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The end of the Euro as we know it – when the party ends?

| 4-5-2017 | Lionel Pavey |

The papers are full of stories about the level of Government debt within the Eurozone (Italy has a debt to GDP ratio of more than 130%), probable new bailouts for Greece, lack of suitable bonds to purchase for Quantitive Easing, Brexit, the rise of populist rightwing politics etc. Well at least we have all the bad news out in the open – don’t we?

Target 2

A new problem has arisen that was partly accelerated by QE – namely the outstanding national balances within Target 2. This is the “Trans European Automated Real-time Settlement Express Transfer System” foe the Eurozone. The key word is “Settlement” as I shall explain.
When a financial transaction is agreed 2 actions have to happen – clearing and settlement. Clearing entails all the actions that must be undertaken up to settlement, such as delivery of bonds, securities or shares. Settlement means the exchange (transfer) of money for goods or bonds etc.

When a party in Italy buys goods from the Netherlands, they instruct their bank to debit their account and credit the account of the seller. This is a cross-border transaction. But, within the Eurozone monetary settlement does immediately take place between banks. The Italian bank will have its balance reduced at the Banca D’Italia and the Dutch bank will have its balance credited at de Nederlandsche Bank. However, the balance is not settled between the 2 central banks – a new claim is shown on their books.

At the end of 2016, according to the Euro statistics website Italy has a negative Target 2 balance of EUR 420 billion with other countries in the Eurozone. This amount has been accumulated over the years since 1999 and now represents more than 25% of GDP. This is on top of the Italian Government debt of 130% of GDP. If a country were to leave the Eurozone they would be liable to immediately settle their Target 2 balances – something that is not realistic. Under the current agreement the other countries within the Eurozone would be liable to cover the debt. Target 2 balances do not have to be settled as countries would never default appears to be the thinking.

At the other end of the scale, Germany has an outstanding claim on other Eurozone countries of EUR 830 billion. At the moment these amounts are shown at full face value in the books – it would appear that politically, no one wants to acknowledge that the claims can not be settled in full under the current constraints within the Eurozone. If the Eurozone are 100% committed to supporting the Euro and, the balances are not going to be settled within the foreseeable future then, eventually, something will have to break.

Emperor with no clothes

Confession time – I am English (and proud of it). If I had been able to vote in last year’s referendum in the UK, then I would also have voted for Brexit. This does not make me anti-European; rather the reality of the Eurozone is very much like the fable of the Emperor with no clothes. Everyone sees it, but no one will say it. Perhaps, a solution can be found that does not mean debt forgiveness, writedowns, defaults or exits, but common sense would imply that this is wishful thinking.

When I was a young boy at Grammar School I had to learn some poetry for my English Literature exam – it included D.H. Lawrence. As a wild youth I could cope with Shakespeare, had a hard time with Chaucer, but fell in love with a poem by Lawrence entitled “A Sane Revolution”. He told us to make a revolution for fun and not in seriousness. Also I knew the poem as it was quoted by Mott the Hoople who got me through my teenage years with their music.

The creation of the Euro is a revolution in European history, but could it ever be called sane?

TARGET 2 BALANCES

Source: http://sdw.ecb.europa.eu/reports.do?node=1000004859

GOVERNMENT DEBT

Source: http://www.debtclocks.eu/select-an-eu-member-state.html

Lionel Pavey

Cash Management and Treasury Specialist

Regulatory demands: compliance required!

| 20-4-2017 | Olivier Werlingshoff | Sponsored content |

Complying with regulatory demands is a must, and banks know it. In practice, however, the majority still can’t manage to meet all requirements. Manual solutions prove to be insufficient and important rules are often overlooked. But how does one ensure that all regulatory demands are complied with?

Facilitating screening

Today, most banks offer apps that customers can use for online banking purposes, such as opening an account. However, there are two important aspects when onboarding a customer. First, you need to have adequate controls and procedures in place to know the customer with whom you are dealing. Adequate due diligence on new and existing customers is a key part of these controls – which can be done using advanced software that is linked to different sanction lists. Second, all customer transactions should be monitored for AML – which is done after the settlement of a transaction and live transaction screening, which happens in real time. The moment a payment is made and a beneficiary bank receives it, sanction lists are instantly scanned to check if there is a hit or not. This is done for every transaction, ensuring that regulatory demands are met.

Compliance: points of attention

Some banks still don’t comply with regulatory demands. They merely check sanction lists for the customer’s name – often manually –, which is by no means sufficient! For example, one should also verify whether the customer’s name appears in any media or lawsuits, and a customer’s partner needs to be checked as well. So what you need is a comprehensive solution that takes all these different aspects into account.

Implementing a solution

Proferus helps banks and corporates opt for a proper automated solution based on the demands involved. We assist in choosing the right software and support teams that have to learn to work with it. Basically, we help them in two respects: we provide consultancy – by conducting business analyses – and we implement the technical solution!

Olivier Werlingshoff

Managing Consultant at Proferus

Management of bank mandates – eBAM – a lot of challenges

| 19-4-2017 | François de Witte |

In the past, a bank mandate for a company was a fairly simple affair. There were panels of signatories (paper-based) and payments were controlled by the banks based upon the DOA (delegation of authority).

However there remained a lot of risks:

Many individuals at different levels could engage the firm with purchase orders. This implies that the control should be at that level, rather than the payment authorization.
Dealing mandates were not used frequently for financial market operations. The business was done based upon a personal relationship and many transactions were initiated verbally.
There was no overall database of who could engage the company, nor a check if these persons were still working in the company.

Over time, dealing mandates have become more common. The concept of limits, which was already in use for payments, was also introduced for the financial market operation. Corporates used the bank to police these different limits, essentially expecting banks to verify each signature against the mandate and to check limits for each dealer.

With the growing complexity of the business, and the increased use of electronic banking channels, for several corporates, the management of the bank mandates is now a real challenge. If you have a complex business with a very large number of accounts, it is very difficult to have an overview of who has the power to sign transactions, what is the delegation of authorities and which is the link with the legal database of the company.

