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Why you need to automate swap execution
22-11-2022 | treasuryXL | Kantox | LinkedIn |
Do you struggle with having a perfect match between your currency hedging position and the cash settlement of the underlying commercial exposure? We’ll let you in on a secret: most treasurers and finance teams do. But how can you simplify this time-consuming and resource-intensive task? In this article, we show why you need to automate swap execution and how you can do it.
We reveal why this is an essential issue for treasurers, how it’s typically handled, and why automated swap execution can help finance teams play a more strategic role in the business.
Setting the scene
Treasurers know that it is practically impossible to have a perfect match between the firm’s currency hedging position and the cash settlement of the underlying commercial exposure. That’s especially the case if those hedges were taken long before. This is why swapping is so essential.
Let us briefly see an example. If you have a ‘long’ USD forward position with a given value date and you need, say, 10% of that amount in cash right now, a swap agreement allows you to perform that adjustment.
With the ‘near leg’ of the swap, you buy the required amount of USD in the spot market while simultaneously selling —with the ‘far leg’ of the swap— the same amount of USD at the value date of the forward contract. And that’s how you adjust your firm’s hedging position.
Pain points: a resource-intensive activity
Swapping can be extremely time-consuming and resource-intensive, particularly if many transactions, currencies and liquidity providers are involved. We recently saw how a large European food producer was struggling mightily with manual swap execution, a dreadful situation faced by many, if not most, companies.
Among the most common pain points, we can cite the following three:
Traceability and automated swap execution
Traceability is when each element along the journey from FX-denominated entry to position to operation to payment has its own unique reference number. But how can we apply this concept to solve the problem of manual swap execution?
The answer is automated swap execution, a solution that is embedded in Currency Management Automation software. It relies on the perfect end-to-end traceability between the different ‘legs’ of a swap agreement and the original forward contract. Meanwhile, FX gains/losses and swap points are automatically calculated. It’s dead simple!
Swap automation is a powerful tool for the treasury team. At the company level, it opens the way to:
At a personal level, in terms of the daily workload of members of the treasury team, automated swap execution means:
And that’s no small achievement!
Interview | 9 questions for Kurt Smith, Seasoned Treasury Expert
21-11-2022 | treasuryXL | Kurt Smith | LinkedIn |
Meet our newest expert for the treasuryXL community, Kurt Smith.
Kurt is a Director of Marengo Capital, a corporate advisory company specialising in treasury, financial markets, corporate finance and private equity. Marengo Capital has a track record of, and passion for, creating and managing for long term enterprise value by aligning corporate strategy, finance and risk.
Kurt is also the Vice President and Technical Director of the Australian Corporate Treasury Association, a member of the Australian Payments Network Stakeholder Advisory Council, and a member of FX Markets Asia Advisory Board. His career includes senior positions across fund management, bank derivative trading, Fintech, private equity and corporate treasury. He has a Ph.D in Finance and is a graduate of the University of Cambridge.
Kurt is an engaging and compelling public speaker with substantial experience in presenting, being a panellist and master of ceremonies, for intimate and large audiences in Australia, Asia, Europe, and the United States. He is well known for providing unique insights into new and well-worn issues, balancing contrarian thinking with informed judgment, and communicating highly technical issues to non-technical audiences.
We asked Kurt 9 questions, let’s go!
INTERVIEW
1. How did your treasury journey start?
I started in financial markets, firstly as a portfolio manager with a macro fund, and secondly as an FX option trader and Head of Derivative Trading for a commercial bank. While I enjoyed the excitement, spontaneity, and commercial pressure of each day, I wanted something more fulfilling.
I became a Director in two FinTech companies commercialising option valuation and risk management technologies, one for the interbank exotic option market and the other for retail investors. Sourcing capital for product development was a constant challenge but also very rewarding. By this stage I was hooked on corporate treasury. Treasury allowed me to direct my passion for financial markets to create, operate and scale businesses by funding growth and making them financially sustainable.
