payments, Supply Chain Finance & E-Invoicing Guide 2016

| 14-06-2016 | treasuryXL |

The B2B Fintech: Payments, Supply Chain Finance & E-Invoicing Guide 2016 has been released by the Paypers. The guide is a map of the complex and dynamic world of Fintech. Carefully documented, the guide keeps readers informed about the latest developments and opportunities in B2B payments, SCF, and e-invoicing.

The guide offers valuable information for industry professionals, associations, analysts, industry solutions providers and Fintech enthusiasts via a thoughtfully structured journey into the dynamic world of B2B payments, supply chain finance and e-invoicing. Also, the guide is completed by a detailed online company profiles database with advanced search functionality.

Highlights of the report:

  • the future of banking innovation from two leading banks (Deutsche Bank, UniCredit);
  • the most interesting use cases for blockchain in B2B payments and supply chain finance (Aite Group, Innopay, Orchard Finance);
  • how to reinvent the correspondent banking model as we know it today (SWIFT);
  • the challenges for international payments & financing projects (sharedserviceslink, KAE, NAPCP, Token, Future Asia Ventures, INTIX);
  • supply chain finance: a significant new proposition in the financing of trade and supply chains, but what’s next (ICC Banking Commission, Windesheim, Magnus Lind – The Talent Show, Anita Gerrits);
  • the steps needed for successful open & cross-border e-invoicing (Comarch EDI, Fraunhofer Institute, simplerinvoicing);
  • the regulation helps or hinders innovation and growth: up to date insights on PSD2, Directive 2014/55/EU, Prompt Payment Code, etc. (Brendan Jones, EESPA, Asset Based Finance Association, IAAF)

The guide opens an eye on the unique factors that puts the scene in a forever changing game, with new actors, new rules and impediments that require constant innovation and original ideas. The inner architecture of the guide follows closely the most important issues of the moment, trends and developments in payments & financing.B2B payments Report 2016_Cover_The Paypers
Don’t miss out the most comprehensive and up-to-date overview on the global B2B Fintech: payments, supply chain finance and e-invoicing ecosystem. Download your free copy of the Guide here.

Share your thoughts on the topics developed in the B2B Fintech: Payments, Supply Chain Finance & E-invoicing Guide 2016 by commenting on this article or maybe share your thoughts in an article about one of the topics.

 

 

Zero Coupon Yields and implied Forward Yields

| 13-06-2016 | Lionel Pavey |

 

Having constructed our 20 year yield curve with both observable data and discovered data in my previous article,we are now in possession of 3 sets of data:

  1. Spot par rates
  2. Spot zero coupon rates
  3. Discounted Cash Flow factors (DCF)

The most important of these, for calculation purposes, is DCF.

Present Value

The discounted present value of a future cash flow can be calculated by dividing the future value by the DCF. It therefore follows that a series of future cash flows can also be discounted to a single net present value.

Implied Forward Rates

The original yield curve showed annual spot rates for a period of 20 years. Using DCF it is possible to construct similar curves but with forward start dates – a curve starting in 1 year, 2 years, 3 years etc. When building these curves the “implied” forward rate will actually be a zero coupon rate and not a par rate. Converting the zero rates to par rates can be achieved by using Excel Solver – a very useful tool but great care must be taken as Solver gives an answer but shows no formula.

So, how do we calculate an implied forward rate?

Let us assume that we wished to find a rate with a duration of 4 years, starting 5 years forward.
To achieve that, we need both the 5 year DCF and the 9 year DCF

The previous constructed curve yields the following values –

5Y DCF                    =               0.9464924176

9Y DCF                    =               0.8508986778

((.9464924176/.8508986778)^(1/4)-1)*100     =  2.6975% implied 4 year rate starting in 5 years

As stated, this is the implied zero coupon rate – the implied par rate is 2.6887%

All forward rates are purely implied rates – a true quoted rate would always be different for various reasons –

  1. Spread between bid and offer
  2. Yield curve constructed with specific data
  3. Sentiment of the trader
  4. Possible exposure already in the banks’ books

Here is a small snapshot of both implied rates and par rates built with the original curve.

parrates complied rates

When I discussed building the original yield curve, different ways of interpolation were tried. I would now like to show how small differences in yields in a spot curve can lead to significant differences in a forward curve.