In addition, most of the banks have their own set of documents and the bank account management communication with the banks is still largely paper-based.

In order to streamline these processes, SWIFT developed some years ago its e-BAM initiative, aiming at streamlining these processes. Also vendors have started to bring new solutions in the market.

The current article aims to make a status on the question and to highlight some opportunities to rationalize the process.

Main pain points and requirement of the corporates

When discussing with corporates, I usually identify the following pain points in the management of the bank mandates:

No linkage between the DOA (delegation of authority) and the BAM (Bank Account Management)
Lack of consistency between legal and finance databases: linked to the organization updates, restructurings, people turnover, etc.
Internal Control issues:
- Safety and operational risks (access rights, lost or forgotten accounts)
- Management & control: rules of compliance & segregation of powers
- A lack of audit trails, logging control and traceability
No global oversight : Multiple data sources: decentralization and update issues
No automation, resulting in daily time-consuming, manual tasks (turnover, reorganizational changes, dormant/ inactive accounts…) both often non-auditable and non-compliant
Lack of standardized and transparent processes scattered across the corporation, especially regarding bank accounts, signatures, authorizations and/or limits
Signatory information in e-Banking tools often differing from internal data of the corporate, e.g. after an employee has left the company
Exchange of information via fax, mail or courier
Costly archiving, printing and posting to internal systems (ERP, TMS, electronic banking interface, etc.)
Compliance issues linked to the lack of segregation of duties : this can possible lead to audit points
Multiple stakeholders and systems (ERP, TMS, electronic banking, …)
Heavy compliance requirements such as the KYC
Operational and fraud risks

Typically, the main requirements of corporates are to:

Have at the central treasury department the visibility and control over all the bank accounts maintained globally, including the authorizations, limits and signatories per bank account
Be able to effectively store bank account related information and documentation, as well as centrally managing the processes on the lifecycle of this information in one central database
Be able to use a standardized and transparent workflow for bank account management (opening and closing, access rights monitoring, authorization and limit setting, etc.)
Have an automated system that corporates can use for electronic opening, closing and maintenance of bank accounts, including generation of audit reports
Build one central repository with digitized electronic documentation (a single version of truth), with auto-generation of documents and correspondence
Keep an audit trail on who had ad every moment mandate over the bank accounts
Be able to quickly revoke mandates of persons who are no longer in their position, or who left the company
Have the banks accepting an increased use of an electronic exchange of bank account management information

Initiatives taken by SWIFT

Some years ago, SWIFT launched the e-BAM initiative. eBAM is based on the exchange of ISO 20022 XML messages, developed by SWIFT, which mainly cover the processes of opening, closing and changing bank accounts and mandates.

The SWIFT eBAM message formats provide both the standardized format, necessary to communicate account management information between companies and their banks. SWIFT eBAM messaging consists of specifically designed XML based file formats that allow companies and banks to conduct five common bank account management conversations. These types of conversation allow you to perform virtually all bank account management tasks electronically as outlined below:
Source: SWIFT Presentation on E-BAM

The key advantages and acknowledged benefits in adopting an eBAM solution are:

Complete overview, control and management of all bank relationships, including bank accounts and their legally binding documents
Compliance fulfillment through automated approval workflows for requests to open, close and change bank accounts and the respective mandates
Secure processes for exchanging messages with banking partners, including a complete audit trail
Complete integration with existing back-office infrastructures: ERP, TMS, HR, etc.
Improved efficiency and cost reduction through automating manual processes and monitoring their performance
Easy access to real-time information for strategically supporting all involved departments

There is a recognition in the market, especially with large corporations of the necessity for eBAM. Standards have evolved, solution provider came up with solutions and mono-bank platforms are being developed. But still, the standards need to be perfected. In addition, whilst several banks have developed e-BAM in their own platform, only very few banks have developed a fully-fledged e-BAM multibank solution.

BNP Paribas came up with solutions in this area and more recently Société Générale. The lack of adoption by other banks of this multi-bank solution is an obstacle for the further adoption of e-BAM.

How to start such a project:

Streamlining the bank account management is a complex project, requiring a number of steps:

First one needs to convince internal stakeholders that account management responsibility should be migrated to a single department, such as treasury
The next step is to put in place the BAM : inventory of all the bank accounts and mandates
I recommend to also examine your bank database and to consider a clean-up of your bank accounts. It is likely that quite a number of bank accounts are hardly used, and that it would be more cost efficient to close them.
It is essential to ensure the link between your legal administration (delegation of authority) and your bank mandates.
Ensure to have a central a repository for account information, which is integrated with all your systems, including treasury management systems (TMS); bank systems; enterprise resource planning (ERP) and accounting systems, the legal and HR database, etc.
In order to be successful, one should also improve the transparency and efficiency, by harmonizing and streamlining processes, and by ensuring that they are fully digitalized.
Some banks already embedded eBAM in their electronic banking application. You can already start to use it, but be aware that each bank will have its own systems.
It is important include in the project the implementation of the group internal controls and the reduction of the operational risks
One should also examine possible restrictions for e-BAM in the local legislation of the affiliates.
I recommend to standardize as much as possible the documentation with the different banks. Try to impose whenever possible your own documentation.

For smaller corporates, standardizes process and an Excel database can be a good solution. However for more complex organizations, managing over 100 bank accounts with over 5 to 10 banks, there can be a business case to combine the streamlining of the processes with a specialized solution, e.g. a web based “Software as a Service” (SaaS) BAM solution to automate and streamline internal processes and to digitize them. This includes a centralized document management internally and externally, towards the banks, as well as a central repository and shared directories for document storing, spread across the enterprise. This also encompasses the automation of the correspondence to the banks and the auditors. I also recommend to have a link with the legal database of the company.

There are a number of solutions in the market, such as middleware providers (e.g. TIS and PowertoPay), the offering of TMS providers and the Visual Sign solution of Equity. According to my information, Equity is the only European vendor providing an integrated link with the legal database, ensuring a close link with the Delegation of Authority, which is the source of the bank mandate.

