Treasury Today Country Profiles in association with Citi

Reporting necessities

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Most of the new regulations coming into play have an element of greater transparency embedded in them. This means that corporate treasurers are having to report in greater detail and depth in order to satisfy this demand. Technology can ease the pain of reporting, provided that the systems in place are flexible and robust.

Historically, there has been something of a culture in which ‘treasury does, and then finance reports’. It was something of a macho attitude – a little freewheeling without being irresponsible – of taking, balancing and managing risks that the rest of the organisation barely grasped.

But of course that was in the past, before the succession of corporate and financial industry scandals in the 1990s and early years of the 21st century – culminating in the global financial crisis. Today, all corporate and financial dealings are governed by a raft of legal and regulatory provisions, largely led by the US and the EU – and many more are coming down the line.

The universal impetus is towards the prevention of further scandals or disasters by tighter regulation and oversight, in the process protecting consumers and investors. There is political pressure in most countries to try to ensure financial crises are avoided in the future. The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 is the exemplar legislation in the move towards reform of the global financial system.

As in so many financial matters, US law and practice tends to become global at least in influence. In Europe, the European Market Infrastructure Regulation (EMIR) is just over a year in force and is similarly aimed at mitigating risk across financial services and markets. The impact of all of this on corporate treasury operations is increasing both in terms of the range of regulations and restrictions of which treasurers must be aware and in the reporting obligations which result.

The devil is in the detail

A corporate treasury operation that masterminded the largest ever deal by a non-US entity in the US private placement market is headed by Dympna Donnelly, Vice President of SAP US-Ireland Financial Services, the arm of the SAP Group treasury responsible for all of the company’s US dollar financing. Last year’s $1.4 billion placement earned that record, with the funds directed principally towards SAP’s acquisition of Ariba. “That was our third successful foray into that private market in recent years, raising a total of $2.65 billion so far,” explains Donnelly.

The SAP Group has over 65,000 employees worldwide but the treasury team consists of just 20 people. “In terms of reporting obligations, our concern is really what is coming directly at us, such as EMIR,” Donnelly says. “Although there are elements of Dodd-Frank that affect us, they are not difficult and are looked after by our treasury colleagues in the US.

“On the other hand, the Foreign Account Tax Compliance Act (FATCA) will have direct implications for us and we are not yet clear about what we will have to do. With FATCA, there will be direct bilateral agreements with the US in all major financial markets, effectively Germany, UK and Ireland for SAP. The national revenue authorities have agreed to co-operate with the IRS – it is in everyone’s interest to avoid any potential mess – but the arrangements will not be identical in all of those agreements.”

That is a constant difficulty with new regulation, Donnelly says. “You know about it well in advance and can see the broad overall plan, but then you do not know enough about the detail of the implementation required. It happened with EMIR, for example, which covers internal foreign exchange (FX), although I don’t think that is related to what it was designed to achieve. Yet the implementation covers internal hedges within our group, which is not in financial services and the movement of funds within the group is entirely for trade-related purposes. That’s the kind of issue that arises when measures are made very broad and designed to catch all activity that might be in breach.”

She adds that trying to design and test reporting systems in advance can be a problem. “You have to wait for the detail of required formats before you can make the system changes and report templates, but the actual implementation time tends to be telescoped. What’s more, the sheer volume of work and time that has to go into extracting the relevant information and adapting the systems in big diverse groups is generally underestimated.”

Developing a system response

“We look after both the treasury operations and all the relevant reporting,” says Sean Grace, Group Treasurer at Securitas, a world leader in security services and systems. Listed and headquartered in Stockholm, it employs over 300,000 people in 52 countries. The group treasury centre, based in Dublin’s International Financial Services Centre (IFSC), is responsible for all of the funding and treasury activities of Securitas globally.

Grace explains: “Everyone in any role related to finance is highly aware of the growing importance of reporting requirements and in a way it’s quite circular – Boards and top management want to be assured that the organisation is doing everything it should. No one wants to be caught at some stage having to say ‘We didn’t know this was happening.’