I then moved to a $10B+ corporate to run their treasury, corporate finance and insurance businesses. My main responsibility was developing and implementing capital management and financial risk management strategies to ensure that the company target credit rating was achieved, while obtaining funding, allocating capital to investments, and hedging market exposures to reduce earnings volatility.
I am now a Director of Marengo Capital which specialises in creating and managing for value in corporate treasury and corporate finance. I am still involved in FinTech as the Group CFO of a cash flow securitization company; and I am also the Vice President and Technical Director of the Australian Corporate Treasury Association, which is engaging with and improving the treasury community in Australia.
2. What do you like about working in Treasury?
I like that the success of the company is in your hands. The company can formulate exciting corporate strategies and business plans, but those strategies and plans will not be delivered unless capital is sourced, structured and allocated properly, and financial risks are hedged to provide corporate resilience to business cycle downturns and adverse economic conditions.
When you think about it, it is a massive responsibility. However, I prefer to think of it as a fantastic opportunity to make an impactful contribution.
3. What is your Treasury Expertise and what expertise gives you a boost of energy?
My specialist expertise is in creating and managing for long term enterprise value. Increasing value is critical to increasing the capital funding capacity of the company and delivering into the main goals of Executives and the Board. Most treasurers consider treasury a cost centre and do not have ambition to add value. To me, that makes treasury a tax on the business, an overhead to be recovered by everyone else. I believe that there are a large number of ways that treasury can add substantial value, by increasing cash flow not just forecasting it, managing the capital structure to reduce the cost of capital, and evaluating the allocation of capital to investments to ensure value accretive and efficient returns.
While I get a kick out of applying commercial acumen to improve businesses, I really get a kick out of convincing others to do the same, from decision-makers to operational teams. I get very enthusiastic – but I truly believe that value is the key to financial sustainability, which is necessary for companies to do more of what they want to do.
4. What has been your best experience in your treasury career until today?
I built a very high-functioning treasury and got team members to work on several projects simultaneously in small multi-disciplinary teams. Team leadership was based on expertise not the hierarchy, and it not only provided all team members with rapidly growing CVs to support their careers, it also provided opportunities for, and the most satisfying discovery of, junior employees with real talent fast tracking into leadership succession planning. This way of working was new to all of us, and we created a lot of value and had a lot of fun doing it!
5. What has been your biggest challenge in treasury?
I worked for a capital-intensive company that had rapidly growing capital expenditure to be funded predominantly by debt, during an expected aggressive interest rate tightening cycle. The rates market had already factored five sequential monetary policy tightenings into the yield curve, such that fixed rates for term debt were very high. Our analysis showed that in most foreseeable scenarios floating rates would outperform fixed rates, even during sharp tightening cycles. We went with the maximum allocation to floating rates, and over the next five years interest rates decreased markedly, and we used those decreases to gradually re-weight floating rate exposure back to their neutral weight.
This was a real risk management lesson for me, that is applicable now. One has to take emotion out decisions, especially fear, do the analysis and trust your instincts. Worked for us!
6. What’s the most important lesson that you’ve learned as a treasurer?
Communication is crucial, especially verbal communication.
Executives, Boards and operational teams do not understand treasury and corporate finance. Treasurers need to be able to communicate complex technical information in a persuasive and compelling way to non-technical audiences. For example, I prepared a 35-page capital management strategy working paper that I turned into a six-page Board paper, and my presentation to the Board was a single diagram on one slide. If they were not convinced in the first few minutes, all that work would have been wasted. Communication is key, and I believe it is a defining characteristic between the best and the rest.
7. How have you seen the role of Corporate Treasury evolve over the years?
Corporate treasury was formerly a satellite of the business that was involved at the end of the value-chain, to be engaged only when funding of spend and hedging of exposures was required. As a result, treasury did not influence decisions, it just implemented them.
Good corporate treasuries today are deeply integrated with, and embedded into the DNA of, their businesses; and, as a result, are involved at the beginning of the value-chain where they can influence outcomes. This is a much more interesting space to play in.
