Tag Archive for: treasury

Short note on interest rate derivatives

16-05-2016 | by Ad van der Plas |

 

They are often in the news, but what are they and how do they work? Interest rate derivatives are derivatives of the money- and capital markets and are especially designed to give assurance on the interest rate you will have to pay or receive in the future. Best known is the interest rate swap, a swap between the fixed and variable interest rate. All other interest derivatives are calculated on the interest rate swap. How does this swap work?

The interest rate swap is a two party agreement, usually in ISDA model, in which the fixed and variable interest amounts are swapped. The swap period, the fixed and variable (reference) interest rate are defined. The interest is calculated on the agreed notional principal amount and the interest amounts are payable on the payment dates. One party receives the fixed rate amounts and pays the variable rate, and the other party receives the variable rate amounts and pays the fixed rate.

With buying an interest rate swap, you can change the interest rate risk of an underlying loan from an uncertain variable rate to a certain fixed rate. That is….if during the swap period there are no changes in the loan itself. Since you aim to obtain certainty you should be aware of potential uncertainties during the swap period, such as:

  1. A change of the reference rate in terms of content or effective representation (Libor).
  2. A change in the interest rate calculation of the loan caused by regulatory changes in the financial markets (Solvency) or due to balance sheet effects of the lending company itself like a liquidity surcharge.
  3. The lender changes the surcharge because he has revised the credit rate of your company.
  4. The underlying loan is canceled or restructured.
  5. The counterparty in the swap agreement requires an additional payment if the swap has a negative value.
  6. Possible P&L and Balance sheet effects due to changes in the valuation of the swap because of changes in regulations, for example IFRS.
  7. A different interpretation of the regulations when changing your auditor.

Please also note that the outstanding swap agreements will have effect on your total financing capacity. And finally, a warning: improper use of derivatives can be a big risk. Be sure to have a professional opinion when using derivates.

Ad van der Plas

 

 

Ad van der Plas

Independent Treasury Consultant & Interim Manager

Is this the solution to solving the derivatives mis-selling issue?

12-05-2016 | by Victor Macrae |

EuroRecently the Dutch Ministry of Finance appointed three independent experts to solve the long-lasting issue of derivatives mis-selling in the Netherlands. This is important for both firms and banks as the dispute puts severe pressure on their relationship. Moreover, judges are reaching more and more verdicts in favour of SME’s. In several cases interest rate swap transactions were declared void and the firm was compensated for its losses. Therefore the stakes are high. Is this last step permanently going to solve the issue?

The derivatives mis-selling problem originates from the fact that banks have been selling interest rate swaps to SME’s as an alternative to fixed rate loans. If market interest rates would not have dramatically decreased to unprecedented lows, there might have been no issue at all! But the reality is that buyers of interest rate swaps face various problems that they were apparently not aware of when signing the contract. For instance, in contrast to fixed rate loans, a bank can increase the interest margin when it deems a higher counterparty risk. Furthermore, when a firm wants to repay the underlying loan, it will also have to pay a possible negative market value of the swap. Also, a swap’s negative market value can decrease the firm’s access to liquidity.

MiFID strongly protects non-professionals

A key fact in this issue is that SME’s are deemed to be non-professional investors according to MiFID, a powerful EU directive that protects customers that purchase financial instruments. When selling interest rate swaps to non-professionals, banks should in advance inform them whether it acts as an advisor or as product seller. Furthermore, the bank should upfront provide sufficient information about all risks involved. Last but not least, banks should check that the non-professional investor understands the proposition and that the product is in the best interest of the customer.

Overarching solution

The Dutch financial conduct authority AFM first asked the banks to review their files of derivatives sales to SME’s and to pay compensation if necessary. Thereafter, the AFM concluded that the reviews were not ‘in the best interest of the customers’ and demanded that banks do it all over again. Recently the Dutch Minister of Finance intervened because he was unhappy with this process. As a consequence, to solve the issue once and for all the Ministry of Finance appointed three independent experts. I’m pleased with the idea of appointing three ‘outsiders’ as it makes it easier to reach a sound overall solution for all parties involved. SME’s would be fairly compensated and further financial and reputational damage of banks would be limited.

