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Cash forecasting 2.0

Cash forecasting has been a hot topic in 2016 and it looks like it will keep this status in the years to come. As Cash Specialist, I’m frequently asked about my vision on this subject. About a month ago, I presented my thoughts to an audience of Group Treasurers & CFOs at the ACT Smart Cash conference in London. During the Q&A, I was asked an intriguing question: “How does a cash management platform, such as Cashforce, differentiate itself from old school Treasury Management Systems in terms of cash forecasting?”

TMS vs. Cash Management/Forecasting platform

Classic Treasury Management Systems (TMS) are focused on inputting, maintaining & managing complicated financial instruments and managing bank connectivity. In other words, they focus on cash optimization from the treasury side.
Cash management & forecasting platforms, on the other hand, focus on cash optimization from the business side. Hence, they typically connect to a company’s ERP systems, in which you’ll find 90% of the company’s cash flows.
And guess what, it’s this refreshing vision on cash optimization that is now attracting the attention by more and more Corporate Treasurers worldwide: they call it “connecting treasury with the business”.

Difference No 1: Transparent cash forecasting

With a classic TMS, a Corporate Treasurer will typically consolidate cash forecasts from the different OpCo’s, which are already consolidated from the underlying business transactions. So, there is no drill-down available into the business drivers, no assurance on the quality of the data/input/manipulations. This blurs a treasurer’s view on what’s actually happening on the business side, taking away the cash visibility into the company’s different OpCo’s. Full drill down isn’t offered by a classic TMS due to two main reasons:

It is simply not designed for carrying millions of transactions on a daily basis, while cash management/forecasting solutions use a ‘big data’ approach and have built-in engines to process millions of transactions daily.
Connecting to each single ERP requires deep knowledge of each of these systems (to avoid long implementation times) and traditionally, Treasury Management Systems didn’t have a need to develop these connectors.

Difference No 2: Collecting the data in a smart way

One of the pain points often linked to Cash Forecasting, is the lacking ability to merge all relevant data and apply smart logics to it. Indeed, it might be a challenge to connect to all data sources and, at the same time, to do this in a smart way. At Cashforce, our reaction to this issue is twofold: A smart logics engine takes care of the forecasting algorithms, while easy connections to ERPs and other systems (like HRM, CRM..) ensure the continuous supply of rich data.

Defining and applying smart logics are often a challenge to overcome and have an enormous impact on the accuracy of the cash forecast. For example, well-defined smart logics help you to better estimate actual payment times and hence improve the accuracy of a forecast. A TMS system often lacks this powerful ability and has no built-in smart engine for forecasting rules.

Difference No 3: Cash saving from the business instead of treasury optimizations

Finally, driving action from forecasts should be the main objective. Intelligent simulation engines enable companies to consider multiple scenarios and measure their impact. This gives users the power to report on cash saving opportunities and compare options to ultimately pick the better one. As a result, finance departments can be turned into business catalysts for cash generation opportunities throughout the company. In contrast, Treasury Management Systems are not designed to perform complicated business-driven cash simulations.

Complementary or Competitors?

New, often innovative cash management platforms, like Cashforce, are complementary to a TMS and tend to bring a lot of value in working capital intensive businesses. They are complementary, as they have a different focus: Treasury Management Systems look at the entire treasury spectrum in order to improve treasury processes. Cash Management/Forecasting platforms start from the business and want to enable finance departments to become a strategic partner on one of the key growth indicators, cash. On the other hand, for smaller companies, these platforms might be a good alternative for an often expensive TMS, when only limited financial instrument management functionality is required.

Nicolas Christiaen

Managing Partner at Cashforce

Treasury & amp; Working Capital Quick Scan Methodologie – Voorbeelden uit de praktijk

| 7-3-2017 | François de Witte | Patrick Kunz | treasuryXL

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 soms 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.

Heb je al eens gedacht aan de mogelijkheid van een treasury quick scan?

Wij bieden je aan om deze quick scan voor je uit te voeren.
Een ervaren hands-on treasurer maakt een scan van jouw organisatie om te kijken of het de moeite waard is om te investeren in treasury. En vaak blijkt dat je door deze quick scan flink geld kunt besparen, zoals de volgende praktijkvoorbeelden laten zien.

Onderneming A: Productie onderneming in de verpakkingssector

(omzetcijfer ca. 150 miljoen euro)

A gebruikte voor zijn financiering een combinatie van EUR 5 MM met straight loans aan 2,25 % en EUR 3,5 MM met factoring (totale factoring faciliteit : EUR 10 miljoen) aan een rente van 0,75 % + 0,15 % flat op het omzetcijfer (of 225.000 euro op jaarbasis).
Een treasury quick scan maakte snel duidelijk dat er een besparingspotentieel was indien de onderneming een deel van zijn bankfinanciering verschoof naar de factoring. Het beroep op de factoring werd verhoogd naar EUR 7,5 miljoen, wat toegelaten heeft een jaarlijkse besparing toe realiseren van EUR 60.000.
De facturen werden niet altijd tijdig opgesteld en werden per post opgestuurd. De quick scan maakte duidelijk dat er besparingspotentieel was. Dankzij een strikter facturatieproces en het overgaan op e-invoicing is de onderneming er in geslaagd 3 dagen te winnen in de Order to Cash Cyclus of een besparing van ca EUR 1,25 miljoen aan werkkapitaal en ca. 30.000 euro aan financiële lasten.

