Tag Archive for: corporate treasury

Treasurers to be the strategic super-heroes for their CFO

|3-4-2017 | GTNews | Lionel Pavey | Udo Rademakers |

Treasurers to be the super-hero for their CFO? We found this article headline on GTNews.com so intriguing that we asked our experts Lionel Pavey and Udo Rademakers to comment on it. According to the article the role of the treasurer has to be re-evaluated due to the fact that deal-making (figures of mergers and acquisitions have increased) is high on the global agenda. Traditionally treasurers focussed on informing the C-Suite and the board and integrated systems and processes after decisions about a deal were made.  Treasurers started to address this issue, which led to a new role of the treasurer, in fact a much more strategic role. The treasurer was no longer a risk manager, but also a ‘business change enabler ‘.  GTNews states: ‘The treasurer who opens this door is truly aligning themselves to the needs of the chief financial officer (CFO).They’ll be a superhero.’

Expert Lionel Pavey added some valuable information on the 4 different stages of a M&A proces.

Targeting

  1. Examine the different methods of payment – cash, debt, equity
  2. Discretely ascertain interest rate levels if using debt
  3. What are the effects of additional debt on the existing bank covenants and financial ratios
  4. Complete takeover or just buying a business unit or division?

Negotiating

  1. Examine the cashflow forecast of the target
  2. Examine any documentation on outstanding loans
  3. Existing pledges – Letter of Credit, Bank Guarantees, financial contracts, contingent liabilities
  4. Outstanding debtors, creditors, taxes etc.

Closing

  1. Detailing the bank accounts
  2. Either merging the bank accounts or creating new accounts at the time of closing
  3. Agreeing all bank balances and outstanding claims
  4. Receiving detailed cashflow forecast for the first 2-3 months after closing date
  5. Combining the new cashflows with the existing forecasts
  6. Arrange any agreed financing

Integration

  1. Close all existing facilities and services that will be no longer used
  2. Ensure the new data is present in the book keeping system
  3. All counterparties are informed of new bank accounts
  4. All authorized personnel have access to new banking systems

Expert Udo Rademakers states:
The posting at gtnews.com  points out where treasurers could add value in M&A activities. Unfortunately, in too many cases, treasurers had been brought into M&A transactions rather late: at a stage where the acquisition already had been concluded and where the treasurer only gets involved in “getting the deal done”.

As pointed out in the article, this is often a missed chance for the company and also for the treasurer of not adding more strategic value. Apart from that, the sooner the treasurer gets on board, the better the company can prepare for this kind of rather complicated transactions. It enabled the treasurer as well to act on a tactical level in order to support the M&A transaction in a cost efficient and well documented way.

What strategic value could the Treasurer bring?

  1. value the target company or the combined entity as a whole based on CF projection models
  2. evaluate the capital mix (cash, debt, equity)
  3. evaluate borrowing capacity/credit lines (low risk, best price)
  4. evaluate the country risk
  5. creating the funding flow overview and analyze this (timing of transactions)
  6. evaluate credit- and forex risk (natural hedging possibilities, consider to pay as much as possible from     “restricted countries” in order to decrease your restrained cash)

If the treasurer has been on board for the strategic part, he is well informed and able to manage the tactical part systematical as soon as the effectuation of the transaction takes place.

The treasurer needs to arrange (if applicable):

  1. temporary limit increase with banks
  2. forex transactions (increase of in- and external limits if needed)
  3. time critical payments to agencies, funding parties, seller, capital injections etc. : validate account information, prepare correct timing of the flow (cut off times, correct payment details and descriptions, etc.)
  4. documenting of all transaction in a systematic way and liaise with all in- and external parties involved.

Especially in high demanding environments where one transaction takes place after the other, mistakes will be made and processes might not be well documented. Obviously this could lead to higher risk and additional costs and lots of additional (correcting) work afterwards. Having a well prepared, skilled treasurer on board could avoid this.