Disturbing signals

What bothers me is the fact that in the procedure set up by the AFM the banks will create an overall recovery plan together with the independent experts. This gives far too much power to the banks and undermines the independency of the experts! Having said that, the Minister of Finance has already softened this statement of the AFM. We will see how it works in practice. As an alternative SME’s can always go to court as judges have reached verdicts that are beneficial to them…

Victor Macrae

 

Victor Macrae

Owner of Macrae Finance

 

Basisprincipes van interne beheersing op het gebied van Treasury – deel II

11-05-2016 | by Jan Doosje |

treasury

 

Hoe vaak komt het nog voor dat een externe adviseur of een nieuw aangetreden functionaris moet constateren dat de financiële functie op het deelgebied Treasury qua opzet bij een bepaalde organisatie niet goed ingericht is ? Naar mijn idee te vaak, vooral waar het bedrijven en organisaties uit het midden- en kleinbedrijf betreft. En dit terwijl control op het gebied van de Treasuryfunctie vrij snel en vrij simpel te verkrijgen is!

 

 

Voor de ‘niet financiële’ lezer zal wellicht niet goed duidelijk zijn wat de Treasury functie inhoudt. Zie hiervoor mijn vorige artikel. Als tweede vraag komt op: “Wat is goed ingericht ?”.

Waar het bij organisaties vaak strak is geregeld wie er verantwoordelijk is voor bijvoorbeeld commerciële afspraken of waar de grenzen liggen voor autorisatie van een bepaalde offerte, dan wel wie er verantwoordelijk is voor ICT wil dit soort structuren nog wel eens aan de Treasury functie voorbij gaan. Bevoegdheden en checks en balances liggen hier nog wel eens in één hand. Uiteraard met alle risico’s van dien.

Enige voorbeelden van organisaties die risico’s lopen

  1. Wie kent ze niet, de bedrijven waar een administrateur of controller zowel de facturen accordeert als deze facturen betaalbaar stelt? En of het nog niet genoeg is, deze betalingen ook daadwerkelijk bij de bank autoriseert. Het behoeft geen betoog dat hier grote risico’s aan kleven.
  2. Of denk aan de onderneming waarbij een goedwillende controller een flink bedrag in dollars opneemt in de verwachting dat deze koers zal stijgen? Vooral bij bedrijven met veel internationale handel zal dit niet vreemd overkomen. Maar wat nu als blijkt dat de dollar verder daalt en er voor de onderneming verliezen opdoemen?
  3. Of het bedrijf dat zijn vermogen bij de Icesave bank had belegd en daar slechts een fractie van heeft teruggezien?

Er zijn nog vele voorbeelden op te noemen maar kern van alle voorbeelden is dat er niets geregeld is, er wordt uitgegaan van vertrouwen en dat kan tot financiële rampen leiden.

Bijvoorbeeld dat posities in rente (nog niet afgedekte leningen) of valutasaldi te lang op de (buitenlandse) bankrekening blijven staan en daarmee het resultaat van de onderneming substantieel kunnen beïnvloeden. Maar ook dat niet duidelijk is wie er nu eigenlijk een betaling mag autoriseren bij de bank. Wie heeft de contacten met de bank en met welke banken (tegenpartijen) mag de onderneming zaken doen?

Doelstelling Treasury bepalen

Als begin van een oplossing voor deze problematiek dient de organisatie te bepalen wat haar doelstellingen zijn op het gebied van Treasury. Is beheersing van risico’s de grootste drijfveer? Dan kan dit misschien gepaard gaan met wat hogere kosten. Of dient het beschikbare kapitaal tegen een zo hoog mogelijke rente te worden belegd tegen een aanvaardbaar risico?

Zodra deze vraag min of meer beantwoord is kan de organisatie hierop ingericht worden. Met ingericht wordt bedoeld dat er procedures en richtlijnen komen op het gebied van Treasury.

  • Ten eerste zal bepaald moeten worden welke functionarissen er betalingsvoorstellen mogen inlezen bij de bank en wie deze mag autoriseren. Bij een wat grotere organisatie dienen deze autorisaties niet in één hand te liggen.
  • Ook moet bepaald worden met welke banken men zaken wil doen en welke “grading” deze banken mogen hebben. Voor de crisis “wemelde” het van de triple A banken (AAA) maar tegenwoordig zijn deze met een lichtje te zoeken.
  • Verder dient bepaald te worden of er van “instrumenten” gebruik gemaakt mag worden (denk hierbij aan opties, aandelen, vaste of variabele rente e.d.). Ook de verdeling over de instrumenten (maximaal X procent in aandelen, Y procent in obligaties met een bepaalde rating e.d.) en banken (bijv. maximaal 10% bij de X Bank en 50% bij de Y bank en 40% verdeeld over de Z en A bank) Dit dient in het Treasury statuut vastgelegd te worden.