Onderneming B: Groep die een aantal autoconcessies bezit

(omzetcijfer ca. 175 miljoen euro)

B gebruikte voor zijn korte termijnfinanciering (ca. EUR 13 miljoen) korte termijn kredietlijnen bij banken (financieringskosten voor van 1,90 %) en bij de financieringsmaatschappij van de importeur (financieringskosten van 1,10 %).
Een treasury quick scan maakte duidelijk dat er een besparingspotentieel was indien men een deel van de bankfinanciering verschoof naar de importeur financierings-maatschappij. In casu besloot de onderneming EUR 7,5 miljoen meer op te nemen bij deze, wat een jaarlijkse besparing aan rentelasten heeft toegelaten.
B had regelmatig credit saldi op een aantal bankrekeningen, terwijl ze debetsaldi op andere bankrekeningen had. Een van de aanbevelingen van de quick scan was het invoeren van een dagelijkse opvolging van alle banksaldi. Hierdoor is onderneming B erin geslaagd het gemiddeld uitstaand bedrag aan bankleningen te doen dalen met EUR 1,6 miljoen, wat een rentebesparing oplevert van 30.000 Euro.
B ondervond regelmatig vertraging in de incassering van facturen op leasingmaatschappijen, omdat de dossiers niet in orde waren (ontbrekende documenten, etc.). De quick scan maakte duidelijk dat een striktere opvolging van de procedures en keurige dossiers (first time right) zou toelaten de gemiddelde incassoperiode te reduceren van 23 naar 18 dagen. De onderneming heeft uiteindelijk een besparing van werkkapitaal van 800.000 Euro en een jaarlijkse rentebesparing van meer dan 15.000 Euro gerealiseerd.

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.

Patrick Kunz

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

MEER INFORMATIE

Wil je gebruik maken van een treasury quick scan of een Flex Treasurer of heb je een andere vraag?
Of wil je je aansluiten als Flex Treasurer?
Pieter de Kiewit helpt je graag verder.

[email protected]
+ 31 (06) 1111 9783

De controller in een veranderende omgeving: Budgetteren als hulpmiddel bij cashmanagement

| 28-2-2017 | Olivier Werlingshoff | FM.nl |

Op de website FM.nl vonden wij een artikel van Theo van Houten ( 21 februari 2017) die wij graag met jullie willen delen.
Hij schrijft: ‘Zijn de methoden en technieken die controllers tijdens hun studie leerden nog wel relevant nu organisaties in een omgeving werken die inmiddels veel dynamischer en complexer is?’ Het artikel is een onderdeel van een serie en richt de focus op cash managment.

Cash Management

Theo van Houten schrijft dat cashmanagement gaat over alle activiteiten die verband houden met de optimalisatie van de kasstromen tussen de organisatie en haar stakeholders, zoals bijvoorbeeld klanten, leveranciers, werknemers en financiers. Een goed kasbeheer is voor een organisatie vaak van doorslaggevend belang. Dat komt mede door de hoge kosten die verbonden zijn aan het aanhouden van liquide middelen en het afwikkelen van ontvangsten en betalingen.

Maar de belangrijkste reden voor een goed cashmanagement is het voorkomen van een faillissement. Het CBS doet jaarlijks onderzoek naar de oorzaken van een faillissement. Daartoe onderzoekt zij gerechtelijke vonnissen om het eerder uitgesproken faillissement te beëindigen, omdat er bijvoorbeeld door de curator een akkoord met de schuldeisers is bereikt of omdat er een gebrek aan baten is. De rechter baseert zich bij die uitspraak op het verslag van de curator die de oorzaak van het faillissement heeft vastgesteld. In december 2016 publiceerde het CBS de cijfers over 2015. In dat jaar werden van 7.602 rechtspersonen (exclusief eenmanszaken) het faillissement beëindigd. Die organisaties waren door de volgende oorzaken failliet gegaan;

De belangrijkste oorzaken zijn dus:

Economische oorzaken. Denk hierbij aan toegenomen concurrentie, smaakveranderingen bij het publiek en veranderende economische omstandigheden (al dan niet in het buitenland).
Mismanagement, waarbij gedacht moet worden aan administratieve problemen, gebrekkig debiteurenbeheer, te hoge of te lage financiering en marketingmissers.
Overig. In deze categorie vallen zaken als een kredietstop en dubieuze/frauduleuze handelingen

Volgens The van Houten maakt het overzicht duidelijk dat in verreweg de meeste gevallen de oorzaken direct (krediet-stop, oninbare debiteuren, te lage financiering) of indirect (tegenvallende afzet, administratieve missers, hoge financieringslasten) de liquiditeit van de organisatie aantasten. Het gevolg daarvan is, dat er bijvoorbeeld niet meer kan worden ingekocht op rekening, personeel niet meer betaald kan worden of de te betalen belasting verschuldigd blijft. Een faillissement is dan vaak onafwendbaar.