Hence the comparison with a superhero…

Conclusion

Involve the treasurer from the first step
Draw up a detailed project plan for M&A and ensure that it is signed off by Board of Directors
Implement project plan for every M&A
Identify all costs linked to M&A
Highlight any cost savings and/or efficiencies

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist

 

 

 

Udo Rademakers

Independent Treasury Consultant & Interim Manager

 

 

 

 

Banker to corporate treasury transfer – A topic as relevant as ever

| 27-3-2017 | Pieter de Kiewit | treasuryXL

In July 2016 our expert Pieter de Kiewit wrote an article about bankers who want to make a transfer into corporate treasury. With all the news about major banks laying off huge numbers of staff and the recent news that ABN AMRO asks 30 top managers to leave the bank or accept demotion, we believe that this topic is still very relevant and worthwhile to be published. Pieter de Kiewit wrote his blog based upon his observations working as a treasury recruitment consultant having meetings with many of them.

The transfer has been made many times successfully, even more it appeared to be impossible.

You have to ask yourself: “why do I want this?”. If this is your lifelong dream your application strategy will be different from the situation where your employer asked you to leave. Be honest with yourself, you know the answer. I will describe the consequence of both scenarios.

If your dream is working in a corporate treasury, you have acted upon this. Your studies included the right topics, you visited the relevant events and in your communication with clients you showed a sincere interest what their tasks involve. You projected yourself in these tasks and are able to tell why you would be good at it, why you prefer them over your banking tasks. You already knew there will be a pay cut and that is no problem. Your story is sound and the hiring manager will notice. It will be authentic and most likely you will not apply from unemployment.

If you were made redundant and will try to convince the hiring manager you always wanted to be a corporate treasurer, you will fail. Why didn’t you try before? What did you do to prepare for this step? Can one notice you understand their job?

Just tell it like it is: you studied to be a banker, you loved the job and were great at it. Times have changed and regretfully you have to recalibrate. But there is a silver lining: you have a valuable skill set your potential employer might benefit from. But here is where it gets a bit harder: it is your job to find out what the (potential) problem of you future boss is and why you can solve it. He/she will not take the effort to find out. So ask questions, match them to your skill set and do not use banking lingo. Ask your friends if they think you have an old school banking attitude (“you might receive our funding”). If so, ditch it. You do not have to beg for the job but you might mention you look forward to working together and being successful.

Good luck out there!

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

Toename SCF om werkkapitaal te financieren

| 14-3-2017 | Jan de Kroon |

Rond de Creditexpo verschijnen er tal van artikelen over de voor en nadelen van uiteenlopende ontwikkelingen rond het thema Supply chain financering (SCF). Zo publiceerde PriceWaterhouseCoopers (PwC) recent in verkorte vorm de uitkomsten van een gehouden onderzoek naar Reversed Factoring als alternatief voor werkkapitaalfinanciering van banken.

Het zal de lezer niet verbazen dat SCF in het algemeen en reversed factoring specifiek, hard groeien. Het is een nieuwe trend en dus is er ook een groeiende groep innovators en early adopters. Dat laatste echter vooral bij adviserende of toeleverende partijen in het proces. En dus met een zeker belang.

Waarbij ik overigens geen waardeoordeel geef;  ik ben zelf ook adviseur.
Wel is het van belang iedere ontwikkeling en dus ook deze, te beoordelen op de werkelijke merites. Anders dan in relatie tot bancaire financiering heet het niet voor niets Supply chain financiering.

Belangrijk is te bedenken dat het juist daar van toegevoegde waarde is, waar de vertrouwensrelatie tussen leverancier en afnemer in de keten ‘beyond reasonable doubt’ is. Je hebt een relatie waarin je langer met elkaar optrekt als op elkaar ingespeelde ketenspelers. Omdat dat vertrouwen er is kan het ook zonder bank en omdat je het vaker met en voor elkaar doet, loont het ook er wat meer ‘(infra)structurele’ afspraken over te maken.

Dat houdt tegelijkertijd in dat als de connectie een minder frequente of regelmatige is, het instrument minder tot zijn recht komt. Mutatis mutandis geldt dat ook voor ‘reversed factoring’ als belangrijk SCF instrument. Anders dan reguliere factoring gaat het niet om het bevoorschotten op basis van de kredietwaardigheid van de verkoper, maar om het voorfinancieren van debiteuren in portefeuille op basis van hun kredietwaardigheid. Daarmee is het een alternatief voor die bedrijven die op basis van hun eigen kredietwaardigheid niet of moeilijk bij banken of factormaatschappijen terecht kunnen. Hoewel het wordt aangeboden door factormaatschappijen, kan echter ook een opvolgende ketenspeler hier zijn surplus cash voor inzetten. Met name dat laatste is interessant omdat op die manier er een zekere ‘disintermediatie’ plaatsvindt; de supply chain regelt het zelf buiten de financiële sector om en bespaart zich de tussenmarge.