When working on such a project, do not underestimate time needed to gather & validate information. It is a complex project which needs to be phased. Split & prioritize the different phases of the project, and keep it simple!

Conclusion

The management of bank mandates is a complex process, which in many companies is still managed manually with paper-based processes, without a central database. There is a real opportunity to automate and to digitize these processes in one central repository.

SWIFT launched some years ago e-BAM, an interesting initiative to standardize and automate these processes, including the customer to bank communication. However the adoption of e-BAM is a slow process and only very few banks are offering through multi-bank solutions.

There exist solutions in the market to develop standardized automated processes. If you have the require critical mass, it can be useful to consider them. Be aware that this is a complex exercise, as you need to ensure that the system is connected to your applications, including the legal database. But in the end, it is worth the exercise.

François de Witte

Founder & Senior Consultant at FDW Consult

More articles from this author:

Working capital management : Some practical advice on the optimization of the order to cash cycle

PSD 2: A lot of opportunities but also big challenges (Part I)

PSD 2: The implementation of PSD2: A lot of opportunities but also big challenges (Part II)

Treasury : Proposed “to do” list for 2017

SaaS-oplossingen optimaliseren het managen van bankrekeningen

| 11-4-2017 | Mark van de Griendt | treasuryXL

In 2014 publiceerde expert Mark van de Griendt een artikel over de voordelen (en nadelen) van SEPA en IBAN, die toen werden ingevoerd en Electronic Bank Account Management. Intussen zijn SEPA en IBAN al bekende fenomenen, maar Electronic Bank Account Management is alleen maar complexer geworden, zeker in het tijdperk van Fintech. Reden genoeg om nog een keer terug te kijken op wat Mark toen zei. Intussen zijn processen veranderd en zijn er nieuwe uitdagingen bijgekomen. Maar wij denken dat wat hij schrijft nog steeds actueel is…

In 2014…

In het verlengde van de SEPA- en IBAN- invoering kijken veel ondernemingen bewuster naar de processen die samenhangen met het beheer van bankrekeningen en het contact met hun banken. Daarnaast wordt veel gesproken over Electronic Bank Account Management (EBAM).

Of het nu gaat om het digitaal openen of beëindigen van conto’s of om de uitwisseling van informatie, zoals het beheer van tekenbevoegdheden, van EBAM wordt verwacht dat het in het gegevensverkeer tussen banken en klanten niet alleen voor transparantie, efficiëntie en kostenbesparingen zorgt, maar ook voor het voldoen aan governance-eisen.

Om echter van de voordelen van EBAM te profiteren, moeten de meeste ondernemingen eerst hun interne processen optimaliseren, stelt Mark A. van de Griendt, Sales Director bij TIS. “Deze optimalisatie wordt bereikt met een strak ingericht Bank Account Management (BAM), in combinatie met daarop afgestemde software.”

Bij veel bedrijven is het beheer van de bankrekeningen niet optimaal georganiseerd. Het proces verloopt niet transparant en niet efficiënt. Op lokaal niveau worden autonoom rekeningen geopend of beëindigd. “Dit gebeurt vaak zonder dat het hoofdkwartier of de treasury-afdeling het weet. Onduidelijk is dan of de banken aan de eisen voldoen die de onderneming aan de financiële partners stelt,” weet Van de Griendt. “Daarnaast heeft een groot aantal banken dan toegang tot essentiële bedrijfsinformatie, zonder dat centraal geregistreerd is welke partijen dat zijn. In het gunstigste geval worden Excel-tabellen door de treasury-afdeling verzameld om tot een overzicht te komen.”

Ondernemingen moeten hun interne processen, die te maken hebben met het openen en beëindigen van bankrekeningen en met de veranderingen bij tekenbevoegden, analyseren en indien nodig opnieuw inrichten. Met een centraal BAM-platform creëert een onderneming de basis voor eenheid in het datamanagement en een duidelijke taakverdeling bij het verwerken van belangrijke informatie met betrekking tot bankrekeningen.

Op deze manier is op het gebied van transparantie, centralisering, kostenreductie en governance al veel te bereiken, nog zonder dat EBAM uitgerold wordt. Concreet betekent dit: een onderneming structureert zijn bankrekeningprocessen. In het ideale geval door het gebruik van workflowsystemen.

Laat software de workflow ondersteunen

Hoe komt een onderneming tot een geoptimaliseerd proces? Van de Griendt: “Door software, die alle data samenbrengt die voorheen in afzonderlijke Excel sheets werd bijgehouden. De software verzamelt informatie die verder gaat dan de individuele bankrekening; van belang is immers ook de rating van de bank, of aanwijzingen hoe het ERP-systeem met de betreffende instelling moet communiceren.”

Vervolgens moeten alle processen die te maken hebben met het openen of beëindigen van rekeningen en met het doen van transacties in de workflow-software opgenomen worden. Hierbij worden ook de processen vastgelegd waarvoor het vier-ogen principe geldt.

Cloud-oplossingen zijn snel inzetbaar

In tegenstelling tot enige jaren geleden, zijn er nu krachtige en efficiënte Bank Management Oplossingen die de workflow ondersteunen. “Deze oplossingen structureren en automatiseren werkprocessen. Vooral cloud-oplossingen, die op SaaS-basis worden afgenomen, zijn snel inzetbaar zonder langdurige IT-implementaties,” stelt Van de Griendt.

Voor een optimaal proces is een geautomatiseerde inventarisatie van bankrekeningen, de daaraan gekoppelde juridische documenten en de tekenbevoegdheden nodig. Op die manier heeft de treasury-afdeling van het hoofdkantoor altijd een compleet overzicht en voldoet aan alle governance-eisen

Als bovengenoemde maatregelen zijn doorgevoerd heeft een onderneming al een grote stap gezet op de weg naar een efficiënter Bank Account Management. Vervolgens kan de stap naar EBAM gezet worden. In dat geval communiceert de onderneming op basis van XML-bestanden met de bank. In deze digitale communicatie worden ook tekenbevoegdheden en rechten van verschillende verantwoordelijken automatisch meegenomen.

