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“Systems om je bank buitenspel te zetten” – Verslag van mijn Financial Systems presentatie

| 23-5-2017 | Pieter de Kiewit |

Dit is een verslag en korte samenvatting van mijn presentatie die ik mocht houden op het Financial Systems evenement. Afgezien van een gênante vertraging door mijn gebrekkige Powerpoint skills was het een prettige sessie afgerond met een pittige discussie tussen experts in de zaal. Eerst een korte samenvatting:

Als Feyenoord fan ben ik dit jaar gelukkig en weet veel van voetbal, ook al speel ik het niet. Daarin ligt een parallel in mijn werk als treasury recruiter. Maandelijks krijg ik van circa 100 experts persoonlijk college en zie een veelvoud aan cv’s. Ik denk dat ik hierdoor inzicht heb in systemen die worden gebruikt om treasury processen te managen en ik zie de afgelopen decennia interessante ontwikkelingen die de laatste jaren in een versnelling zijn geraakt.

Zonder namen te noemen van leveranciers, ik doe geen software sales, heb ik een lijst gemaakt van diensten en producten die de gereedschapskist van de treasurer kunnen vergroten en afhankelijkheid van zijn bank verkleinen. Toen ik deze lijst opstelde, viel me op dat er tussen de vakgebieden cash & werkkapitaal management enerzijds en funding anderzijds interessante ontwikkelingen zijn zoals bankonafhankelijke betaalplatforms, crowdfunding en het bankkosten inzichtelijk maken. In het managen van risk zie je bijvoorbeeld trade finance in blockchain en partijen die FX transacties tegen ongebruikelijk lage marges bieden.

Banken daadwerkelijk buitenspel wordt lastig en is volgens mij ook niet het streven. Banken bashen vind ik een zeer onsympathieke hobby. Daarbij is de Fintech wereld ook nog niet volwassen met alle bijbehorende consequenties. Voor de drukbezette treasurer, voor de DGA en CFO die maar incidenteel te maken hebben met het vakgebied kunnen deze ontwikkelingen nogal onoverzichtelijk zijn. Helaas is er geen oplossing die snel inzicht verschaft. Wel denk ik dat er mooie kansen liggen voor degene die vooraan wil meelopen in ontwikkelingen.

De discussie die zich ontspon tussen financiële lijnmanagers en treasury experts ging, onder andere, over de vraag of bankkosten daadwerkelijk inzichtelijk zijn en wat de toekomstige rol van de banken zal zijn. De Powerpoint presentatie is onder dit artikel opgenomen. Ik verheug me op verdere events waar discussie rond dit thema kan worden verder gevoerd.

Pieter de Kiewit
Owner Treasurer Search

Klik hier als je de presentatie van de sessie wilt bekijken.

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

The Euro from a treasury perspective

| 10-4-2017 | Hans de Vries |

In a perfect world, one currency is the ultimate dream for every Treasurer. The introduction of the Euro has been a major leap forward in that direction. However, current anti-euro sentiments boosted by populist movements all over Europe, seriously threaten to hamper this unique and visionary European accomplishment. This article focusses on what impact the introduction of the Euro had for the corporate treasurers and what will happen if the Euro gets skipped.

Let’s start with the beginning. One must be aware that the introduction of the Euro is the world’s largest economic policy experiment so far with heavy repercussions on the autonomy of the countries involved with regard to their monetary regimes. So naturally this expedition has met a lot of criticism ever since the beginning, the creation of the European Monetary System (EMS) on March 13,1979.

The Euro skeptics mostly feared that the wide-spread adoption of the Euro would deteriorate the economies of countries that accepted this currency and was in favor of the larger countries, like France and Germany, that now could easily manipulate the Euro’s puppet strings. Main belief was that the Euro would weaken instead of strengthen the European economy.

As from the start, Euro stronger than expected

Although the Euro met quite some negative public attention, looking at more than 15 years of Euro, the track record has not been that bad at all. As the graph shows, after a relatively weak position against the USD at the beginning of this century, the Euro has held a strong position against the USD as from 2003 on, although weakening after 2014 in the aftermath of the banking and economic crisis that followed it. However, the predicted downfall of the Euro never took place. Remarkable phenomenon was that when the value of the dollar was higher, it was regarded in the media as a sign of weakness of the Euro against a “strong” Dollar and when the value of the Euro was stronger than the USD it was regarded by the analysts as a sign of weakness of the Dollar.

More important is that the introduction of the Euro as per January 1, 1999 has indeed brought the predicted transparency to the European market but also to the global market. This transparency has contributed to the substantial growth (5-40% according to Bun and Klaassens) of the internal trade flows within the EU countries due to the fact that the Euro has lowered the fixed and/or variable costs of exports. Prices can be compared across the whole Eurozone, allowing companies to choose the most price-competitive suppliers. The newly exported goods are of lower unit values than those previously exported because the Euro has made exporting them profitable, particularly for small exporters. Don’t forget that with 28 member states in 2014 Europe was the strongest economic player on global level taking care of 17,1% of the World GDP whereas the USA had a share of 15,9% and Russia 3,3%.
From a more monetary viewpoint the Euro brought price stability. Inflation in the Eurozone has been around 2-2.5% for most of the time since its creation.
A strong Euro mitigated the impact of the volatility of dollar-denominated commodity prices.This advantage was particularly visible before the beginning of the financial and economic crisis, when the oil price and the price of some other important food commodities reached unprecedented peaks. Due to the Strong Euro or weak USD, the consequences for the European market were relatively minor.

Euro leads to transparent treasury operations and substantial cost reductions

In today´s Euro environment, most Treasurers in Europe only have to deal with the USD, GBP and sometimes CHF and the Nordic Currencies. This makes live quite overseeable and has substantially enhanced their risk portfolio. The same applies for the Treasurers outside the Euro zone, who are now freed from the hassle of the past European currency palette.