Belangrijk is ons te realiseren dat SCF nu juist de ketenactiviteit en dus een zeker repeterend karakter benadrukt en de financiering daarop inregelt. Voor meer eenmalige transacties of transacties met minder regelmaat is SCF en daarmee reversed factoring vooralsnog minder geschikt. In dat soort gevallen is voorlopig de weg naar nieuwe start-ups als ‘Debiteurenbeurs’ meer geschikt. Daar kan een onderneming afzonderlijke facturen of incidentele liquiditeitskrapte op maat oplossen.

Jan de Kroon

 

Jan de Kroon

Owner & Managing partner of Improfin Groep

Managing treasury risk: Liquidity Risk (VI)

|13-3-2017 | Lionel Pavey |

There are lots of discussions concerning risk, but let us start by trying to define what we mean by risk. In today’s article I will focus on liquidity risk. Many companies have very significant credit needs and this needs to be formally addressed with a credit analysis procedure in place. In my former articles I dealt with risk management, interest rate risk, foreign exchange risk, commodity risk and credit risk. See the complete list at the end of today’s article.

Liquidity risk comes in 2 distinct forms – market liquidity risk and funding liquidity risk.

Market Liquidity Risk

This relates to assets and potential illiquidity in the market and, as such, can be considered a market risk. In a normal functioning market it is always possible for market participants (buyers, sellers, market makers and speculators) to find each other and negotiate a price for their transactions. Assuming that the transaction is of a normal market size, there should be no dramatic change to the price of the asset after the transaction.

At the time of a crisis, participants could be absent from the market, making it difficult – if not impossible – to trade an asset. Sellers are left frustrated as there are no opportunities to sell the asset they are holding and vice versa for buyers. This can occur due to a financial crisis, changes in legislature, scarcity of an asset or someone attempting to corner the market. An asset generally will have a value, but if there are no buyers in the market that value can not be realised.

Liquidity risk is not the same as falling prices – after all prices are free to rise or fall. If an asset was priced at zero then it means that the market considers its value to be nothing. This is different from trying to sell an asset but not being able to find a buyer.

Markets for Foreign Exchange, Stocks, Shares, Bonds and many Futures and other derivatives are generally highly liquid. Off balance sheet products related to physical settlement can be less liquid as there is a need to actually provide physical settlement. Bespoke products like CDO’s can be considered illiquid as their size is normally small (relatively speaking) and not freely tradeable. Also the complexity needed to value the product affects its liquidity.

Housing is an asset class with very low liquidity – sometimes a property could be sold as soon as it hits the market. At other times the same property could be available for sale for many years and the price reduced regularly, without attracting a firm buyer.
The easiest and quickest way to see if there is a heightened market liquidity risk is via the bid – offer spread. If this is suddenly seen widening, this would imply that there appears to be more risk. In a normal, liquid market, the spreads are fairly constant and small, allowing participants to easily step in and transact. A widening of spreads occurs in a normal market when government data is published – nonfarm payrolls, balance of payment, etc. Within a short time the market will return to a normal spread as the information is properly digested and the market makers return. However, if the spreads widen without a publication event taking place, it is reasonable to assume that the risk has increased.
Additionally, risk could grow if reserve requirements were increased. In markets such as Futures, it is necessary to pay margin to the exchange. If these margin payments were increased, this would lead to transactions being more expensive and so lead to less liquidity in the market.

Market makers can also observe the market depth. This is shown by the quantity available for transacting at a particular price in their order books. When a market is perceived as being deep, it means there are many orders and, therefore, a large number of orders would be needed to move the market price significantly. The deeper the market, the more liquid the market.

