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EU crypto regulation: towards global cooperation?

19-07-2022 | Carlo de Meijer | treasuryXL | LinkedIn |

Finally, after two years of intensive deliberations, EU legislators have reached a provisional agreement on its landmark Markets in Crypto Assets (MICA) directive, that is aimed to govern the crypto space in Europe for the years to come.

The recent crypto market crash shows how highly risky and speculative crypto currencies are. It confirmed the urgent need for enhanced regulatory and law enforcement frameworks in the EU. So far, digital assets, such as cryptocurrencies, have been largely out of the scope of EU legislation, while divergent laws exist in the member states.

But what may we further expect? Is this the start of further regulatory co-operation worldwide or will it trigger growing regulatory competition between the various countries, especially the US and UK, that are presently dominating the crypto market.

The deals

The deal reached on 30 June consists of two elements: the Markets in Crypto Assets or MICA regulation and a Bill on the Transparency of crypto asset transfers. Both laws are put in place to set clear common rules for a harmonized market in the EU.

The aim of the regulation is to put an ’end to the crypto wild life’ by creating a comprehensive regulatory framework for the crypto-asset market in a balanced way that supports innovation and harnesses the potential of crypto-assets while preserving financial stability and protecting investors.

Such a regulation should provide legal clarity for the crypto business including crypto asset issuers, guaranteed equal rights for asset service providers, as well as ensuring high standards for consumers and investors.

While MICA will put new requirements on exchanges and issuers of stable coins, and provide legal certainty for crypto-asset issuers, guarantee equal rights for service providers and ensure high standards for consumers and investors, the Transparency Bill will force crypto asset service providers(CASPs) to gather information about the transfers they operate to prevent money laundering in crypto.

New provisions

The proposed EU regulation is especially targeting so-called crypto asset services providers(CASPs) and aims to provide a consistent approach across all 27 member states and covers issues like authorisation and supervision, transparency, disclosure and authorisation and supervision of transactions by crypto asset service providers (CASPs) as well as consumer and investor protection, stablecoins and environmental considerations.

License

MiCA will change the registration and authorization process for crypto asset services providers in Europe. Under the provisional agreement they will need an authorization in order to operate in the EU. National authorities will thereby be required to issue authorisations within a timeframe of three months. Regarding the largest CASPs, national authorities will transmit relevant information regularly to the European Securities and Markets Authority (ESMA).

These CASPs will have to be licensed by national authorities and must be based in the EU and have their office within the European Union by a legal person, with a predetermined capital base and adhere to consumer protection safeguards, and be listed on a register held by the European Securities and Markets Authority.

This license will give issuers of crypto assets and providers of related services a “passport” to issue and sell digital tokens in the EU \nd serve clients across the EU from a single base.

Public register

To avoid any overlaps with updated legislation on anti-money laundering (AML), which will now also cover crypto-assets, MiCA does not duplicate the anti-money laundering provisions as set out in the newly updated transfer of funds rules agreed on 29 June.

The new framework will put ESMA in charge of a public register where all non-compliant crypto providers who offer services without authorization will be listed. This to reduce anonymity to tackle money laundering and evasion of sanctions.

EU cryptocurrency exchanges will be obliged to identify users and track suspicious transactions. Entities issuing crypto assets will have to disclose basic information such as a description of the issuer, the project and the use of the funds. This “identity card” will be backed up by details of the rights, obligations and risks associated with these digital assets. National authorities will be notified of all of this information.

Crypto-asset service providers, whose parent company is located in countries listed on the EU list of third countries considered at high risk for anti-money laundering activities, as well as on the EU list of non-cooperative jurisdictions for tax purposes, will be required to implement enhanced checks in line with the EU AML framework. Tougher requirements may also be applied to shareholders and to the management of the CASPs, notably with regard to their localisation.

White Paper: transparency

CASPs will also be obliged to be more transparent about their financial position as well as the tokens they offer. The regulation makes it a legal obligation for crypto projects to issue a White Paper on all tokens, with all the characteristics and risks and submit it to the regulatory authorities, although the submission will be merely declaratory and the regulatory authorities do not enjoy the power to authorise or reject crypto projects, other than stablecoins.