Budgetteren als hulpmiddel bij cashmanagement

Een van de belangrijkste planningsinstrumenten waar een controller volgens The van Houten mee werkt is het budget. Budgetten zijn taakstellende begrotingen, dus aan financiële grenzen gebonden plannen van actie. Er zijn belangrijke redenen om te budgetteren. Vaak genoemd worden: kostenbeheersing, het verhogen van de slagkracht, coördinatie en communicatie, prestatiemeting en de bijdrage die ze leveren aan het voorspellen van de financiële resultaten van de organisatie.
Ook op het gebied van cashmanagement kunnen budgetten een belangrijke bijdrage leveren. Dat gebeurt via het zogenaamde masterbudget. Hiermee wordt een samenhangend geheel van alle deelbudgetten bedoeld, dat resulteert in een begrote eindbalans, begrote resultatenrekening én een liquiditeitsbegroting.
Om dat masterbudget op te stellen, begint de controller om in samenspraak met degenen die er zicht op hebben (de verkoopafdeling, bijvoorbeeld) een inschatting te maken van de te verwachten omzet voor komend jaar en meestal wordt dat nader gespecificeerd in verkopen per kwartaal, maand of week. Zodra dat bekend is, kan bepaald worden wat er elke periode geproduceerd moet worden, waarbij rekening gehouden wordt met beschikbare en gewenste voorraden eindproducten. Daarna kunnen de inkopen gebudgetteerd worden die noodzakelijk zijn om te kunnen produceren, waarbij ook hier rekening gehouden wordt met beschikbare en gewenste voorraden grondstof.

In veel organisaties start het budgetteringsproces in het najaar met het opstellen van een begroting, waarna voor het einde van het jaar de budgetten van komend jaar worden bepaald die vervolgens vaak een heel jaar ongewijzigd blijven. Deze budgetten zijn niet zelden ook het uitgangspunt waarop het cashmanagement is gebaseerd. De economische omstandigheden veranderen tegenwoordig echter zo snel, dat de budgetten veel minder houvast geven. Dat heeft grote gevolgen voor de mogelijkheid om aan betalingsverplichtingen te voldoen. Gaat het immers plotseling slechter, dan neemt de omzet af en dat heeft al snel veel minder ontvangsten tot gevolg. Als daar qua uitgaven niet op geanticipeerd wordt, ontstaan mogelijk onoverkomelijke betalingsproblemen. Maar ook als het economisch ineens veel beter gaat, dan zijn er potentiële risico’s rond de liquiditeit. De extra inkopen en de eventueel extra personeelsleden die ingezet moeten worden, dienen vaak veel eerder betaald te worden dan het moment waarop de extra ontvangsten worden geïncasseerd.

Taken controller

Theo van Houten : ‘Het bovenstaande maakt budgetteren geen zinloze exercitie voor cashmanagement, integendeel. Nog steeds spelen ze een belangrijke rol bij het inschatten van toekomstige ontvangsten en uitgaven. In mijn vorige column gaf ik echter al aan dat de hoogte en samenstelling van planningsinstrumenten als budgetten beduidend vaker moet worden herzien dan in veel organisaties nu het geval is.
Hiervoor dient de controller veel dichter op de business te zitten en te begrijpen hoe de bedrijfsprocessen werken, zodat de gevolgen voor de geldstromen van veranderingen veel beter en sneller ingeschat kunnen worden. Dat maakt het namelijk mogelijk om te anticiperen en tijdig, voordat de problemen ontstaan, maatregelen te nemen, zoals het uitstellen of vervroegen van investeringen, het maken van afspraken over betaaltermijnen met klanten en leveranciers of het regelen van extra kredietfaciliteiten. Kortom, de controller heeft hier een spilfunctie. Om die goed uit te voeren is het noodzakelijk dat hij of zij in de gesprekken met budgethouders de te verwachten ontvangsten en uitgaven steeds aan de orde stelt.’

De hele serie artikelen kunt u lezen op FM.nl

Theo van Houten is hoofddocent management accounting en onderzoeker bij het lectoraat Financial control aan de hogeschool van Arnhem en Nijmegen. Tevens is hij onder meer (mede-)auteur van de boeken ‘Financial control van projecten’ en ‘Bedrijfseconomie in de praktijk’.

Zo ver het artikel van Theo van Houten. Wij hebben onze expert Olivier Werlingshoff gevraagd om zijn eigen inzichten hierover met ons te delen. Zijn antwoord:
‘Ik ben het helemaal eens met wat er in het artikel word aangegeven.Wat ik tot nu toe echter heb gemerkt is dat (financial) controllers vaak naar de organisatie kijken vanuit de boekhouding en niet zozeer vanuit geldstromen. Business controllers kijken daarentegen weer meer naar de organisatie-processen. Het zou goed zijn als er ook meer gericht wordt gekeken naar de geldstromen en hoe deze kunnen worden ingeschat en zelfs kunnen worden geoptimaliseerd. Een voorbeeld hiervan is om te kijken naar de cashmanagement mogelijkheden die er bestaan om gelden sneller binnen de organisatie op de gewenste plek te krijgen.
In wat complexere organisaties zou de functie van het opvolgen van de diverse processen met een cash bril beter kunnen worden opgepakt door een toegewijde cashmanager. Een cashmanager is vaak beter dan een controller op de hoogte van de mogelijkheden die er in de markt bestaan om cashstromen te optimaliseren en te beheersen. Een goed combinatie en samenwerking tussen een controller en een cashmanager is naar mijn mening de oplossing om de financiële processen goed in beeld te krijgen, budgetten op te stellen en acties op te zetten om indien nodig bij te sturen.’