Deze drie elementen zijn m.i. de basis voor een goed ingerichte treasury functie. Als dit goed is beschreven, vastgesteld en geïmplanteerd kan de ondernemer de werkzaamheden op dit terrein met een gerust(er) gevoel aan de betreffende medewerkers overlaten.

Ook is het van belang dat de “tegenpartijen” (de banken) waar de onderneming zaken mee doet, op de hoogte zijn van het Treasury statuut. Zij stellen het op prijs om het Treasury statuut te verkrijgen en adviseren graag hoe er verbeteringen behaald kunnen worden.

Kort samengevat kunnen de risico’s op het gebied van Treasury sterk gemitigeerd worden door een simpel in te richten structuur:

  1. Wie mogen zich bezighouden met aangelegenheden op het gebied van Treasury?
  2. Wat mag ieder van de functionarissen qua bevoegdheid?
  3. Met wie (welke banken e.d.) mag er zaken gedaan worden?
  4. Welke posities mag de onderneming innemen?

Om dit te bedenken en uit te schrijven gaat enige tijd voorbij maar het zal zijn vruchten afwerpen. Ook voor de ondernemer, de medewerkers, accountant evenals eventuele toezichthouders is het goed te weten dat er afspraken zijn op dit gebied en dat hier ook op gemonitord wordt.

Uiteraard wordt in dit artikel slechts op basisprincipes ingegaan. In een eventueel vervolg zal op ieder van de deelgebieden verder ingezoomd kunnen worden dan wel op de treasury functie zelf.

Conclusie is dat een op de wensen en eisen van de organisatie afgestemd Treasury beleid, tezamen met een goed gestructureerd en actueel Treasury statuut een grote mate van control op dit gebied geeft en dus als essentieel onderdeel van het in control zijn van de organisatie gezien moet worden.

Jan Doosje

 

Jan Doosje

Owner of Fimterim Advies & Consultancy

 

Basisprincipes van interne beheersing op het gebied van Treasury – deel I

| 06-05-2016 | by Jan Doosje |

treasuryHoe vaak komt het nog voor dat een externe adviseur of een nieuw aangetreden functionaris moet constateren dat de financiële functie op het deelgebied Treasury qua opzet bij een bepaalde organisatie niet goed ingericht is ? Naar mijn idee te vaak, vooral waar het bedrijven en organisaties uit het midden- en kleinbedrijf betreft. En dit terwijl control op het gebied van de Treasuryfunctie vrij snel en vrij simpel te verkrijgen is!

Voor de ‘niet financiële’ lezer zal wellicht niet goed duidelijk zijn wat de Treasury functie inhoudt. Als tweede vraag komt op: “Wat is goed ingericht?”.

Ik zal daarom beginnen met deze vragen te beantwoorden.

De Treasury functie houdt zich bezig met beheren van de financiële waarden en verplichtingen van een organisatie met als doelstelling om op zowel lange als korte termijn voldoende liquide middelen te hebben voor het voldoen aan (toekomstige) verplichtingen. Een tweede belangrijk element is dat dit tegen marktconforme tarieven dient te gebeuren (hier worden ook de geldende rentepercentages bij inbegrepen). Het laatste, en vooral gezien ervaringen bij diverse organisatie, zeker niet het meest onbelangrijke element is, dat dit dient te geschieden tegen voor de organisatie acceptabele en te dragen risico’s.

Treasury houdt zich bezig met:

  • Kasgelden
  • Banksaldi en optimalisatie hiervan (cash management)
  • Leningen opgenomen
  • Leningen uitgegeven
  • Rentebeheersing
  • Valutarisico’s
  • Optimalisering van rentebaten of rentekosten
  • Goede voorwaarden met de bank(en)

Kort gezegd dient de Treasury functie er zorg voor te dragen dat er altijd voldoende geld in kas (lees: banksaldo) is en dat hiervoor niet teveel betaald wordt en er geen, of vrijwel geen risico’s aan verbonden zijn. In deel twee van dit artikel zal ik verder ingaan op de inrichting van de Treasury functie.

