Roche turns to CLS to address FX risk
Roche’s foreign exchange (FX) transactions were settled individually with banks. In this conventional settlement the exchange of the two currencies involved in the trade was not synchronous. There was a risk that Roche would transfer irrevocably the currency it had sold without receiving from the counterparty the currency it had bought, thereby introducing settlement risk.
This means there was a risk of the counterparty delivering late (liquidity risk) or, in the worst case, not at all (credit risk). These risks were compounded if the foreign exchange market participants were in different time zones. If one party does not fulfil its obligations, depending on the size of the transaction, liquidity problems may arise.
Roche decided to implement Continuous Link Settlement (CLS). Multiple set-ups were discussed with various partners, however the company wanted to ensure its objective of maintaining its current streamlined, robust ERP solution was not disrupted. In 2018 there were a total of 39,239 FX transactions that were settled in their ERP system, of which 99.9% were confirmed through SWIFT. In this context there were 17,955 SWIFT treasury payments executed with a total value of CHF307bn.
“Our ERP also handles our affiliate AP payments, as well as for some countries salary payments via SWIFT, which totalled 2.9 million transactions with a total of €35.4bn counter value. We also receive via SWIFT our lockbox and credit card reconciliation files which are sent down to our affiliate system on a daily basis. Our ERP is truly the sole information channel between financial institutions and the entire Roche Group. With such a robust, automated solution in place, running a bi-lateral process was not practicable. Rather, we wanted to implement a CLS solution that maintained our automation rate and fit within our ERP-/SWIFT-based treasury landscape,” explains Martin Schlageter, Head of Treasury Operations at Roche.
Roche was able to accomplish all its objectives through the utilisation of SWIFT MT396, and MT971 which its CLS partner BNP Paribas developed for them, as well as the MT300 T-copy where it is the first “treasury counterparty” to utilise.
Best practice and innovation
By having direct connection to SWIFT and exploring message types that were previously not used by a treasury counterparty, Roche was able to create a truly in-house solution that addressed the first objective of reducing risk. By creating the in-house solution, it not only reduced the risk that is covered by CLS, but by severing the dependency to its CLS provider it would also reduce the risk of its CLS provider potentially no longer offering their services. By having a strong backbone based on SWIFT messaging, the company is able to be agile if it is ever faced with a potential provider issue.
CLS has been around for close to 20 years. There are more than 24,000 market participants (mainly banks), and according to SWIFT, Roche is the first treasury counterparty that requested to join SWIFT’s CLS third-party service.
The company expects to reduce substantially its intraday credit need because of net payment instead of gross payment.
The cash management view is never distorted with idle cash sitting in additional bank accounts due to the automated transfers to and from their CLS multicurrency account.
The company expects the number of payments to be reduced by 40%.
It expects to achieve 90% settlement risk reduction.
This project spanned several different departments from treasury front office, treasury operations to treasury IT. By working jointly already from the design phase, they were able to achieve a product that meets all of their needs. This project was accomplished by the great collaboration they have across the different Roche departments as well as their bank, which was willing to go along on this journey with it.