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Roadmap for unwinding derivatives

| 14-7-2017 | Roger Boxman |

Banks offer proposals to smaller companies and housing associations to unwind interest rate swaps. The benefit for the banks is that this will reduce their risk weighted assets. Whether this offer is attractive or not depends on several issues.

A short-list of advantages of unwinding to keep in mind is found below:

The advantage of skipping break clauses and uncertain margin call events and therefore a reduction of liquidity risk.
Creating a potential current tax loss on the unwinding fee which can be possibly offset in the near future.
Opportunity to restructure the funding structure and refinance against lower interest rates.
Optimise the redemption schedule and therefore to create lower interest rate risk in the loan portfolio.
Reduce costs of monitoring and supervision.
No hedge accounting issues with unexpected profit and loss accounting in combination with latent taxes.

Off course the decision to unwind or not depends highly on the amount of the fee and the specific expectations of the organisation. No situation will be the same, an exact blueprint simply does not exist. In a substantial number of situations, the ‘do nothing option’ will be the best.

Roger Boxman

Senior Advisor Internal Control

Why Is Bank Independency Important?

As financial technologies develop, bank independency is something more and more companies adopt. Bank independency not only means that financial streams are dealt with online and require less manual interventions (straight through processing). Mainly not having to rely on the services provided by the bank where the account is held is also an important one when talking about bank independency. A couple of things mentioned below emphasise the importance of being, or becoming, bank independent.

The changing landscape

Since the economic crisis, the banking landscape has become a more dynamic environment. Besides banks going bankrupt we have also seen banks that have withdrawn themselves in certain geographical or business areas. This gave CFO’s in the corporate sector headaches for having to find another bank and to ‘move’ its business. A good example of a (sudden) change of the financial landscape is the Brexit. Not knowing what the Brexit will bring in this perspective, one thing we do know is that the changing banking landscape is here to stay.

Where using bank-independent tools, products or instruments doesn’t solve the problem of finding another bank, it does take away having to start up a time-consuming project changing the applications used in the various financial processes. Bank independency will become more and more common as the banking landscape continues to change.

Formats & Interfaces

Another good reason to use bank independent solutions is not to find yourself in a so called lock-in situation when looking at file-formats and interfaces. Where local formats or proprietary interfaces may have their benefits, formats and interfaces will be subject to change or even may be replaced by the bank offering the service. Recently a bank had decided to phase out a proprietary reporting format. Although this was done with an alternative reporting format and customers had a reasonable period to migrate, many of them were confronted with major changes in their business applications from which many of them being legacy systems.

Again in this case using a bank independent solution will not prevent you from change but a good bank independent solution or tool will offer the flexibility to deal with this type of change outside the corporate IT domain. Still a project but one with less impact on the organisation. When using fully bank independent instruments (for example MT101) the number of changes are limited to a bare minimum and in case of compliance will always be dealt with by the vendor as part of its service.

Cost Savings

Last but not least a bank independent will save costs. Of course there is an investment consideration with regards to a bank independent solution but when looking at the business case the benefits of not having to manage changes due to compliancy or technological developments will in most cases create a break-even point somewhere in year 2.

Recent customer case-studies even showed a significant decrease in costs in year 1 simply by not having to change its output from their applications creating payment instructions when expanding their business to other regions using new local banks. By itself not a bad investment, even when leaving the non-qualified benefits of bank independency aside.

Mark van de Griendt – Cash Management Expert at PowertoPay

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Please also read: 7 reasons why you should do e-invoicing too.

Decentralised data capture, centralised data analysis: a case study

From now on, Faber-Castell will be organising its cash flow forecasting, accounts and derivatives with TIP. Regardless of where in the world, TIP allows the many subsidiaries of the multi-national to forecast and plan without major time inputs. Data capturing is decentralised while data analysis is centralised.

Case study

Groups with international subsidiaries need to regularly request all financial data from their subsidiaries spread around the world. This requires a lot of time and robust review procedures. Our web-based treasury information platform, TIP, allows the decentralised input of these data, irrespective of the various source systems, and their automatic reporting to Group Treasury. On behalf of the well-known family-owned company Faber-Castell, we recently implemented a solution which allows this stationery manufacturer to access and plan its group-wide data, ranging from its financial status and cash flow forecasting to its derivative management. Find out more about the implementation and how Quick Guides helped Faber-Castell subsidiaries to get started with the new system in their case study.

TIPCO Treasury Technology

TIPCO provides treasury reporting and cashflow forecasting solutions for over 120 companies. TIP automatically compiles existing data from various systems (TMS, ERP, etc.) and prepares analyses of these. This avoids the need to capture data manually, which is one of the most common causes of inaccurate data. Huge data volumes can be processed within seconds and reports can be set up and managed flexibly, even if the company’s requirements change. A smart cashflow forecasting module utilises that data and allows modification and simulation of forecasts.

You can read more about their case study by clicking on this link.

If you want to find out more about TIPCO and their services and products please refer to their company profile on treasuryXL.

Hubert Rappold – CEO at TIPCO Treasury & Technology GmbH

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