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What will be the Treasury Trend of 2023?

30-11-2022 | treasuryXL | LinkedIn |

As 2023 is approaching, we explored what Treasurers are particularly looking forward to in treasury for next year. What will be the Treasury Trend of 2023? Are treasurers curious to know what is going to happen in the area of Market and FX Risk Management, or just what the developments are going to be in e-commerce related to Treasury? Or will the understanding of APIs in Treasury be the story of 2023, or the role of Treasury within companies? We sought it out!

We thank Huub Wevers and Kim Vercoulen for sharing their views with us.

Source

What will be the Treasury Trend of 2023?

As 2023 is approaching, we explored what treasurers are particularly looking forward to in treasury for next year. What will become the trends in treasury management next year?Are treasurers curious to know what is going to happen in the area of Market and FX Risk Management, or just what the developments are going to be in Ecommerce related to Treasury? Or will the understanding of APIs in Treasury be the story of 2023, or the role of Treasury within companies? We sought it out! This topic was also the subject of discussion during the last webinar together with Nomentia, you can find the recording here.

Question: What are you particularly interested in that will develop in 2023 in treasury?

First observation

We see that Market and FX Risk Management stands out a little, and that there is less focus on trends in e-commerce and Treasury. What do those within treasuryXL say about this, and what are they looking forward to for next year?

View of treasuryXL experts

Huub Wevers (Nomentia)

Huub is especially interested in the developments in APIs for Treasury for in 2023.

“My personal interest is in the focus on APIs, which is good, as APIs offer new functionalities and convenience for treasurers”

With the current political and economic turmoil, it makes sense that market risk is back on the agenda. Interest rates are rising and emerging markets are becoming riskier. My personal interest is in the focus on APIs, which is good, as APIs offer new functionalities and convenience for treasurers. However, it is a jungle because everyone promises APIs, but few deliver on them, and the few that do make them have no standards.

We also see APIs that are ‘disguised’ file connections. This makes sense, because an API means linking two applications and this can be done through authentication, security and then exchange of a file. We see this a lot with Payment Service Providers. Getting reporting files for matching purposes, for example.

The webinar the other day was interesting because Niki and I represent two different areas of treasury that are important to Patrick, a very experienced treasurer, namely market risk and technology. Together with Pieter as moderator, it was fun to hear the different perspectives and experiences!

Kim Vercoulen (Treasurer Search)

Kim is especially interested in the developments of Market and FX Risk Management for in 2023.

” Important question for the treasurer will remain what to do about this.”

I chose for Market and FX Risk Management. I think especially with inflation and higher interest rates, this is going to have an impact on the treasurer’s work within the treasury department.

This is obviously all going to play through on companies’ costs, and pressure on selling prices will also increase. Important question for the treasurer will remain what to do about this.

How this will affect the treasury market compared to the current year remains to be seen. That is what we are going to witness at Treasurer Search.

The 3 Fundamental Treasury Concepts: Bank Relationships

29-11-2022 | Vasu Reddy | treasuryXL | LinkedIn |

The 3 fundamental treasury concepts being discussed currently include Working Capital Management, Bank Relationships and Treasury Transfer Pricing which are pivotal pillars for effectively and efficiently optimizing cash, liquidity, funding and managing risk for any Treasury function to support the achievement of the organizations business objectives and strategy. In the second blog of a series of 3, Vasu Reddy explains the best practices and benefits of Bank Relationships.

Strong Bank relationships (including Central Banks) are key to operating successfully in any country- locally, regionally or Globally.

When selecting and maintaining bank relationships, it is key to include partners with strong track record including:

Strong Bank Credit rating – BBB+ to AA+
Strong Bank Balance sheet, assets size and Cash Reserves,
Strong Ethics, Governance, Compliance
Bank Geographical Footprint
Huge Product knowledge, expertise and offering
Strong Service capability and rapid response times
Competitive Pricing and transparency
Being a trusted advisor – including investment banking, FX, etc.
Advanced technology and systems and Project support
Managing confidentiality of information and conflicts of interest
Strong Relationship with Central Bank for Advocation
Going above and beyond for client during drastic times– providing credit sufficient lines
Accepting Clients standardized documentation in different countries due to regional relationship
Ease of doing business – bank account opening, KYC onboarding, Projects, system implementation, integration with ERP, TMS, RFP’s, RFQ’s , legal issues, etc.