“Since Lehmans, the buzzword is ‘derivatives’ and the authorities on both sides of the Atlantic are very wary. But they are then casting their nets very wide indeed, perhaps because they really have not figured out where the real risks are or where the next risk is coming from,” he adds.

That wide-cast net is now bringing in the corporates, says Grace. “Traditionally, we only had to worry about accounting standards and our Boards, now we’re being dragged into the general mess. It’s true that global enterprises are often managing larger sums of money than some banks, but we are doing it to manage and minimise risk, not to make profits per se. Banks have a longstanding – and now growing – set of compliance obligations and have been set up to deal with that. Corporate treasury has not, so now we have to set up special systems.

“In our own case, we rely on smart treasury management and reporting systems, and we think we have good skill sets in both treasury and systems.”

“We developed very sophisticated internal management reporting systems, precisely because our rapid growth posed massive challenges in retaining oversight and control.”

Michal Kawski, Head of Treasury, Gazprom Marketing & Trading Ltd

Grace is a firm believer that systems should reflect the organisation’s business rules rather than be driven by the software design. “The ideal system is one you design yourself, choosing what you want to do and what you want to get out at any time. You need to know in advance of every deal what data is required and where it will end up in your reporting at a later stage. Then you are not going to be surprised, and you can pull together whatever report is needed. You certainly want to avoid rigid systems that cannot easily adapt to fit changing circumstances and reporting is definitely in that category these days. Actually, in some ways a positive result from this new regulatory climate is that it forces you to think everything through in a fresh way in the light of both the compliance and the reporting on it.”

The Russian oil and gas giant Gazprom has made a world impact in recent years. Trading in billions, its subsidiary Gazprom Marketing & Trading (GM&T) is a UK registered company with a unique suite of products from gas and electricity marketing, trading and supply, to liquid natural gas (LNG), liquefied petroleum gas (LPG), oil, carbon and FX deals and a retail business, trading as Gazprom Energy. GM&T treasury and commodity broking operations are headquartered in London, with seven other offices globally. Head of Treasury is Michal Kawski, who is happy to acknowledge that today’s reporting obligations are from his organisations’ point of view relatively modest additions. “We are a relatively young organisation but have been growing rapidly in scale and range of business, and have developed the systems to manage all of that. We started in 1999 with two people in a London office, really got going in 2004 and now have over 1,000 staff.”

The Gazprom management systems were developed to report on a daily transactional basis, not strictly treasury. But a key point is that the company has robust centralised information systems for all of its transactions and activities across the full range of accounting and other compliance requirements, internationally, in specific jurisdictions and internally. “We developed very sophisticated internal management reporting systems, precisely because our rapid growth posed massive challenges in retaining oversight and control,” Kawski says. “We placed a strong emphasis on visibility and very strict control of corporate risk management from the beginning. That is now a great strength when new reporting obligations are placed on treasury, as they are also growing in other financial areas.”

Another great need from a treasury perspective, according to Kawski, even apart from EMIR and Dodd-Frank and other such specific requirements, is to monitor the market and be prepared to act and react quickly from a liquidity perspective. “The necessity to keep up with increased reporting actually has a positive impact. The more centralised but also fluid and flexible the systems are the better. Our systems were designed and built on an integrated model, and so the burden on us is significant but probably less than in many organisations with legacy systems.”

The nuts and bolts

“Has regulation become an increased burden? Absolutely,” says Neil Fleming, Director of Treasury Solutions in Capita Asset Services, one of the largest independent treasury service providers in Europe, administering over £300 billion of client assets. “Bear in mind we have over 250 clients globally, so we have to manage all of their relevant reporting obligations.” Capita has over 100 staff providing a comprehensive suite of treasury solutions such as deposit and FX trading, intragroup loans, cash pools, netting plus cash advisory, counterparty analysis, valuation and accounting services.

