Regional Focus

Eastern aspirations

Published: Jan 2013

The past decade has seen Asia become a much more significant economic player. Against a backdrop of low interest rates and sluggish growth in Europe and the US, Western corporates have increasingly been focusing on expanding their businesses in the faster-growing emerging markets. Yet one consequence of these developments is that many multinational corporates (MNCs) have been obliged to bring the management of their Asian subsidiaries’ treasuries closer to the region. Conducting operations from a Western headquarters has become impossible for many firms, with the result that an increasing number of regional treasury centres are being established in Asia in order to manage the corporate funds and risk exposures.

At the same time, the structure of domestic corporate treasuries in Asia is also changing: Asian companies are trying to control their global treasury operations centrally. Treasury is becoming a higher priority than before and companies are increasingly building dedicated treasury operations.

The treasurer’s rising profile

The past decade has seen the evolution of the role of the treasurer from an almost administrative position towards the more coordinator role that is expected today. “In the past few years, treasurers have played the role of coordinator, particularly with areas like finance, tax and IT. They have been the centre of expertise and they connect back to the lifeblood of the company, which is cash flow and managing liquidity,” says Steve Dwyre, Managing Director, Industrials and TMT at Lloyds Banking Group.

Yet now treasurers are making another transition. From this coordinator position, the treasurer is being drawn on to play a much more strategic part in the firm, in the heart of the business so to speak, deferred to by the CFO and participating at Board meetings more than they have ever done before. As the role of the treasurer achieves this higher profile, the number of talented professionals from a banking background who are choosing corporate treasury as a career choice is also rising, according to Stuart Ridley, Manager – Treasury at Robert Walters Recruitment. “I’ve seen an improvement in the quality of people who are choosing treasury over the normal financial/accounting route. As the treasurer becomes a more respected position, more people are attracted to it,” he says.

Treasurers are being asked to present the Board with innovative solutions for counterparty risk analysis that goes beyond credit default swap (CDS) spreads and public ratings.

As a senior figure, and an expert across many fields, the objectives of the treasurer are therefore shaping many of the trends that we can see developing in 2013. As they juggle their many balls of responsibility, the treasurer must respond to economic developments and regulatory changes, while also grabbing growth opportunities with both hands. The decisions they make are driving the industry forward.

Global priorities

Risk management is one area where the treasurer has recently proved to be a strong coordinator. Often sitting on the risk committee, the treasurer may assist the banking partners with stress scenarios and management planning, taking the treasury function to the next strategic level. In this new, more involved approach, treasurers are being asked to present the Board with innovative solutions for counterparty risk analysis that goes beyond credit default swap (CDS) spreads and public ratings.

As they’re the ones liaising with the banks, the treasurers understand the ratings and counterparty analysis processes, affirms Rajesh Mehta, EMEA Head of Treasury and Trade Solutions, Citi Transaction Services. “They are increasingly being seen as ‘the risk manager’ which in many corporate organisations is not a designated function per se. Whether it is with bank counterparty risk, credit ratings or potential sovereign default, treasurers get involved in all key stages of the risk management process. And the investment committees are looking to treasurers to satisfy the threshold of risk management.”

From a risk perspective, the way the treasury operates and how it is managed will only continue to rise in importance. This is currently reflected in the upgrade of the risk management capabilities of treasury departments – in both financial institutions and larger corporates, according to Rohan Douglas, CEO at Quantifi. “Given the turmoil in the financial marketplace, institutions are subject to a lot more volatility, which is driving an increased focus on more accurate valuations and more comprehensive risk management.”

In these uncertain times, corporates can face difficulties with regard to credit lines and liquidity that they rely upon for business operations. Treasurers, therefore, are aware of the importance of working capital and maximising the internal working capital resources. They are also looking to improve working capital through improved credit risk analysis and collections automation strategies, resulting in reduced borrowing margins. Treasurers are now much more the arbiters of working capital across the firm, says Mehta. “Most treasurers tend to act as the bank relationship arm of finance within the firm and are now preaching the value and importance of working capital and optimising internal capital.”

