Back to the old days: Currency jargon in forex trading

14-01-2020 | Marco Lassche |

Nowadays the youth use apparently ‘stacks’ as a nickname for money. In forex we use already for a long time nicknames…

 

Recently I heard my son talking to one of his friends on the play station: “Hey bro, we need more stacks to go to the next level.”

When I asked him what is stacks: “Dad come on, you don’t know? Maybe you are getting too old for this (41?). Everybody knows that stacks is money.” Ouch…
My ‘old’ brain went back in time and this felt a bit like my first steps in the world of FOREX trading. At that time no electronic forex trading platforms were used. We traded still directly with banks / brokers by phone or Reuters messenger. Instead of Bro we used Mate. Instead of stacks we used the nicknames for the different currencies. For me the first days it felt like I was ended up in a scene of the Tower of Babel.

“Hey Mate, I need a Cable (GBP/USD) in two”. Later on I understood, this meant I want a price quote for a GBP/USD in 2 million GBP at which you can buy/sell GBP against the USD.

Now you know that stacks is money, and a cable is GBP/USD, it is time for some more nicknames in currency (pairs), and some background explanation:

Please feel free to contact me if you need any further information or assistance in setting up a more professional framework for controlling your financial risks and cash management in a more efficient way.

 

Marco Lassche 

Founder and Owner of at Bedrijfskostenexpert
Treasurer and Project Manager at Van Caem Klerks Group
treasuryXL Ambassador

Why are you still paying too much banking costs? There is a simple solution to save money

2-12-2019 | treasuryXL | Vallstein |

Do you have full transparency in your banking cost? Do you fully trust your bank(s)? You can easily save a significant amount of money and create strong ties with your bank(s) for a better relationship.

We interviewed Huub Wevers, Head of Business Development at Vallstein, he will take a deeper dive into the advantages of using WalletSizing® , give you a better insight and even shares a success story.

Can you tell something about WalletSizing® ?

WalletSizing® is a SaaS platform with a number of modules that gives Corporates full transparency on how much they spent on their banks and how profitable they are for their banks. A CFO would like to be able to drive the meetings with the bank supported by independent data showing exactly what a corporate is doing with the bank AND how profitable the corporate is for the bank. This is exactly what WalletSizing® delivers. WalletSizing® drives the focus and strategy of the meeting by showing how much a corporate is spending on their banks and how profitable they are for their banks. It ensures that a corporate gets value for money from their relationships with their banks.

An additional module of WalletSizing®, the bank fee edition is able to upload all bank invoices for cash management and comparing them with the original price agreements. Am I paying the price as agreed during the RFP phase?

WalletSizing® the Bankfee edition, can be used together with the other WalletSizing® modules or stand alone.

This module uploads all bank invoices (any format) for cash management and audits them with the original price agreements: Am I paying the price as agreed during the RFP phase? Are there unforeseen billing charges? I was not aware of these unusual situations like:

  1. a) manual payments,
  2. b) investigations,
  3. c) volumes… leading into continuous internal processes improvements.

WalletSizing® Bankfee edition is all about Automation, Control and Transparency, down to account level and including tailor made reporting for Auditors and Control teams. WalletSizing® Bankfee edition it is not a daily reconciliation system. It is an audit process that can be ran in different frequencies as those fits’ client requirements.

What is, in your perception, the biggest benefit of using WalletSizing® ?

Let me explain the following questions that WalletSizing® answers:

  • How much am I spending on my bank products & services?
  • How profitable am I for my banks?
  • Is the above fair?

The last question is the most important one and can be answered through the benchmarking capabilities of WalletSizing® and the underlying methodology. WalletSizing® is calculating the exact profitability on the basis of the relevant credit ratings, bank fees and the latest Basel III/IV regulations.

Another benefit is during the RFP or price revision process where the proposed prices from the Banks are also uploaded in the system and amongst other criteria, compared with the Vallstein Benchmark. This benchmark is a Vallstein property owned database with hundreds of thousands of data points collected over the last 20 years.

How does the customer project phase look like from start till actual use?

A typical WalletSizing® project takes 6 weeks where Vallstein will handle most of the work, typically 90%. We will gather all necessary data and integrate, translate and upload into the system. Through a number of workshops we ensure the client domain is 100% accurate and the client is versed in making the analysis and acting on it. “Having learned how to fish instead of just been given a fish” as the saying goes. During the project we will also set-up and agree how to continue maintenance of the system, ensuring an up to date system.

How fast can customers experience the impact of WalletSizing® after implementation?

