Tag Archive for: FX

Risk Management – what does it mean

| 24-5-2017 | Patrick Kunz |

You might visit this site, being a treasury professional with years of experience in the field. However you could also be a student or a businessman wanting to know more details on the subject, or a reader in general, eager to learn something new. The ‘Treasury for non-treasurers’ series is for readers who want to understand what treasury is all about.
Our expert Patrick Kunz tells us more about an important task of a treasurer: Risk Management

Background

One of the main task of a treasury is risk management, more specifically financial risk management. This is still broad as financial risk can result from many origins. Treasury is often involved in the risk management of Foreign currency (FX), interest rates, commodity prices and sometimes also balance sheet/profit loss. Furthermore insurances are often also the task of the treasurer.

Exposure

To be able to know how to reduce a certain risk the treasurer first needs to know about the risk. Often risk positions are taken outside of the treasury department. The treasurer needs to be informed about these risk positions. FX and commodity price exposure is often created in sales or procurement while the interest rate risk is created in the treasury department itself (although this is not always the case). In an ideal world the treasurer would like to know an exposure right after it is created. Often IT solutions or ERP connections with treasury help with that.

Policy

Once the exposure is know the treasurer needs to decide whether it is a risk position or not and whether he wants to mitigate this risk by hedging it. Let me explain this with an FX example: A EUR company who buys goods in USD is at risk for movements in the EUR/USD rate. However, if the company is able to sell these goods at the same time they are bought (a sales organization), for  USD then the net exposure could be lower. Risk Exposure is therefore lower as only the profit needs to be hedged.

Risk appetite of the company determines if the treasurer needs to take action on certain risk exposure. Some companies hedge all their FX exposure. The reason for this is often because FX risk is not their core business and therefore not a business risk. Non-core risk needs to be eliminated. Commodity risk is sometimes not hedged as this is the company’s core business or a natural hedge as the companies is also producer/miner and seller of the commodity. Other companies have more risk appetite and hedge only amounts above a certain threshold. Due to internal information restrictions, delays or accounting issues and the fact that some currencies are not hedgable most multinationals always have some FX exposure. In the profit and loss statements you often see profit or losses from FX effect, either realized or non-realized (paper losses).

Hedging

Once you know the risk position the treasurer needs to determine how to reduce the risk of that position. He does that by hedging a position. A hedge is basically taking an opposite position from the risk. Preferably the correlation of these positions is -1 which means that both positions exactly move in opposite directions, thereby reducing the risk (ideally to 0). For FX the treasurer can sell the foreign currency against the home currency on the date the foreign currency is expected, either in spot (immediate settlement) or forward (in the future), removing the FX exposure into a know home currency exposure.

Certain vs uncertain flows

Important about hedging is the way you hedge. A hedge can commit you to something in the future or a hedge can be an optional settlement. This should be matched with the exposure. If the exposure is fully certain then you should use a hedge which is fully certain. If an exposure is only likely to happen (due to uncertainty) then you should use a hedge that is also optional.

Example1: a company has a 1 year contract with a steel company to buy 1000MT of steel every month at the current steel price every month. The goods need to be bought under the contract and cannot be cancelled. This company is at risk for the steel price every month because the steel price changes every day. The treasurer can hedge this with 12 future contracts (1 for every month) locking in the price of the steel for 1000MT. The future contract also needs to be settled every month matching the risk position. 0 risk is the result.

Example2: company X is a EUR company and looking to take over company Y, a USD company. The company needs to be bought for USD 100 mio. Company X has the countervalue of this amount in cash in EUR. The companies are still negotiating on the deal. Currently the EUR/USD is at 1,10. The deal is expected to settle in 6 months. Company X is at risk for a change in the EUR/USD rate. If the deal goes through and the rate in 6 months changes negatively then X needs more EUR to buy USD 100 mio. making the deal more expensive/less attractive. There is a need to hedge this. If this would be hedged with a 6M EURUSD forward deal the FX risk would be eliminated but there is still the risk that the deal is cancelled. Then X has the obligation out of the hedge to buy USD 100 mio. which they have no use for. This is not a good hedge. A better hedge would be to buy an option to buy USD 100 mln against EUR in 6 months. This instrument also locks in the EURUSD exchange but with this instrument the company has the option to NOT use the hedge (if the deal is cancelled) matching it ideally with the underlying deal.