Jan Doosje

Jan Doosje – Owner of Fimterim Advies & Consultancy

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Profit versus cash

03-05-2016 | by Ad van der Plas |

It all started in the 90 ‘s of the last century when the Securities and Exchange Commission (SEC) requested the Financial Accounting Standards Board (FASB) to provide guidelines for the presented net profit in financial statements. The idea was to help private investors make better comparisons between the various investment opportunities. The set out guidelines were made mandatory for all listed companies in the USA. The principles of the FASB guidelines – generally accepted accounting principles (GAAP) – were also adopted in the financial statements of unlisted companies and applied worldwide (IAS) and in The Netherlands (RJ).

It is important for companies to comply with Standard Guidelines in their external financial statements. The reported net profit, however, is not the key management information. The profit is based on “provision accounting” and includes lots of  expectations and assumptions that are far from sure. For example the calculated amounts for pension provisions, depreciation, actual investment and accrued revenue are based upon big ifs and maybe’s. A better and more accurate tool of management is the free available cash flow. Ultimately, it is every company’s goal to make a bottom line cash surplus.

For investors the free available cash – and not the calculated net profit  – is the single most important information.

Investors in long-term-debt want to know if and when the company can pay back the interest and principal based on the generated cash.
Investors in equity capital want to know if the revenues on their investment have sufficient value for money compared to alternative yields such as mutual funds, bonds, savings accounts etc. All returns are compared based on  cash calculations.
Daily, weekly, monthly, quarterly and yearly the management need to know the turnover, margin, costs and net profit but most important : the actual generated cash and the use of capital. Why else would Warren Buffett believe that the real value of a company is determined by the total expected discounted net cash flow?

Want to know more about managing on cash ? Feel free to contact me.

Ad van der Plas – independent Treasury Consultant & Interim Manager
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Rousseff impeachment: short-term strength for BRL

brasil22-04-2016 | by Simon Knappstein |

Will the ousting of President Rousseff help the Brazilian Real to strengthen or not?

From a high of 4,15 at the end of January USD/BRL has fallen steadily to 3,55 level today. This strengthening came on the back of a broadly weaker USD, a rebounding oil price, renewed inflow into Emerging Markets in general and supported by a high carry for the BRL more specifically.

 

What has played an important role more recently is the diminishing popularity of president Dilma Rousseff. This comes in part by a massive corruption scandal at state-run oil company Petrobras with a lot of Worker’s Party politicians already convicted. Yesterday, the Brazilian Lower House voted for her impeachment over allegations for manipulating government accounts to hide a budget shortfall. All this has crippled the government’s ability to deal with an economic recession and rising unemployment.

The consensus FX forecast for USD/BRL, with current spot at 3.62, is 3.90 in 12 months’ time.

Consensus FX forecast for USDBRL

According to Nordea the potential impeachment of president Rousseff is a “short-term positive for the BRL at best. Short-term positive because markets seem to cheer the potential for change and for more political stability under Vice President Temer, albeit with the recognition that the BRL has already strengthened a lot and that most of the impeachment may be priced. More importantly, however, Brazil’s huge and numerous challenges will not go away with President Rousseff and markets may soon realize that.”

ING that expects USD/BRL to trade at 4.05 in one year’s time states: “Yet, we continue to see a high risk of the current market euphoria to fade as an impeachment does not necessary mean a highly stable political environment thereafter”. That might be an understatement as vice-president Temer, who would assume power on an interim basis when Rousseff has to step aside, also runs the risk of an impeachment process.

And although, as Scotiabank poses it “hopes that changes in the country’s leadership could lead to more market friendly economic policies” market participants seem to underestimate that “Brazil is undergoing a deep economic crisis exacerbated by a profound crack in its political institutions” and more specifically underestimate “the nature of the structural change required to rebuild credible political institutions”. Scotia sees the BRL weakening to 4.20 in 11 months’ time.

So in the short-term the BRL might strengthen a bit further still but further out it is still in general expected to weaken to around 4.0 against the USD.

Simon Knappstein - editor treasuryXL

 

Simon Knappstein

Owner of FX Prospect

Negative Interest Rate Policy: No lasting effect on FX

14-04-2016 | by Simon Knappstein |

bank

 

Negative interest rates are gripping Central Banks worldwide. The BoJ has resorted to this unexpected and unusual policy at the end of January. The ECB is expected to dig deeper into negative realms at their March meeting. The Swedish Riksbank has also gone negative and the Fed is contemplating the possibility for the eventuality economic growth will falter and inflation will fall. And of course the Swiss are already quite accustomed to negative interest rates. But in the FX markets the effects are minimal and short-lived.