8. What developments do you expect in corporate treasury in the near and further future?
Everyone is focusing on using technology, digitalisation and data rich environments to reduce operational risk, release resources and gain insights. This is understandable given the change in the technology landscape and eco-system.
However, I believe that we will have to focus increasingly on our human resources as we re-examine whether the treasury operating model, governance architecture, people, processes and systems are fit-for-purpose not only now, but for the future. Are our selection processes biased towards technocrats with limited ability to engage and communicate? Do we hire and / or cultivate businesspeople with commercial acumen? Do we encourage out-of-the-box innovation or do we effectively enforce the status quo through a relentless drive for efficiency? I see treasury as a business within a business, and that it should be run as such.
9. Is there anything that you would like to share with our treasury followers that they must know from you?
As a community of treasury professionals we all have a responsibility to improve the standard of the profession, and to contribute to the recognition of the profession as a profession! In this regard, treasuryXL is doing a fantastic job of bringing us all together and giving us opportunities to share, learn, explore and discuss treasury. Let’s make sure that we contribute more than we take out, so that we add value overall.
Want to connect with Kurt? Click here
Thanks for reading!
Kendra Keydeniers
Director Community & Partners, treasuryXL
What’s the difference between a neobank and a challenger bank?
19-11-2020 | treasuryXL | XE |
The biggest difference between neobanks and challenger banks is the presence or absence of a banking license, but it’s not the only difference.
Most banks began looking into online services shortly after 9/11 brought air travel to a sudden and screeching halt. They wanted a way to move money which did not involve placing paper checks on airplanes. Internet-based banking, or mostly internet-based banking, was the next logical step. According to some recent market research, neobanks and challenger banks will be worth over $470 billion USD by 2027. Frequently, people use these terms interchangeably. However, there are some significant differences between neobanks and challenger banks. Challenger banks are mostly online, and neobanks are exclusively online.
Neobank vs Challenger bank
But while the presence of physical locations (and lack thereof) is an important distinction between neobanks and challenger banks, it isn’t the only difference between the two bank types. There are several differences to note, as these differences often have a direct bearing on which one is best for your family or business.
Difference #1: physical presence
Think of it like this. Many retailers, like Walmart, have both a physical and an online presence. Other retailers, like Amazon, are exclusively online. Challenger banks and neobanks are basically the same. But the Walmart comparison only goes so far. Most challenger banks only have a handful of physical locations, as their online services are their main draw. Furthermore, most of these physical locations are in the UK. After the 2008 financial crisis, the government opened the market to new banks.
Neobanks, on the other hand, first appeared in 2017 as a way to fill the niche between traditional banks and FinTechs. Less than four years later, there are hundreds of these institutions in the UK, U.S., and worldwide.
Difference #2: accounts, products, and services
There are some other differences as well. Typically, challenger banks offer both personal and business accounts. Moreover, challenger banks streamline their products and services, so they can be more internet-friendly. Challenger banks are small institutions which “challenged” the Big Four UK banks (Barclay’s, Lloyd’s, HSBC, and RBS). Their technology-based services and commitment to markets traditionally under served by the Big Four quickly attracted legions of customers.
While neobanks do offer some personal accounts and services, they usually target small and medium-sized businesses (SMEs) and business startups. They present themselves not just as banks, but as online financial technology firms, and typically appeal to more tech-savvy customers.
Difference #3: banking license
What’s the difference between a psychiatrist and a psychologist? It’s not their sense of humor, or lack thereof. Psychiatrists can prescribe medication, and psychologists can only provide therapy.
That’s also the major difference between challenger banks and neobanks. Most challenger banks have such a limited physical presence that they are essentially 100 percent online. But challenger banks have banking licenses and neobanks do not. So, only challenger banks can offer a full range of financial services. That includes things like issuing credit cards and loaning money. Neobanks can offer these services as well, but only if they are tied to a licensed institution.