Mark van de Griendt – Cash Management Expert at PowertoPay

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Blockchain: Securities market infrastructure players in the contra-attack

| 7-4-2017 | Carlo de Meijer |

Blockchain technology has long been viewed as a threat to CSDs (Central Securities Depositories) and their role as intermediaries for securities transactions. Blockchain and distributed ledger technology may make the role of many intermediaries in the post trade market infrastructure obsolete. In one of my blogs (Blockchain and the securities industry: future eco-system) I was one of those who think that players such as custodians, CCPs, CSDs and others would disappear when blockchain would be used in a massive way.

“It however is not expected that there will be a complete disintermediation of service providers. While the role of custodians would greatly disappear and those of clearinghouses and CSDs will drastically change in a blockchain environment, the rest of the value chain in the securities industry may remain largely intact. The functions associated with tracking, reconciling, and auditing enormous amounts of data are not going to be disintermediated away. They have to continue to exist, but just need to be done more efficiently, at lower cost and with fewer errors”- Carlo R.W. de Meijer

But these players are going in the contra-attack. 15 CSDs from developing and emerging markets, including Strate and NSD, have agreed to form a consortium to explore blockchain and DLT technology in a post-trading environment. The partners say that“financial market infrastructures need to embrace the technology and identify opportunities that will add value to their current clients”.

Let’s look what they are all doing.

CSDs aim to build distributed ledger for mobilising scarce collateral (January 2017)

A coalition of four central securities depositories are collaborating with Deutsche Börse on an initiative to use blockchain technology to ease cross-border mobilisation of security collateral. The members of the so-called “Liquidity Alliance” include The Canadian Depository for Securities Limited (CDS), Clearstream (Luxembourg), Strate (South Africa) and VPS (Norway). Via this initiative they want to overcome existing hurdles when moving collateral across various jurisdictions, making the transfer faster and more efficient. The Alliance’s ‘LA Ledger’ will initially be implemented as a prototype based on the Hyperledger Fabric. Validation by regulatory authorities and market participants will start in the second quarter of 2017.

DTCC taps blockchain to rebuild its platform (January 2017)

The Depository Trust & Clearing Corporation (DTCC), a US post-trade provider, has announced plans to use blockchain technology in 2017 to rebuild its platform. It aims to create a credit derivatives post-trade lifecycle solution built using a distributed ledger platform. Blockchain can simplify the process by automatically maintaining a shared electronic record of the security which is visible to all relevant parties. This new DTCC’s platform – Trade Information Ware house – will keep track of the security throughout the lifecycle of the associated bond.

IBM, Axoni, and R3 CEV, two technology startups have been selected to work on the project which is set to kick-off in January 2017. DTCC expects the new blockchain-enabled Trade Information Warehouse to go live in early 2018. Furthermore, the project has been developed with input from market participants and infrastructure providers including Barclays, Citigroup, Credit Suisse Group, Deutsche Bank, JPMorgan Chase, UBS Group, Wells Fargo, IHS Markit and Intercontinental Exchange, DTCC said.

SWIFT creates blockchain application to simplify cross-border payments (January 2017)

SWIFT has begun building a blockchain application to simplify cross-border payments. The global platform is integrating open-source blockchain technology with its own products to build a proof-of-concept that might “one day” replace the so-called “nostro” accounts its members keep filled with cash all over the world – just in case they need it. A successful test of distributed ledger technology (DLT) could enable banks to optimize their liquidity globally and SWIFT to reduce the costs of reconciliation between independent databases maintained by the inter-bank platform’s members, reduce operational costs and free up liquidity for other investments.

Euroclear pencils in 2017 for bullion on blockchain roll out (December 2016)

Euroclear, the securities market depository, is set for a 2017 go-live for the application of blockchain technology in the London bullion market after completing its first pilot trades. Over 600 OTC test bullion trades were settled on the Euroclear Bankchain platform over the course of a two-week pilot. A number of leading market participants in the London bullion market – all part of the Euroclear Market Advisory Group – were involved in the test run, including Scotiabank, Société Générale, Citi, MKS PAMP Group and INTL FCStone. The Euroclear Bankchain Market Advisory Group set up in June this year now includes 17 participants working with Euroclear and blockchain platform provider Paxos in the roll-out of the new service. Another market simulation will run early this year in preparation for a production launch later in 2017.

Euroclear report: “CSDs matter in blockchain settlement system” (December 2016)

A new report by Euroclear has looked at the regulatory and legal aspects of the use of blockchain technology in post-trade settlement in a European context. The report, Blockchain Settlement: Regulation, Innovation, and Application, with support from Slaughter and May, found that central securities depositories (CSDs) would play an important role in a blockchain-based settlement system. It added that as ‘custodians of the code,’ CSDs could exercise oversight of, and take responsibility for, the operation of the relevant blockchain protocol and any associated smart contracts. CSDs will continue to perform an important role as trusted, centralised FMIs, providing gatekeeping services and oversight of the relevant blockchain. While the Euroclear report states that CSDs are trusted central entities that facilitate the settlement process, it is believed that the distributed ledger technology system would be a natural evolution of this facilitation role.

SWIFT deploys PoC for bond trading based on blockchain (November 2016)

SWIFT has unveiled a proof-of-concept for managing the entire lifecycle of a bond trade based on blockchain technology. SWIFT, that has been targeted in the press as “a legacy incumbent that will be doomed by DLT”, is determined not to be left behind “in the wake of the revolution that is unfolding in the finance world” with the adoption of blockchain or Distributed Ledger Technology (DLT). SWIFT believes “it can leverage its unique set of capabilities to deliver a distinctive DLT platform offer for the community.”

At the beginning of 2016 SWIFT and Accenture released a paper investigating how blockchain technology could be used in financial services. As a technology assessment, SWIFT and Accenture identified gaps between existing DLT solutions and industry requirements.