Already during the implementation clients will be able to get benefits from the system by detecting missing bills. After an implementation, clients can immediately review their bank relationships and typically will reach very significant savings in their banking costs through that. And on the long run, clients will have more transparent and better relationships with their banks. When you have clarity on how much you are really paying, you have time to talk about more strategic topics with your banks.

What was your biggest challenge with WalletSizing® ?

The biggest challenge with WalletSizing® we had over the last 20 years is the data quality of the banks and the speed at which they deliver the data to our clients.  Fortunately this is improving due to invoice standards like CAMT.086 and a more shared belief in transparency in the market place. Things have changed for the better and we hope that we have and are contributing to that.

Can you share a great WalletSizing® success story?

A client of ours implemented WalletSizing® Bank Fee Edition. We Started with 9 Banks, 12 countries and 170 different accounts. We have now made the bank process completely automatic. Banks are sending the required and detailed fees data on a quarterly basis and this data is being uploaded into the system.

We found no unique and individual product codes across the banks. Product descriptions are not clear and fees are not consistent across the same billing items and accounts. This has been resolved completely by the system which is now automatically mapping all billing items into unified product names and codes. It is more easy now to compare different banking terms and conditions and market benchmark. Needless to say significant savings and 100% transparency has been achieved.

After this implementation the client agreed that they now had done the difficult part of Bank Relationship Management (Cash Management Fees) and were interested to pursue the analysis of the full banking wallet across all their banks. An exercise to understand the current situation, reduce the number of banks, but with full visibility across all banks on how much business and how profitable they were right now. In the end the client reduced their number of banks from 17 towards 9 and have an even spread of their business (Wallet) across all their banks.

visit Vallstein.com

You are only one step away from saving a lot of money

Huub is thrilled to help you. Fill out the contact form and we arrange a call for you.

Recap ATEL Annual Conference 2019

| 22-10-2019 | François de Witte | treasuryXL |

Each year in the 3rd week of September, ATEL, the Luxembourg Association of Corporate Treasurers, organizes its Annual Conference. This year the ATEL Annual Conference was held on September 19, 2019. It was a very special edition, as it coincides with the 25th anniversary of the creation of ATEL. There were over 200 participants, and this was a good opportunity to have snapshot of some recent tendencies in treasury.

“The annual conference is a great way to take stock of the sector’s developments while celebrating our quarter-century run in a friendly atmosphere,” stated François Masquelier, Chairman of ATEL and Deputy Chairman of the EACT.,

The Conference started with a series of workshops. I followed the one on Cybersecurity in Treasury, given by BNP Paribas, and the one on “®evolution of Payments” given by BearingPoint.

BearingPoint expect major changes due to Instant Payments. The existing solutions to obtain customer information on the receipt of payments are not enough anymore.  Corporations require immediate information on received payments. The Westhafen Expert Dialogue has defined immediate customer information of received payments as a best practice. The format used is the Credit-notification N54 defined based on the camt.054. The proposed transmission channel is either via API: Incoming payments are transferred from the bank to the corporation via a web-service-notification (HTTPS, push) or the through the banking server (EBICS.

The plenary session started with a video of Finance Minister Gramegna congratulating the association on its 25th anniversary and coming back on the establishment of the euro as a great accelerator for the profession and underlining Luxembourg’s key role in maintaining a positive environment for treasurers.

Isabelle Badoux presented Sanofi’s treasury transformation journey focusing on centralized treasury, central bank interaction and the conception of a “payment factory.”

Luca Lazzaroli, then presented the EIB, the largest multilateral lender and borrower in the world. The institution invests over € 1.2 trillion in innovation, environment, infrastructure and SMEs with a special accent on sustainable growth in Europe.

Vincezo Dimase from Refinitiv concluded the plenary session by presenting the challenging transition from LIBOR the so-called ARR (Alternative Reference Rate – e.g. the ESTER – Euro short term rate, which will replace the EONIA). By the end of 2021, the financial sector will abandon the IBOR, and this will have a major impact on the corporate treasurers, as several long-term contracts using the IBOR go beyond end 2021.

Following on this conference we had a nice get together with all the participants where I had interesting exchanges of experience. The ATEL Annual Conference was a very good event.

I am impressed by ATEL, who proves to be able in the small country of Luxembourg to group top experts along hot topics in treasury. On 26/9/2019, we also had at the Luxembourg House of Training the official Ceremony where 13 treasury professionals received their “Certified Path in International Treasury Management and Corporate Finance“, organized in collaboration with ATEL. A new session of this Certified Path will be held starting from January 2020. All practical information and program are available here. I was also part of the lecturers and of the jury.