More key considerations are:

– Size of Corporate/business

– Credit rating/balance sheet size

– Growth Plans – M&A, etc.

– # of bank relationships

-# of bank accounts

-# of Legal Entities

-Bank interaction, performance and evaluation

**“Maintain a good central bank relationship is key”** Vasu Reddy

What are the benefits of good bank relationships?

Smooth Business operation with no disruption resulting in improved cash flow, profits and reduced costs
Management able to focus on business growth and sustainability
Minimal bank law compliance risks
Able to pivot easily during macro-economic cycles – surviving recessions, political risks, etc.

Thank you for reading!

Vasu Reddy

Corporate Treasury, Finance Executive

Recording Panel Discussion | Treasury Trends for 2023

28-11-2022 | treasuryXL | Nomentia | LinkedIn |

Recently, we had a panel discussion about a few major treasury trends for 2023 together with Nomentia and experts Pieter de Kiewit, Patrick Kunz, Niki van Zanten, and Huub Wevers. If you didn’t get the chance to attend the webinar, you can find the recording here.

During this interactive live discussion we covered some of the following topics:

Market and FX Risk management in current times of uncertainty.
Top treasury technologies to consider for 2023. Will APIs deliver their promises?
Building the bridge between Ecommerce and treasury.
The rapidly changing role of treasury to facilitate business success
Treasury technology visions beyond 2023.

Watch the recording

Interview | 9 questions for Kurt Smith, Seasoned Treasury Expert

21-11-2022 | treasuryXL | Kurt Smith | LinkedIn |

Meet our newest expert for the treasuryXL community, Kurt Smith.

Kurt is a Director of Marengo Capital, a corporate advisory company specialising in treasury, financial markets, corporate finance and private equity. Marengo Capital has a track record of, and passion for, creating and managing for long term enterprise value by aligning corporate strategy, finance and risk.

Kurt is also the Vice President and Technical Director of the Australian Corporate Treasury Association, a member of the Australian Payments Network Stakeholder Advisory Council, and a member of FX Markets Asia Advisory Board. His career includes senior positions across fund management, bank derivative trading, Fintech, private equity and corporate treasury. He has a Ph.D in Finance and is a graduate of the University of Cambridge.

Kurt is an engaging and compelling public speaker with substantial experience in presenting, being a panellist and master of ceremonies, for intimate and large audiences in Australia, Asia, Europe, and the United States. He is well known for providing unique insights into new and well-worn issues, balancing contrarian thinking with informed judgment, and communicating highly technical issues to non-technical audiences.

We asked Kurt 9 questions, let’s go!

INTERVIEW

1. How did your treasury journey start?

I started in financial markets, firstly as a portfolio manager with a macro fund, and secondly as an FX option trader and Head of Derivative Trading for a commercial bank. While I enjoyed the excitement, spontaneity, and commercial pressure of each day, I wanted something more fulfilling.

I became a Director in two FinTech companies commercialising option valuation and risk management technologies, one for the interbank exotic option market and the other for retail investors. Sourcing capital for product development was a constant challenge but also very rewarding. By this stage I was hooked on corporate treasury. Treasury allowed me to direct my passion for financial markets to create, operate and scale businesses by funding growth and making them financially sustainable.

I then moved to a $10B+ corporate to run their treasury, corporate finance and insurance businesses. My main responsibility was developing and implementing capital management and financial risk management strategies to ensure that the company target credit rating was achieved, while obtaining funding, allocating capital to investments, and hedging market exposures to reduce earnings volatility.

I am now a Director of Marengo Capital which specialises in creating and managing for value in corporate treasury and corporate finance. I am still involved in FinTech as the Group CFO of a cash flow securitization company; and I am also the Vice President and Technical Director of the Australian Corporate Treasury Association, which is engaging with and improving the treasury community in Australia.

2. What do you like about working in Treasury?

I like that the success of the company is in your hands. The company can formulate exciting corporate strategies and business plans, but those strategies and plans will not be delivered unless capital is sourced, structured and allocated properly, and financial risks are hedged to provide corporate resilience to business cycle downturns and adverse economic conditions.

When you think about it, it is a massive responsibility. However, I prefer to think of it as a fantastic opportunity to make an impactful contribution.