The list of information that crypto projects are required to share with the public is relatively slim and does not include many aspects that are already customarily included in white papers. Most importantly, the regulation does not require white papers to explain the project’s ‘tokenomics’.

Consumer and investor protection

This regulatory framework also aims to provide an appropriate level of consumer and investor protection against some of the risks associated with the investment in crypto assets. Consumer protection standards adopted in the regulation will legally protect consumer funds against cyber-attacks, theft or misuse which are within the responsibility of the cryptocurrency exchanges.

Crypto companies will be held more accountable for investor protection and for investor losses. They must act ‘fair, honest, professional in the best interest of their clients and provide such clients or potential clients with fair and not misleading information’.

Once implemented, the law will require crypto asset service providers (CASPs) to adhere to certain requirements aimed at protecting investors as well as warn clients about the potential risk associated with investing in a volatile crypto market, and publish their pricing policy on their website.

Although these regulations will not provide protection against all of the risks associated with cryptocurrencies, individuals’ own knowledge and analyses will therefore continue to be a key method of consumer protection.

Un-hosted wallets

Unhosted wallets, also known as cold storage or self-custody that enable the user to maintain a cryptocurrency balance outside of an exchange, are mostly excluded from regulation. Transfers between exchanges and so-called “un-hosted wallets” owned by individuals will need only to be reported when transfers are made to a person’s own wallet, and when the value tops the 1,000-euro threshold. This move is designed to reduce anonymity, and thus money laundering, through crypto transactions.

Stablecoins

Stablecoins, which the regulation calls ‘asset-referenced’ tokens’, are also subject to strict regulatory standards of transparency, operation, and governance.

When the regulation comes into force, existing stablecoins will have to seek authorisation from the regulatory authorities to be traded within the EU. Issuers of these so-called asset referred stablecoins will need to have a registered office in the EU to ensure the proper supervision and monitoring of offers to the public of asset-referenced tokens. Most importantly, the regulation prohibits the issuance of interest to e-money tokens. The authorisation requirement applies also to stablecoins already in circulation.

Reserves will have to be “legally and operationally segregated and insulated” and must also be “fully protected in case of insolvency.” Stablecoins that become too large/big also face being capped at 200 million euros in transactions a day under the new regulation.

Holders of stablecoins will be offered a claim at any time and free of charge by the issuer, with all stablecoins be supervised by the European Banking Authority (EBA), with a presence of the issuer in the EU being a precondition for any issuance.

Environment

MiCA will also address environmental concerns surrounding crypto. Crypto asset providers will be required todeclare information on their environmental and climate footprint and disclose their energy consumption to regulators as well as the environmental impact of digital assets they choose to list, using the EU regulatory standards as a basis.

The ESMA is now developing draft regulatory technical standards on the content, methodologies and presentation of information related to principal adverse environmental and climate-related impact.

Oversight of the crypto industry

The new EU regulation of the crypto market will primarily be enforced by national regulatory authorities designated by the member states. They will employ national procedural rules and impose remedies foreseen in national law, including criminal remedies where applicable, when they enforce the regulation.

While EU member states will be the main enforcers of the rules, the regulation also gives the European Banking Authority and the European Securities and Markets Authority significant supervisory and investigative powers.

ESM will be responsible for oversight of the industry, while a new legal framework will seek to regulate public offers of crypto assets to protect market integrity. ESMA will thereby be given powers to step in to ban or restrict crypto platforms if they are seen to not properly protect investors, or threaten market integrity or financial stability.

In the meantime the European Council reached an agreement to form an anti-money laundering body that will have the authority to supervise certain CASPs. And will probably get the name of AMLA.

Reactions from the cryptomarkets

How ate crypto firms reaction? Overall, crypto industry players are reacting positively to the EU’s MiCA efforts, and largely welcomed this outcome that heralds the end of several months of negotiations.

As such a harmonized, comprehensive framework could give market participants regulatory the desired clarity to make sure their activities are compliant with AML regulations and crypto end-users key projections and market-wide assurances. The rules would underpin the development of a robust and well-functioning market, within which they could safely operate their businesses further driving crypto innovation and adoption in the EU region.

Some called the rules “a significant milestone”, while others said the comprehensive new framework was “exciting”, providing regulatory certainty to the market, and raising industry standards.