Let us look at a duration of 5 years starting 10 years in the future and compare the linear interpolation with the smooth adjusted curve. Assume that the instrument to be priced is a linear instrument – equal repayments of principal every year.

I have built both curves using the same layout and formulae throughout with the exception of the input rates in the missing periods.

The linear rate is 3.276%; the smooth adjusted rate is 3.416% – a difference of 14 basis points or about 4% of the smooth rate. In a market where the normal bid/offer spread is about 3 or 4 basis point, this represents a significant difference/anomaly.

I regularly hear people say that when they need to purchase a financial instrument that they get at least 2 quotes – this is all very well but does not stop a treasurer from first ascertaining what the correct price should be before getting a quote. If banks know that, as a treasurer, you can not calculate the theoretical price this allows them to move the price away from the implied to a price that is more advantageous to them and their trading book! A dedicated financial data vendor system can make life easier, but it is not impossible to calculate a price without these resources!

 

Next – Spreads; their use and the hidden extra costs

First two articles on building a yield curve:
1. Yield Curves (term structure of interest rates) – filling in the blanks
2. Yield Curves (term structure of interest rates) – filling in the blanks part II

 

Lionel Pavey

 

 

Lionel Pavey

Treasurer

 

 

McKinsey beats Warren Buffett

| 10-06-2016 | Victor Macrae |

mcckinseywarrenbuffetAccording to investigations made by the Financial Times, McKinsey Investment Office (MIO), a formerly unknown investment daughter of the top tier strategy consulting firm, has shown a stunning performance over a long period of time. MIO holds $9.5 billion in assets from current and former McKinsey partners, half of which is invested for pension plans, the other half for wealth management. MIO acts like a hedge fund and its policy is to generate equity-like returns over a longer period of time, however with lower risk.

Over the last twenty-five years MIO’s top fund achieved positive returns every year except for the year 2008, in the middle of the financial crisis when most were losing out! According to Hedge Fund Research, the average similar fund lost money in five years over the same period. I guess even Warren Buffett would be pleased with these results. By the way, in 2014 the top fund generated a 14 per cent return against a 3 per cent average return for hedge funds.

MIO was set up thirty years ago and its existence was until recently only known to a small circle of McKinsey partners. Its investment activities are set apart from McKinsey’s consulting business. MIO does not invest directly in quoted securities, but uses external hedge funds and private equity funds, which are considered alternative investments. This alternative asset class generally performs well over a longer period of time and it is not exposed to market volatility such as Buffett’s Berkshire Hathaway shares.

Now that MIO’s ‘cover is blown’ and if it survives the scrutiny of regulators regarding the question whether there is a conflict of interest due to possible information advantages, I suggest that MIO becomes an investment fund open to the public. I would definitely consider investing myself. What do you think?

Victor Macrae

 

Victor Macrae

Owner of Macrae Finance

 

 

 

 

FX Global Code of Conduct

| 09-06-2016 | Simon Knappstein |

 

Last month the BIS published the first phase of the FX Global Code. The final version is planned for completion by May 2017. What is this Global Code and what is the BIS trying to achieve by the establishment of this Code?



Recent history

In the wake of the Libor Scandal a similar rate rigging scandal emerged in the FX market. This related to fraudulent actions around the fixing process of FX Benchmarks. In 2013 the Financial Stability Board commissioned a working group to firstly analyse the structure of the FX Market and the incentives that might promote inappropriate trading activity around a benchmark fixing, and then come up with some potential remedies to address the problems found.

In September 2014 a report was published by the FSB containing 15 recommendations to reform the FX Benchmark process. A number of these recommendations concerned market conduct, specifically related to the fixing process.  To further restore trust in the foreign exchange market and make this market function as effectively and efficiently as possible the BIS commissioned a working group to facilitate the establishment of a single global code of conduct for the FX Market and to come up with mechanisms to promote greater adherence to the code. The first phase of this global code is now published and I will share some observations with you.

What is the Global Code?