Will you join next year?

François de Witte
Founder & Senior Consultant at FDW Consult
Managing Director and CFO at SafeTrade Holding S.A.
treasuryXL ambassador
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How are largest European companies managing their financial risks?

17-10-2019 | Stanley Myint | BNP Paribas

The second edition of the “Handbook of Corporate Financial Risk Management” has just been published by Risk books. The handbook is written with all risk management professionals, practitioners, instructors and students in mind, but its core readership are Treasurers at non-financial corporations. It contains 43 real life case studies covering various risk management areas. The book aims to cover both financial risk management and optimal capital structure and its contents.

Motivation for the book

This Handbook is based on real-life client discussions we had in the Risk Management Advisory team at BNP Paribas between 2005 and 2019. We noticed that corporate treasurers and chief financial officers (CFOs) often have similar questions on risk management and capital structure and that these questions are rarely addressed in the existing literature.

This situation can and should lead to a fruitful collaboration between companies and their banks. Companies often come with the best ideas, but do not have the resources to test them. Leading banks, on the other hand, have strong computational resources, a broader sector perspective, an extensive experience in internal risk management, and the ability to develop and deliver the solution. So, if they make an effort to understand a client’s problem in depth, they may be able to add considerable value.

The Handbook is the result of such an effort lasting 14 years and covering more than 700 largest European corporations from all industrial sectors. Its subject is corporate financial risk management, ie, the management of financial risks for non-financial corporations.

While there are many papers on this topic, they are generally written by academics and rarely by practitioners. If we contrast this to the subject of risk management for banks, on which many books have been written from the practitioners’ perspective, we notice a significant gap. Perhaps this is because financial risk is clearly a more central part of business among banks and asset managers than in non-financial corporations. However, that does not mean that financial risk is only important for banks and asset managers. Let us look at one example.

Consider a large European automotive company, with an operating margin of 10%. More than half of its sales are outside Europe, while its production is in EUR. This exposes the company to currency risk. Annual currency volatility is of the order of 15%, therefore, if the foreign revenues fall by 15% due to FX, this can almost wipe out the net profits. Clearly an important question for this company is, “How to manage the currency risk?”

The book blends real corporate situations across capital structure, optimal level of cash, optimal fixed-floating mix and pensions, which are particularly topical now that negative EUR yields create unpresented funding opportunities for corporates, but also tricky challenges on cost of cash and pensions management

One reason why corporate risk management has so far attracted relatively little attention in literature is that, even though the questions asked are often simple (eg, “Should I hedge the translation risk?” or “Does hedging transaction risk reduce the translation risk?”) the answers are rarely simple, and in many cases there is no generally accepted methodology on how to deal with these issues.

So where does the company treasurer go to find answers to these kinds of questions? General corporate finance books are usually very shy when it comes to discussing risk management. Two famous examples of such books devote only 20 – 30 pages to managing financial risk, out of almost 1,000 pages in total. Business schools generally do not devote much time to risk management. We hope that our book goes a long way towards filling this gap.

Website

We invite the reader to utilise the free companion website which accompanies this book, www.corporateriskmanagement.org There, you will find periodic updates on new topics not covered in The Handbook. Much like the book this website should prove a useful resource to corporate treasurers, CFOs and other practitioners as well the academic readers interested in corporate risk management.

About the authors

Stanley Myint is the Head of Risk Management Advisory at BNP Paribas and an Associate Fellow at Saïd Business School, University of Oxford. At BNP Paribas, he advises large multinational corporations on issues related to risk management and capital structure. His expertise is in quantitative and corporate finance, focusing on fixed income derivatives and optimal capital structure. Stanley has 25 years of experience in this field, including 14 years at BNP Paribas and previously at McKinsey & Company, Royal Bank of Scotland and Canadian Imperial Bank of Commerce. He has a PhD in physics from Boston University, a BSc in physics from Belgrade University and speaks French, Spanish, Serbo-Croatian and Italian. At the Saïd Business School, Stanley teaches two courses with Dimitrios Tsomocos and Manos Venardos: “Financial Crises and Risk Management” and “Fixed Income and Derivatives”.

Fabrice Famery is Head of Global Markets corporate sales at BNP Paribas. His group provides corporate clients with hedging solutions across interest rate, foreign exchange, commodity and equity asset classes. Corporate risk management has been the focus of Fabrice’s professional path for the past 30 years. He spent the first seven years of his career in the treasury department of the energy company, ELF, before joining Paribas (now BNP Paribas) in 1996, where he occupied various positions including FX derivative marketer, Head of FX Advisory Group and Head of the Fixed Income Corporate Solutions Group. Fabrice has published articles in Finance Director Europe and Risk Magazine, and has a master’s degree in international affairs from Paris Dauphine University (France).