Crypto expansion in Europe

These regulatory developments haven’t stopped firms within the digital asset space from planning their expansion in the EU. Several industry insiders see the move as a positive step and believe Europe could lead the way on crypto regulation saying the EU framework represented a “significant milestone’.

A growing number crypto firms operating or planning to expand into Europe have already taken steps ahead of schedule to ensure compliance. Such as cryptocurrency exchange STEX, that has partnered with KYC and AML platform Ondato in March 2022 to ensure the exchange’s continued customer growth within a compliance environment of imminent new EU regulation of crypto-assets. But also Coinbase, that already holds authorisation from Germany and Ireland, as well as other crypto platforms are seeking licenses in several Eurpean countries.

How to progress?

We are not there yet! The provisional agreement will now move to be approved by the Economic and Monetary Affairs Committee, and should be rubber-stamped by the European Parliament before being translated into legislative text and gazetted in the EU’s Official Journal. The European capitals will then have 18 months to implement them in the national legislation. This process could thus take until 2024 for states to implement MICA and the EU crypto regulation effectively be working.

Some loose ends

There are still a number of regulatory open issues that should be taken into account in a future revision of the EU crypto regulation such as NFTs, the environment, supervision .etc. An additional problem is that legislation is always lagging behind practice, this especially goes for crypto where technological developments are very rapid. In the meantime EU policymakers are already planning MICA2 to tie up any legal loose ends.

NFTs

Members of the European Parliament have proposed that NFT trading platforms should be made subject to the EU anti-money laundering (AML) laws and should be brought in the scope of MiCA, with authorization and supervision of crypto firms at member state level. They have been tasked with determining whether NFTs require a separate regulatory framework to address the emerging risks of such new market.

Environmental impact

Another issue that should be solved is the question how to address the environmental impact of crypto assets. The final version of the new directive mandates co-legislators to take into account the environmental impact of crypto assets in a future review. The European Commission would assess the energy footprint of crypto assets. Within two years, the European Commission will have to provide a report on the environmental impact of crypto-assets and the introduction of mandatory minimum sustainability standards for consensus mechanisms, including the proof-of-work.

Some concerns

But there are still a number of concerns that should be taken into account before the new regulation becomes law and is fully implemented..

Regulatory overlap

The ECB has warned EU member states about the necessity of harmonizing the different crypto regulations across EU member states until MICA becomes law and is fully implemented. The ECB is concerned about the different crypto regulations across member states and the possible regulatory overlap between respective central banks in the EU and crypto companies during that period.

The ECB is set to warn countries in the eurozone of the dangers of national regulators getting ahead of MiCA and proposing new rules that may affect the future harmonization of rules. The ECB is concerned that countries start providing crypto-related licenses to traditional banks when there is not yet a pan-European framework in place.

The central bank wants to discuss the need to harmonize the provision of these licenses across countries before MiCA is fully implemented. Regulators from 19 EU member states will reportedly attend a supervisory board meeting in July to discuss MiCA and its possible implementation.

Regulatory competition or cooperation

The much-anticipated EU crypto regulation is expected to completely change the crypto landscape. But how and at what scale will greatly depend on the attitude of regulators in both the US and the UK.

The provisional agreement by EU regulators is a welcome step in the right direction. It is still questionable if other regulators will follow suit and work together with industry leaders to deliver a clear and effective global framework which will allow the sector to flourish.

What is sure is that the rules plant Europe firmly ahead of the major crypto centres US and the UK in the race to regulate crypto. These countries have yet to approve similar rules. The Bank of England’s Financial Policy Committee has called for “enhanced regulation” of the crypto asset market to mitigate against potential risks.

The question if they are prepared to cooperate or if they use crypto regulation as a way to compete in this promising market is still open. Here is a great task for international bodies like the G7, the G20, the BIS and others to teak a lead.

Thanks for reading!

Carlo de Meijer

Economist and researcher

Source

Cross border movements of Treasurers and what drives them

Over the last weeks I saw the topic of fiscal expat rulings popping up in various media. The labour market is tight and governments want to support employers in attracting the best talent. Also internationally. In The Netherlands we have the “30% ruling” that takes care expats are not taxed over the first 30% of their income. Among politicians there is a discussion about this because, do we want to attract the best? Or do we consider lowering taxes for those who are already earning a lot not appropriate….?