Conclusion

For a treasurer to do effective risk management he needs information from the business to determine the risk exposure. Furthermore he needs to assess the certainty of this exposure; how likely is the exposure to happen. With this information, together with the pre-determined risk appetite (whether or not written down in a policy confirmed by senior management), the treasurer can decide if and how to hedge the position. The certainty of the exposure determines the hedging product that is used.

Hedging products can be complex. Banks can structure all kinds of complex derivatives as hedging products. It is the task of the treasurer to determine the effectiveness of a hedge; a treasurer if often expert in these product and their workings. Hedging could have impact on accounting and sometimes profit/loss consequences but that is beyond the scope of this article.

 

 

Patrick Kunz

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

 

MIFID II – a short excursion into the MIFID landscape

| 10-5-2017 | treasuryXL |

MIFID II – you read about it frequently. And there are more abbreviations: you will also find MIFIR and MIFID I.  As a banker you will know what we are talking about.  As a treasurer or financial professional you are supposed to understand what MIFID II will bring you. We think it is time to zoom in on this subject and present a short summary.

MIFID

MIFID, short for ‘Markets in Financial Instruments Directive’ (2004/39/EC) and applicable since November 2007 has been a cornerstone of the EU’s regulation of financial markets  since then. It aims to improve the competitiveness of EU financial markets by creating a single market for investment services and activitities. To ensure a high degree of harmonised protection for investors in financial instruments.

MIFID or MIFID I set out the conducts of business and organisational requirements for investment firms, authorisation requirements for regulated markets, regulatory reporting to avoid market abuse, trade transparency obligation for shares; and rules on the admission of financial instruments to trading.

MIFIR

MIFIR short for Markets in Financial Instruments Regulation is more than a directive. It is a European law and needs to be implemented as written. The member states have to comply with this regulation and the aim is to protect end consumers and markets. It unifies for example reporting and ensures that the reporting format is consistent.

The Markets in Financial Instruments Regulation and the Directive on Markets in Financial Instruments repealing Directive 2004/39/EC, commonly referred to as MiFID II and MiFIR, were adopted by the European Parliament on 15 April 2014, after heavy discussions that lasted more than two years.

MIFID II

MIFID II and MIFIR are building on the rules of MIFID I, already in place. The new rules are designed to take into account developments in the trading environment since the implementation of MiFID in 2007 and, in light of the financial crisis, to improve the functioning of financial markets making them more efficient, resilient and transparent.

MIFID II will be transposed into the national laws of Members States on July 3rd, 2017 and will apply within Member States from January, 3rd, 2018.
(Source: European Securities and Markets Authority (ESMA)

MIFIR reporting list

Implementing MIFID II and MIFIR will be a real challenge, as it brings enormous complexity for enterprises throughout the industry in terms of generating, collecting and processing financial data. We found a MIFIR reporting list, published by the London Stock Exchange Group, which is applicable not only in the United Kingdom.

In short they propose the following to firms to help them be in the best possible position for MiFIR reporting go-live:

  • Preparing your data to the wider scope of MIFID II with a project tool that allows to not only find data but also access it
  • Know what you are doing about data protection
  • Select your ARM (Approved Reporting Mechanism) and APA (Approved Publication Arrangement)
  • Identify which transactions to report by sourcing a reliable list of instruments that are eligible for MiFIR transaction reporting
  • Train your staff
  • Reconcile your data with the help of an ARM
  • Implement appropriate governance –  ensure best practice in effectiveness and appropriate accountability.
  • Give management business insight

More details can be found in the MIFIR reporting list of the London Stock Exchange Group.

There is little time left until the implementation, still much to do in the industry and it will involve considerable human resources and IT costs. The trading landscape will change significantly.

