Treasury in 2015: regulation, trepidation and the quest for automation

Published: Jan 2015

What does the New Year hold in store for treasurers? A challenging macroeconomic environment and, of course, yet more regulation are most likely going to be the big themes once again. But are there going to be a few surprises too?

By the time treasurers read this, the fireworks will have fizzled out, hangovers will have just about cleared and it will be time to get down, once again, to the serious business that is cash management.

What a gloomy backdrop it is for treasurers as they return from the seasonal festivities though. Six years on from the financial crisis and the global economy, once again, is facing some strong headwinds. The Eurozone appears to be lurching towards a third recession, with falling growth and the risk of falling prices too. Emerging markets like China and Brazil, the main drivers of growth since the crisis, are now slowing down as well.

Add to this a geopolitical environment that looks increasingly uncertain – think Putin, Ukraine and ISIS – and it’s not difficult to imagine corporate CFOs and treasurers, ever watchful for signs of heightened volatility in financial markets, heading into the New Year with a slight sense of trepidation.

“I think the macroeconomic issues are the ones that most treasurers will wake up thinking about on 1st January,” says Paul Taylor, Regional Sales Head, GTS EMEA at Bank of America Merrill Lynch. “We’ve heard talk in recent weeks about a cooling in the global economy; we’ve seen what’s happened to the price of oil and what that has done to currencies globally, which in turn has had a knock-on impact on currency valuations. I don’t think anybody can ignore what is happening on that level at the moment.”

That may be so, but the worries for the treasurer do not end with the uncertainties we are currently seeing in the markets. On the contrary, treasurers are also likely to be concerned about the changes in market policies as central banks struggle to turn the tide, together with the actions of global and regional regulators tasked with ensuring that there is no repeat of the last financial crisis.

I think the macroeconomic issues are the ones that most treasurers will wake up thinking about on 1st January.

Paul Taylor, Regional Sales Head, GTS EMEA, Bank of America Merrill Lynch

In the negative

A negative deposit rate, introduced by the ECB in July 2013 to provide stimulus to the Eurozone economy and encourage banks to lend more to businesses, is one example. Following the announcement of the new policy most banks decided not to immediately pass on additional costs to their corporate depositors. No bank, naturally, wanted to be the first mover. However, market participants remained convinced that if rates remained negative for long enough, some would eventually have to go down that route.

In recent months, that has indeed begun to happen, with a handful of custodian and commercial European banks applying negative rates. “I think there is some evidence that charging is happening in the market now,” says Suzanne Janse van Rensburg, EMEA Head of Liquidity at BofA Merrill. It’s not entirely down to monetary policy, however. “I think some banks have been looking at the LCR and the associated cost and taking a view on that,” she explains.

This is not, exactly, an unintended consequence. The ultimate objective of negative rates is, after all, to try and force cash back into the economy – substantial sums of which have been sitting on the balance sheets of large corporates – and the policy gives the banking industry little room for manoeuvre in that respect. Is that how corporates view it though?

“In my own experience, when I talk to clients they have been very understanding of that,” says Taylor. “I think that this further reinforces the need for dialogue between banks and corporates – we are in constant dialogue with our clients helping them to optimise the way their cash is managed. We do everything we can to support them, looking at where they want to hold the cash, whether it should be on- or off-balance sheet, and we put solutions and structures in place to help them get the best possible return on that cash.”

The impact of negative rates is also being felt beyond the banking industry. Sharp inflows could be observed in money market funds (MMFs) shortly after the banks began passing on the costs, which Yaron Ernst, Managing Director of Moody’s Managed Investments Group, believes is no coincidence. “I met with several treasurers recently who were very concerned with what that means, and about where they can place their excess liquidity now,” says Ernst.

That looks set to be one of the big questions treasurers will need to find an answer to in 2015. European MMFs are, at the time of writing, still able to serve as a positive yielding alternative to bank deposits. The yields on offer are marginal, however, and it may only be a matter of time before MMFs head the same way as some bank deposits.

“Yields are declining,” explains Ernst. “Since MMFs are refinancing their assets on a daily or weekly basis – depending on the maturity of their assets – and the assets they are buying into are yielding lower, it is probable that they will turn negative in the next few weeks.” The recent inflows, therefore, are likely only to be temporary and, once funds begin to reach or fall below zero, treasurers wishing to avoid erosion of principle will need new options.

But what are the other options? That will largely depend upon the risk appetite of the corporate. Moody’s expectation is that we are going to see a growing level of interest in alternative investment products such as separately managed accounts (SMAs), cash ETFs, and ultra-short bond funds in the coming months.

“For SMAs, corporates would have to work upon the relationships with the fund managers to devise personalised funds that match their objectives,” says Ernst. Whatever instrument one chooses – SMAs, ultra-short bond funds, or cash ETFs – there are similar trade-offs, he adds. “Either you accept the negative yields in MMFs or you take on slightly longer maturities, more risk, and possibly more fees, but generate higher yields.”

Since MMFs are refinancing their assets on a daily or weekly basis – depending on the maturity of their assets – and the assets they are buying into are yielding lower, it is probable that they will turn negative in the next few weeks.

