The creation of a pioneering operating model of commercial treasury by this world-leading mining and metals company

Rio Tinto Group Treasury decided in mid-2016 to fundamentally change its operating model, redefine its purpose, and increase the efficiency of its processes. The main aspect of its change was the creation of Commercial Treasury in Singapore, an integrated and group-wide centralised platform for all treasury and commodities derivatives products, as well as credit and trade finance. Rio Tinto is probably the first, and to this day one of a handful of MNCs, to have established its global treasury dealings and operations in Singapore.

With the recent implementation of a new trading and treasury management system, commercial treasury has further created the conditions for optimisation and for driving a profound transformation on trading and treasury activities based on value creation, digitalisation, technology and constantly striving for excellence.

This extensive and fast change created a number of challenges along the way. The first challenge in implementing this change was to re-organise group treasury, close its regional centres in Montreal and Melbourne, and relocate the global treasury dealings and operations, all of which was done in less than six months with an entirely new team, whilst at the same time further centralising its processes and maintaining a sound control environment. Key to the move to Singapore was the model of working in partnership with the commercial organisation which was being set up there at the same time.

In addition, commercial treasury pursued the centralisation of the commodities derivatives activities as well as credit and trade finance activities, which were all previously decentralised in various locations and operated with different processes. This centralisation required not only a fair bit of change management with all businesses within the group but also a standardisation of processes. It was also structured with the creation of a fully-fledged risk management team covering trading and market risks, data analytics, systems and controls. Finally, to complete the integration of the commercial treasury platform with standardised and unified processes, the team embarked on a journey of implementing a new trading and treasury management system, replacing a suite of old legacy systems and providing increasing risk and exposure visibility, improvement automation and performance, and an enhanced control environment.

Best practice teams

Commercial treasury has now stabilised its structure, gone live in its new system, and has become part of the solution in the strategic agenda of the group commercial optimisation. Commercial treasury is proud of its pioneering spirit, agile culture and diversity. The team comprises ten nationalities, 40% female, one third Singaporeans, speaks 12 languages, is aged 27 to 55, and comes from a span of different industries from oil and gas, mining, consulting, banking, trading and technology.

In the team, global markets, covering all aspects of FX, IRS/CCRS, investment of cash, and commodities derivatives, have improved both the strategy and the yield on cash without detriment to the risk-based investment framework. The team has also notably contributed to the value of the physical sales with the use of derivatives for targeted price risk management strategy.

The team looking after trading and market risks have deployed essential risk analytics and risk measures, enhanced reporting and further strengthened controls. This is a critical component in the context of the new commercial treasury model as it seeks to deliver market-based, risk-adjusted price discovery for he business’s decisions on financial assets and liabilities.

In trading and treasury operations, the team has started the daunting task of reviewing the existing cash and liquidity structures with a vision to further enhance and extend the model, through the adoption of POBO/ROBO, the establishment of a fully-fledged in-house cash structure, and based on the principle of design for no operations and technology.

Best practice has been applied by managing operations in a highly centralised and sophisticated operating model which includes multicurrency physical cash pooling, multilateral/multicurrency intercompany netting and follow-the-sun trading desks and by harnessing technologies to achieve automated processing with minimum manual intervention in it. The very concept of a commercial treasury is a new concept of treasury now starting to be emulated by other companies. It is firmly anchored in the recently created commercial organisation and its purpose is to partner with the business for value creation. This is set to become a best practice across organisations.

Real benefits

The fact that Rio Tinto moved all dealings and operations from London to Singapore, centralised all commodities derivatives, created supporting risk management activities, and also centralised credit and trade finance activities all in the same platform and in less than nine months (with treasury operations live after only three months) is a remarkable achievement. What defines the step change however is not only the scope of activities centralised globally in Singapore, it is also the speed of the change and the very role of treasury.

The vision of one treasury team globally with a single integrated platform has significantly improved the control and visibility over all treasury dealings and operations, cash, and commodities derivatives, enabling the treasury team to respond to business partners’ needs efficiently and effectively.

Commercial treasury tracks its performance across a number of KPIs and four dimensions: effectiveness; efficiency; controls and value.

The creation of the structure has provided clear value benefits to the organisation in the form of:

• Additional return on cash through an improved investment framework and allocation across products.
• Additional return from targeted trading activities and improved management of price risk management activities.
• New value opportunities through the delivery of quantitative risk-based analysis and solutions.
• Cost savings through process efficiency and reduction of friction costs across the entire cash management, netting, in-house bank, accounting and reporting processes.

Demonstrating excellence

Rio Tinto treasury demonstrates a leading practice of global treasury management, one which reinforces its role as the group financing centre of excellence by creating one treasury team with a single integrated platform. It is a sophisticated, centralised and automated operating model that significantly improves efficiency, visibility, control and governance over treasury activities.

The transition of global treasury operations from London to Singapore was managed efficiently, collaborating with stakeholders across multiple functions and time zones. The initiative demonstrates their continuous efforts to “partner with the business for sustained value creation”.

Commercial treasury has embarked on a journey to create a treasury unit like no other in existence today, one that is a true partner to the business, actively seeking opportunities to create value through its understanding of financial markets and expertise in risk management, and being, by design accountable for performance outcomes without compromise to a robust control environment.

To illustrate this very purpose, commercial treasury is firmly anchored in both group treasury and in the newly created commercial organisation with Singapore at its epicenter. No longer is treasury simply a support function to the group in regards to funding and liquidity, but it is also an integral part of the risk-based, value-creation agenda of the entire business.

Aligning physical and financial supply chains, where treasury processes become anchored in technology, is the ambition of a team seeking to be at the forefront of what it means to be a treasurer.

Its achievements make it a worthy recipient of the Top Treasury Team Highly Commended Winner award.