3. What is your Treasury Expertise and what expertise gives you a boost of energy?

My specialist expertise is in creating and managing for long term enterprise value. Increasing value is critical to increasing the capital funding capacity of the company and delivering into the main goals of Executives and the Board. Most treasurers consider treasury a cost centre and do not have ambition to add value. To me, that makes treasury a tax on the business, an overhead to be recovered by everyone else. I believe that there are a large number of ways that treasury can add substantial value, by increasing cash flow not just forecasting it, managing the capital structure to reduce the cost of capital, and evaluating the allocation of capital to investments to ensure value accretive and efficient returns.

While I get a kick out of applying commercial acumen to improve businesses, I really get a kick out of convincing others to do the same, from decision-makers to operational teams. I get very enthusiastic – but I truly believe that value is the key to financial sustainability, which is necessary for companies to do more of what they want to do.

4. What has been your best experience in your treasury career until today?

I built a very high-functioning treasury and got team members to work on several projects simultaneously in small multi-disciplinary teams. Team leadership was based on expertise not the hierarchy, and it not only provided all team members with rapidly growing CVs to support their careers, it also provided opportunities for, and the most satisfying discovery of, junior employees with real talent fast tracking into leadership succession planning. This way of working was new to all of us, and we created a lot of value and had a lot of fun doing it!

5. What has been your biggest challenge in treasury?

I worked for a capital-intensive company that had rapidly growing capital expenditure to be funded predominantly by debt, during an expected aggressive interest rate tightening cycle. The rates market had already factored five sequential monetary policy tightenings into the yield curve, such that fixed rates for term debt were very high. Our analysis showed that in most foreseeable scenarios floating rates would outperform fixed rates, even during sharp tightening cycles. We went with the maximum allocation to floating rates, and over the next five years interest rates decreased markedly, and we used those decreases to gradually re-weight floating rate exposure back to their neutral weight.

This was a real risk management lesson for me, that is applicable now. One has to take emotion out decisions, especially fear, do the analysis and trust your instincts. Worked for us!

6. What’s the most important lesson that you’ve learned as a treasurer?

Communication is crucial, especially verbal communication.

Executives, Boards and operational teams do not understand treasury and corporate finance. Treasurers need to be able to communicate complex technical information in a persuasive and compelling way to non-technical audiences. For example, I prepared a 35-page capital management strategy working paper that I turned into a six-page Board paper, and my presentation to the Board was a single diagram on one slide. If they were not convinced in the first few minutes, all that work would have been wasted. Communication is key, and I believe it is a defining characteristic between the best and the rest.

7. How have you seen the role of Corporate Treasury evolve over the years?

Corporate treasury was formerly a satellite of the business that was involved at the end of the value-chain, to be engaged only when funding of spend and hedging of exposures was required. As a result, treasury did not influence decisions, it just implemented them.

Good corporate treasuries today are deeply integrated with, and embedded into the DNA of, their businesses; and, as a result, are involved at the beginning of the value-chain where they can influence outcomes. This is a much more interesting space to play in.

8. What developments do you expect in corporate treasury in the near and further future?

Everyone is focusing on using technology, digitalisation and data rich environments to reduce operational risk, release resources and gain insights. This is understandable given the change in the technology landscape and eco-system.

However, I believe that we will have to focus increasingly on our human resources as we re-examine whether the treasury operating model, governance architecture, people, processes and systems are fit-for-purpose not only now, but for the future. Are our selection processes biased towards technocrats with limited ability to engage and communicate? Do we hire and / or cultivate businesspeople with commercial acumen? Do we encourage out-of-the-box innovation or do we effectively enforce the status quo through a relentless drive for efficiency? I see treasury as a business within a business, and that it should be run as such.

9. Is there anything that you would like to share with our treasury followers that they must know from you?

As a community of treasury professionals we all have a responsibility to improve the standard of the profession, and to contribute to the recognition of the profession as a profession! In this regard, treasuryXL is doing a fantastic job of bringing us all together and giving us opportunities to share, learn, explore and discuss treasury. Let’s make sure that we contribute more than we take out, so that we add value overall.

Want to connect with Kurt? Click here

Thanks for reading!