Funding Liquidity Risk

This relates to the risk of not being able to settle debts when they are due. Treasury specialists in a corporate environment are acutely concerned with funding risk. Every month wages must be paid, together with tax and social premiums (pensions, insurance etc.) Additionally, it would be advantageous to pay trade creditors on time. Future liabilities also have to be funded after they have been recognized. This could mean arranging external financing.

If there is a liquidity crisis in the market, it becomes difficult and expensive to arrange to borrow the necessary funds. The price may be so high that the intended profit provided by selling the goods, is negated by the increased cost of funding. A reduction in the credit rating of a company can also lead to increased costs and a reluctance to lend.
If a company is known to have problems making payments, then the liquidity risk is specific to the company – the rest of the market will function normally.

Funding risk can also occur if creditors fail to pay you, or if an unforeseen event has occurred that leads to an outflow of cash from the company.
A company can initially perform a quick spot check to ascertain its current ratio. This shows if a company can meet its current liabilities with its current assets. A ratio of less than 1 would imply that the company can not meet all its obligations at the same time. However, this could also be because there is no short term finance arranged at that moment.
It is possible to arrange a line of credit with a financial provider. He defines a maximum loan (line of credit) that can be extended which the company may utilize. While it is normal to pay a standing charge for the balance of the line that is not being used, this can be offset by the knowledge that it is possible to drawdown against the line when needed (in normal circumstances). There is greater flexibility with a line of credit than with a traditional bank loan.

Other methods include –

i)                    Sell assets like stock that are slow moving and tying down cash

ii)                   Analyse all overheads – office equipment, expense claims

iii)                 Increase efficiency in the debtors’ administration. Be proactive

iv)                 Renegotiate with suppliers – better that you talk to them before it is too late

v)                  Design contingency plans

vi)                 Subject your business to stress testing

vii)               Apply the techniques of ALM (asset and liability management)

 

Some very well known companies have fallen to liquidity problems – Bear Sterns, Lehman Brothers, Northern Rock, ABN Amro, AIG, etc. While the risks were prevalent before the crises, the main liquidity problems occurred when it was determined that there was no more time allowed for the situation to remain.
Time is the soul of business.

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist 

 

 

 

More articles of this series:

Managing treasury risk: Risk management

Managing treasury risk: Interest rate risk 

Managing treasury risk: Foreign exchange risk

Managing treasury risk: Commodity Risk

Managing treasury risk: Credit Risk

Flex Treasurer: The life of an interim treasurer

| 16-2-2017 | Patrick Kunz |

 

An interim treasurer is just like a normal treasurer. The difference is that he has a flexible contract and changes “jobs” more often. Assignments can be to replace the existing treasurer due to leave or sickness. This means that he gets to take an operational role and be part of the normal organization, often until a “permanent” solution is found. I did several of these roles, which often last between 3-6 months and 1 year.

 

Treasury Support

Another option is to provide support to an existing team/treasurer/CFO on a treasury related project. These can be short term or longer projects. Often the projects cannot be filled with the existing capacity of the team and hiring a permanent FTE for this is not an option. Another reason can be to finish the project quicker due to nearing deadlines. These projects are often several weeks to a couple of months. For example I helped a big semi-profit organization from Rotterdam to investigate into embedded derivatives in the firm to comply with new regulation. The project was finished in several weeks and the accountant accepted my conclusions in the annual report. Also I build a RAROC model for one client to periodically rank their banks based on return versus risk adjusted capital. A powerful tool to compare banks and their profitability compared to their lending.

Treasury Expert

An interim/flex treasurer does not have to be a fulltime position. At big corporates and multinationals this is often the case but smaller firms often don’t have fulltime treasurers. Sometimes the controller or the CFO fulfills the treasury position “parttime”. A part time (external) treasurer could potentially add value here. The controller/CFO has extra time for his “normal” activities and an expert is hired for the treasury task. This can be from a couple of hours a day to several days. For example I helped a real estate company with the valuation and (weekly) margin calls on their interest rate derivative portfolio, their cash management optimalisation, treasury reporting and ad hoc work. 8 hours a week.

Treasury Scan

Are you not sure if treasury is optimal at your company? A treasury scan might be a solution. A ‘quick and dirty’ scan is possible in 1 day if treasury data is collected beforehand. The costs of a treasury scan are therefore limited and often earned back from treasury savings which were identified by the scan and later realized by either the flex treasurer or the company itself; often in combination.