Content:

Introduction

1 Theory and Practice of Corporate Risk Management *

2 Theory and Practice of Optimal Capital Structure *

PART I: FUNDING AND CAPITAL STRUCTURE

3 Introduction to Funding and Capital Structure

4 How to Obtain a Credit Rating

5 Refinancing Risk and Optimal Debt Maturity*

6 Optimal Cash Position *

7 Optimal Leverage *

PART II: INTEREST RATE AND INFLATION RISKS

8 Introduction to Interest Rate and Inflation Risks

9 How to Develop an Interest Rate Risk Management Policy

10 How to Improve Your Fixed-Floating Mix and Duration

11 Interest Rates: The Most Efficient Hedging Product*

12 Do You Need Inflation-linked Debt

13 Prehedging Interest Rate Risk

14 Pension Fund Asset and Liability Management

PART III: CURRENCY RISK

15 Introduction to Currency Risk

16 How to Develop an FX Risk Management Policy

17 Translation or Transaction: Netting FX Risks *

18 Early Warning Signals

19 How to Hedge High Carry Currencies*

20 Currency Risk on Covenants

21 Optimal Currency Composition of Debt 1:

Protect Book Value

22 Optimal Currency Composition of Debt 2:

Protect Leverage*

23 Cyclicality of Currencies and Use of Options to Manage Credit Utilisation *

24 Managing the Depegging Risk *

25 Currency Risk in Luxury Goods *

PART IV: CREDIT RISK

26 Introduction to Credit Risk

27 Counterparty Risk Methodology

28 Counterparty Risk Protection

29 Optimal Deposit Composition

30 Prehedging Credit Risk

31 xVA Optimisation *

PART V: M&A-RELATED RISKS

32 Introduction to M&A-related Risks

33 Risk Management for M&A

34 Deal-contingent Hedging *

PART VI: COMMODITY RISK

35 Introduction to Commodity Risk

36 Managing Commodity-linked Revenues and Currency Risk

37 Managing Commodity-linked Costs and Currency Risk

38 Commodity Input and Resulting Currency Risk *

39 Offsetting Carbon Emissions*

PART VII: EQUITY RISK

40 Introduction to Equity Risk*

41 Hedging Dilution Risk *

42 Hedging Deferred Compensation*

43 Stake-building*

Bibliography

Index

Note: Chapters marked with * are new to the second edition

Special offer for treasuryXL readers. Use the code HCFRM20 at checkout for 20% discount on your book purchase at riskbooks.com/corprisk2

How to reduce your credit risk

14-10-2019 | Marco Lassche |

It is nice to sell your products at a good price. But what if you have delivered goods to your customer, and he is not able to pay? In this article we give you over 15 options, how to reduce your credit risk.

Although a company that you do business with can look very successful and credit worthy from the outside, there are many examples of unexpected bankruptcies.
Credit risk is the probability that your company incurs a financial loss as your counterparty (customer/supplier), cannot meet its contractual obligations.

In this article we give you guidance, how to control and cover your credit risk. We focus on the sales perspective, however it is also applicable on the purchases side; a prepayment to a supplier causes also credit risk.

Ways to control your credit risk:
  • Make a credit check on your counterparty before onboarding, and make sure to keep doing this during the whole relationship. Credit rating agencies like Creditsafe, Graydon, Dunn & Bradstreet make their business out of running credit checks on companies. They also have good tools (risk alerts), to follow the credit worthiness of your counterparty.
  • Transfer your credit risk and insure your counterparty risk to a credit insurer (Atradius, Euler, Coface). In case you trade with unstable countries, do not forget to insure the political risk. If insurance of your counterparty is not possible, this might be already a warning. However it can also be a just established subsidiary, being part of a bigger credit worthy parent.
  • Bank guarantee: the bank of your customer will ensure the payment if the customer is unable to.
  • Execute the exchange (payment vs. property of goods) with your counterparty at the same time or use a trustable intermediary.
Options with the bank:
–    Direct Collection
–    Letter of Credit (LC)In a direct collection as well as in a LC you handover agreed documents to the bank. The biggest difference between direct collection and Letter of Credit: In a collection the bank pays you only, when the customer paid to the bank. In an LC the bank of the buyer pays you when the agreed documents are delivered by the seller. So for goods that are not easily sold to another counterparty, we would advise to go for a LC.