“We are very conscious that a number of countries such as Australia, Japan and Switzerland are planning new reporting regulations that will affect our clients. They will each be different and country-specific, however much they have in common. FATCA is coming in, Foreign Bank and Financial Accounts (FBAR) is another US regulation and there is also the whole money market funds (MMFs) valuation issue, which may impact on Europe. Some have been delayed or are still being finalised, like EMIR, and International Financial Reporting Standards (IFRS) 13 is already with us. The key point is that there is a growing volume and range of regulation in place and on the way, all of it inter-related in many respects and with knock-on effects on what treasury and other financial operations have to do to comply and report.”

Understanding the totality of the risk is at the core, Fleming says, both direct counterparty and any underlying risk. “In the EU everything is heading in broadly the same direction. The MMF valuation issues have not been decided in an EU context yet but the European Commission (EC) proposals are diverging from the Federal Reserve’s. From a reporting point of view, they will all in a sense be pulling from the one general database. So the context from our point of view moves on to the required fields and the construction of the reports. You can only report where you have the information and EMIR requires something in the realm of 80 fields – but your existing treasury system may not have all of them.

“Banks have traditionally built data warehouses to cope with their various reporting requirements, but by and large corporates have not yet gone down that route,” Fleming says, returning to Grace’s point. “We are seeing a lot more smart business intelligence software coming in on top of treasury platforms. Yet a recent survey showed that over half of corporate treasury operations were still using spreadsheets to manage their cash. The smart tools available today are a lot more flexible and user-friendly, and they will be essential not just for external reporting but to keep the Boards satisfied.”

For the system’s preservation

There is a universal urge today towards ensuring financial stability, which is in turn putting increased regulatory and other pressures on ensuring liquidity. In many practical respects, liquidity is more important than capital in ensuring stability. That is the start point for all reporting requirements and in turn for new ways of managing treasury, says Leonard Orlando, Finance and Enterprise Performance Manager at Accenture UK. “Companies need to put in place more sophisticated tools and processes, as well as structured analytics, to accurately predict cash flows in order to understand their liquidity risk more thoroughly. In the future, we will be looking at risk aggregation, effectively putting all of the risk profiles together in a consolidated view.

“The challenging regulatory environment is making the measurement and management of risk more complex. Traditionally, treasury has not been fully integrated with other functions in the business. But now we need to see across treasury, finance and risk management and the correlation of different risks. The question is whether we have the information to aggregate and analyse the full spectrum of risk?”

Although the process and system challenges are complex, there is enormous potential value, Orlando believes, in that aggregated risk picture from the pooled information – not least in preparedness for the future. “I also think that treasury will become increasingly important in corporate strategic decision-making, because it will be the only place with deep insight into the future cash and liquidity position.”

In the ordinary course of daily business treasurers are not really concerned about reporting for external requirements, says John Byrne, Managing Director of treasury management system (TMS) vendor, Salmon Software. “You can simplify treasury to buying and selling money, in more than 1,000 different ways. As a treasurer, I want to know exactly where all my money is right now, as well as currency, jurisdiction, counterparty and all of the other risk and exposure levels across perhaps hundreds of bank accounts in a large multinational. That is the daily task: to see the overall corporate position, clearly and accurately. I will then have the data to furnish accounting with what is needed for regulatory reporting, but it is not my primary concern. I will also be able to show that I am complying with the set corporate policies across all of the areas.”

Treasurers are aware of the regulatory parameters they face and the management systems they use have the rules built in with automatic alerts if any position gets out of line. “On a day-to-day basis, complying with their own corporate policies may well be a stronger imperative. On the simple and often quoted basis that ‘treasurers look forward and accountants look back’, the actual mandatory reporting tasks fall to the accounting function. The onus of compliance, of course, remains with treasury. Once the information is in the systems, reporting is – or should be – relatively straightforward and capable of being automated to a high degree.”

That is the theory, Byrne acknowledges. In practice the rise of new reporting requirements continues to uncover elements that were not provided for in the past, or that are not immediately compatible with existing systems. But he echoes the view that the solutions to these challenges will come in pooled, common data and systems that provide an aggregated view across treasury, accounting and risk management. “Once all of the information is there, you can use it for advanced ‘what if?’ modelling just as readily as a mandatory monthly report.”

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