The Treasurer’s Guide to Digitisation 2015

We want information

Published: Sep 2015

For corporate treasurers, the key themes of risk mitigation, adhering to regulation and data management should be to the fore in today’s volatile world. According to the size and complexity of the corporate operation, understanding how to plot the safest passage through what is, for many, uncharted territory, requires preparatory work. Whilst the treasurer’s level of professionalism remains absolutely vital in keeping a steady course, the adoption of suitable technology and solutions will be a key factor in delivering information from so much data. But there is so much more to it than just plugging into a new platform.

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Data, data everywhere

“There is an abundance of data in every aspect of life, and yet there is no abundance of information.” This important distinction made by Fraser Lee, Assistant Treasurer at Vodafone, lies at the heart of the digitisation issue. In his view, getting to the core information is the real goal for the modern treasurer; with many facing multiple sources of data, it is vital to be able to pull this together with speed and accuracy “in order to be able to make valid, real-world decisions”. Technology is a major constituent of success in this realm but, of course, the treasurer must know exactly what to look for, he says. It is right then that the evolution of treasury technology is a balance of push by the client, and pull by the vendors.

Treasury can be a hands-on function, “making deals and decisions on the fly”, says Lee. In the context of one of the most rapidly changing influences in this space – regulation – it requires constant monitoring “so we are not surprised by anything”. However, he warns, there can sometimes be a “disconnect” between a specific regulatory change and the technology used to supports its compliance. European Market Infrastructure Regulation (EMIR) is a good example of this.

There is an abundance of data in every aspect of life, and yet there is no abundance of information.”

Fraser Lee, Assistant Treasurer, Vodafone

As EMIR comes on stream, some of the changes implemented have been rather broad in their outlook. Given the rapid time frames required by the authorities, keeping up to speed with each and every nuance within a sizeable instance of SAP, for example, could present a major challenge for companies. “We are lucky that the system we use is very flexible; we could go in and change it ourselves,” reports Lee. With this experience in mind, he asserts the need for robust and accurate systems that, through their flexibility, traverse business functions allowing a rapid response to any changes that may be required.

A volatile space

Putting aside regulation for a moment, in terms of sheer volume of trading, by far the largest market in the world is that of FX. As a global decentralised market for the trading of currencies, it is an ideal place to start looking at how data becomes information in the digital age. But regulation is never far from the scene.

Indeed, what has been seen in terms of volatility and liquidity in the FX market in recent times is unprecedented. From the historic lows of last year, fed in part by market uncertainty around how the flood of new regulation will pan out, there has been a divergence of liquidity conditions with some notable highs this year. From the perspective of Alex Goraieb, Head of Market Development, FX, at Thomson Reuters, there are challenges on liquidity emanating from changes to the market structure, driven by this regulatory imperative. In particular, Basel III has put pressure on bank balance sheets and this has seen less cash in the market to absorb risk. Similarly, non-deliverable forwards (NDFs), a common option amongst corporates doing business onshore in some emerging markets, although never the most liquid option, is now subject to trade over a regulated venue and as such is even less so.

The wide ranging pressure on market liquidity is leading to higher levels of volatility to the point where it has become “the new normal”, says Goraieb. The twin themes of risk mitigation and regulation have been the chief pain points for corporates, he notes. Data “could be their saviour”, but only if they have the wherewithal to work with it efficiently and create information.

“Whether we like it or not, we are being herded into an environment where regulatory requirements are increasing in terms of frequency, breadth and complexity.”

Damian Glendinning, Corporate Treasurer, Lenovo, Singapore

As a risk mitigation measure around FX, for example, treasurers need a defined hedging programme driven by a clear understanding of risk, regulation and data and the potential impact each may have. This must not be built upon an over-reliance on banks, but should instead be something treasurers have to drive themselves. As part of that planning process, they also need to be a lot more sensitive to potential negative impacts (the recent storm unleashed by the Swiss National Bank after it removed its exchange rate floor of 1.20 on the EURCHF tested many hedging programmes). To facilitate change, automation and operational efficiency should be on the agenda too.