 

Annette Gillhart – Community Manager treasuryXL

[button url=”https://www.treasuryxl.com/about/” text=”View more” size=”small” type=”primary” icon=”” external=”1″]

[separator type=”” size=”” icon=””]

 

 

 

The IT Savvy Treasurer

| 9-5-2017 | Patrick Kunz |

 

We cannot switch on the news without hearing about technological advancements which, supposedly, make our lives easier, better or smarter. We all embrace these, get used to them and cannot do without them anymore. Sometimes we think back to the time before these advancements and cannot image how we lived without them. The same applies to treasury.

 

 

I am 35 years old; my experience in treasury was always linked to IT. I sometimes hear stories from older treasurer who worked without computers, later tabulating/punch cards and still managed to do a good job in their field. Of course times have changed; information is faster than in these days and also the need to process it. We all had to embrace the new technology. In this blog I will try to analyse the link between IT and treasury and try to make predictions about the future or at least where I wish the future would go (in treasury terms).

Payments

In the old days payments were a manual process with people entering them in the banking system or sending them to the bank via fax. Nowadays, we link our ERP system with the banking system and have a batch file automatically added to the bank. With bulk payments a payment hub can be used which will make the whole process bank independent, fast and cheap. If wanted and needed the whole process can be made straight-through by automating it from creating a payment to approving it.

The future will make payments even faster (instant payments should be possible in the sepa region from November onwards), cheaper and more bank independent (PSD2 regulation allows non banks to link with your bank and provide (payment) services). Maybe we will be using our facebook account for payments sooner or later. Bitcoin could be an alternative payment currency and/or be used to hedge non deliverable currencies (to achieve this the volumes need to increase significantly).

Risk management

An important part of the treasurers work is risk management. Hedging FX, interest rate, commodity prices are daily business for a treasurer. Doing the deal is easy, doing the right deal is more difficult. A treasurer can only hedge correctly if he knows what he is hedging: the exposure. To know the exposure information of the business is key. The reason for the exposure originates in sales (FX) or procurement (FX and Commodity). These departments need to be aware that the actions they take might have consequences for the treasurer and therefore the treasurer needs to have some information. I have been at companies where sales was daily generating a lot of USD exposure at a EUR company. They were supposed to let finance know about positions. Often this was done at day’s end or forgotten and done a day later. Result: an exposure on USD without the treasurer knowing it; a risky position. IT helped to fix this. Sales entered a deal in a program and the relevant FX exposure was automatically shared with the treasurer via an API to the Treasury Management System. The treasurer could  decide directly whether he needed to hedge or not and even aggregated deals to get better rates at the bank. For small deals a link was set up with a FX trading platform to STP them at the best rate.

The future in risk management will be even more automation within the company (internal) but also with connections to banks and risk solution providers. Prices are becoming more transparent due to the fact that bank independent solutions are available which compare prices, in real time. Risk management sales is becoming less a bank business. Brokers are having less hurdles to enter the market, due to IT platforms in the cloud.  Why pick up the phone and call your bank for a EUR/USD quote when you can compare prices via an online platform and directly trade it? Often you don’t even have to settle via your own bank accounts but you can have it directly sent to your customer or supplier.

For Trade Finance blockchain will become the new standard. The financing and shipping of commodities is a rather paper based process which is inefficient and slow. Blockchain could automate and improve the speed massively. The challenge to achieve this is big as there are many parties involved,  but initiatives have started so the future is beginning now.

Information

As above examples show information is key to a treasurer. Even more so, as treasury is often a small team and most of the information comes from other departments. To get this information the treasurer can use several nice IT solutions. The ERP systems helps, but the treasury needs to know where to find the information. A treasury management system is often used to sort all treasury related information. TMS can link with ERP systems or other systems to gather information. The TMS will sort this information so that the treasurer is well informed and can make decisions.  When I started in treasury 10 years ago the market for TMS was small; systems were expensive and limited in use (payments only, fx only etc). Nowadays a TMS does not have to be expensive anymore. A SME (Small medium enterprise) could use it to upgrade their treasury information. Most TMS can be used for all aspects of treasury (cash Management, risk management, corporate finance, guarantees etc). This will give the tech savvy treasurer an edge. The treasurer with most information can make the best decision. In treasury taking decisions while being well-informed often means either costs saving (e.g. better cash position, lower working capital) or lower risk. The IT savvy treasurer contributes to an optimally functioning company; he/she should be considered a business partner; he knows your cash position, your risk position and your balance sheet, hopefully in real time at all times.