SA Strate to launch block chain based e-proxy voting in 2017 (October 2016)

Strate, South Africa’s central securities depository (CSD), plans to launch an e-proxy voting system based on blockchain technology in 2017. The body, responsible for clearing and settling all transactions that take place on the Johannesburg Stock Exchange (JSE), has partnered with Russia’s National Settlement Depository (NSD) to develop and test systems aimed at simplifying shareholder voting. Both CSDs plan to launch the e-proxy voting system in 2017, as such they are looking to partner with an international service provider whose product is around 70% to 80% complete. In South Africa, the planned e-proxy voting system will be rolled out on a client-by-client basis, with an eventual goal to have the entire market take up the system.

The decision to partner with NSD, taken at the Sibos Conference in Geneva last year, is rooted in the fact that both CSDs have conducted independent proof of concept studies and are at a similar stage in understanding and developing an appropriate voting solution. The NSD was also one of the first financial organisations in the world to announce the development of a blockchain-based prototype for e-proxy voting. Strate and NSD will share information regarding standards, regulations and DLT technologies; explore mutually beneficial ideas; and look to make savings through the sharing of technology and development costs. They are claiming that several other CSDs have expressed interest in joining them.

Innovation in CSD space session at SIBOS: “ a slow burn for CSDs” (September2016)

During the “Innovation in CSD space: What about distributed ledger technology?” session at SIBOS, some panellists argued that the technology would “hail the end of CSDs” while others said there would be no revolution, just a “natural evolution” of what exists.

The message from the CSDs was that they are “open to innovation with blockchain, but will test it out in safe places first”.

WFE Survey “Financial market infrastructures piling into blockchain” (August 2016)

More than 84% of trading venues and clearing counterparties (CCPs) surveyed by the World Federation of Exchanges (WFE) are either investigating or actively pursuing the applicability of distributed ledger technologies in financial markets.

WFE says that the poll of 24 members indicates that firms are at different stages of evolution in their DLT initiatives, with one having already deployed a DLT-based application, some at proof-of-concept, and others on the spectrum of evaluation, design, and proof-of-technology. Clearing and settlement provided the most obvious use case for respondents, but with regulatory, legal and technical risks an issue there was little consensus on a viable time frame for live production.

Strate, global CSDs to collaborate on blockchain use (August 2016)

Strate, the South African body responsible for settling transactions concluded on the Johannesburg Stock Exchange, met with 20 other central securities depositories (CSDs) in Switzerland in September to discuss how blockchain technology can be used across global financial markets. Aim is to form a group of CSDs to share information and knowledge. The group of CSDs would try to determine an ideal model for putting clearing settlements and the transaction of shares on to a blockchain. And as opposed to each going and developing their own technology, the group could potentially get a vendor to develop something for all of them or develop something their selves and share it and share in the costs.

Euroclear explores use of blockchain in London gold markets (June 2016)

Euroclear is exploring the potential of using blockchain technology to create a next generation settlement service for the London gold market. The clearing is working with blockchain infrastructure firm itBit and market participants to evaluate the use of distributed ledgers to remove the risks and reduce the capital charges related to the settlement of unallocated gold. Euroclear will thereby use ItBits’ Bankchain product, a private network of trusted participants that clears, tracks and settles trades in close to real-time, opening the prospects of providing true delivery-versus-payment in the bullion market.

Rise testing post-trade blockchain tech with banks, custodians and CSDs (May 2016)

RISE Financial Technologies (RISE), a provider of distributed ledger technology for both post-trade settlement and securities safekeeping, has become the first technology firm to launch the second generation of blockchain for the post-trade sector. RISE is testing its solutions with a number of leading financial institutions including banks, custodians, and CSDs.

The core attributes of RISE’s technology are de-centralised ledger qualities and permissioned transparency, which gives access to different types of information depending on who you are. These qualities are applied to ensure any ‘single point of failure’ inherent in many technology systems is removed and guarantees data integrity. So investors have sight and control over their assets but not those of other participants; issuers have a view but no control into final beneficiaries; financial institutions (ledger operators/validators) have access to client information; and regulators have a complete view of the information in their jurisdiction in real-time but no direct control over the assets.

Carlo de Meijer

Economist en Researcher

More articles about blockchain from Carlo de Meijer:

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How can payments improve your working capital? Part I

| 6-4-2017 | Olivier Werlingshoff |

Working Capital is the term for the operating liquidity of a company that can be used and is needed to continue the day to day business. To calculate the working capital you have to deduct the current liabilities from the current assets. By managing your account receivables, accounts payables and inventory you can fluctuate your cash position and optimize your working capital so that the cash “trapped” in the company can be lowered to a minimum while you are still able to meet your payment agreements.

The way you are making or receiving payments can have influence on the trapped cash and therefore can influence your working capital.In a few articles we will dive into the world of payments and explain the influence on working capital. In this first article we will discuss the wire transfers within the EU and cross border.

Wire Transfer

SEPA
With SEPA all payments in the EU are considered as a local payment. To minimize your banking process time with bank transfers you don’t need to open local bank accounts in the different countries in the EU anymore. If you have a customer in, let’s assume Spain and you agreed on a payment term of 30 days, you send your invoice by mail as soon as the client signed the contract. At that moment your working capital will increase with the amount until the moment the amount is paid into your bank account.

You can mention on your invoice that payments can be done by transfer to your IBAN number in The Netherlands. The maximum processing time will be one banking business day if you send the payment instruction before the cut off time of your bank. This means that if the client is doing the payment on Friday before the cut off time, mostly 3.30 PM, the amount will be on your account on Monday. Otherwise you will receive it on Tuesday.

Risk of non-payment
With wire transfers you still have the risk of nonpayment by you customer. Within the SEPA area you can also use Direct Debits. With this type of payment you can be the one who initiates the payment and if your client accepts, your money could be on your account after the agreed payment term of 30 days. Furthermore Direct debits can’t be reversed by your client when you use the Business variant.