5 steps to effective fraud prevention in fintech

14-07-2022 | treasuryXL | Refinitiv | LinkedIn |

A recent Refinitiv expert talk looks at the digital banking and fintech arena, unpacking the compliance challenges that dominate the sector and offering advice for a best-practice response.

The Role of AI in Liquidity Management | Webinar | July 21

13-07-2022 | treasuryXL | Kyriba | LinkedIn |

Join this 15-minute bitesize webinar with a leading Kyriba Liquidity Management specialist to learn how artificial intelligence and machine learning are being applied in today’s liquidity management processes and how they will affect the future of treasury.

Emerging technologies are changing the way finance functions operate, opening up new opportunities for treasury and enabling teams to deliver increased value to the organization. As a new decade emerges, executives are looking to artificial intelligence and machine learning as a means for enhancing overall operations.

In this session he will discuss:

Difference between Business Intelligence, Artificial Intelligence and Machine Learning
Why are AI Solutions needed for best-in-class enterprise liquidity management ?
What Kyriba offers
Challenges of building AI forecasting solutions within an organization

Approaches to FX Volatility

13-07-2022 | treasuryXL | ComplexCountries | LinkedIn |

The latest CompleXCountries report is based on two Treasury Peer Calls in which senior treasurers from Asia, the Americas and Europe discussed the latest bout of increased FX volatility, and the impact it is having on their hedging strategies. As to current volatility, some people are adjusting their strategies, but most prefer to stick with the approach which has already been defined.

Source

FX – one of the biggest and most important challenges we all face. It has a direct impact on the business, and everyone has a view.

The calls (European morning and afternoon to accommodate Asia and the Americas) were to discuss the latest bout of increased FX volatility, and the impact it is having on people’s hedging strategies – if any. Unsurprisingly, it turned into a long discussion of the way different companies approach hedging. The report below is long and very varied – we managed to reduce it to 20 pages, but they are dense. As to current volatility, some people are adjusting their strategies, but most prefer to stick with the approach which has already been defined.

What is that approach? The participants came from a variety of different industries, and covered a broad range of different ways of handling the issue.

Everyone has a defined hedging approach, though most contain some degree of flexibility. So, if the approach is to hedge the next 6 months, for example, there may be leeway to go down to 4 months or up to 8.
Most people add their hedges via a layering approach, where they build up the hedge over time. This provides an average hedge rate, and avoids the risk of choosing a single point in time.
Everyone tries to match their hedges to the needs of the business. This involves co-ordinating with the business units to get their input on the ability to change prices, how long it takes to do so, etc.
Most companies have a centralised approach to hedging, but there is variety as to whether central treasury acts as and advisor, or as a decision maker. In most cases, this is decided by the company’s internal measurements and incentive system.
Several companies try to insulate the operating units from the effects of currency. This is done by various means: several participants operate re-invoicing centres, which invoice the operating entities in their own currencies, and manage the resulting exposures in the centre. One participant achieves the same result by levying a currency specific working capital charge on the operating units. The income from this charge is then used to pay for hedges – which may, or may not, actually be taken out.
In these cases, the centre usually operates as a profit centre – but with strong risk management disciplines to contain the danger of positions getting out of control.
One other approach is to fix a budget exchange rate for the coming year, and try to lock that in via hedges. There was a discussion as to whether this suits all businesses.
Most participants use forwards for hedging, with the choice of deliverable or NDF varying from one country to another. Several use options, though cost and accounting complexity were obstacles.
One participant has an approach which is built entirely around options, including a sophisticated trading strategy to reduce the cost of what they view simply as an insurance policy, like any other. This company is also very opportunistic, and will be active or inactive in the market according to their view of current pricing. This company is also private, and family owned, so they have a higher tolerance for earnings volatility than most – and they are not concerned about quarterly earnings announcements. They also have a relatively high margin business.
In this company, as in all others, this strategy is only possible because it has the understanding and buy-in of the management and the operating units. Every participant mentioned this as being key for success.
Generally, the percentage of hedging is fixed by policy. However, most participants exercise some judgement, based on the cost of hedging. This is particularly relevant for some emerging market countries, such as Brazil, Argentina and many African countries. The judgement as to what constitutes a hedge which is too expensive was often empirical, but the currencies which were left unhedged usually did not represent a significant exposure for the company.
Most participants prioritise balance sheet hedging over cash flow hedging, but some take the opposite approach. In all cases, the accounting treatment is a significant factor in determining the approach.