 

Patrick Kunz

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

 

 

 

Other articles of this author:

Flex Treasurer: The life of an interim treasurer

How much are you paying your bank?

 

Flex Treasurer – Besparing na een treasury quick scan: Nog meer praktijkvoorbeelden

| 22-3-2017 | François de Witte | Patrick Kunz |

Als je ondernemer bent of als financiële professional werkt in een kleine of middelgrote organisatie die geen treasurer of cash manager in dienst heeft, vraag je je wellicht af of je alle treasury taken wel goed geregeld hebt. Iemand aannemen voor deze taken gaat misschien een stap te ver. Maar dat betekent niet dat je geen kosten zou willen besparen of dat er geen mogelijkheden zijn voor bijvoorbeeld funding. Wij hebben jullie al eerder kennis laten maken met onze Flex Treasurers en de Treasury Quick Scan die zij kunnen uitvoeren in een onderneming. In een eerder artikel hebben wij al praktijkvoorbeelden gepresenteerd. In dit artikel nog twee voorbeelden, waaruit blijkt dat een Treasury Quick Scan grote besparingen kan opleveren.

Onderneming C: Internationaal Handelshuis in voedselproducten

Omzet ca 1 miljard Euro

  • C is handelaar in voedselproducten in de B2B markt. Wereldleider in zijn segment en op alle continenten actief. Producten worden standaard in USD geprijsd. C heeft geen treasurer in dienst, de finance managers deden dit erbij.
  • Een treasury scan in 1 dag liet zien dat een besparingspotentieel op treasury processen mogelijk was van minstens EUR 200.000 per jaar (oplopende tot EUR 1.000.000 op jaarbasis)
  • Door optimalisatie van cash management processen en heronderhandeling van transactiekosten is binnen een maand EUR 300.000 jaarlijkse besparing gerealiseerd
  • Door optimalisatie van interne processen en toevoegen van extra banken en een online handelsplatform is op FX hedging een verdere besparing van EUR 100.000 gerealiseerd. Verder is het proces verbeterd waardoor er minder tijd wordt besteed aan de processen.
  • C heeft inmiddels een eigen treasurer, treasury afdeling en treasury management systeem. De flex treasurer is nog steeds betrokken bij projecten.

Onderneming D: vastgoedbedrijf

Omzet ca 125 miljoen Euro.

  • D had een treasurer in dienst welke met pensioen ging op korte termijn. Een flex treasurer is aangenomen om kritsch te kijken naar de treasury processen welke intern en extern gedaan werden
  • Alle terugkerende treasury activiteiten zijn naar intern gehaald. Dit zorgde voor een besparing van ca EUR 50.000 per jaar.
  • Een treasury rapportage werd opgezet zodat (senior) management en lijn management beter geïnformeerd zijn over treasury activiteiten
  • Cash Management en cash flow forecasting is geoptimaliseerd welke het renteresultaat verbeterde. Besparing ca. EUR 10.000 per jaar.
  • Corporate finance activiteiten werden verbeterd waardoor er zeer scherp in de mark geleend kon worden.
  • Treasury kon uiteindelijk afgebouwd worden van 36 uur naar 8 uur per week. Besparing ca EUR 60.000 per jaar.

 

Herken je een of meer situaties uit je eigen organisatie? Heb je een vraag? Onze experts zijn gaarne bereid om met jou in gesprek te gaan. Zij werken als Flex Treasurer en helpen jou graag verder. Overigens ook als je bijvoorbeeld na een treasury quick scan behoefte hebt, om tijdelijk een (flex) treasurer in dienst te nemen.