Olivier Werlingshoff

Managing Consultant at Proferus

Blockchain: Accelerated activity in trade finance

| 24-2-2017 | Carlo de Meijer |

Last year August I wrote a LinkedIn blog on blockchain and trade finance. There I described the various pilots and plans for using this technology in the trade space. In that month, the bank-backed R3CEV blockchain consortium revealed that 15 of its member banks had participated in a trial involving trade finance. Since then activity in this area has accelerated. It signals that enterprise banks are increasingly interested in the application of the blockchain to trade finance. The idea is that a distributed database like a blockchain can form the basis for a wholly digitized supply chain.

“Blockchain lends itself easily to the trade finance industry, which heavily rely on the settlement of sensitive information. This technology could be used to digitise sales and other legal contracts (smart contracts), allow the location of goods to be monitored and facilitate payments in close to real time. Potentially, business transactions can be executed directly on the platform itself through the use of “smart contracts” embedded in the platform and the platform could be further connected to payment systems and distribution networks for smoother flow of payments, goods and services.” – I wrote in Blockchain and trade finance: projects and pilots

Moving from the proof-of-concept stage into production

It is also becoming all the more clear that blockchain technology is moving from the proof-of-concept stage into production, especially for cross-border payments and trade finance. Last week seven European banks announced their plans to develop a trade finance platform based on blockchain technology. Let’s have a look – there are more examples.

European banking consortium: cross-border trade platform

Seven of Europe’s biggest banks (Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Société Générale and UniCredit) signed a Memorandum of Understanding in Brussels under which they intend to collaborate on the development and commercialisation of a new product called Digital Trade Chain (DTC). A shared cross-border trade finance platform for small and medium-sized using blockchain technology.

The product is based on a prototype trade finance and supply chain solution originated by KBC and tested to ‘Proof of Concept’ stage. The aim of the project is to simplify trade finance processes for SMEs by addressing the challenge of managing, tracking and securing domestic and international trade transactions by connecting all of the parties involved (i.e. buyer, buyer’s bank, seller, seller’s bank and transporter), online and via mobile devices. They thereby hope to accelerate the order-to-settlement process and decrease administrative paperwork significantly. The group plans to initially focus on building critical mass in seven European markets.

S7 Airlines and Alfa-Bank pilot the first Russian blockchain LoC transaction

Two Russian companies, S7 Airlines, and Alfa-Bank, have successfully closed a deal using a smart contract to settle and record a Letter of Credit (LoC) on a blockchain. Deloitte in Russia provided legal support to the project. Only the people with information about the original parameters of the deal can view the status of the letter of credit in the blockchain record. In this transaction, in addition to Alfa-Bank and S7 Airlines, the information is available to a service company that receives money under the letter of credit. Legally, this transaction meets all the requirements for a letter of credit as a form of bank settlement, and demonstrates the potential of smart contract application in the framework of Russian legislation.
“The transaction enabled us to test the capabilities of smart contracts and understand how the technology helps to improve business processes and document flow efficiency. We are planning to continue cooperating with Alfa-Bank in this area.” – Dmitry Kudelkin, Deputy General Director, S7 Group

Barclays enabled first global trade transaction trial

Barclays announced that it had successfully completed the first global trade finance transaction trial using blockchain technology. The test enabled two partners, Ornua, an Irish agriculture co-operative (formerly the Irish Dairy Board), and Seychelles Trading Company, a food product distributor, to successfully transfer trade documentation via a blockchain platform created by its accelerator program graduate, Wave. A blockchain-based letter of credit closed a transaction between Ornua and the Seychelles Trading Company, guaranteeing the export of almost US$100,000 worth of cheese and butter from Ireland to the Seychelles, facilitated by Barclays. Meanwhile, the funds for the transaction were transferred via Swift.
Wave has worked with Barclays in developing new solutions for trade finance. The start-up’s blockchain-based technology connects all members of a supply chain to a decentralised network, allowing them direct exchange of documents. Wave’s blockchain-based system allows all parties to see, transfer titles, and transmit shipping and other trade documentation through their decentralized network. The new platform helps optimise internal processes for banks and reduces the risk of documentary fraud, while speeding up the time it takes to complete a trade transaction – from as many as 20 days, to just a few hours.
“Blockchain is a very good solution to eliminate the pain in international trade, because you have an industry that combines all industries, because all industries are either importers or exporters at some level. You have the carrier, the bank and the customer and it’s hard to find one centralized entity everyone can work with.” – Wave founder Ruschin

IBM promotes Blockchain Trade Finance In India

In India, IBM is hoping to promote mainstream adoption of blockchain by collaborating with multinational company Mahindra, which operates Mahindra Finance. IBM and Mahindra are developing a blockchain-based trade finance solution to offer banks in the country. The cloud-based tool will look to facilitate trade finance transactions between buyers and suppliers, and could overhaul trade finance for SMEs in particular.
The companies have already completed a proof of concept that “represents a significant step forward in blockchain, a more compelling and efficient supply chain solution for Mahindra Finance’s small and mid-sized enterprise loan business”. IBM and Mahindra will explore other use cases for blockchain including applications for Mahindra’s car and tractor manufacturing operations.

Microsoft and BAML to Test Blockchain for Trade Finance

Microsoft and Bank of America Merrill Lynch (BOML) announced a collaboration on blockchain technology to fuel transformation of trade finance transacting. The companies have teamed up to implement blockchain technology in trade finance to facilitate faster, safer, cheaper and more transparent transactions. The main objective of the collaboration is to develop and test blockchain technology and establish best practices for blockchain-powered exchanges between businesses and their customers and banks, before commercializing it. Microsoft’s own cloud-based platform Azure will be utilized to test the project. Microsoft Treasury experts will serve as advisors and initial test clients. Development and testing of the initial application, built to optimize the standby letter of credit process, is currently in progress.