Other options

  • Use an escrow account of the warehouse.
    The warehouse releases the goods to the buyer, when they received the payment, and forward the payment to the seller.
  • In case of transport of the goods by ocean freight you can use the shipper to be the intermediary.
    When your sold goods are transported by sea, you can give the release to the shipper to handover the Bill of Lading (property document) to the buyer. Normally this is done after payment of the buyer.
  • Use factoring. You sell your debtor at a discount to a factoring company. Make sure that you cannot be liable for non-payment (non-recourse basis).
  • Ask for a parent guarantee if the counterparty that you trade with is part of a big parent company. This parent guarantee can also be used to get an insurance at your credit insurer.
  • Diversification. Try to limit credit exposure on one customer, one region (concentration ratio’s). Ensure that a non-payment of one not covered counterparty will not put you in any liquidity squeeze and put your company at stake.
  • Give collection responsibility to the sales team. A trader works mainly for its sales bonus. In my opinion, to be eligible for the bonus, the whole order to cash cycle should be fulfilled. What if you give already bonus to a sale, but the invoice is not paid. So give the trader also the responsibility for collection. In this way he will be more critical with onboarding his customers, agreeing on payment terms and fight for the invoice to get paid.
  • Create your own financial buffer; an umbrella for rainy days.
  • Limit the number of payment terms for your customers, and make sure that you keep them within the Terms & Conditions of insurance company.
  • Determine who within the company has the responsibility for the credit risk management and setting the credit limits. Most of the time this is a collaboration between treasury, sales and controlling team, and final responsibility at CFO.

As said, running a business hardly goes without credit risk, but there are a lot of tools that can help you to limit it to an extent that is acceptable.

Please feel free to contact me if you need any further information or assistance in setting up a framework to control your credit risk.

Marco Lassche 

Founder and Owner of at Bedrijfskostenexpert
Treasurer and Project Manager at Van Caem Klerks Group
treasuryXL Ambassador

What is Treasury?

10-10-2019 | Marco Lassche | Kendra Keydeniers

What is treasury?

Have you ever asked yourself the question, “what is Treasury?”. Many people will think about pirates and big see ships that sank deep into the bottom of the ocean including their ‘treasure’. A mystery treasure map will lead the finder to a treasure worth a lot of money. In some way Treasury and Treasure have definitely similarities, it is about money and other valuables.

Find out what Treasury is……

Treasury

Treasury or Treasury Management is the task to manage the firm’s liquidity and mitigate its financial and operational risk, with the goal to safeguard an organizations’ holdings. Let’s make this more specific. In each organization treasury tasks exist, regardless if the organization is big/small, profit/non-profit, nationally operating/ multinational. Although entrepreneurship is always bearing risk, this should be limited to a certain extent in order not to jeopardize the survival of the company. For each company this is different. For a company like Apple with a net profit margin > 20% losing 4% on its FX exposure has a much smaller impact on profitability, than for a WallMart with a net profit margin of 2-3%. In small organizations treasury is mostly done by the CFO or finance department. Bigger organizations have their own treasury departments, controlled by the CFO. In general, the bigger and more international the organization operates, the bigger and more complicated the tasks of treasury get.

3 main Treasury Categories of Tasks

Treasury management, can be divided in 3 main task categories.

  1. Cash & liquidity management (short term):
    a. This is mostly the day-to-day operations. Make sure that payments that are due are being paid in time to the correct account.
    b. Manage your bank accounts in an effective and efficient way
  2. Corporate finance (long term): How do you want to finance your company? What is the best mix for equity and debt, based on the long term scenarios for a company.
  3. Risk management (short & long term):
  • Liquidity risk: the risk that you cannot pay your bills in time (salaries, suppliers)Market Risk (or price risk) is the risk that changes in market prices (e.g. foreign exchange and interest rates), cause losses to the business;
  • Credit Risk is the risk that a counterparty default causes loss to the business;
  • Operational Risk (cyber & security, internal fraud).

Although the basic tasks for treasury remain the same over time, the content of the tasks evolves over time. Due to external factors like technology, regulations or new financial products, some tasks are less time consuming nowadays then they were in the past.

The future treasurer

A treasurer is someone who manages and oversees the treasury side of financial management of an organization. Tasks like bank selection, reconciling bank statements and managing cash flow are typical for a treasurer.

Payments these days can be automatized to a high extent, a TMS (treasury management system) can help the treasurer. However risks in cyber fraud are increasing. Also increased regulations by banks and/or government take more time of the treasurer. In the past a treasurer only went to his own bank for financing, these days there are many other options for financing or reducing financial risks. It is the task fort the treasurer to keep up-to-date with developments, and to be the consultant for the organization on treasury related subjects.