 

François de Witte 
Senior Consultant at FDW Consult

 

 

 

 

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 

Blockchain: What happened during my stay in South Africa? (Part II)

| 30-12-2016 | Carlo de Meijer |

chains-iiIn the past three weeks I travelled throughout South Africa. My main focus was on the country, the people, the safaris, the Big Five and not on blockchain! Now being back home I was curious to learn if there were developments in the blockchain area. 

A number of interesting reports were launched, amongst others by Euroclear and Deloitte. And there has been growing blockchain and distributed ledger activity in the financial industry from start-ups, to banks, central banks, the market infrastructure and consortia. But also from advisory companies, central government bodies and others.

In my first article on treasuryXL, earlier this week, I  wrote about two reports and startups. I want to focus on banks and consortia in this second article about blockchain developments.

BANKS

BNP Paribas completed its first blockchain-based live cross border B2B payments

BNP Paribas has completed its first live cross-border B2B payments between corporate clients using blockchain technology. The transactions, conducted on behalf of packaging outfit Amcor and trading cards group Panini, were cleared in various currencies between BNP Paribas bank accounts located in Germany, the Netherlands and the United Kingdom. For the ‘cash-without borders’ project, the payments were fully processed and cleared in a few minutes. This highlights the potential of the technology to eliminate delays, unexpected fees and processing errors, and pave the way for real time cash management. The bank has strong commitment to follow closely and further accelerate their participation in a number of market initiatives aiming at improving the corporate payments experience using blockchain technology.

Citi backs blockchain startup

Citi has invested in blockchain venture Cobalt DLT, ahead of what the company expects will be a second round of funding in 2017. Cobalt DLT is a blockchain startup aiming to bring distributed ledger technology to the processing of foreign exchange trades. Transactions in the FX market are notoriously inefficient and costly. Currently, foreign exchange trades need multiple records for buyer, seller, broker, clearer and third parties and then reconciliation across multiple systems.   Cobalt is now building a post-trade processing network based on distributed ledger technology. The Cobalt DL solution has the potential to significantly improve post-trade services by cutting costs and reducing risk for our industry. Cobalt DL’s FX solution is set to launch in 2017, with 15 institutional participants committed to using the service.

 CONSORTIA

While the number of consortia in the blockchain arena are further growing, the bank-backed R3CEV sees some cracks in the consortium. Some of its biggest founding members parted ways. Big names like Goldman Sachs and Banco Santander are leaving the R3CEV consortium. And new reports are surfacing suggesting that others such as JP Morgan, Morgan Stanley, Macquiries, US Bancorp and National Australia Bank may follow soon.

The R3 consortium has its first Spanish-speaking Latam member

But there is also some good news. Creditcorp, a Spanish-speaking Latin American financial institution, has joined the R3 consortium to design and apply distributed and shared ledger-inspired technologies to global financial markets. The bank provides corporate and personal banking, brokerage services, and other financial services across its six principal subsidiaries in Peru, as well as other South American countries including Bolivia, Columbia and Chile, and is listed on the Lima and New York stock exchanges.

R3 and Calypso to develop blockchain trade confirmation system

Blockchain consortium R3 continues to press ahead with new initiatives, partnering with Calypso Technology to develop a multi-party trade confirmation system running on its Corda distributed ledger-based smart contract platform. Calypso will be the first application partner to adopt the R3 platform, utilising the technology to enable counterparties to see all trade tickets on the distributed ledger so they can be sure they are matching against the correct trade.

JPX to form Japanese blockchain consortium

Japan Exchange Group (JPX) is to form a consortium of financial institutions to run trials of the use of blockchain technology in capital markets infrastructures. The exchange will seek participation from a wide range of Japanese financial institutions in order to gather broad industrial expertise ahead of testing in spring 2017. They will consider a structure for efficient information sharing between the DLT engineer community and financial institutions through efforts such as training on DLT technology. The Tokyo Stock Exchange together with the Osaka Exchange and Japan Securities Clearing Corporation (JSCC) will lead the coalition which intends to create a test environment for Proof of Concept (PoC) using Hyperledger fabric, the open source DLT platform, in cooperation with IBM.