Kendra Keydeniers

Director Community & Partners, treasuryXL

The 3 Fundamental Treasury Concepts: Working Capital Management

17-11-2022 | Vasu Reddy | treasuryXL | LinkedIn |

The 3 fundamental treasury concepts being discussed currently include Working Capital Management, Bank Relationships and Treasury Transfer Pricing which are pivotal pillars for effectively and efficiently optimizing cash, liquidity, funding and managing risk for any Treasury function to support the achievement of the organizations business objectives and strategy. In the current blog of a series of 3, Vasu Reddy explains the best practices and benefits of Working Capital Management.

Trade and Working Capital Management Products offered by banks

Working Capital Management involves working with supply, purchase, procurement, production, delivery and sales.

What are the best practices to improve working capital balances?

Letter of Credits for imports, Bank Guarantees instead of cash prepayments, Documentary Collections
Trade loans, overdrafts
Structured Trade and commodity finance
Supplier/commercial Finance – including ESG – Green Bonds
Bills & LC Discounting to improve cash collection
Receivables Discounting to monetize cash and reduce past dues with poor paying customers with no recourse
Securitization of receivables on customer contracts executed mainly by Mobile operators
Selling Debt to off-taker/3rd parties with minimal haircut
Procurement/Travel credit cards

Benefits from these practices

Trade finance improves working capital Efficiency, reduces borrowing costs and enhances cash flow.

What are the best practices for Cash and Liquidity Management?

Implementation and use of Online banking –Centralized single banking platform across region of operation
Robust cash planning and forecasting policies to ensure accurate cash flow forecasting by working with Accounts Receivables, Payables and FP&A teams including businesses to submit monthly forecasts with post month-end review discussions to understand any material variations and investigation thereof. This must be CFO Endorsed to get overall Treasury, Finance, business collaboration.
Overnight/Money market deposits – Invest excess surplus cash
Structured Cash Sweeping/Cash Pooling arrangements for all LE’s – to minimize having excess cash in one country and simultaneously having borrowing in another country
Interest Optimization structures with Regional/Global banks to take advantage of wallet size

“Cash is the life blood to sustain operations” Vasu Reddy

Benefits from these practices

Reduced Borrowings/overdrafts, increased income
Cash Visibility and improved reporting and financial planning– Group Level
Strong credit rating – improved Shareholder relationship/Returns
Strong positive cash flow and Balance sheet – Higher Dividend distribution
Cost savings, reduced manual interventions – errors, reduced head-count

Thank you for reading!

Vasu Reddy

Corporate Treasury, Finance Executive

Only one week left! Live Panel Discussion: Treasury Trends for 2023

10-11-2022 | treasuryXL | Nomentia | LinkedIn |

A friendly reminder that next week at 11 AM CET (November 17th), we’ll be collaborating with Nomentia.

Participate in our live panel discussion regarding 2023’s predicted treasury trends. We invited industry experts to join us and have an open debate about the issues that treasurers would need to think about in 2023. Additionally, there is the option to ask questions.

Date & Time: November 17, 2022, at 11 AM CET | Duration 45 minutes

Some of the topics we’ll cover:

Market and FX Risk management in current times of uncertainty.
Top treasury technologies to consider for 2023.
Will APIs deliver their promises?
Building the bridge between Ecommerce and treasury.
The rapidly changing role of treasury to facilitate business success
Treasury technology visions beyond 2023.p

SIGN UP TODAY

November 17 | 11 am CET | 45 minutes

Panel discussion members:

Pieter de Kiewit, Owner of Treasurer Search (Moderator)
Patrick Kunz, Independent Treasury Expert (Panel member)
Niki van Zanten, Independent Treasury Expert (Panel member)
Huub Wevers, Head of Sales at Nomentia (Panel member)

What is meant when we read or hear about Volatility?

09-11-2022 | Harry Mills | treasuryXL | LinkedIn

We all have an intuitive feel for what volatility is – we know when a market is exhibiting high or low volatility because we see differences in price changes. But it pays to be more precise with our language and to understand what is meant when we read or hear about volatility.

By Harry Mills

Source

Defining Volatility

Let’s start with a more instinctual and accessible definition:

Volatility is the rate at which prices change from one day to the next. If some currencies or other financial assets routinely exhibit greater daily price changes than others, they are considered more volatile.