Intelligent data

Today, Big Data can be a significant challenge for companies seeking information (as opposed to yet more data) around FX and liquidity risk; it can also be an opportunity, especially if the services of third parties are used to do the “heavy lifting”. Thomson Reuters publishes a number of sources of information and analysis that sit squarely in this space, says Goraieb. Its liquidity heat-maps, for example, highlight precisely what liquidity is available in the market at any given point in the day. Updated every 30 minutes for every venue on the platform, and with analysable historical data, this can guide when might be best to trade in terms of available liquidity. Similarly, SDR (Swap Data Repository) Views analyses and simplifies the otherwise almost-impossible-to-analyse reams of public domain data on due expiry dates for every FX option traded and reported to The Depository Trust & Clearing Corporation (DTCC). A sizeable expiry that is exercised will have an impact on market liquidity because it will absorb some of the available liquidity, especially if that liquidity is already constrained. Knowing this can allow forward planning.

It is widely acknowledged that using a multi-lateral trading network gives access to more counterparties, diversifies liquidity, creates a competitive environment and opens more avenues of trade when liquidity is tight. But more than this, it can also deliver valuable management information (MI), providing a running commentary on essential functions such as how well the counterparty fills trades across the range of currency pairs. “Use it as a scorecard of who is doing a good job and who is not – and be sure to let them know,” Goraieb advises. If a company needs to urgently offset a position, it needs to know who it can work with: MI is derived post-trade but is vital for pre-trade intelligence. A third data consideration is around supply-chain risk. If the purchase of a core component is significantly interrupted there is an immediate Know Your Customer (KYC) compliance risk in handling a new supplier, but potentially serious ramifications for FX may arise if that supplier operates with non-core currency.

The right technology can help navigate such scenarios and in a perfect end-to-end world, Goraieb suggests a single enterprise resource planning (ERP) system would connect to the treasury management system (TMS), with data from multiple sources aggregated in a single location. This could be easily digested and presented on any device in real-time according to need. Such a landscape is not reserved solely for major corporates. Vastly more efficient technology is increasingly coming out of a simpler “cookie cutter” mould, which means lower cost and easier deployment for many more businesses. “These tools allow treasurers to deal with the challenges of implementation. What used to be in the hands of the very few is now for the many; it is about levelling the playing field.”

Whilst cost and other priorities may divert attention, in a volatile world, the need is to “play to the puck” rather than wait for the impact of risk and regulation. Consider hiring a compliance manager; whether as an internal resource or external consultant. Speak to solutions partners about how they can help. But above all, urges Goraieb, start now. “I’ve never seen anything like it but this is the new normal and it is never going to be the same again.” For a cross-border trader with exposure to FX volatility, doing nothing is certainly not an option. The good news is that there are a lot of tools out there to help and treasurers should not only be well-informed but also ensure that they “think big.”

A clear decision

“When we were setting up our international treasury location in 2005, I absolutely wanted to minimise the use of phone-based FX trading,” explains Damian Glendinning, Corporate Treasurer, Lenovo, Singapore. “First of all, I have doubts about how efficient phone-based trading is; it is clear to me that there is little control over whether the trader is taking the best deal or not. Then you have the problem of confirming trades when you rely on the trader to note what has been agreed with the bank and then having to liaise with the bank to make sure it has agreed the same thing.”

Selection of Thomson Reuters FXall trading platform was a “very and simple clear” choice for Lenovo, a $39bn consumer PC business with customers in more than 160 countries. “The beauty of FXall is that it gives you an audit trail of every deal so you know your traders are actually achieving the best price or, if not, have recorded the reason why.” FXall, he adds, does not suffer from over-complexity as other systems seem to. It also enables straight through processing of the transaction lifecycle all the way through to Lenovo’s own Treasury Management System for booking FX trades, valuing and running the mark to market on the FX positions. “We have also been very pleased with the increasing number of currencies which are on the platform and the increasing number of products too,” confirms Glendinning.