Do you recognize one the above situations? Do you want to know more about an (interim) Flex Treasurer?
Please click on this link or visit my expert page on treasuryXL.

 

Patrick Kunz

Treasury, Finance & Risk Consultant/ Owner Pecunia Treasury & Finance BV & Flex Treasurer

 

 

Managing treasury risk: Commodity Risk (Part IV)

| 14-2-2017 | Lionel Pavey |

There are lots of discussions concerning risk, but let us start by trying to define what we mean by risk. In my fourth article I will write about commodity risk, what the strategies around commodities are and how to build a commodity risk framework. More information about my first three articles can be found at the end of today’s article.

Commodity Risk

Commodity risk occurs due to changes in price, quantity, quality and politics with regard to the underlying commodities. This can refer to both the commodity as a whole and an input component of a finished good. Commodity risk usually refers to the risk in a physical product, but also occurs in products like electricity. It can affect producers, suppliers and buyers.

Traditionally, commodity price risk was managed by the purchasing department. Here the emphasis was placed on the price – the lower the price, the better. But price is only one component of commodity risk. Price changes can either be observed directly in the commodity or indirectly when the commodity is an input in the finished product.
Availability, especially of energy, is crucial for any company to be able to undertake operations. Combining commodity risk over both Treasury and Purchasing allows these 2 departments to work closer and build a better understanding of the risks involved. It also allows for a comprehensive view of the whole supply chain within a company. A product like electricity is dependent on the input source of production – gas, petroleum, coal, wind, climate – as well as the price and supply of electricity itself.

There are many factors that can determine commodities prices – supply and demand, production capacity, storage, transport. As such it is not as easy to design the risk management model as it is for financial products.

 General strategies that can be implemented

  1. Acceptance
  2. Avoidance
  3. Contract hedging
  4. Correlated hedging

Acceptance
Acceptance would mean that the risk exposure would be unchanged. The company would then absorb all price increases and attempt to pass the increase on when selling the finished product.

Avoidance
Avoidance and/or minimizing means substituting or decreasing the use of certain input components.

Contract hedging
Contract hedging means using financial products related to the commodity, such as options and futures as well as swapping price agreements.

Correlated hedging
Correlated hedging means examining the exposure of a commodity – the price of crude oil is always quoted in USD – and taking a hedge in the USD as opposed to the crude oil itself. The 2 products are correlated to a certain extent, though not fully.

Commodity risk framework

Commodity price speculation – most contracts are settled by physical delivery – affects the market more than price speculation in currency markets.
To build a commodity risk framework, attention needs to given to the following:

  1. Identify the risks
  2. Measure the exposure
  3. Identify hedging products
  4. Examine the market
  5. Delegate the responsibility factors within the organization
  6. Involve management and the Board of Directors
  7. Perform analytics on identified positions
  8. Consider the accounting issues
  9. Create a team
  10. Are there system requirements needed

Problems can arise because of the following:

  1. Relevant information is dispersed throughout the company
  2. Management may not be aligned to the programme
  3. Quantifying exposure can be difficult
  4. There is no natural hedge for the exposure
  5. Design of reports and KPI’s can be complex

It requires an integrated commitment from diverse departments and management to understand and implement a robust, concise policy – but this should not be a hindrance to running the policy.

Lionel Pavey

 

 

Lionel Pavey

Cash Management and Treasury Specialist 

 

 

More articles of this series:

Managing treasury risk: Risk management

Managing treasury risk: Interest rate risk 

Managing treasury risk: Foreign exchange risk

 

Managing Treasury Risk – Foreign Exchange Risk (Part III)

| 7-2-2017 | Lionel Pavey |

 

There are lots of discussions concerning risk, but let us start by trying to define what we mean by risk. In my third article I will focus on foreign exchange risk. This risk has to be taken into consideration when a financial commitment is denominated in a currency other than the base currency of a company.
There are 4 types of foreign exchange risk.

Transaction Risk

Transaction risk occurs when future cash flows are denominated in other currencies. This refers to both payables and receivables.  Adverse changes in foreign exchange prices can lead to a fall in profit, or even a loss.