There is some overlap. Many neobanks essentially began as FinTechs. Then, once regulators approved their banking license requests, they became challenger banks.
Some examples of top challenger banks and top neobanks
Formed in 1995, Richard Branson’s Virgin Money is one of the oldest challenger banks in the UK. It also has locations in Australia and South Africa. Between 2007 and 2010, Virgin Money also operated in the U.S. A private equity group began Aldermore in 2009. The online institution bought Ruffler Bank a few months later, so the neobank became a challenger bank almost overnight. Aldermore is also the poster boy of this sector’s growth. South African financial conglomerate FirstRand recently bought Aldermore for a staggering £1.1 billion.
Durham, England’s Atom Bank was the UK’s first online financial institution to tailor its platform to tablets and smartphones, as opposed to PCs. It was also the first 100 percent digital bank to receive a banking license. Shortly thereafter, international banking giant BBVA acquired a large stake in Atom Bank. As a result, it expanded its financial services to include residential mortgages, competitive savings accounts, and secured business loans.
Founded in 1996, First Internet Bancorp was one of the first FDIC-insured, state-chartered financial institutions in the United States with a 100 percent online presence. It mostly offers retail services, like checking accounts, and securities investments. Customers also have access to installment loans, personal lines of credit, and other financial services. Chetwood Financial Services is an example of a limited challenger bank. It offers most financial services, with the exception of residential mortgages. Regulators do not allow CFS to issue any buy-to-let residential mortgages. Civilised Bank, which is now known as Allicia Bank, is in the same boat. It offers a single financial product, a twelve-month savings account, by virtue of a limited Part 4a UK license.
In 2010, General Motors Assurance Corporation, GM’s financing arm and a free-standing financial services company, became Ally Financial. Not surprisingly, Ally focuses on auto leasing and financing. It has close to five million such customers. In 2016 and again in 2019, the company significantly expanded its mortgage lending business. Ally is affiliated with Via, an online vehicle auction site.
San Francisco-based Good Money sends half its profits to social justice and environmental preservation groups. Accountholders cast ballots to decide where Good Money invests. The bank offers a range of FDIC-insured products, mostly DDA checking and savings accounts. As of January 2019, there was a waiting list to be a Good Money customer. All new customers also have the option of purchasing a stake in the company. Credit Suisse X is the online arm of the venerable Zurich-based investment bank. Its online banking services are targeted to individuals with high incomes. Online financial institutions are more able to go after specific market segments.
Use Xe to make international money transfers
Neobanks and challenger banks are good options for customers who want an all-online or mostly-online experience. But they are not a very good option for international money transfers. Traditionally, bank fees are rather high in this area, and you may not get the best exchange rates for your transfers.
Money transfer providers, such as XE, are neither neobanks nor challenger banks. Xe does not try to be all things to all people. Instead, we focus on electronic funds transfers in general, and international electronic funds transfers in particular. We have worked very hard to develop a platform that’s both convenient and secure. As a bonus, we are also able to offer fast money transfers (some taking just a few minutes) and competitive exchange rates.
Get in touch with XE.com
About XE.com
XE can help safeguard your profit margins and improve cashflow through quantifying the FX risk you face and implementing unique strategies to mitigate it. XE Business Solutions provides a comprehensive range of currency services and products to help businesses access competitive rates with greater control.
Deciding when to make an international payment and at what rate can be critical. XE Business Solutions work with businesses to protect bottom-line from exchange rate fluctuations, while the currency experts and risk management specialists act as eyes and ears in the market to protect your profits from the world’s volatile currency markets.
Your company money is safe with XE, their NASDAQ listed parent company, Euronet Worldwide Inc., has a multi billion-dollar market capitalization, and an investment grade credit rating. With offices in the UK, Canada, Europe, APAC and North America they have a truly global coverage.
Are you curious to know more about XE?
Maurits Houthoff, senior business development manager at XE.com, is always in for a cup of coffee, mail or call to provide you detailed information.
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