CBA, Wells Fargo and Brighann Cotton pioneered blockchain trade finance transaction

The Commonwealth Bank of Australia (CBA), Wells Fargo and trading firm Brighann Cotton have successfully completed the “first” global trade finance transaction experiment in October between two banks using blockchain, smart contracts and the Internet of Things (IoT).
“The interplay between blockchain, smart contracts and the Internet of Things is a significant development towards revolutionising trade transactions that could deliver considerable benefits throughout the global supply chain.” Michael Eidel, CBA. The trade involved the shipment of 88 bales of cotton worth approximately $35,000 from Texas US to Qingdao, China. The transaction mirrors a letter of credit, executed through a collaborative workflow on a private distributed ledger – Skuchain’s Brackets system – between the seller (Brighann Cotton in the US); the buyer (Brighann Cotton Marketing Australia); as well as their respective banks (Wells Fargo and CBA).
By connecting Brighann Cotton’s container to the internet of things (IoT), both CBA and Wells Fargo have been able to “track a shipment in real time”. It was the geographical location which triggered the smart contract to release the payment for the cotton (which happened via the traditional Swift system, allowing the banks to avoid having to win the approval of prudential regulators for the deal).

Major banks from India and Dubai complete blockchain trade finance transaction.

ICICI, India’s largest private bank, and Emirates NBD, recently announced successful international transactions for both trade finance and remittance purposes using blockchain technology.
This pilot transaction was executed to showcase confirmation of import of “shredded steel melting scrap” by a Mumbai-based export/import firm from a Dubai-based supplier, and to exchange and authenticate original international trade documents. The blockchain trade application co-created by ICICI Bank “replicates the paper-intensive international trade finance process as an electronic decentralised ledger”.
The information contained in the blockchain transaction included a purchase order, an invoice, shipping and insurance papers. Each participant was able to access and view a single dataset, to authenticate ownership of goods digitally, transmit their trade documents, check the status of their applications, and transfer their titles, while maintaining confidentiality. Further, it allowed each participant to check online the status of the application, transfer of title and transmission of original trade documents through a secure network, while preserving client and commercial confidentiality. The application is designed to work with existing banking systems and processes, allowing banks to “plug in their systems and process.”
“I envision that the emerging technology of blockchain will play a significant role in banking in the coming years by making complex bilateral and multi-lateral banking transactions seamless, quick and more secure.” – Chanda Kochhar, ICICI MD & CEO

CGI rolls out blockchain lab for trade finance

CGI, a leading IT and business service provider, has launched a lab, a digital sandbox dedicated to helping its trade finance and supply chain clients harness the efficiencies of blockchain for new and existing products. The formal launch took place at Sibos, Geneva, and is part of the company’s rapidly increasing use of Ripple’s distributed ledger solutions. But, the lab itself will soon explore the benefits to trade finance more broadly.The Trade Innovation Lab is a three-tiered “sandbox” that begins with platforms that could include Ethereum, BigchainDB, Ripple, Corda and Eris Industries, then works with CGI’s blockchain developers to build messaging workflows via the Intelligent Gateway that can be integrated via APIs to new blockchain applications. As part of the digital sandbox offering, the company will let its clients experiment with how various blockchains interact with its new Digital Intelligent Gateway, which allows for the sending of a wide range of supply chain messages.

UBS and IBM test blockchain for trade finance

Swiss UBS and IBM have collaboratively designed a project that replicates the entire lifecycle of an international trade transaction on Hyperledger`s Fabric blockchain. Aim is to simulate a complete international trade transaction incorporating stages such as trade finance, cargo inspections, bills of lading, customs inspections, release and payment. The trade finance project is in its earliest stages and focuses on just a single aspect of the process, combining payment transactions, foreign exchange payments and more, into one single, elaborate smart contract.
By programming that process into a smart contract on Hyperledger, both parties expect to be able to cut the processing time down from seven days to one hour. Besides the letter of credit process, the project also aims to incorporate the account opening process, to build a user-friendly interface, “capable to operate on the go, from a transportation vehicle for example”. It remains unclear how long it will take to complete the international trade project.

Consortium rolls out blockchain trade finance app in Singapore

Bank of America Merrill Lynch, HSBC and the Infocomm Development Authority of Singapore (IDA) have jointly developed a prototype solution built on blockchain technology that could change the way businesses around the world trade with each other. The consortium used the Linux Foundation open source Hyperledger Project blockchain fabric, which development was supported by IBM Research and IBM Global Business Services.
The application mirrors a paper-intensive letter of credit (LC) transaction by sharing information between exporters, importers and their respective banks on a private distributed ledger. This then enables them to execute a trade deal automatically through a series of digital smart contracts. Each action in the workflow is captured in a permissioned distributed ledger, giving transparency to authorised participants whilst encrypting confidential data. With this concept, each of the four parties involved in an LC transaction – the exporter, importer and both of their banks – can visualise data in real time on a tablet and see the next action to be performed.
“A letter of credit conducted on blockchain enables greater efficiencies and visibility in trade finance processes, benefitting multiple parties across its value chain,” – Khoong Hock Yun, assistant chief executive of the IDA’s Development Group. The consortium now plans to conduct further testing on the concept’s commercial application with selected partners such as corporates and shippers.