TreasuryXL.com will help you with this by following the latest trends on all aspects of treasury.

Marco Lassche 

Founder and Owner of at Bedrijfskostenexpert
Treasurer and Project Manager at Van Caem Klerks Group
treasuryXL Ambassador

Our banks are not like theirs (if they even have one)

| 08-10-2019 | by Pieter de Kiewit |

Recently Bloomberg reported about the authorities in Indonesia closing down 826 Fintech startups. My first assumption was this has to do with tax evasion and a very controlling government. Indonesia is most definitely not my field of expertise. Reading the article it struck me that my mindset concerning banking is quite limited and restricted to western standards. And over time I have noticed that I am not the only one. Reason to browse the internet, tell you about my findings and issues this concerning.

Even European banks are not all the same
In The Netherlands the retail banking standard was: banking services are for free and you get a decent percentage on your savings. Furthermore cheques were left in the previous millennium and even my grandmother uses on-line banking. Italian retail banking already came with an invoice long ago and cheques were and still are a standard in Germany. As many Europeans have no regular access to the (mobile) internet, banking on their computer or phone is not an option. One can also take this from the average number of banking offices to be seen in the streets of Amsterdam versus the ones in Bucharest.

Banking differences in the rest of the world
I did not do a comprehensive study but do know that for many of us Europeans a personal credit rating does not very sound familiar. When I lived in Canada I learned that you need a personal credit to get a cheque book. You get your credit rating by having an account where a regular income lands and improve it by leasing a car and pay your credit card bills in time. Without a credit rating no mortgage, a better credit rating results in a lower interest rate.
In some African countries telephone landlines were never installed and the first regular telephone was a cell phone. In parallel, bank accounts were skipped and cash is replaced by credit on this same cell phone. I think all these systems are doing a more or less proper job. Only if you want to cross the border you will need to help.

Problems with inadequate banking services
EY reports that over 200 million SMEs do not have access to banking services putting them in an offside position in the global economy. All this because the regular big banks want to deal with them as if they are a Western company. The Bloomberg article describes a situation where 90% of the Indonesian population has no credit card or access to banking services. Of course this is a facilitator for the black market economy. But also, there are examples where Fintech and loansharking are being combined with all related criminal behaviour and excessive interest rates. And, in a society without banks, what can you do with your savings? I think these are real issues.

Having browsed and learned I don’t think we should aim for a worldwide standard in banking. I hope we can learn from each other and that the banking landscape will be more honest, enabling a fair global economy. With this in mind I think I will have another look at cryptocurrencies introduced by Facebook and other new kids on the block. That is for another blog and by now I think I understand the Indonesian government better.

What are your thoughts and which interesting examples do you see around the world?

Pieter de Kiewit
Owner Treasurer Search

 

To swap, or not to swap that is the question

30-9-2019 | Marco Lassche |

Cash management in different currencies:
The FX swap, a way to optimize your interest result

Years ago, when I made my first baby steps in the world of Treasury at Bank Mendes Gans, my old teachers Jan Loohuis and Aart-Jan Lensvelt, taught me some good lessons. One of them, that I always used in the companies that I have worked for, is this one.

What if you have temporary an overall negative position in one currency (e.g. -/- EUR 10 mio) and an overall positive position in another currency (e.g. +/+ USD 11 mio)?

Basically you have two easy ways to manage this liquidity position and optimize your interest result. Both ways lead to Rome:

  • Keep the balances in your bank account
  • You swap the balances in different currencies temporary by means of a FX-swap

Option 1: Keep the balances in your bank account
This option does not need much clarification.

  • For your debit balance you pay interest (basic interest +/+ margin)
  • For your credit balance you receive credit interest (basic interest -/- margin

Option 2: The FX swap
In a FX swap you do a trade in your FX trade portal, in which you exchange the bank balances at a spot date (at the spot rate) and you reverse it at a future date (at the forward-rate). You do the trade at the same time, so no FX risk is involved.

Forward FX-rates are being calculated directly from the spot FX-rate and are adjusted for the difference in interest rates between the two currencies.

FX swap visualised

Option 1 or option 2?
When the interest rate difference between the two currencies is more attractive in option 1, you keep your bank balances. When the interest rate difference between two currencies is more attractive in option 2, you swap.

Example
I would like to clarify it by an example in which we have a EUR balance of -/- EUR 10 mio and a
USD balance of +/+ USD 11 mio. We will swap the currencies for 1 month (30 days).