Blockchain applications, consortium for Malta Stock Exchange

Malta Stock Exchange (MSE) has announced plans to research and develop into the blockchain technology, and to establish its own consortium. MSE’s committee will be run by MSE board members, blockchain experts and its chairman. The consortium will be sharing knowledge and establishing connections or joint-ventures with each other to assist fintech companies based on the blockchain technology, to grow by supporting them in designing and implementing blockchain applications. Furthermore, with this consortium, the Malta Stock Exchange could be planning its first blockchain application. It is very likely their first application on blockchain will replace standard stock exchange platforms.

South Korea rolls out blockchain consortium

The Korea Financial Investment Association (FIA), along with 21 financial investments and five blockchain companies, have teamed up to form a blockchain consortium. The group has signed a memorandum of understanding (MoU) to collaborate on projects and share their expertise on blockchain technology. Moreover, the group aims to create business opportunities for the consortium as well as establishing a platform with the member companies. Its future research projects include the establishment of a common platform for personal authentication due in 2017, researching into clearing and settlement automation in 2018 and 2019, and a platform for over-the-counter trading for 2020.

Microsoft creates Asia’s first blockchain consortium on Azure

Microsoft has teamed up with AMIS and the Industrial Technology Research Institute of Taiwan (ITRI) to form Asia’s first and the most advanced consortium blockchain network on Azure. The consortium includes members such us: Ubon Financial, Cathay Financial Holdings, MegaBank, KGI, Taishin, and CTBC Bank. Aim is to further develop blockchain opportunities in the Taiwan financial market.

The pilot blockchain project is developed using ITRI’s technology (to create an internal application program interface (API)) and Microsoft Azure. AMIS chose Ethereum, to develop a permissioned blockchain, an infrastructure specific to the needs of Taiwan’s financial market. As part of the project, ITRI provided its advanced technology to create an internal application program interface (API), while Azure provided high-speed cloud computing to ensure high security and efficiency for the blockchain infrastructure.

XBRL and ConsenSys work on deploying blockchain tokenization standards

XBRL US, a US non-profit consortium for business reporting standard, has teamed up with Consensys, a blockchain technology company, to work on deploying blockchain tokenization standards. The working group aims to establish a standardized method to represent a token across all blockchain networks in order to eliminate transactional friction and reduce processing costs; enable automation and provenance tracking; and allow interoperability of transactions on a global scale.

The working group will establish goals and action steps by early 2017, and is requesting participation from individuals representing technology, finance, and accounting to provide their expertise in developing tokenization standards that can be used worldwide, for all asset classes.

Source: LinkedIN/Carlo de Meijer

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

 

The treasurer and data

| 13-12-2016 | Lionel Pavey |

dataTreasurers are confronted with new data every day – just think of the daily download from the bank statements. As this is a constant process, treasurers need to able to perform real-time financial analysis.

This analysis has to be performed with various internal data management sources, together with external data such as foreign exchange and interest rates. Originally this was done with rather large static data like annual budgets, but nowadays there appears to be a change in sentiment towards more proactive rolling forecasts.

The treasurer has a multitude of tasks including cash flow forecasting, hedging of foreign exchange and interest rates, investing excess funds, acquiring funding, advising on liquidity and financial risks, maintaining relationships with financial institutions. To be able to do all this requires a good continuous flow of internal data, together with an understanding of data analysis.

Treasurers need to be more proactive and interact and understand the requirements of all departments and divisions within the company. They need to be able to zoom in and out between the macro and micro levels and gain a better understanding of the business fundamentals through the whole scope from procurement to sales.

 The 5 biggest challenges

  • Receiving timely and accurate data
  • Recognizing and acting on data – both structured and unstructured
  • Keeping abreast with the constant changes in data technology – blockchain
  • Becoming truly proficient at data analytics
  • Continuous feedback to data providers to show how their data has been incorporated and used

So, just a few extra activities on top of the normal roles of forecasting, negotiating, risk management, and people management.