Remaining challenges

As evidenced by the recent announcements of successful international trade finance transactions via blockchain, promising to transform trade finance over the coming decade for business around the globe, streamlining the trade finance process, cutting time and expense from the process, the real-world use of the technology in trade finance will see a growing trend. It however could take a while before the technology will take off in a massive way and will fundamentally transform trade finance.
Going forward, the big challenge for banks wanting to employ blockchain at scale for trade finance will be the interoperability of different blockchain or distributed ledger systems. Another issue that needs to be addressed seriously is integration. How will buyers, sellers, and any required trusted third party/intermediary, interface to the network? Without having to implement an entirely new technology infrastructure, the parties involved in the trade finance process will need flexible tools to map and process documents and payments.

“The introduction of blockchain in your company will require the well needed time. You will have to address the enterprise issues around transaction audibility, visibility and integration into existing business functions. Without this, a profitable integration of the blockchain in the company will prove to be a difficult story” .

Carlo de Meijer

Economist and researcher

More articles about blockchain from Carlo de Meijer:

Managing treasury risk: Credit Risk (Part V)

| 23-2-2017 | Lionel Pavey |

There are lots of discussions concerning risk, but let us start by trying to define what we mean by risk. In my fifth article I will focus on credit 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 and commodity risk. See the complete list at the end of today’s article.

Credit Risk

Credit Risk occurs when there is a risk of default from money that has been lent to a borrower, or funds that have been invested.
The risk can be caused by:

Trade credit extend to a client, who does not pay
Inability to make a payment on a loan
A company going bankrupt
An insurance company not paying under a policy
A bank becoming insolvent
A company not paying wages to employees
A government defaulting

Main categories

The main categories of credit risk are:

Default risk
Counterparty risk
Sovereign risk
Legal risk
Concentration risk

Default risk:
occurs due to the default on monies owed either from lending or investment. The counterparty could be unable to repay. Sometimes they could also be unwilling to repay. The default risk is therefore on 100% of the outstanding balance, unless some form of recovery (be it full or partial) was possible.

Counterparty risk:
occurs when counterparties have to perform an action on a contractual commitment.
This can happen at both the time of settlement and also before settlement, but after entering a contract. Since the start of the financial crisis settlement risk is a major factor for banks. If at settlement a counterparty fails to meet its obligation, this can potentially lead to large losses and, eventually, to a systemic risk as you are therefore unable to meet your own obligations. A default before settlement can be alleviated by substituting a new contract though this could occur at prices far less favourable.

Sovereign risk:
entails the political, legal and regulatory exposures arising from international trade and cross border transactions. It can relate to a government failing in its obligation to repay or to new laws that prohibit free movement of funds – exchange control. Any contracts entered into with nondomestic counterparties should be analysed for the embedded sovereign risks and potential political instability.

Legal risk:
can occur if the counterparty is not legally allowed to enter into certain trades – especially derivative trades. We see in the media stories of companies that have experienced difficulties with derivatives leading to losses and court cases are started to either enforce or negate the contract. Also special purpose vehicles are formed purely to enter into certain transactions like securitisation issues. These are companies with no staff, fixed abode, or assets other than the underlying collateral of the issue.

Concentration risk:
arises from lack of diversification. Too many loans from 1 or 2 banks, too many products purchased from 1 or 2 suppliers, too much revenue generated by 1 or 2 customers. This risk is a bit of a paradox as many companies become successful through concentrating their resources in key niche areas, whilst having to diversify their underlying risk at the same time.

Measures

There are, of course, measures that can be undertaken to identify and minimize these potential losses.

The first approach is counterparty ratings. Certain criteria can be examined – credit rating agencies, examination of financial statements, good knowledge of the counterparty, political, geographical (are they situated next to a volcano?) and legal status.

Notional exposure reveals the full amount outstanding with a counterparty – all the money that could potentially be lost.

Aggregate exposure netts the exposure with a counterparty between monies to be received and monies to be paid.

Clear picture of the replacement costs – the costs involved to replace the existing transaction with a new counterparty.

Techniques of measurement

Measurement of credit risk requires quantitative techniques to measure and model the risks. An example would be Basel III that places a regulatory framework on banks to ensure adequate capital ratios. Eventually the techniques being used will trickle down to commercial companies. This should result in the creation of risk tools that are more sophisticated and improvements of the techniques used to report and measure risk.

However, as the financial crisis has clearly shown, over-reliance on sophisticated computer models appeared to lead to false comfort with the results generated by the modelling systems. This was caused by underestimating the risks in new financial products and the great assumption that is always prevalent in economic theory – people behave rationally at all times! Any model is a snapshot of the world and can only contain a few variables that are perceived as critical. All others are discarded to ensure that the model can work quickly and efficiently.

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

What’s FinTech and how does it change the financial world?

| 22-2-2017 | Arnoud Doornbos |

FinTech is a term that is becoming popular in the financial world. Only one third of the financial experts know what this means and understands what consequences it has for their business. How this innovation is currently changing the ecosystem of money, is still relatively unknown.

FinTech is a contraction of the words financial and technology. In other words: it covers all innovative financial products and services that simplify and accelerates the way we handle money. For traditional banks FinTech is still an uncomfortable concept. Why? Because a large portion of the revolutionary financial concepts are derived from technology driven start-ups. These start-ups change the traditional ecosystem. This is enormously important in a country like the Netherlands where the majority of firms is financed by banks and personal finances of the people are predominantly held by financial institutions which find it often difficult to modernize.