Yaron Ernst, Managing Director, Moody’s Managed Investments Group

The regulatory ‘black hole’

Without taking their eye off what is happening in the market, treasurers will also need to keep up-to-date with all the latest regulatory developments. Compliance is a word many treasurers have learnt to dread in recent years, with the activity taking up an ever bigger share of the department’s valuable time and resources. According to Treasury Today’s 2014 European Corporate Treasury Benchmarking Study, for nearly half of the treasurers surveyed the amount of time dedicated to compliance and regulations now ranges between 10-30%, a three-fold increase since the financial crisis, some treasurers commented.

However, after two successive years of managing very practical compliance projects such as the Single Euro Payments Area (SEPA) and derivative position reporting under the European Market Infrastructure Regulation (EMIR), the challenges will be different in 2015.

“EMIR was extremely hands-on,” says Ruth Wandhöfer, Global Head of Market and Regulatory Strategy at Citi’s Trade and Treasury Services division. “The regulation we’ve got this year is going to be more indirect in the way it impacts treasurers.” Monitoring developments in the market and making their voices heard by regulators on issues such as banking regulation will continue to be important, but also challenging.”

In the US, corporates might feel the impact of regulation more directly, most notably in the case of the Report of Foreign Bank and Financial Accounts regulation (FBAR). This regulation, brought in to help trace funds that might be used for illicit purposes, will require all US domiciled corporate to file annual electronic reports on any foreign bank account that’s average value of or above $10,000. With the compliance deadline for FBAR now set for 30th June 2015, affected corporates will be working hard to ensure they can meet the requirements of the regulation in time. But given that corporates often hold a multitude of bank accounts across multiple jurisdictions this is not, by any means, going to be a straightforward task – at least not in a world still lacking a viable multi-bank eBAM solution.

The regulation we’ve got this year is going to be more indirect in the way it impacts treasurers.

Ruth Wandhöfer, Global Head of Market and Regulatory Strategy, Citi

Seizing the opportunity

Although regulation is often – and understandably – perceived as a challenge by treasurers, we should not forget that some measures, particularly those that fall into the standardisation and harmonisation bracket, can also offer corporates a chance to review and improve upon departmental processes.

Indeed, if Wandhöfer’s observation that hands on compliance projects are not going to feature so strongly in 2015 holds true, then now may be the perfect time for treasurers to really focus on seizing the opportunities presented by recently completed projects such as migration to the Single Euro Payments Area (SEPA).

“With every challenge there are always opportunities as well,” says Maha El Dimachki, Head of Cash Product Initiatives for RBS Global Transaction Services. For treasurers, taking the time to look at where there could be potential opportunities to change or enhance a process affected by regulation can be enormously beneficial, but that is not always apparent at the start, she explains. “For example, while what was pure regulatory compliance for many corporates initially, has become an opportunity for treasurers to obtain further business benefits. The treasury agenda continues to be about automation, integration and optimisation, and the economic environment in Europe is pushing treasurers further in that direction.”

Having finally put to bed their SEPA migration projects in 2014, corporates operating in the Eurozone in 2015 are as a result looking excitedly at a range of new possibilities barely imaginable a few years back. Ideas such as pan-continental collections factories, which nobody had previously attempted before now due to the technical difficulty, are becoming a reality. “Corporates will benefit from improved cash conversion cycles and cash allocation,” she adds. “As soon as the SEPA deadline passed, companies were already starting these types of discussions with us.”

Best practice in treasury has always been about greater optimisation, automation and integration.

Almost everyone in the industry agrees that SEPA offers corporate treasuries a chance to review current payment processes. Less discussed, but by no means less significant, are the opportunities presented by IFRS 9. The introduction of the new standard might make it a good time for corporates to “dust off” and review old risk management policies as well as seeking more alignment between risk management and the application of hedge accounting, says Sander Van Tol, Partner at treasury consultants Zanders. Under the old regime, some corporates were discouraged from hedging due to the rigid nature of the standard. Once IFRS 9 begins to be applied, however, corporates might want to look again.

“I feel that a lot of corporates are missing opportunities,” Van Tol explains. “They are not hedging certain economic exposures because of the negative accounting effect. Hopefully with IFRS 9 the whole debate about whether to hedge or not will start over again,” he adds. “I think it’s an excellent opportunity.”

Next steps

With all the recent turmoil in financial markets coupled with the unprecedented plethora of new regulation hitting the statute books, the past few years have not, by any means, been an easy ride for corporate treasurers.

But while the year ahead of us will surely prove every bit as challenging for the profession, many believe that the nature of the challenge in 2015 will be very different. If the past several years have been about merely keeping up with the pace of regulatory change and ensuring a minimal level of compliance with the various diktats coming out across different jurisdictions, this year treasurers have a chance to move on to the next step.

This next step should involve seeking out opportunities to exploit within necessary compliance projects – such as SEPA and IFRS 9 – and using these as an incentive to review and improve existing practises, processes and policies.

Those that seize such opportunities will almost certainly be better placed for riding the ongoing economic storm. Best practice in treasury has always been about greater optimisation, automation and integration. In the environment we find ourselves in now, these can no longer be seen as luxuries, however. They must be priorities.

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