Harry Mills, Founder & CEO Oku Markets

In his preeminent book, Option Volatility & Pricing, Sheldon Natenberg refers to volatility as “a measure of the speed of the market,” which is a particularly useful reference point when we consider that volatility and directionality are two different things: an underlying’s price can slowly move in one direction over time with very low volatility, or perhaps it swings wildly from day to day, but over a year it’s not changed much.

Now we have a feel for what volatility is, how do we quantify it? This third definition explains what it actually is: the annualised standard deviation of returns, and Natenberg refers to volatility as “just a trader’s term for standard deviation.”

This isn’t an article on standard deviation per se, but if you’re unaware of what this means then it is a measure of the dispersion of data around the average. Take for example if we measure the height of 1,000 people:

If all 1,000 people are exactly 5’7″ then standard deviation is zero
If standard deviation is two inches, then we know that 68.2% of people will be between 5’5″ and 5’9″ (see the normal distribution chart below)

What about “annualised” and “returns”?

Volatility is always expressed as an annualised number – this uniformity means that everybody knows what is meant when we talk about volatility being X%. In that sense, it’s rather like interest rates, which are also always described as an annualised figure.

This might not be so immediately useful to a trader or a risk manager, though, who might be thinking of daily or weekly price movements and where their risk or opportunities lie. Volatility is proportional to the square root of time, so to convert annualised volatility into daily, we simply divide the volatility by the square root of the number of days in a year – but we need trading days – on average there are 252, equating to 21 trading days a month. The square root of 252 is 15.87, but most traders approximate this to 16…

Hence, if we have a contract trading at 100 with a standard deviation of 20%, then: 20%/16 = 1.25%. We would therefore expect to see a price change of 1.25% or less for every two days out of three (+/- 1 standard deviation is around 68%).

Returns… I won’t go into detail, but if you want to explore this I would recommend chapter 10.6, The Behaviour of Financial Prices, in Lawrence Glitz’s superb Handbook of Financial Engineering which explains how price returns follow a normal distribution and prices follow a lognormal distribution. I’ll also add that calculating the standard deviation of prices doesn’t provide meaningful information because what we are looking for is the change from one period to the next, so we need to look at the daily returns!

Still here? Ok… let’s take it down a notch and look at the types and uses of volatility

Types of Volatility

There are a few types of volatility that can be measured, but by far the most commonly used and referred to are historical and implied volatility:

Historical volatility is a backward-looking measure that shows how volatile an asset has been over say, a 20-day period. It’s useful to look at different time periods and to chart the daily movement in the volatility.
Implied volatility is the future expected volatility – the term ‘implied’ is helpful because it literally means the volatility that is implied by the premium of an option contract. It’s a critical factor that influences options prices and draws the attention of traders and risk managers.

Uses of Volatility as an Indicator

Volatility is a common measure of risk, and it is a key component of Value at Risk modelling. But be warned of the ubiquitous disclaimer that past performance is no guarantee of future results.

Historical volatility is useful to understand how an asset or a currency has performed in the past – you can line this up with significant macroeconomic events and understand why there may have been a period of change, and you can get a feel for how the underlying “normally” behaves. For example, trading in the Turkish lira will probably present a higher risk than in, say the Swiss franc.

Summary

Volatility is the rate at which prices change from one day to the next
It demonstrates the “speed of the market” and is different from directionality
Technically, volatility is the annualised standard deviation of returns
You can approximate daily volatility by dividing the annualised volatility by 16
Historical volatility tells us what happened in the past
Implied volatility is the expectation of future volatility, and critical to option pricing

Thanks for reading!

Harry Mills, Founder at Oku Markets

Interview | 8 questions for Konstantin Khorev, Seasoned Treasury Professional

01-11-2022 | treasuryXL | Konstantin Khorev | LinkedIn |

Meet our newest expert for the treasuryXL community, Konstantin Khorev.

Konstantin has 18+ years of experience in corporate treasury, gained in various environments: from public companies with +100BUSD turnover, to PE and privately owned companies, as well as at a prominent treasury consulting firm.

Being exposed to a wide range of different challenges and projects, Konstantin has built a strong expertise in the full spectrum of treasury and risk activities and in cross-functional collaboration and treasury partnership with business operations, tax, accounting, audit, and internal control.

Konstantin holds a Ph.D. degree in financial mathematics and is a CFA charter holder since 2009.

We asked Konstantin 8 questions, let’s go!