The Global Code is a set of global principles, not rules as rules are easier to arbitrage than principles. It is meant to provide a common set of guidelines to promote the integrity and effective functioning of the wholesale FX Market, i.e. a robust, fair, liquid, open, and appropriately transparent market

Unlike for instance the Model Code by the ACI Forex, which is only intended for the sell side and more rule based, this Global Code is developed by a partnership between Central Banks and Market Participants from both sell- and buy-side globally.

The Global Code is organised around six leading principles:

·      Ethics

·      Governance

·      Information Sharing

·      Execution

·      Risk Management and Compliance

·      Confirmation and Settlement Processes

Furthermore it is emphasized that this Global Code does not supplant the applicable laws and regulations for the relevant jurisdictions. It should serve as a reference when conducting business in the FX Market.

So far, so good.

The good thing in this Global Code is that it applies to all organisations and persons active in the wholesale FX Market globally and thus creates a level playing field. The more cynical observer could argue that codes of conduct are around for decades and that these have not been very successful in preventing scandals.

Obviously, thinking of myself as an ethical and honest ex-salesperson and trader, most of these principles are a no-brainer. There is only one principle and related good practices that leaves me a bit puzzled, and that concerns Execution, sub-principle 5: The Mark Up applied to Client transactions by Market Participants acting as Principal should be fair and reasonable. Sounds fair enough, but in a competitive world with Clients comparing quoted prices and trading the most advantageous price to them, hasn’t mark-up already ceased to exist? So what is fair and reasonable about zero mark-up? Or shouldn’t Clients trade the most advantageous?

I wonder, dear reader, what your thoughts are on this?

Reference:
Speech by Mr Guy Debelle, Assistant Governor (Financial Markets) of the Reserve Bank of Australia, at the FX Week Europe conference, London, 25 November 2015.
FX Global Code: May 2016 update

 

Simon Knappstein - editor treasuryXL

 

Simon Knappstein

Owner of FX Prospect

How to improve Cash Awareness without targets

| 08-06-2016 | Olivier Werlingshoff |

cashawarenessMany CFO’s and Financial Managers would like to improve the cash awareness inside their companies. The most obvious action is to set up financial targets but how could a change of mindset be reached without new targets? One way is to see cash awareness as a product and to try to sell this product inside the company.

If cash awareness is a product; what are the benefits of this product, why would someone like to buy this new product? In fact, you would have to develop a marketing approach and analyze some of the marketing P’s. I will give you some examples:

Product:

Try to translate Cash Awareness into a product. You could use the term “Cash is King” and find an appropriate symbol or picture for it.

The second step is to enumerate the benefits of cash awareness for the company. One of the benefits is looking at different business processes from a cash point of view. Those processes could probably be improved in a way where liquidities could be released from the company in a faster way.

For example: if you send the invoice by mail the same day you receive the order from your client, you will receive the money faster.

Promotion:

When you know how to make Cash Awareness visible, you have to work on the promotion of it. To give you a few ideas: the first thing I did was getting a ‘Cash King cup’. Every three months I gave the Cup, with his or her name on it, to the colleague with the best idea on how to improve the release of liquidities. I made a picture of him or her with the Cash King cup and mailed it inside the company and put it on the intranet.

To ensure everybody was there when the Cup was awarded, posters were hang and (senior) managers were invited to come to the event. Encourage managers to come by inviting some directors of the company and ask them to give a presentation!

During the event you can give an update of all the ideas you received from colleagues to improve processes and what the financial benefits are of those ideas. To ensure the idea will be implemented you have to make sure the colleague is responsible for his or her idea and try to get the support from the management so it could be implemented. Be aware that without their support it would be difficult to implement the idea!

Positioning:

A third P is the P of Positioning. Develop a habit of constantly looking at the positioning of the product “Cash Awareness” in the company. Think and check how your colleagues think and talk about Cash Awareness when you are not in. You could do this by “walking around” and listening.

Once you have developed your marketing strategy, you should use the “P formula” to continually evaluate and re-evaluate your activities.

Olivier Werlingshoff - editor treasuryXL

 

 

Olivier Werlingshoff

Owner of WERFIAD