Bottom line: hedging and managing currency is one of the key competences of the treasurer. For many years to come, it will continue to be one of the areas where there is the biggest variation in approaches – and endless debates. If you have an approach which is well defined and which has been fully discussed with the business, there should not be any need to change it during a period of volatility – though it can be an excellent stress test!

Contributors:

This report was produced by Monie Lindsey, based on two treasury peer calls chaired by Damian Glendinning.

[The full report can be downloaded FREE by corporate treasury practitioners, please Log in to your account to download (if you receive emails from us – use your email address to retrieve your password), if setting up a new account, please ask for the FX report in the comments and ComplexCountries will send you a copy]

Please contact ComplexCountries to find out about their subscription packages.

GTreasury Launches New Connectivity Suite for Treasurers

12-07-2022 | treasuryXL | GTreasury | LinkedIn |

Workflow Brings in Third-Party Banking, Payments, and Financial Data

ClearConnect ensures the fidelity of data essential to treasurers and CFOs

CHICAGO, Ill. – July 12, 2022 – GTreasury, a treasury and risk management platform provider, today announced the launch of ClearConnect. Featuring more than 80 API calls in a dozen key categories, ClearConnect offers the most robust connectivity suite available to treasury teams and the office of the CFO. The solution provides immediate access to the comprehensive data required for confident and actionable treasury insights, and ensures the fidelity and security of that data through purpose-built connections bolstered by GTreasury’s support.

While “API” is becoming a buzzword often associated with data connectivity solutions, the terms are not synonymous. API connections are only as powerful as the underlying workflows that support them. Activating an out-of-the-box API is not an instant panacea for an organization’s data needs. Without the right underlying workflows, APIs not attuned to a business’s specific requirements will drop or fail to capture all the data sets necessary to power effective analytics and data lakes. Given the complexity of treasury and risk management, those missing insights can result in significant consequences for treasury teams and CFOs.

ClearConnect provides both the powerful underlying workflows and the multifaceted purpose-built API-enabled connectivity to ensure that data capture is consistently done correctly and thoroughly—providing all the analytics an organization needs from a particular connection. The solution creates certainty, security, and seamless connections by integrating all data from business systems and financial institutions, and is capable of combining connection types for uniquely complete data sets and data fidelity.

Specifically, ClearConnect creates value for treasury teams and the office of the CFO by delivering:

Secure connectivity across the financial value chain
Extensions to corporate treasury workflows
Access to specialist solutions within the integrated platform
Lower bank fee costs through seamless connectivity
Access to multiple innovative FinTech products and services

ClearConnect’s market-leading API catalog features over 80 API calls, augmented by host-to-host connectivity wherever needed to bolster capabilities. The solution enables robust functionality across a dozen categories, including payment approval rules, payment workflows, payments and templates, balances and transactions, general ledgers, deal management, bank accounts, bank account management, legal entities, forecasts, operators, and data extracts. ClearConnect’s flexible connectivity architecture uses best-in-class API-enabled connections to ensure fidelity and continuity of customers’ most vital data. Connectivity into Swift, Fides, and others provides a single source of truth and visibility into an organization’s cash and financial risk, and delivers transparent workflows for payments, bank file monitoring, and more.

GTreasury’s always-expanding partnerships with leading global financial institutions and market data partners ensure seamless bank and ERP connectivity, domestic and international transactions, and access to market insights. As client needs change, GTreasury’s active collaborations with product partners further ensure the creation and delivery of modernized products and services, securing ClearConnect’s place as a market-leading solution always aligned with customers’ current data requirements.

From risk management capabilities powered by Moody’s Analytics and KYOS, to market data provided by Refinitiv and Fenics MD, to banking, ERP, investments, and payments partners, ClearConnect now enables customers to wield the full power of the GTreasury ecosystem even more easily and completely.