As FX has been more or less tamed by the Lenovo team the creeping administrative burden of regulation has risen up the agenda. There is no doubt in Glendinning’s mind that the ‘new normal’ of regulatory change has increased the pressure, with consequences for all. For one, corporates might not be able to rely on their banks for proactive support, he feels, because they are busy doing things to meet their own challenges. But within the corporate space he sees a distinct two-way split of regulatory data requirements. “The first category is information that is actually useful to us in terms of managing our business. The second category is what I call useless data; this is all the junk that has to be provided to various regulators which has no value-add to us.” As all stakeholders progress with a heavy-duty reporting requirement there is, he notes, “an absolute need to make sure that everything is captured and that each business can meet these requirements”.

“Whether we like it or not, we are being herded into an environment where regulatory requirements are increasing in terms of frequency, breadth and complexity,” he states. “There is an additional cost that goes with it, so to the extent technology can be used to help mitigate that effect it is something that we are inevitably going to be adopting.”

Knowing me, knowing you

A core component to counterparty trading, FX or otherwise, is the KYC due diligence process that a bank or FI has to undertake on their customers during the client on-boarding process. Current KYC processes amply demonstrate just how the increase and tightening of regulations have impacted on the workload of banks and their clients. KYC is quite “reactive”, as Financial Intuitions (FIs), especially banks, must determine what information they need to adhere to regulations before communicating this to treasurers, says Steve Pulley, Global Managing Director of Org ID at Thomson Reuters. With each FI required by regulators to prove the correct level of due diligence, it inevitably means corporates must provide copies of passports for signatories, specimen signatures and a range of other documents such as certified articles of association and are expected to repeat the process for each FI and each account and sometimes for different branches of the same bank. Any alteration, such as a change of personnel, means a repeat process.

Chart 1: Streamline and accelerate the KYC process

Source: Thomson Reuters

The issues partly stem from the fact that the world’s financial authorities are loathe to regulate in an entirely prescriptive way, instead opting for principles or rules-based approaches which require interpretation. So, whilst KYC requires FIs to demonstrate, as far as they can possibly determine, that there is no untoward activity with any of their clients’ banking activities, FIs are left to their own devices, to a degree, to interpret the regulations as they best see fit. As Glendinning notes: “(Banks) can face huge fines if they don’t get it right, but the authorities don’t tell the banks how to do it or what constitutes sufficient due diligence.”

The result is that not only is there variance in what is required but also, because this process is ongoing, treasurers are often uncertain as to when the next request will be lodged. To make matters worse, in certain sectors (mining for example) FIs will automatically deem participants as high risk and will demand a KYC refresh more often. “The typical treasury team is just not staffed” to adhere to the variable requests, notes Pulley. Furthermore, it would be fair to say that the ‘client experience’ is being lost as a result of the inconsistency.

Chart 2: Drivers for the rise of KYC Utilities

Source: Thomson Reuters

This is where managed services and utility offerings can deliver respite from the frequent pain of KYC compliance. In March 2014, Thomson Reuters launched Org ID. It was the first vendor to offer an end-to-end client identity service that collects, classifies and verifies a client’s identity, facilitating the auditable exchange of identity information through a secure web-based portal. In delivering this service, Thomson Reuters is clearly leveraging its technology offerings, data and risk expertise.

Additionally, says Pulley, Org ID can extend the benefits beyond KYC. “Structured correctly, it is possible to increase the standards around data security and data privacy,” he notes. Currently, where a bank asks for certain information from a corporate client, this will be sent by email or handed over as a physical document and sometimes these artefacts are lost. By digitalising the collection and distribution of documents the platform offers a genuine upside in this respect as corporates can securely send documents to the correct person. But it can also reduce the corporate cost burden. By providing the information once only, and making it easy to maintain the profile securely online, corporates can better manage the KYC demand cycle themselves.