Although a number of Euro critics pointed their finger at the Euro as direct cause for the Banking crisis a few years ago, it is almost impossible to imagine the consequences of the crisis in and outside Europe if every European country had been dealing with their own currencies. This would have resulted in a pandemonium of devaluations and revaluations with even more severe consequences for the values of all national and international operating companies and even more bank bankruptcies. Not to mention the impact this might have had on pension funds and other investment vehicles on short and longer terms.

From a corporate perspective, the benefits of the introduction of the Euro are therefore quite clear.

But also the consumers more and more are sharing the benefits of the common Euro market. Not only during travels abroad but also internet shopping becomes more and more international with new initiatives on the way to support payments like the Fast Payment project.

Looking at all these benefits, the current anti Euro sentiment in a number of European member states is from an economic point of view hard to understand and might pose a serious threat on the future European economic development.

Consequences of a Euro exit from a treasury and cash management perspective

Imagine getting back to the world without the Euro. This means an enormous rise of the operational costs considering:

The daily currency shifts that influence directly the position of the corporate’s accounts receivable/ and accounts payable and therefore the short time profit/loss situation. To minimize the impact substantial investment in systems and manpower will be needed;
The monetary developments as result of the internal economic/ political situation per country resulting in overnight currency devaluation/ revaluation and it’s inter currency reaction’s. (The recent takeover of Opel by Peugeot was merely a result of the strong decline of the GBP against the Euro which had severe consequences on the UK based Vauxhall subsidiary and shows the impact of the monetary developments on the corporate world.)
The banking costs involved in setting up swaps/ hedges/ Long term deposits etc.
The banking costs involved in buying and selling the various currencies;
The impact on money transfers which will be treated as international payments again with different clearing systems, correspondent banks, local payment instruments and formats etc. resulting in delayed payments and receipts and therefore threatening the growth of the economies.
The impact on international trade that will strongly diminish due to the lack of transparency of the international markets, the rise of costs and the loss of trust.
Re-opening of local accounts to support local business

Banking industry as sole winner

The only party that will benefit from this skip of the Euro development is the banking industry, because of the margin to be made on currency exchange, swaps and other derivates, and the backshift to a Non-Sepa/ international payments environment with substantial higher transaction costs. Looking at the public opinion on banks in general ever since the bank crisis, it’s hard to believe that the populist movements in Europe are in favour of this development.

Take the loss or start a counter movement?

This leaves us with the question, what benefits are there to gain by consumers and businesses alike by leaving Europe and the Euro? Looking at the economic development of the Euro countries today and all the benefits the Euro has brought the corporates and consumers, there is no clue why we should not stick to the current status quo and enhance it in any possible way.

It is therefore high time to start advocating the true merits a United Europe has been gaining thanks to the pan European ideals: a unprecedented war free community already lasting for more than seventy years combined with an enormous economic and cultural development.

Hans de Vries

Treasury/ Cash Management Consultant

Treasurers to be the strategic super-heroes for their CFO

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

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

Targeting

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

Negotiating

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

Closing

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

Integration

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

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

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

What strategic value could the Treasurer bring?

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

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

The treasurer needs to arrange (if applicable):

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

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

Hence the comparison with a superhero…

Conclusion

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

Lionel Pavey

Cash Management and Treasury Specialist

Udo Rademakers

Independent Treasury Consultant & Interim Manager

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

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

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

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

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

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

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

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

Good luck out there!

Pieter de Kiewit
Owner Treasurer Search

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: 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

Managing treasury risk: Liquidity Risk (VI)

|13-3-2017 | Lionel Pavey |

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

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

Market Liquidity Risk

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

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

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

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

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

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

Funding Liquidity Risk

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

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

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

Other methods include –

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

ii) Analyse all overheads – office equipment, expense claims

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

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

v) Design contingency plans

vi) Subject your business to stress testing

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

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

Lionel Pavey

Cash Management and Treasury Specialist

More articles of this series:

Managing treasury risk: Risk management

Managing treasury risk: Interest rate risk

Managing treasury risk: Foreign exchange risk

Managing treasury risk: Commodity Risk

Managing treasury risk: Credit Risk

Flex Treasurer: The life of an interim treasurer

| 16-2-2017 | Patrick Kunz |

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

Treasury Support

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

Treasury Expert

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

Treasury Scan

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

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

Patrick Kunz

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

Managing Treasury Risk – 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

What risk does a company face and how can it be measured
What hedging or rate management policy should a company use
What financial product, available in the market, should be best used
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

Cash Management and Treasury Specialist

More articles of this series:

Managing treasury risk: Risk management

Managing treasury risk: Interest rate risk

Tag Archive for: treasury management

Main pain points and requirement of the corporates

Initiatives taken by SWIFT

How to start such a project:

Conclusion

As from the start, Euro stronger than expected

Euro leads to transparent treasury operations and substantial cost reductions

Consequences of a Euro exit from a treasury and cash management perspective

Banking industry as sole winner

Take the loss or start a counter movement?

Targeting

Negotiating

Closing

Integration

What strategic value could the Treasurer bring?

The treasurer needs to arrange (if applicable):

Conclusion

Onderneming C: Internationaal Handelshuis in voedselproducten

Onderneming D: vastgoedbedrijf

Computer System, Information Technology

Theft and Fraud

Unauthorised Activity

Solutions

Market Liquidity Risk

Funding Liquidity Risk

Treasury Support

Treasury Expert

Treasury Scan

Transaction Risk

Translation Risk

Economic Risk

Contingent Risk

Identifying Foreign Exchange Risk

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