Cross border
If you have a client in the US, you will also send him the invoice by mail to skip the postage process. You can ask him to transfer the amount to your IBAN number. The client will probably convert the amount in his own currency and make an international transfer. With a cross border transfer you will have different costs: the outgoing transfer cost, the incoming transfer cost and also even sometimes correspondent bank costs. Besides the high costs, payments can even take a week before reaching your bank account.

What is the effect on your working capital? Because it takes a long time before you get paid, your accounts payables will increase and the “days sales outstanding” will be longer than the 30 days you agreed on.
When you have a lot of international clients in one specific country you can make a calculation whether opening a local account in the country of your clients could be profitable for you. To avoid correspondent cost you can choose a bank that has connections with your main bank.
After receiving the money on your local account there are some instruments you can use to sweep the balance to your main account in The Netherlands, those products are called pooling techniques.

In the next articles we will focus on payments by internet, credit – and debit cards but also payment on delay and trade products.

Olivier Werlingshoff

Owner of WERFIAD

More articles from this author:

Managing cash across borders

How to improve cash awareness without targets

Managing treasury risk: Operational Risk (Part VII)

| 21-3-2017 | Lionel Pavey |

There are lots of discussions concerning risk, but let us start by trying to define what we mean by risk. In my last article on how to manage treasury risk I will write something about operational risk. The Bank for International Settlements (BIS) defines this as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. If you want to read my earlier articles on managing the different treasury risks please refer to the complete list at the end of today’s article.

Whilst this is the last article in this series, it is actually – potentially – the most significant risk that a company can face, as there are many different ways that a loss could occur, together with the fact that when it happens the amount lost can be very large. Even if the size of the loss could be considered small, there is always the threat of reputation risk which, once identified, is very difficult to erase from the memory.

While it is possible to insure against rogue trading for a company (the risk present in the Treasury function can be quantified and qualified) it is very rare that damage is caused by just one individual – a financial version of the lone wolf theory. Operational risks tend to be interlinked – a fraudulent payment could be initiated by human involvement (either as fraud or human error) and facilitated by weak processes together with insecure technological systems.

There are 2 main areas of operational risk within treasury for a company

Internal
External

There are 3 main categories of operational risk within treasury for a company:

Computer System, Information Technology
Theft and Fraud
Unauthorised Activity

Computer System, Information Technology

A lack of robustness and deficiencies in the technology and systems contribute to circumstances for failures, errors, data losses, corruption and fraud. Internally considerable care and attention should be given to the protocol for Static Data. This encompasses all the relevant reference data for a counterparty and should be subject to at least an input and verification procedure before entering the computer system. Changes to Static Data have to be recorded, together with the proper paper trail and authorization matrix. Externally the risks relate mainly to illegal entry (hacking), together with the complete theft of data.

Theft and Fraud

Both internally and externally main areas include:

Theft – both physical and electronic
Extortion
Embezzlement
Forgery
Misappropriation
Willful destruction
Bribes
Kickbacks
Insider Trading

Unauthorised Activity

From the Treasury point of view, this is an internal activity and mainly relates to 2 types of transactions – unauthorized by transaction and or type; transactions that are not captured in the system and reported. These can lead to monetary losses (though a gain is possible – at the price of an operational risk), together with loss of reputation.
The last category clearly shows where the biggest risk occurs within a company – at the human level. Generally speaking, these are caused by incompetence, lack of knowledge, misuse of power or compulsion to act caused by external factors – extortion.
It is clear therefore that whilst the electronic systems employed by a company can be a liability if not properly programmed or safeguarded, even here, most of the errors can be traced by to human intervention.

So why are the human risks so often underestimated? Naturally a company wishes to have the feeling that its staff can be trusted (within reason). After all, the company felt that the staff were the right people to employ. It is not my intention to formulate the reasoning and thinking of people who perform illegal acts. However certain areas that can be considered include how staff are treated; the demand placed on them; the rewards given; the levels of transparency and inequity within the company; a closed-off attitude (problems in one department are kept within that department and not discussed throughout the company); the role model set by owners, directors and managers; loss of personnel, reduction in morale; disinterested and unmotivated staff.

Solutions

An effective framework of operational risk management needs to be designed and implemented within the business. This requires input and commitment from all departments within the company, meeting one agreed standard and not being shaped to every individual department’s wishes. The framework has to run and meet the requirements for all different strategies within the company.

I wish to finish with 2 examples of operational risk to illustrate how large they can be.

In 1995 the world’s second oldest merchant bank (Barings Bank) collapsed due to the actions of a rogue trader. Corruption and a lack of internal control led to a loss of GBP 827 million.

Around the same time I was employed as an international money broker working in the interbank market and travelled every day from The Hague to Amsterdam via train. As I knew the route off by heart, I read all the time – magazines, papers, books – anything. I purchased a book called “The Cuckoo’s Egg” as it seemed interesting and would pass the time away sitting on the train.
The synopsis told me that an unreconciled accounting discrepancy of just 75 cents would lead to a world of computer espionage and spies. I highly recommend reading the book to understand how a simple error can grow to show the dangers of ignoring operational risks. If you like acronyms then you will enjoy reading about the FBI, CIA, NSA and KGB – all hacked via a UNIX server at a laboratory linked to the University of California.The story is true and threatened national security.

Trust people – but do not place temptation in their way.

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

Managing treasury risk: Liquidity risk

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

Owner & Managing partner of I mprofin Groep

Working capital management : Some practical advice on the optimization of the Order to Cash Cycle

| 27-2-2017 | François de Witte |

As mentioned in my article “Treasury : proposed “to do” list for 2017”, working capital management will remain a hot topic throughout the year. The first priority is to reduce the working capital needs and financial expenses by optimizing the Order to Cash cycle. In this article, we will develop a plan of approach and propose some concrete actions enabling to generate tangible savings.