Translation Risk

Translation risk occurs when accounting translation for asset and liabilities in financial statements are reported. When consolidating from an operating currency into a reporting currency (overseas offices etc.) the value of assets, liabilities and profits are translated back to the reporting currency. Translation risk does not affect a company’s cash flows, but adverse changes can affect a company’s earnings and value.

Economic Risk

Economic risk occurs when changes in foreign exchange rates can leave a company at a disadvantage in comparison to competitors. This can affect competitive advantage and market share. Future cash flows from investments are also exposed to economic risk.

Contingent Risk

Contingent risk occurs when potential future work is expressed in a foreign currency. An example would be taking part in a tender for work in another country where the pricing is also in a foreign currency. If a company won a large foreign tender, which results in an immediate down payment being received, the value of that money would be subject to transaction risk. There is a timeframe between submitting a tender and knowing if the tender has been won, where a company has contingent exposure.

Identifying Foreign Exchange Risk

  1. What risk does a company face and how can it be measured
  2. What hedging or rate management policy should a company use
  3. What financial product, available in the market, should be best used
  4. Does the risk relate to operational cash flows or financial cash flows

Initially we need to ascertain what we think future FX rates will be. Methods that can be used include the Forward Rate Parity, the International Fisher Effect which also includes expected inflation, forecasts provider by banks and international forums, along with VaR. Model analysis can be provided, among others, via fundamental factors, technical analysis, and political analysis.

Different FX rates can then be used to simulate the effects on cash transactions when converted back into the base currency. This will provide different results that will allow a company to determine what level of risk it is prepared to accept. Finally a decision must be taken as to whether the company wishes to hedge its exposure or not. Before the advent of the Euro, both the Netherlands and Germany  were members of the Exchange Rate Mechanism (ERM). This meant there was agreed band within which the spot rate could move around an agreed central point – this was NLG 112.673 equal to DEM 100.00 with a bandwidth of +- 2.25%. For some companies, this tight band meant that they took the decision not to hedge any exposure between DEM and NLG.

Financial products that are commonly used to manage foreign exchange risk include Forward Exchange contracts, Futures, Caps, Floors, Collars, Options, Currency Swaps and Money Market hedging.

Lionel Pavey

 

 

Lionel Pavey

Cash Management and Treasury Specialist

 

 

More articles of this series:

Managing treasury risk: Risk management

Managing treasury risk: Interest rate risk 

Managing treasury risk: Interest rate risk (Part II)

|31-1-2017 | Lionel Pavey |

 

There are lots of discussions concerning risk, but let us start by trying to define what we mean by risk. In my first article of this series I wrote about risk managment and what the core criteria are for a solid risk management policy. Today I want to focus on interest rate risk. There are 4 types of interest rate risk.

 

Absolute Interest Rate Risk

Absolute interest rate risk occurs when we are exposed to directional changes in rates – either up or down. This is the main area of rate risk that gets monitored and analysed within a company as it is immediately visible and has a potential effect on profit.

Yield Curve Risk

Yield curve risk occurs from changes between short term rates and long term rates, together with changes in the spreads between the underlying periods. Under normal circumstances a yield curve would be upward sloping if viewed as a graph. The implication is that longer term rates are higher than short term rates because of the higher risk to the lender and less liquidity in the market for long dated transactions. Changes to the yield curve (steepening or flattening) can have an impact on decisions for investment and borrowings, leading to changes in profit.

Refunding or Reinvestment Risk

Refunding or reinvestment risk occurs when borrowings or investments mature at a time when interest rates are not favourable. Borrowings or investments are rolled over at rates that had not been forecast leading to a potential loss on projects or investments.

Embedded Options Risk

Embedded options are provisions in securities that cannot be traded separately from the security and grant rights to either the issuer or the holder that can introduce additional risk. Benefits for the issuer can include a call option, a right to repay before maturity without incurring a penalty, an interest rate cap. Benefits for the holder can include a put option, a conversion right via convertible bonds, an interest rate floor.