Interest results after 30 days

Option 1) Interest result by keeping balances in your bank account

Total interest proceeds in USD: EUR 2,708 * 1.1000 = USD 2,979 + USD 18,563 = USD 21,542.
Interest rate difference between USD and EUR: 2,35% (2.025% -/- 0.325%).

Option 2) Interest result by swapping balances

Interest result FX swap

At the start date we buy EUR 10 mio, and sell USD 11 mio at the spot rate 1.1000.
At the end date, after 30 days, we reverse the trade as we agreed with the bank:
We sell EUR 10 mio, and buy USD 11,025,770 at the agreed forward rate 1.102577

Our total interest rate difference proceeds is USD 11,025,770 – USD 11,000,000 = USD 25,770.

Conclusion:
In this example the FX swap is USD4,200 more attractive than keeping the account balances like it is. Of course, this is not always the case, but a FX swap can be a good alternative in many cases.

* How to calculate the interest rate difference between two currencies in a FX swap
As previously said, the difference in spot and forward rates, can be explained by the interest rate difference between two currencies, We calculate the interest rate differences as follows:

Forward Rate on annual basis / Spot Rate

As interest percentages are always based on 1 year we multiply the 30 days forward points by 12 to get to 1 year forward points (EUR and USD, calculate 360 days in a year, GBP e.g. 365 days).
The forward points for 30 days: 25.77, which means for one year 12 * 25.77 = 309.24
Forward rate on annual basis: 1.130924

Spot rate: 1.1000

1.130924/1.1000 = + 2,81%

Please feel free to contact me if you need any further information.

Marco Lassche 

Founder and Owner of at Bedrijfskostenexpert
Treasurer and Project Manager at Van Caem Klerks Group
treasuryXL Ambassador

PSD2, Open Banking and their major impact

| 24-9-2019 | François de Witte | treasuryXL |

This training program at the Febelfin Academy prepares participants for 2 major challenges of the upcoming years in banking: PSD2 & Open Banking. This will have a major impact on the financial ecosystem and will create new challenges.

The goal of this training course is to:

  • Make participants aware of the ways PSD2 & Open Banking affect banks and other players in Europe;
  • Understand the impact of the technical requirements with a focus on strong customer authentication;
  • Outline the risks and responsibilities of the involved parties within the new regulatory framework;
  • Understand the impact of Open Banking APIs (Application Programming interfaces;
  • Understand the impacts of the PSD2 & Open Banking the financial ecosystem;
  • Evaluate the risk and opportunities created by PSD2 & Open Banking the banks and the new players;
  • Determine action plan for your company.

Target Group

This training course can be followed by multiple target groups:

  • Managers of a banks/PSP’s/Fintechs involved with the payments and digital strategy
  • Product Development Experts (payments)
  • Service providers involved with Open Banking
  • Corporate Treasurers
  • Compliance officers

Advanced: offers practice-based applications to complement the theoretical knowledge already acquired through the “basic level” courses (in-depth learning).

There is no specific preparation required. For persons who are less acquainted with PSD2 and payments, some pre-course reading material can be made available.”

Program

This training program prepares participants for two key challenges of the upcoming years in banking: PSD2 and Open Banking.

Part I: PSD2 and Open Banking – overview:

  • PSD2: Scope and Basic Principles
  • XS2A (Access the Accounts)
  • New Players: AISP and PISP
  • SCA (Strong Customer Authentication)
  • Consent and SCA
  • Requirements for the Banks and TPPs
  • Timetable
  • Trends in Open Banking

Part II: Open banking architecture: Implications for banks and the New Players

  • XS2A: Risks, Responsibilities and obligations of the related parties
  • XS2A: Availability Requirements
  • Setting up the SCA in Practice
  • SCA: Optimization of the Exemptions
  • Security requirements ensuring consumer protection
  • Addressing the fraud and cyberattack risks
  • Technology: building interfaces – APIs (Application Programming Interfaces)
  • European initiatives to standardize the interfaces
  • Practical aspects – Role of Aggregators
  • Group Exercise

Part 3: PSD2: Potential impact on the market and next steps

  • Global impact on the market – New Players
  • Impact on the Payments Landscape
  • Impact on the Cards and Digital Payment Instruments
  • Impact on the Merchants and the e-commerce
  • Impact on corporates
  • FinTech Companies: ready to disrupt banks?
  • Implication on the Digital Banking Strategy
  • The new role of competition and cooperation
  • Action Plan for Banks and New Players
  • Group Exercise

Practical information

Duration: One day training

Date: October 10, 2019

Hours: 9AM-5PM (6 training hours)

Location: Febelfin Academy, Aarlenstraat/Rue d’Arlon 80, 1040 Brussels

Additional information: This training course will be given in English

 

REGISTER TODAY

 

François de Witte

Founder & Senior Consultant at FDW Consult / Managing Director and CFO at SafeTrade Holding S.A.