So, are Central banks reaching the end of the effectiveness of their extremely loose monetary policies? If so, the big question is what next? Plain currency intervention? Hard to imagine currently, though the Swiss National Bank is said to be continuously intervening to prop up EUR/CHF.

The ECB has crossed the zero interest rate border in the summer of 2014 bringing its depo-rate to minus 0.10%. A move intended to stimulate credit growth by commercial banks, and as a means to lower the value of the Euro as to import more inflation. Although the latter was not explicitly mentioned everyone knows it was.

Since then the Swiss National Bank in December 2014, the Riksbank in February 2015 and the Bank of Japan in January 2016 have followed suit by introducing negative interest rates.

Currency impact

Interest rates
Figure 1 – Currency impact

The impact on the currency exchange rate is questionable and certainly not a straightforward main driver, as can be seen in figure 1.
When the ECB introduced a negative interest rate in the summer of 2014 it was accompanied by the start of the QE program and indeed EUR/USD moved considerably lower. The rate cut to -0.3% last December had no material impact on the exchange rate, even though it was followed by the first Fed rate hike in years.

The pressure on EUR/CHF could not be relieved by a rate cut to -0.25% in December 2014 so it was soon followed by the abandoning of the minimum exchange rate at 1.20 and a further cut to -0.75%. EUR/CHF stabilized but only continuous intervention by the SNB has brought the pair higher since then. The charts for EUR/SEK and USD/JPY speak for itself.

The conclusion is that there is very little to no evidence that negative interest rates lead to weaker currencies to support inflationary pressures.

Simon Knappstein - editor treasuryXL

 

 

Simon Knappstein

Owner of FX Prospect

 

Consensus FX forecasts March 2016

30-03-2016 | by Simon Knappstein |

FX forecast

 

The March edition of the consensus FX forecasts report shows that spot US Dollar has weakened broadly since February. In the forecasts for 1 year the changes for he USD are less strong and more diverse though.  



Changes vs. February

Against the CAD and RUB the USD is expected to weaken a little more than last month. The oil price is a main driver here. Less strengthening is seen in 1 year against the Indonesian Rupiah IDR and against the South African Rand ZAR. Both are supported by a high carry, and in the case of the IDR coordinated action in the form of economic reforms and interest rate cuts is supporting economic growth and the Rupiah.
Against the general direction of a weakening USD there are a few currencies against which the USD is expected to strengthen more versus last month. These are the Indian Rupee INR, the Turkish Lira TRY and the Korean Won KRW. For the specifics here please see the comments in the report.

Market Focus

Developed Markets

Although the Fed has voiced a softer tone on the interest rate path, the USD is still expected to strengthen supported by tighter monetary policy from the Federal

Reserve this year. A hawkish re-pricing of the 2016 path presents upside risk to the USD.
Expect the EUR to weaken on the basis of policy divergence and interest rate differentials.
The Brexit threat has provided for a sizeable drop in GBP; risks remain tilted to the downside into the June 23 referendum.
The recovery in oil prices is still fragile and a pullback would punish the CAD. Over the longer term, the CAD should take flight anew more sustainably, in step with the oil price recovery and the improved economic environment in Canada.
JPY is expected to weaken, as it reverses its YTD sentiment-driven gains and monetary policy divergence takes the upper hand again.

AUD sentiment might be tentatively turning the corner, but AUD remains vulnerable to a slowing Chinese economy.

Emerging Markets

The RUB stabilised on the back of a rising oil price, but the recovery is fragile and tentative.
TRY found some support during the recent risk-on period but idiosyncratic risks and on-going geopolitical risks are expected to weigh on the TRY.

Latam

The BRL has recovered somewhat thanks to a combination of high yields and a more benign global risk environment. Political risk remains high and unwinding of the carry trade might see a sharp weakening of the BRL.
MXN has responded positively to aggressive and concerted policy action. Further gains in MXN are expected.

Asia

CNY should weaken modestly in response to slower growth and central bank policy accommodation.
IDR is supported by a change in investor sentiment on the back of coordinated action by the central bank and government.
Simon Knappstein - editor treasuryXL

 

Simon Knappstein

Owner of FX Prospect