 

An attempt can be made to calculate the interest rate risk on either a complete portfolio or on individual borrowings or investment. This is done by comparing the stated interest rate to the actual or projected interest rate. Methods include:

  1. Mark to market
  2. Parallel shift in the whole yield curve
  3. Tailor-made shift in the whole yield curve
  4. Duration, DV01, Convexity
  5. Value at Risk (VaR)

These are all forms of quantitative analysis and well recognized. Personally I am of the opinion that VaR is not a very good method for interest rates. Interest rates do not display normal Gaussian distribution – they do not resemble a normal bell curve. Interest rate distribution curves display fat tails compared to normal statistical models.

Financial products that are commonly used to manage interest rate risk include FRAs, Futures, Caps, Floors, Collars, Options, Interest Rate Swaps and Swaptions.

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist

 

 

 

More articles from this author:

Safety of Payments

The treasurer and data

The impact of negative interest rates

How long can interest rates stay so low?

 

Safety of payments

| 3-1-2017 | Lionel Pavey | GT News

Fraud and cybercrime protection is of major importance for corporate treasurers. In the past year a new risk had to be added to the list: connectivity. Reports of banks being hacked and losing millions through unauthorised payments appeared more and more frequently and since protecting payment connectivity workflows was not a high priority item on the list of treasurers, it created damage in the industry.
GT News deals with the topic of how to protect payments in their article’ ‘Five tips for keeping your payments safe‘ on december 21st, 2016. We asked our expert Lionel Pavey to comment on the article and give us his own view on how to protect payments.

Safety of payments

As even medium size companies can easily have over 100,000 bank transactions per year, it is imperative for a company to ascertain the validity of all payments so that no fraudulent payments take place.

Authorisation Matrix

It is necessary to embed a clearly defined matrix within the company. This should follow a six-eye principle and be traceable within the payment system – invariably a bank payment system. The matrix should include the names of all those authorized; the amount they may authorize; the distinct legal entities they may represent etc. This data also needs to maintained and secured away from the payment centre (IT or legal department). If a new person needs to be added to the list who implements the procedure – Treasury or IT?

Types of payments

There are various workflows that will generate payments and these should be mapped and a complete process should be designed for each one – procurement system and creditors in the book keeping; financial obligations from the existing financing operations (loans, bonds etc.); tax on wages; social premiums; Value Added Tax (BTW); manual payments normally arising from expense claims and incidental purchases outside the normal procurement channel.

Validity of payments

Normal payments relating to creditors are relatively easy to follow – authorization has taken place in 2 different areas (procurement and book keeping). VAT requires data from book keeping for both debtors and creditors. Tax on wages and social premiums are normally presented just once a month either through the administration/controller channel or directly from HR. The biggest area of concern relates to manual payments.

Manual payments

These generally relate to purchases (normally one-off). The obvious question that arises is why is there a need for suppliers that are not in the existing procurement system? It is not impossible to ensure that there are preferred suppliers for all normal desires. Another source is repayments to debtors that are not balanced off against outstanding balances. If a company does not have dedicated software relating to the financing operations who, beyond the Treasury Department, can verify the amounts and dates? The area that requires the greatest vigilance relates to expense claims. Just because a line manager authorizes an expense claim does not mean that it is always compliant with company policy – this is an area where the onus should be on the controller to validate the integrity of the expense claim. Is the expense a genuine expense made in direct relationship to working for the company? An employee away on business and staying in a hotel is entitled to a meal at the expense of the company, but what is the policy towards alcohol and entertainment? Is the amount being claimed excessive and work related?

Integrity of bank systems

How secure is the bank system? When a batch is prepared for payment and an authorisation code produced, how is the code produced – what are the underlying factors that generate the code? Is it possible to alter the beneficiary’s account number after the batch has been produced? Would an alteration be seen by the system, resulting in an incorrect authorisation code? Banks generally do not provide a lot of information as to how their system generates codes.

Reconciliation

Who can extract data from the bank systems? Does this occur daily? Are all entries processed the following day in the book keeping system? What happens to items that are not immediately reconciled?

Conclusion

With regard to standard procurement, it should be easy to construct a solid working system that can be followed at all times. Manual payments are a weak link and a serious amount of time and effort has to be used in constructing a strong framework that has to be enforced and maintained at all times.

Lionel Pavey

 

 

Lionel Pavey

Cash Management and Treasury Specialist