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10 Steps for an effective and efficient credit card policy

16-9-2019 | Marco Lassche |

Corporate credit cards are often used by employees to pay their expenses during business trips.

In this article we explain how you can easily control the use of corporate credit cards.

  • What are the advantages of corporate credit cards, apart from the old-fashioned declaration on paper (including receipts)?
  • How do you set up an effective and efficient credit card policy?
  • How do you use simple tools to ensure that the accounting process of credit card statements runs quick and smooth?
  • How can you ensure that costs are controlled or even reduced with a simple analysis tool?
Advantages of business credit cards

The advantage for the employee is that she does not first have to pre-finance the expenses herself and later declare the costs based on a stack of crumpled receipts.

Advantages of business credit cards for the company are countless:

  • A free short-term credit line.
  • Purchases are often insured, as well as misuse of the card.

By using a number of simple tools, many more benefits are added:

  • Time saving for accounting through automatic processing of credit card statements in the accounting system. Every transaction on a credit card statement contains a cost category code (also called Merchant Category Code). These codes can be easily linked to (sub) ledgers.
  • Analyzing credit card expenses becomes easy because there is direct insight into the business costs incurred by staff. This means you can also manage cost savings. You can use a special tool for these analysis, but a pivot table in Excel works fine as well.
  • Employees scan their receipt via an app on the phone and can then throw the receipt away. No more hassle.
10 Steps to implement a good credit card policy

A good credit card policy is essential for optimizing credit card use within a company. So make sure that it is clear beforehand what the rules of the game. Equally important, maintain them as well. It is also important that the management confirms itself to the credit card policy. Management should be a good role model.

10 Steps:

  1. Determine the credit card company that fits the best to the company. (VISA/MASTER/American Express).
  2. Determine who within the company is eligible for a credit card. Usually this will be the management and the people in the sales team.
  3. Determine who within the company is responsible for the credit card management. Place this with the Treasury department or the accounting department.
  4. Determine the credit card limits. An employee who always travels to cheap countries does not need such a high limit as an employee who always travels to expensive countries.
  5. Determine the costs for which a credit card may be used. Think of restaurant, taxi, hotels. We do not recommend to allow using business credit cards for private expenses, as this causes extra work for accounting.
  6. Determine the rules for matching the credit card statement with the receipts. A simple rule is to require that within 30 days after receipt of the credit card statement, the scanned receipts must be linked to the statement by the employee. This is also important for an audit. Of course it is true that in certain countries, people do not get a receipt e.g. a taxi ride, so flexibility is required in this. But hotels, restaurants etc., should be able to provide a receipt at any time. Also emphasize to employees that a payment confirmation from a payment terminal is not a receipt.
  7. Determine who approves the spending on the credit card statement. It makes sense to place this with the department manager or CFO. This approval process can be setup in the same online tool in which the credit card statements are uploaded.
  8. Determine the consequences for not following the credit card policy. Some employees with a corporate credit card are very careless or feel like a kid in a candy store. So consider consequences for not uploading receipts, abuse etc..
  9. Have employees who receive a credit card review the policy and sign it. Make sure this policy is not too long.
  10. Ensure that employees hand in their credit card immediately upon termination of employment and block the credit card.
Cost savings on credit cards

Easy and quick gains:

  1. Limit cash withdrawals by credit cards in ATM’s. Costs are often 4% of the cash withdrawal, with a minimum of around € 5 per withdrawal.
  2. Always pay in the local currency with your credit card in non-EUR countries. Although the credit card company often charges 2-3% rate surcharge, ATM’s, hotels and restaurants charge much higher surcharges to pay directly in EUR.

Other cost savings:
There are more cost savings to realize. E.g. there are still a lot of companies in which employees can book their flights and hotels on their own preferred website and pay it by the corporate credit card. To get better insight and cost control you can consider the implementation of a corporate travel portal, in which the employee can still book on its own, but you can control costs much better.

Please feel free to contact me if you need any further information or assistance in setting up a framework to control your corporate credit card costs.

Marco Lassche 

Founder and Owner of at Bedrijfskostenexpert
Treasurer and Project Manager at Van Caem Klerks Group
treasuryXL Ambassador