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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
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:
Problems can arise because of the following:
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.
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
Payment fraud – how companies can protect themselves
|13-2-2017 | Joerg Wiemer | sponsored content |
Information about the opportunities and risks of digitalization is widely spread. In general, risks occur when there is a chance of losing a competitive advantage or falling behind. However, one of the biggest risks is without doubt cybercrime. Attacks on IT systems worldwide increased yet again by 38 percent in 2015, according to the consulting firm PwC in their “Global State of Information Security Survey 2016”. If these attacks are aimed at the payment transactions of a company, the entire existence of the organization is easily threatened. Therefore, security measures in treasury and payments processes should be at the very top of the agenda. Jörg Wiemer, CSO of TIS, explains how companies can ensure increased security.
In general, when does a risk exist for companies during payment transactions?
JW: In principle, in any situation that involves a lack of transparency across bank relationships and activities. In these cases, cash positions and liquidity are not clear. Let’s assume that a branch transfers ten million dollars at the beginning of the month. If these bookings rely on manual processes and the balance is only checked once at the end of the month, it takes a full thirty days until the fraud is detected. Time is literally money. By monitoring treasury in real time, it is possible to detect these procedures much earlier, thereby solving them in many cases.
It can take a lot of time until the head office of the branch gains knowledge about such cases.
JW: This is the heart of the problem: The prevailing regional division of labor makes it easy for fraudsters. If the account statements in paper are collected locally in each branch, it takes weeks until those responsible in the head office notice that an account statement is missing, and with it, the positions written on it. This is exactly why a company should collect all account statements from every bank account worldwide automatically and assess liquidity positions in real time with a software like TIS.
What else facilitates frauds?
JW: Fraud can occur if there is no complete overview of the electronic signing authorities, if there is no dual control principle during payment transactions or during the administration of payment recipients and, in general, during every user administration, which is particularly prone to fraud. These are the typical gateways.
How can I detect that I am at an increased risk?
JW: One reliable indicator of a low level of security in payment transactions is a high amount of manual transactions. Normally, the assumption is that every payment has to be recorded in the accounting system according to the best practices – no booking without receipt, and no payment without a previous booking. Nevertheless, under certain circumstances, there are deviations and exceptions of this principle. The key term here is “exception handling”, which results in a manual payment. An exemption is necessary for these cases, which includes comprehensive process documentation. The possibility of recording and authorization of non-automatic payments should be restricted to certain recipients of the payment and internal user groups. Furthermore, the user should only be allowed to use unchangeable payment templates that have been approved in advance.
How can companies reduce risks?
JW: A general rule is to standardize and and automate processes across the group of companies! Payment related tasks can be executed on local level, however, based on a standardized and automated process. A central directory of every existing account and a payment governance should be mandatory for every company. Security in payment transactions begins with the professional management of the bank accounts. Otherwise, those responsible run the risk of fraudulent payments through accounts that are not registered in the ledger. The next step is to centralize the payment transactions. Digital payment platforms like TIS pool the cash flow and standardize and automate it. This way, payment procedures and the cash flow are controllable at all times.
What has payment looked like in practice up until now?
JW: Heterogeneous and confusing. Companies have a lot of different systems in each part of their organization and they use different e-banking tools to connect to the banks. The SAP system then generates payments. This is complicated and complex and there are many different protocols and formats. This is the reason for high costs as well as increased fraud risk.
In light of this, which solution approach does TIS pursue?
JW: We provide a payment transactions platform especially for medium and large-sized companies in any industry. The platform connects their accounting system with the respective bank. It then operates between the core systems – which the client does not have to change – and the bank. Therefore, the platform is the single point of contact, allowing all automated and standardized payment transactions to be combined in a uniform way for the entire company. This makes the management, monitoring and assessment of payment transactions tremendously easier.
The TIS solution runs completely in the cloud. What about the topics of control and secure data storage?
JW: A server as such is either secure or not secure, no matter if it runs in the cloud or in your own house. It is also possible to dial into an in-house server with the banking tools of a company from anywhere as long as the person has the appropriate authorization or the right amount of criminal energy. This is why the server has to be permanently protected from non-authorized access with a high level of modern technology. The big data centers, with which TIS also cooperates, have totally different possibilities than a single company. Let me say a few words regarding the topic of online banking: the idea that banking tools on a private notebook which runs offline are somehow more secure is an illusion. This computer provides a much bigger gateway for viruses and Trojans than any e-banking solution that runs in the cloud. It speaks volumes, that the Swiss Reporting and Analysis Centre for Information Assurance (MELANI) has recently started receiving a much higher amount of reports from the general public regarding e-banking frauds.
The right software is one part, but what can be done to ensure risk is handled correctly and that the right methods of payments processing are put into place?
JW: Good governance must be established and implemented. Companies need globally valid rules for their payment transactions with detailed guidelines on the following: how accounts are managed, who can open new accounts, who must give permission for this, and the documentation necessary to do so. There are always bad examples for what can happen if the company does not follow the guidelines. Remember the case of the automotive suppliers Leonie mid-2016? Cybercriminals acquired documents and assumed somebody else’s identity. They were then able to divert 40 million euros from accounts of the company to accounts abroad.
My advice on how to minimize risk? Establish governance guidelines and use a central platform for the management of bank accounts and payment transactions. Through automated and standardized processes, companies can protect themselves against manipulation and fraud and, ultimately, the loss of money.
If you are interested to read more about this topic please click on security in payments
Joerg Wiemer
CSO and Co-Founder of Treasury Intelligence Solutions GmbH ( TIS)