“ClearConnect doesn’t just offer a significantly greater breadth of connectivity options than anything else available, it also underwrites those capabilities with foundational workflows for data integrity and ease of use,” said Pete Srejovic, Chief Technology Officer at GTreasury. “Investing in API technology only to realize that you are dropping crucial data is a nightmare that has come true for many CFOs and treasury teams. With today’s launch of ClearConnect, we’re proud to offer not only the largest and most powerful API connectivity solution on the market, but one that customers can entrust to deliver absolute data integrity along with the comprehensive and future-proof solutions of the GTreasury ecosystem.”

About GTreasury

GTreasury believes there is opportunity in complexity. We connect treasury and finance teams with industry-leading experts, technology solutions and untapped possibility. By simplifying complexity, teams can unleash their organization’s potential to gain strategic advantages and grow. GTreasury helps organizations reach that potential by connecting treasury and digital finance operations through a world-class SaaS treasury and risk management platform and integrated ecosystem where cash, debt, investments, and exposures are seamlessly managed within the office of the CFO. GTreasury delivers intelligent insights, while connecting financial value chains and extending workflows to third-party systems, exchanges, portals, and services. Headquartered in Chicago, with locations serving EMEA (London) and APAC (Sydney and Manila), GTreasury’s global community includes more than 800 customers and 30+ industries reaching 160+ countries worldwide. Visit GTreasury.com

Recording Webinar | How successful master data management can help you secure financial processes?

12-07-2022 | treasuryXL | Nomentia | LinkedIn |

Recently, treasuryXL partnered with Nomentia on a live webinar on how successful master data management can help you secure financial processes.

Watch the recording of this session for free now by clicking on the image below!

In this webinar, we discussed how you can manage your Master data in a safe way, how you can prevent fraud and sanction risks through the management of this data, and the subsequent processes that make use of your master data. This ranges from the creation of counterparties in your ERP to the safeguard checks in your payment process and system.

More specifically, we will discussed the following topics:

Introduction to Master Data management
Managing the counterparty Master Data in your ERP
Trends that companies face related to Master Data
High-risk processes using your master data
Steps to create a safe and secure culture within your company
Setting up appropriate processes and systems to enable security

Watch the recording now!

marcus evans | 9th Annual Liquidity and Funding Risk Management | 14-16 September | New York

07-07-2022 | treasuryXL | marcus evans | LinkedIn |

We are proud to announce our media partnership with marcus evans for the 9^th Annual Liquidity and Funding Risk Management conference taking place in New York, on September 14-16, 2022.

New York, USA

14 – 16 September, 2022

Understand how to adapt to a new normal where regulatory demands, macroeconomic pressures and technological developments are posing a myriad of challenges to liquidity professionals

The landscape for liquidity has changed drastically over the last few months as a result of the changing rates and transition out of the pandemic. During the COVID-19 pandemic banks generated a lot of liquidity via retail and commercial deposits, and the government’s support and stimulus packages. The Basel III regulations, such as the LCR, helped banks to avoid the liquidity crunch leaving them in a good overall financial position. As we are now transitioning out of the pandemic, the biggest concern for banks is understanding how they are going to manage as spending is going up and people are not depositing money in the way they have been over the last two years. Banks need to model and forecast liquidity fluctuations so they can position their balance sheets in the best way. They also need to make sure their operations stay as resilient as possible in the new post-COVID-19 environment.

The GFMI 9^th Annual Liquidity and Funding Risk Management conference will offer case studies on the best strategies liquidity and funding professionals can use when adapting to the current volatile market. The best methods of handling the current regulatory environment will also be assessed, as well as the latest developments within intraday liquidity and data management. This conference will also discuss the challenging funding environment and the best current practices to optimize balance sheets. Furthermore, emerging concerns within liquidity and funding risk management, such as climate risk, ESG and cryptocurrency will be examined and evaluated.