The emergence of ICT in the financial sector may also have different consequences. Those FinTech companies that focus on a single product or service can erode the business model of banks. At the same time the same technology also offers opportunities for traditional players to improve their service and reduce costs. Also, traditional players have a competitive advantage over new entrants based on their knowledge of regulations and access to information from relationship banking (also called soft information).

FinTech companies have greatly changed the rules of the sector. Today we can pay via our mobile phone, quickly apply for online credit and invest online with one click. The list of innovative ideas is endless and an enrichment for everyone.

FinTech VC investments

The explosive growth of the financial technology industry continued in 2016.

2016 has seen 839 deals globally attracting $15.2bn of investment
Global investment is up 27% to Q3 2016 vs the same period in 2015 and has surpassed the 2015 total of $14.9bn
Global deal size is slightly ahead of 2015 Q3 levels, with the average increasing from $14.3m to $18.1m, partially attributable to large Chinese investments such as Alipay

Source: Pitchbook Innovate/Finance

Most money was invested in start-ups. Projections show that the amount of investment will continue to rise.

The power of this technology-driven financial services lies in the fact that it is fast, efficient, transparent and mobile. You can use these services as long as you have Internet access. Of course, this strongly contrasts with the discontent which experienced customers from traditional banks.

Looking ahead — the FinTech industry could experience even greater growth moving into the coming year. The future remains positive from an investment perspective. We may expect an uptick after relative slow growth in the second half of 2016 due to political risks such as the Brexit and the US elections which fueled great uncertainty across all emerging sectors. Along with increased attention, the industry could see a large number of fresh launches and FinTech could make its way into an even stronger growth pattern in 2017 as investors have become more certain about industry prospects.

The possibilities for FinTech in Netherlands

In the Netherlands, there is also a strong rise of FinTech companies. Companies like Paypal are rapidly gaining market share. The biggest and best-known Dutch company FinTech Adyen. This company was recently valued at more than € 2.3 billion.

The FinTech Top 100 announced in 2016 that there are eight Dutch FinTech startups are part of the leading European companies in the financial technology. The financial infrastructure and the international focus play an important role. In addition, capital and expertise is also necessary for innovation, two factors Netherlands as a European Member State meets. The Netherlands also rise in 2016 from the 5th to the 4th place in the ranking of most competitive economies in the world.

The infographic shows that, perhaps inspired by Adyen, payment providers constitute a large share of the pie. Also data startups and alternative financing (crowdfunding example) are well represented in the Netherlands.

Dutch FinTech awards 2017

FinTech startups are disrupting the financial sector. Innovative companies are eager to please millions of frustrated banking customers. Investors are fascinated by the phenomenal profits made by banks struggling with outdated technology. Today, more and more money is being invested in FinTech. The Uber of the banking sector has not yet emerged, but this is only a matter of time. On April 21 the Dutch FinTech Awards 2017 will be held in Utrecht at the Rabobank Headquarter. The panel of judges of this years event consists of seasoned investors, academics, marketeers, entrepreneurs with an extensive track record in finance and/ or technology. (http://www.fintech.nl). The author of this article is one of the judges

Future

What we see in practice is that components of banking products and services are being redeveloped by the FinTech Industry.
These FinTech solutions are smarter, faster and better.
As a result we now see that different FinTech companies will work together. The individual Fintech products often turn out to be complementary to each other.
FinTech companies now recognize that collaboration with other FinTech companies leads to high growth and a better product range.

The Uber of the banking sector

The Uber of the banking sector has not yet emerged, but this is only a matter of time.

Arnoud Doornbos

Associate Partner

Uniform Herstelkader Rentederivaten MKB

| 21-2-2017 | Simon Knappstein |

Op 19 december van vorig jaar is het definitieve herstelkader rentederivaten gepubliceerd door de Derivatencommissie. Dit is een update van de versie die al in juli van 2016 werd gepubliceerd. De update is inhoudelijk onveranderd maar bevat een aantal toelichtingen en bijlagen om de werking van het herstelkader te verduidelijken.
De opdracht om dit herstelkader op te stellen is door de Minister van Financiën in maart 2016 gegeven. Alle Nederlandse banken hebben zich aan dit herstelkader gecommitteerd.

Tegelijk met deze publicatie heeft de Derivatencommissie ook een informatieve brochure uitgegeven. Banken zullen deze gaan opnemen in hun brieven die ze naar klanten met renteswaps gaan sturen. Hierin wordt op hoofdlijnen de werking van de compensatieregeling uitgelegd.
Eerst wordt het toepassingsbereik geschetst, voor wie geldt dit herstelkader?
Dit herstelkader is van toepassing op niet-professionele partijen die niet aan deskundigheids-eisen voldoen. Dat betekent in de praktijk dat het met name gaat om MKB-ondernemingen en particulieren. Verder gelden er voorwaarden met betrekking tot de looptijd van de rentederivaten. (Een interessante ontwikkeling is dat het gerechtshof in Den Haag gisteren geoordeeld heeft dat een groot bedrijf toch recht heeft op schadevergoeding voor renteswaps die de bank heeft verkocht, als vooraf duidelijk was dat het bedrijf geen speciale kennis had over dit soort financiële instrumenten.)

Vier stappen

Vervolgens zijn er vier stappen gedefinieerd om de hoogte van de compensatie te bepalen.