Background

The purpose of the Order to Cash optimization is to improve the whole cycle from the moment of the ordering of the goods or services, until the final payment, with the aim to:

reduce operational inefficiencies and risks such as delays between goods or service delivery and invoicing, credit management issues, unapproved discounts and deductions, data quality issues, etc.).
improve a number of processes such as the invoicing, the dispute management, the credit management and credit control
assess the current the tools, build business case for the improvement thereof, and implement them.

Plan of Approach

When starting such a project, I recommend to have at first a quick scan of the overall Order to Cash process so as to identify the critical areas and to assess the business case. Based hereupon, one can then subdivide the project in a number of streams.

In such a project, typically the following processes should be covered:

Ordering processes:
It is important to have a client acceptance process (for me a must in the B2B) and a clear policy on the way orders are accepted. I recommend to only accept written orders. For nonstandard goods, we also need to examine if a prepayment is required before an order is accepted, so mitigate the risk in case that the client does not execute this obligations. It is also useful to check beforehand if the exposure on the client will not exceed the existing credit limits.

Current invoicing processes:
Ideally the sending of the invoice should coincides with the delivery of the goods or services. Furthermore it is important to have the invoices sent timely. These actions enable to reduce the “hidden DSO”. Quite a lot of companies lose several days of easy working capital by neglecting this.
A good customer database is key, and in combination with the ERP, this enables an automation of the invoicing process. I recommend to use as much as possible e-invoicing, so as to reduce the costs and the postal delays.

Current credit management processes:
A formalized credit policy is a prerequisite. A number of solution providers offer solutions for the scorings of your clients, so as enable you to define the credit limits in function hereof. In some sectors this information can be enriched by market information. Of course, one need to ensure that sales staff comply with this and check beforehand that the credit terms have been duly approved. The credit manager needs to work hand in hand with the sales staff.

Current dispute management processes:
Prevention is important. For this reason, when ordering nonstandard goods, it is recommended to check beforehand the availability of the goods and the timing of the delivery, so as to manage the expectations of your clients. Throughout the process (from the order acceptance to the delivery and the invoicing) one should apply thee “first time right” so as to avoid disputes and litigation afterwards. Check also if some services and repairs are to be done under a maintenance contract or warranty, in which case they should be invoiced to other parties.

Current collection and credit control processes
It is important to have a well-organized credit control process enabling to send reminders quite soon after the due date (if possible the first reminder after 15 days). It can help to send to send to your clients some days before a gentle reminder of the forthcoming due invoices. Once the 2nd reminder has been sent, and provided that there is no dispute, it can be useful to block the delivery of goods and services to your client, so as to have an additional leverage, and to have the credit collectors should calling the clients to see why they do not pay, and agree with them on an action plan.
When the classic reminder and call actions do not succeed, involve also the sales department and consider first a final call by another person, before sending your clients to the debt recovery service or to the debt collection agency.
It is important to also ensure an automation of the processes, in particular if one has to address high volumes. If you cannot do it with your current systems, there exist good solutions in the market.

Reconciliation and allocation of incoming payments:
This is a big challenge for many companies. Make sure that your clients use the right payment instruments and payment messages, so as to facilitate the reconciliation process. Within the accounting department, incoming payments are not always allocated promptly, distorting the real accounts receivable outstanding. As a result, reminders can be sent unduly, leading to client dissatisfaction.

KPI’s and Dashboards:
It is important to foresee KPI’s for all the involved stakeholders, as well as incentives to ensure that everybody play the game. Dashboards should enable to remain in control and to monitor regularly a number of key indicators. An area of attention are the overdue receivables. A too high percentage of overdue receivables/total portfolio might be an indicator of possible uncollectable receivables and the need for write-offs.

Attention points

An Order to Cash optimization program is complex and we need to address a number of issues such as :

The resistance to change: people will come up with several reasons to keep on with the current processes. Overwork or client dissatisfaction will be used as excuse for deviations with the processes. Hence involve all the stakeholders, take time to listen to them and to make sure that they buy in the change. If the change is well explained, people will tend to accept the changed processes. The support of the senior management is key to address this resistance.
The limitation of the systems such as e.g. the ERP or the accounting package: Quite a lot of companies miss opportunities because they do not understand the capacities of their ERP. Involve from the start system experts and examine with them possible workarounds.
The standardization of processes throughout the organization : This can be an issue, in particular when working on multiple locations. Processes should be well documented. Once this is done, one can look for the automation.
The information and training of the stakeholders: Make sure that process documentation is easily accessible, and consider organizing training sessions for the involved staff.
The time and effort needed to implement external solutions: This requires a good business case, including all the aspects. Do not underestimate the cost, the effort and time to implement the tool.
The determination of the KPI’s and incentives: this should not only involve finance, but also other Sales, sales administration, the production department and the other involved stakeholders. Build in incentives to ensure that everybody play the game. Make sure that the KPI’s are monitored regularly so as to be able to take corrective action in case of divergences

Conclusion

By managing better the order to Cash Cycle, you can generate a lot of savings. This requires a global approach involving all the stakeholders. To be successful, an optimization requires a number of concrete process improvements, but also the buy-in of all parties involved. A good change management should ensure that the improvements are embedded in the organization, and smart dashboards will enable to monitor that one remains on track.
Technology can help to automate the processes, but do build first a business case and to not underestimate the effort.

It can be a long journey, but in the end, it is worth the effort.

François de Witte

Senior Consultant at FDW Consult

More articles of the author:

PSD 2: A lot of opportunities but also big challenges (Part I)

PSD 2: The implementation of PSD 2: A lot of opportunities but also big challenges (Part II)

Treasury: Proposed “to do” list for 2017

Working capital management – not just a finance issue

Payment fraud – how companies can protect themselves

|13-2-2017 | Joerg Wiemer | sponsored content |

Information about the opportunities and risks of digitalization is widely spread. In general, risks occur when there is a chance of losing a competitive advantage or falling behind. However, one of the biggest risks is without doubt cybercrime. Attacks on IT systems worldwide increased yet again by 38 percent in 2015, according to the consulting firm PwC in their “Global State of Information Security Survey 2016”. If these attacks are aimed at the payment transactions of a company, the entire existence of the organization is easily threatened. Therefore, security measures in treasury and payments processes should be at the very top of the agenda. Jörg Wiemer, CSO of TIS, explains how companies can ensure increased security.