Attending This Premier marcus evans Conference Will Enable You to:

Determine the best practices to adapt to the current volatile market and macro influences
Evaluate how to manage the current regulatory environment
Assess the latest developments of intraday liquidity and data management
Discuss the challenging funding environment and analyze how to optimize balance sheets
Examine the emerging concerns within liquidity and funding risk management

Best Practices and Case Studies from:

Yujush Saksena, Managing Director, Treasury Risk, Morgan Stanley BNY Mellon
Shahab Khan, Subject Matter Expert- Regulatory Capital and Liquidity, JP Morgan Chase
Bridgit Chayt, Head of Commercial Payments & Treasury Management, Fifth Third
Armel Romeo Kouassi, Senior Vice President – Head of Balance Sheet Modeling, Northern Trust Corporation
Michael Berkowitz, Managing Director, Treasury and Trade Solutions, Citi
Oresta Mehta, Managing Director, Markets Treasury. Global Treasury Climate Lead, HSBC

For more information and registration discounts please contact: Ms Ria Kiayia, Digital Media and PR Marketing Executive at [email protected] or visit: https://bit.ly/3n7h0pb

CFO Perspectives: 3 ways CFOs can use currencies to boost their business’s value

05-07-2022 | treasuryXL | Kantox | LinkedIn |

As a CFO, you are aware of the benefits of FX hedging for treasury. However, are you also aware of the macro-level advantages for your company and its value?

A new CurrencyCast series has just been introduced by Kantox. They examine five ways that efficient currency management may benefit your entire business in the first episode of their CFO Edition miniseries, including how to incorporate it into your strategy and how to decrease cash flow fluctuation. Watch below the video or read the corresponding blog.

Credits: Kantox
Source

In the first edition of CFO Perspectives, we’ll draw from our work with CFOs to explore three ways senior finance executives can make currency management a winning growth and cost-saving strategy for their business.

Looking at the concerns expressed by CFOs in most risk management surveys, a number of familiar themes seem to reoccur: the importance of cash flow forecasting and monitoring, the centrality of FX risk management and the ongoing digitisation of treasury processes

Yet, this picture is far from complete.

Ultimately, among the tasks assigned to CFOs, there is the need to make a contribution toward enhancing the value of the business. But what is the role —if any— played by currency management in that regard? Answering this question allows us to single out three strategic contributions of currency management that CFOs should prioritise.

Value and FX hedging: time for a reassessment

Does currency management create value? The traditional view has been ambivalent: a ‘glass half full, half empty’ kind of appraisal. While the benefits of hedging FX have never been in dispute, the problem lies with the perceived high costs of currency management.

This is precisely where things are changing—and quite fast. Digital, API-based technology is putting to rest the notion that currency management is always a costly, resource-intensive task. Meanwhile, Multi-Dealer Platforms (MDPs) such as 360T, embedded in these solutions, sharply reduce trading costs.

CFOs: three strategic contributions of currency management

(1) Create opportunities for growth

Feeling concerned about exchange rate risk, managers may neglect the growth opportunities that come from ‘embracing currencies’. Buying and selling in more currencies allow firms to capture FX markups on the selling side while avoiding markups on the contracting side. Two examples will suffice:

(a) On the selling side: In e-commerce setups, currencies can be leveraged to increase direct, high-margin sales on company websites with many payment methods. Multi-currency pricing is the secret weapon for reducing cart abandonment, which still stands at about 77% globally.

(b) On the buying side: Buying in the currency of their suppliers allows firms to (1) Avoid inflated prices charged by suppliers who seek to manage their own FX risk; (2) Widen the range of potential suppliers by putting them in competition; (3) Obtain extended paying terms.

By taking FX risk out of the picture, currency management enables firms to reap these and other margin-boosting benefits of using more currencies in their day-to-day business operations. Ultimately, it is about removing the disincentives that prevent firms from ‘embracing currencies’.

(2) Provide more informative financial statements

Informative financial statements allow investors to assess the quality of management by removing noise from the process. To the extent that the variability in net income is perceived as a measure of management quality, effective currency hedging creates a sense of discipline in the eyes of investors.

The good news for CFOs is that technology is making great strides in cost-effectively managing the accounting-related aspects of currency management. Here are two examples:

Balance sheet hedging. Automated micro-hedging programs for balance sheet items take the impact of FX gains and losses out of the picture, as invoices are hedged with great precision.
Traceability and Hedge Accounting. The perfect end-to-end traceability made possible by automated solutions eases the costly and time-consuming process of compiling the required documentation for Hedge Accounting.

(3) Lower the cost of capital

Companies can reduce cash flow variability thanks to a family of automated hedging programs and combinations of hedging programs, including layered hedging programs that make it possible to maintain steady prices in the face of adverse currency fluctuations.