Indeed, in seeking to ensure the corporate treasurer needs minimal contact throughout the process, Org ID provides screening and monitoring for FIs. “We are not just collecting basic data, we are also screening individuals associated with the business against sanctions lists and politically exposed persons lists,” explains Pulley. All FIs gather this in-depth information during client on-boarding anyway, but Org ID obviates the need for them to keep checking back with corporates clients as we also continuously monitor legal entities for changes. The outcome of these checks ultimately notifies the FIs of its clients’ risk status, and this status will affect the information requirements, meaning the FI might not have to keep requesting as much information from clients if the risk status has not changed. As Pulley states: “We can do all the work in one go, making one request to the client.”

Given the nature of the data, vendor trust is of paramount importance. Although Thomson Reuters has been joined in this segment by other utility providers, it was first to market, states Pulley. The fact that it is already handling high volumes of extremely sensitive client information gives it “operational credibility”. From a regulatory perspective, the accuracy of this information and the completeness of KYC records is vital. Thomson Reuters is the first in this space to complete the PwC ISAE 3000 Audit. “As a review of our control mechanism and framework across our entire KYC business, it provides confidence for FIs and corporates,” he comments.

The Org ID service has been developed with input from a number of senior industry professionals including a number of corporate treasury professionals ensuring that the service addresses the KYC challenges of the FIs and their clients. Thomson Reuters has also engaged with the regulators “in all the major capital markets locations around the world”, bringing the different constituencies to the table “to have conversation” about regulatory direction. Of course, the acid test of any solution is whether it offers corporate treasurers notable relief from their current load.

The right thing to do

Jiameng Yu, also Assistant Treasurer at Vodafone, is acutely aware of the KYC issue. Borne out of the authorities’ principles-based approach to this regulation, she says the real burden is not in scanning a document and sending it to a bank, but is in having to supply different documents to different banks. And in his capacity as Treasurer of Lenovo and as President of the Association of Corporate Treasurers of Singapore, Glendinning fully agrees.

To help overcome this problem, Lenovo and Vodafone use Org ID. As a ‘one-to-many’ offering, it allows them to upload relevant KYC documents so that their banks and financial institutions can access that data for compliance purposes. In addition to the obvious advantages of being able to collect, aggregate and pre-populate KYC data, Yu believes that Org ID deserves to be promoted equally as a means of facilitating a common standard amongst FIs, removing the burden from corporates of meeting changing regulatory requirements. It is, she says, a product with “great potential”, but the common standard aspect “may be a little undersold at the moment”.

“Companies should take the opportunity now to really tidy up their documentation; something like Org ID could be really helpful.”

Jiameng Yu, Assistant Treasurer, Vodafone

Yu further explains that, somewhat counterintuitively, the rise of digitisation could make the compliance burden “quite a bit more onerous”. As the availability and adoption of technology increases, treasurers will probably be given less time to prepare the information requested. “Companies should take the opportunity now to really tidy up their documentation; something like Org ID could be really helpful.” Indeed, Thomson Reuters, she feels, is ideally positioned to maintain its dialogue with the FI community and other stakeholders, including various regulatory authorities, enabling clarification of requirements and, ultimately, help develop a common standard for KYC documentation, and perhaps even other forms of documentary collections: Pulley confirms that Dodd-Frank, EMIR and MiFID are now on the radar. For Glendinning, although he acknowledges that the KYC utility concept is yet to gain a critical mass of acceptance amongst FIs and corporates, he is “very enthusiastic” about it. “It is absolutely the right thing to do.”

Connecting thoughts

It is clear that technology alone is not the answer when trying to derive rich information from vast stores of raw data. Indeed, it is connected technology, with managed data and analytics, which becomes the powerful driving force in a volatile and heavily regulated world. Companies should thus resist the urge to buy a product, plug in and hope for the best; the pursuit of real information needs a smarter approach than this. By thinking in terms of data, connection and analysis, companies will be going a long way towards ensuring their business model is ready for the next wave of opportunities.

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