In general, when does a risk exist for companies during payment transactions?

JW: In principle, in any situation that involves a lack of transparency across bank relationships and activities. In these cases, cash positions and liquidity are not clear. Let’s assume that a branch transfers ten million dollars at the beginning of the month. If these bookings rely on manual processes and the balance is only checked once at the end of the month, it takes a full thirty days until the fraud is detected. Time is literally money. By monitoring treasury in real time, it is possible to detect these procedures much earlier, thereby solving them in many cases.

It can take a lot of time until the head office of the branch gains knowledge about such cases.

JW: This is the heart of the problem: The prevailing regional division of labor makes it easy for fraudsters. If the account statements in paper are collected locally in each branch, it takes weeks until those responsible in the head office notice that an account statement is missing, and with it, the positions written on it. This is exactly why a company should collect all account statements from every bank account worldwide automatically and assess liquidity positions in real time with a software like TIS.

What else facilitates frauds?

JW: Fraud can occur if there is no complete overview of the electronic signing authorities, if there is no dual control principle during payment transactions or during the administration of payment recipients and, in general, during every user administration, which is particularly prone to fraud. These are the typical gateways.

How can I detect that I am at an increased risk?

JW: One reliable indicator of a low level of security in payment transactions is a high amount of manual transactions. Normally, the assumption is that every payment has to be recorded in the accounting system according to the best practices – no booking without receipt, and no payment without a previous booking. Nevertheless, under certain circumstances, there are deviations and exceptions of this principle. The key term here is “exception handling”, which results in a manual payment. An exemption is necessary for these cases, which includes comprehensive process documentation. The possibility of recording and authorization of non-automatic payments should be restricted to certain recipients of the payment and internal user groups. Furthermore, the user should only be allowed to use unchangeable payment templates that have been approved in advance.

How can companies reduce risks?

JW: A general rule is to standardize and and automate processes across the group of companies! Payment related tasks can be executed on local level, however, based on a standardized and automated process. A central directory of every existing account and a payment governance should be mandatory for every company. Security in payment transactions begins with the professional management of the bank accounts. Otherwise, those responsible run the risk of fraudulent payments through accounts that are not registered in the ledger. The next step is to centralize the payment transactions. Digital payment platforms like TIS pool the cash flow and standardize and automate it. This way, payment procedures and the cash flow are controllable at all times.

What has payment looked like in practice up until now?

JW: Heterogeneous and confusing. Companies have a lot of different systems in each part of their organization and they use different e-banking tools to connect to the banks. The SAP system then generates payments. This is complicated and complex and there are many different protocols and formats. This is the reason for high costs as well as increased fraud risk.

In light of this, which solution approach does TIS pursue?

JW: We provide a payment transactions platform especially for medium and large-sized companies in any industry. The platform connects their accounting system with the respective bank. It then operates between the core systems – which the client does not have to change – and the bank. Therefore, the platform is the single point of contact, allowing all automated and standardized payment transactions to be combined in a uniform way for the entire company. This makes the management, monitoring and assessment of payment transactions tremendously easier.

The TIS solution runs completely in the cloud. What about the topics of control and secure data storage?

JW: A server as such is either secure or not secure, no matter if it runs in the cloud or in your own house. It is also possible to dial into an in-house server with the banking tools of a company from anywhere as long as the person has the appropriate authorization or the right amount of criminal energy. This is why the server has to be permanently protected from non-authorized access with a high level of modern technology. The big data centers, with which TIS also cooperates, have totally different possibilities than a single company. Let me say a few words regarding the topic of online banking: the idea that banking tools on a private notebook which runs offline are somehow more secure is an illusion. This computer provides a much bigger gateway for viruses and Trojans than any e-banking solution that runs in the cloud. It speaks volumes, that the Swiss Reporting and Analysis Centre for Information Assurance (MELANI) has recently started receiving a much higher amount of reports from the general public regarding e-banking frauds.

The right software is one part, but what can be done to ensure risk is handled correctly and that the right methods of payments processing are put into place?

JW: Good governance must be established and implemented. Companies need globally valid rules for their payment transactions with detailed guidelines on the following: how accounts are managed, who can open new accounts, who must give permission for this, and the documentation necessary to do so. There are always bad examples for what can happen if the company does not follow the guidelines. Remember the case of the automotive suppliers Leonie mid-2016? Cybercriminals acquired documents and assumed somebody else’s identity. They were then able to divert 40 million euros from accounts of the company to accounts abroad.

My advice on how to minimize risk? Establish governance guidelines and use a central platform for the management of bank accounts and payment transactions. Through automated and standardized processes, companies can protect themselves against manipulation and fraud and, ultimately, the loss of money.

If you are interested to read more about this topic please click on security in payments

Joerg Wiemer

CSO and Co-Founder of Treasury Intelligence Solutions GmbH ( TIS)

Tag Archive for: payments

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Emperor with no clothes

Facilitating screening

Compliance: points of attention

Implementing a solution

Main pain points and requirement of the corporates

Initiatives taken by SWIFT

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Wire Transfer

Computer System, Information Technology

Theft and Fraud

Unauthorised Activity

Solutions

Background

Plan of Approach

Attention points

Conclusion

In general, when does a risk exist for companies during payment transactions?

It can take a lot of time until the head office of the branch gains knowledge about such cases.

What else facilitates frauds?

How can I detect that I am at an increased risk?

How can companies reduce risks?

What has payment looked like in practice up until now?

In light of this, which solution approach does TIS pursue?

The TIS solution runs completely in the cloud. What about the topics of control and secure data storage?

The right software is one part, but what can be done to ensure risk is handled correctly and that the right methods of payments processing are put into place?

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