In challenging times, when the availability of external financing at a reasonable cost is scarce —an all too common occurrence in years of pandemics and wars—reduced cash flow variability makes it possible for companies to execute their business plans and meet all cash commitments.

An impaired capacity to raise financing has implications in terms of valuation, especially for smaller businesses. This ‘cost’ has been variously measured, with some estimations ranging from 20% to 40% of firm value. Currency management enhances the capacity to raise finance and, by extension, lowers the cost of capital and boosts firm valuation.

A wide range of opportunities to create value

We have singled out three major contributions of currency management in terms of creating value for the business: (1) stimulating growth while protecting and enhancing profit margins; (2) lowering the variability of cash flows; (3) presenting more informative financial statements. We can mention even more benefits:

Taxation is optimised as smoother earnings reduce the tax burden when higher levels of profits are taxed at a higher rate.
Capital efficiency is raised when pricing with the FX rate improves the firm’s competitive position without hurting budgeted profit margins.

While most of these advantages have been known by CFOs for many years, there is a new factor to consider: they can be implemented with Currency Management Automation solutions that remove most of the resource-consuming, repetitive and low-value tasks performed by the finance team, eliminating unnecessary operational risks along the way.

With an added bonus: by leveraging currencies, CFOs have the opportunity to take decisive steps in terms of digitisation. According to a recent HSBC survey, digitisation is seen as the most positive factor by 84% of CFOs overall, as they expect investments in digital technology to have a “positive impact on their business”, with more than half of them expecting it to give the business model “a large boost”.

The time to act is … now!

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Ask the treasuryXL expert #1 How might digital trade transactions reduce the threat of fraud and money laundering?

04-07-2022 | treasuryXL | Vincenzo Masile | LinkedIn |

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Today, we discuss a question that treasuryXL expert Vincenzo Masile often gets to hear within his treasury network about digital trade finance.

This edition, the following question will be answered:

“How might digital trade transactions reduce the threat of fraud and money laundering?”

Vincenzo Masile

“That is a question I think is very relevant right now, especially after Covid. Firstly, let me look back at trade finance over the past few years. In 2019 and 2020, trade finance came under scrutiny following a number of high-profile defaults, suspected frauds and double financings and, in some cases, the failure to provide proper collateral for goods.

While legislation to recognize electronic trade documents will not bring about an overnight change in financier confidence, it is likely to do so in the medium term.

A game-changer for digital trade

The availability of fully enforceable electronic trade documents recognized by the most widely used trade jurisdiction will in itself have a major impact on the approach of both companies and financiers towards digital trading solutions.

Transferable records, such as bills of lading, are the most important commercial documents in trade and currently, less than 1% of bills of lading are in electronic form. This is a huge missed opportunity, given that electronic transferable records will make trade safer, paperless, easier, cheaper, faster, and greener for companies.

Implications for the security in trade transactions and regulatory treatment of trade finance: URDTT

The Uniform Rules for Digital Trade Transactions (URDTT) version 1.0 are the result of the mandate given by the ICC (International Chamber of Commerce, Paris) Banking Commission to develop a high-level structure of rules, obligations, and standards for the digitalization of trade transactions.

The ICC Uniform Rules for Digital Trade Transactions (URDTT) are intended:

1. For a fully digital environment;

2. To be neutral with regard to technology and messaging standards; and,

3. To extend into the corporate space, including commercial transactions and the growing community of non-bank providers of financial services.

The URDTT are designed to be compatible with UNCITRAL (United Nations Commission on International Trade Law) Model Laws, including those Electronic Commerce, Electronic Signatures and Electronic Transferable Records.

The rules will serve as an overarching framework for digital trade transactions thereby providing global standardization, consistency and conformity, providing a collective understanding of terms and definitions, whilst promoting and supporting the usage of electronic records/documents/data.

Various technology service providers have already publicly stated their intention to work with the URDTT, in fact, a number have already incorporated the URDTT into their platform rulebooks and are actively looking at developing trade products based upon the URDTT.

Conclusions

Trade finance functions that adopt appropriately targeted automation and advanced analytics as integral parts of their compliance operations will be more important than ever in this uncertain international environment. With such high volumes of transactions and increasing complexity, efficient trade financing is key to ensuring that warehouses, harbors and supply chains are running smoothly – thus keeping the age-old business of international trade firmly afloat.”

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