In stap 1 worden gestructureerde, complexe derivaten door de banken aangepast naar een renteswap, een rentecap of een rentecollar. Het verschil in netto cashflows wordt in deze stap gecompenseerd.

In stap 2 worden alle verschillen tussen het derivaat en de onderliggende financiering aangepast. Denk hierbij aan een overhedge in omvang, een overhedge in looptijd of afwijkingen in referentierente. Ook hier worden de verschillen in netto cashflows gecompenseerd.

In stap 3 bieden de banken een coulancevergoeding aan. Deze vergoeding bedraagt maximaal 20% van de rente die per saldo onder een renteswap dan wel rentecollar aan de bank is betaald en naar verwachting nog zal worden betaald. Deze vergoeding is gemaximeerd op €100.000,-. Mijn ervaring is dat met een looptijd van 10 jaar en een hoofdsom van €2,0 mio a €2,5 mio dat maximum wel bereikt wordt.

In stap 4 vergoeden banken onverwachte verhogingen van renteopslagen op financiering(en) die door een renteswap worden afgedekt.
De banken verwachten dat zij in de loop van 2017 hun klanten kunnen informeren met concrete compensatievoorstellen. De exacte timing zal per bank verschillen. Als de bank een voorstel heeft gedaan, kan de klant beslissen of hij van het voorstel gebruik maakt. Bij acceptatie van het voorstel, verleent hij finale kwijting aan de bank.

Toezichthouder AFM gaat er op toezien dat de banken en de externe beoordelaars dit proces zorgvuldig en volledig uitvoeren.

Als u meer wilt weten over dit herstelkader kunt u mij mailen op [email protected]

Simon Knappstein

Owner of FX Prospect

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

Treasury and regulations: A changing environment

| 15-2-2017 | Theo Paardekoper |

Companies need to comply to their regulatory framework in their industry. For the treasury department a regulatory framework is applicable which is basically linked to the financial industry and not linked to the industry of the company. Because regulations in the financial industry are changing it is important for the treasurer to update.

Regulations

Important regulations and rulings for treasurers are EMIR, MIFID and MIFID II/MIFIR.

Other regulations that are applicable for the financial industry, like UCITS and AIFM (regulations for investments funds) and CRD rules (capital requirement directive as a result of BASEL III) do not effect the corporate treasury directly, but the side effect of these rules can have effects on pricing and product offering by financial institutions.

Anti Money Laundring regulations (MOT-melding in The Netherlands) are not only applicable for banks. Also corporates are mandatory to register these transactions at the Finance Intelligence Unit of the Dutch Tax autorities.
The regulations mentioned above are all linked to the European regulatory framework and are valid in addition to local laws, like the WfT (Wet Financieel Toezicht) in the Netherlands.

EMIR (= European Market Infrastructure Regulation)

This regulation is valid since August 2012 and was initiated after the Lehman Brothers bankrupty in 2008. The main goal of EMIR is to improve transpancy of the OTC market to create a clear overview of all the derivative positions. This was one of the main problems that became clear after the Lehman bankrupty. It was totally unclear to get a view on the derivate positions and risk of a counterparty. Emir also introduced a solid clearing member (named CCP) and Trade Repository members to register your OTC derivates. To register your positions a LEI (Legal Entity Identifier) can be obtained at the Chamber of Commerce.
EMIR is not (yet) applicable for small pensionfunds.

MIFID (= Markets In Financial Instruments Derivatives)

Main objective of MIFID is to increase competition in the investment industry and to protect consumers. The well-known 40/20/2 rule to define a professional or non-professional counterparty is one of the items to protect consumers and force financial institutions into a duty of care. One of the results is a direct view on the Market-to-Market pricing of the companies derivates and monitoring of margin call obligations.
Also the classification based on knowledge is an important item and can be part of discussion during a lawsuit.
Mifid increased the number of trades in the OTC market what caused a more fragmented view on market pricing. Financial institutions are forced to provide the 5 best quotes in the market to their clients.

MIFID II

In January 2018 this new set of regulations is applicable. Mifid II made Mifid regulations also applicable for commodity and CO2-rights traders. Also market data suppliers must be registered to comply with MIFID II. Structured deposits (return is not interest based but linked to an other ratio link EUR/USD or oilprice) will also fall under the scope of Mifid. Change of classifications on behalf of Mifid II classifies local governmental entities as non-professionals. Health Institutions governmental education and housing associations are not clearly excluded as non-professional.

Mifid II will mainly “change the game” of manufacturers and distributors of financial services, but this regulations will give corporates more tools in case of a conflict about a trade. The negative side effect of new regulations is that pricing in the market will increase because of reduced competition as a result of higher entry barriers in the market.
Any action required for a corporate treasurer?

It is up to your bank to comply to MIFID II. So I would say “no”. The bank will inform you with new legal documentation and product information in the near future.

Theo Paardekoper

Independent treasury specialist

More articles of this author:

Treasury education and training: what’s next?

Managing treasury risk: Commodity Risk (Part IV)

| 14-2-2017 | Lionel Pavey |

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

Commodity Risk

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

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

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

General strategies that can be implemented

Acceptance
Avoidance
Contract hedging
Correlated hedging

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

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

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

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

Commodity risk framework

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

Identify the risks
Measure the exposure
Identify hedging products
Examine the market
Delegate the responsibility factors within the organization
Involve management and the Board of Directors
Perform analytics on identified positions
Consider the accounting issues
Create a team
Are there system requirements needed

Problems can arise because of the following:

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

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