It is clear that the duties of a treasurer are many and that the job is a very special one requiring both proactive and reactive skills. For all of this to work, companies have to get all relevant staff to think the same way and understand the importance of continuous, timely and accurate data. Good structured data analysis can transform a company’s understanding of its business and provide important insight into its workings. This can lead to better knowledge of customers’ requirements, working capital flows, comparing internal data to industry or sector trends, changes to strategic thinking etc.

There are 2 sorts of data scientists: First those who can extrapolate from incomplete data….

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist – Flex Treasurer

EUR/USD beweging na de verkiezingen in Italië

| 6-12-2016 | Udo Rademakers |

foreign-currencyWaar zondagnacht (11 PM Amsterdamse tijd) de EUR/USD nog een aardige push omlaag kreeg vanwege de ‘Italië-uitkomst’, is dit weer ongedaan gemaakt tijdens de Europese openingsuren. Van paniek is geen sprake, aangezien een beweging van een cent relatief gezien gering is.

Politici haasten zich wederom met uitspraken dat Italië een sterk land is, er is toewijding alom, en er wordt gezegd dat een  ‘nee-stem van Italië geen stem is tegen de EU’ enzovoorts. Echter, het valt moeilijk te ontkennen dat Europa in instabiel vaarwater verkeert. Forex koersen op de (zeer) korte termijn worden vooral door de publicatie van economische data, politieke onzekerheid, aanslagen en dergelijke beïnvloed. Deze bewegingen vinden plaats binnen langere termijn trends (waves).

De EUR/USD beweegt zich sinds februari 2015 grofweg in een range van 1,05 (onderkant) en  1,15 (bovenkant). Vooral in de laatste 3 weken is de EUR/USD relatief sterk gedaald (van 1,11 naar 1,05). De support heeft daardoor (tijdelijk?) zijn werk gedaan. Echter, ik verwacht dat binnenkort richting wordt gekozen (en dan richting het Zuiden) , de volatiliteit toeneemt en ‘sell the rallies’ een interessante strategie kan zijn op het huidige niveau van 1,0720.

Een sensibilisatie van ‘risk awareness’ bij de afdelingen inkoop, verkoop en de CFO heeft een sleutelrol. Mede gezien bovenstaande, bied mij dit een gelegenheid om ook in mijn huidige opdracht een nadruk te leggen op valutarisico´s en dit een integraal onderdeel te maken van een degelijke, actuele  ‘STP multi currency forecast’ die snel te implementeren is om bij toenemende volatiliteit de kans op „negatieve verrassingen“ beperkt te houden.  De volgende stap is om met SMART indicatoren de risico´s waar nodig af te dekken en zelfs te kunnen profiteren van de huidige omstandigheden (middels opties bijvoorbeeld).

Udo RademakersUdo Rademakers – Independent Treasury Consultant & Interim Manager

[button url=”https://www.treasuryxl.com/community/experts/udo-rademakers/” text=”View expert profile” size=”small” type=”primary” icon=”” external=”1″]

[separator type=”” size=”” icon=””]

To be or not to be – what happens next to the Euro?

| 22-11-2016 | Lionel Pavey |


In the last few weeks, there have been many news articles published, by well-known people, about the state of the union:

  • Frits Bolkestein (former European Commissioner) – monetary union has failed. In 10 years there will be a large D-mark block in northern Europe
  • Joseph Stiglitz (Nobel prize winner Economics) – the euro’s days are numbered
  • Otmar Issing (former chief economist ECB) – one day the Euro “house of cards” will collapse
  • Jacques Delors (former president of the EC) –  at some point, Europe will be hit by a new economic crisis. We do not know whether this will be in six weeks, six months, or six years. But in its current set-up, the euro is unlikely to survive that coming crisis.

End of the Euro?

More than 15 years after its creation, has the Euro run its course? After countries put all their effort into meeting the convergence criteria, did they forget to look at the diverging competitiveness between themselves?

There are numerous political elections and referendums in the next year – Italian constitutional referendum, elections in Austria, France, Germany and the Netherlands. There appears to be a rise in anti-European sentiment expressed by both voters and politicians. After the perceived surprise results in the Brexit referendum and the presidential elections in America, it would be prudent to consider all possible outcomes.

So what would happen if the currency union ceased to exist? We can look back in recent history to the breakup of both the Soviet Union in the 1990’s and the Austro-Hungarian Empire in the 1920’s. A split in the current Eurozone would appear to follow a North-South divide, leading to a revaluation of the currencies in the North and a devaluation in the South. Thanks to modern technology it would be possible to sell bonds of southern countries and move the proceeds to the north almost instantaneously. Despite the huge upheaval – rising inflation and unemployment, declining growth and investment, the situation would eventually normalize as can be seen in the new countries that were previously part of the Soviet Union. But this would all come at a very large price.

Consequences for companies

But what about the consequences for companies? If a contract existed between a Dutch company and an Italian company many questions would need to be answered – which contract law takes preference, in what currency should the contract continue, who bears the risks involved? What happens to a loan extended to a Spanish company by an Austrian bank and denominated in Euros that are no longer legal tender? It would be prudent to look at all the possible risks that a company could face if the Euro were to replaced by national currencies – what cross border contracts do they have, what is the impact to the company’s profit if the new currency devalues, what are the terms and conditions in existing loan documentation regarding covenants, how many new bank accounts would need to be opened to allow trading to continue.

Can the Euro survive? Personally, whilst the idea was good, the reality has been different. It requires a complete “One Europe” – monetary, fiscal, political, defence, law etc. Could this ever be achieved and do the people of Europe really wants this – now that is the question.

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist – Flex Treasurer

 

 

FX volatility creates opportunities

currencies| 18-10-2016 | Victor Macrae |

The British pound has strongly decreased in value against other major currencies such as the US dollar and the euro. Such FX movements can negatively impact firms’ financial statements and destroy firm value. On the other hand, they can also create opportunities. I would like to demonstrate this on the basis of a real case of a European based industrial firm which has the euro as functional currency. We’ll discuss two scenarios.

First, some time ago the firm was negotiating a takeover of a British firm. In anticipation of the M&A transaction it purchased British pounds against euros. However, the deal was unexpectedly cancelled. As a result the firm had to sell the pounds again. Luckily, the pound had strengthened against the euro in the meantime and the firm ‘gained’ millions due to the failed acquisition. This could however easily have been a ‘loss’ in case of a weakening of the pound. The ‘no FX strategy’ was in the firm’s favour this time, but I wouldn’t bet on it.
If you are thinking about a takeover in the UK (or any other country where the local currency is under pressure) it is wise to consider multiple FX hedging strategies. For instance, using options for these type of transactions not only provides you with a way out if the acquisition is not closed as an option gives you the right but not the obligation to purchase the FX. Furthermore, when the payment is due it also gives you the opportunity to buy the currency at the option’s strike price or at the lower prevailing market rate if the case.

Second, a characteristic of this industrial firm is that it is very dominant in its core markets. Due to this position, the firm predominantly sells its products in euro, also to customers with a different home currency. While it may seem that there is no FX risk, this strategy has led to currency issues, for instance in the Russian market. Due to the weakening of the Russian rouble against the euro, the firm’s products have become more expensive up to a point where sales in Russia have nearly ceased to exist. Russian customers cannot afford to pay the euro prices and demand pricing in roubles or a discount on the euro price.
This is an example where a firm’s exchange rate policy influences its core business activities. A solution could be to move production to Russia, and possibly to produce for other regions as well, although this has consequences far beyond the FX issue which have to be taken into account.

Both examples show that FX volatility can create opportunities. FX risk management should support the core activities of a firm and not the other way around. But if creative FX management helps create firm value, why not benefit?

 

Victor Macrae

 

Victor Macrae

Owner of Macrae Finance