As for where the specific impact of working capital can be seen, the corporate treasurer is getting involved with their supply chain on a much more strategic level. “Treasurers know that the companies, especially those who are focusing on emerging markets growth, have to optimise their supply chain in order to successfully grow otherwise any weak link or potential disruption could become a constraining factor,” he says.

Furthermore, intraday liquidity will continue to be high on the agenda next year, according to Ruth Wandhöfer, Head of Regulatory and Market Strategy at Citi Transaction Services. “Solutions to improve the corporates’ use of liquidity will help in this respect but banks themselves will need to find ways to better monitor and allocate liquidity usage. Pricing of intraday liquidity will become a more prominent area of discussion given the fact that liquidity constitutes an increasing cost to banks. This is further accentuated by the fact that Basel aims to discourage access to intraday wholesale liquidity and instead more liquidity is expected to be held by banks at all times.”

Treasurers’ objectives – efficient working capital and risk management – are also driving the technology agenda. The challenge for banks in the current environment therefore, according to Citi’s Mehta, is satisfying this demand for innovation while also adhering to the mandatory regulatory demands.

Mobile is one area that seems to be going from strength to strength in the corporate arena. Since Citi launched CitiDirect® BE mobile, the mobile extension of its electronic banking system, last year, it has implemented the solution in 87 countries and accumulatively completed $10 billion in transaction value through mobile. The advantage of mobile as an efficiency enabler for treasurers frequently needing to conduct business while on the road is also widely known, but there is now a more basic demographic trend that the banks must cater for. Says Mehta: “We are seeing a convergence between the personal technology that is used by the average consumer and the expectation that corporate interaction shouldn’t be any less convenient. Treasurers are expecting the same digital interface in their working environment.”

Corporates are looking for more flexible software that provides high performance and the development of technologies, including multicore architectures, are helping provide this. According to Douglas, leveraging Intel’s multicores CPUs allows software to run much faster on what is now industry standard hardware. “To further simplify their IT infrastructure, more companies are also looking to introduce a hosting model and cloud computing. The ability to leverage computational power on demand and rent hardware on an as-needed basis, in addition to run calculations out on a cloud, has a lot of interesting applications in the financial arena where often computational requirements peak at certain times in the day.”

But the world of technology is ever changing. According to Dwyre, we have moved on from simply having a web and a cloud and have now entered a new world of ‘sensors’, which are becoming smaller and more ubiquitous in everyday life. “Linked to the cloud, sensory data that exists in the real world suddenly becomes available to the consumer and the business world. How sensors react to all the data that is being collected and how that data is used is the important part.”

A concrete example of this is Lloyds Bank’s creation of the Arena platform, from which a treasurer can see every balance in every bank account and can even transact in foreign exchange (FX) across this one system that connects it all – no longer do they need to rely on a system that only a bank can access.

Many companies have spent vast quantities of money putting in place a treasury management system (TMS) or an enterprise resource planning system (ERP). But this buoyant market naturally tailed off when budgets were cut; although the corporate might need a TMS or ERP, they had to hold out on its implementation until they could spare the funds. But new providers are coming to the market that can actually offer the required system on a bit-by-bit basis, according to Ridley. “Two or three segments from the entire system might be absolutely essential to you and you can pick and choose these to your specification. This is much more attractive to cash-strapped corporates than paying for an all singing, all dancing system that you are only using a fraction of.”

“The fragmentation in the FX space that has been apparent in Europe for some time is now increasingly becoming an issue in Asia.”

Tanuja Randery, CEO at MarketPrizm

Outsourcing trade

While trade with the rest of the world has continued to show impressive growth, intra-Asian trade has also developed in its importance to the region, affording it a greater level of protection against economic shocks originating in the EU and the US. Indeed, the move away from the bulk of trade being conducted on a US dollar basis has demanded that treasurers expand their risk management arrangements to take account of this changing landscape.

“The fragmentation in the FX space that has been apparent in Europe for some time is now increasingly becoming an issue in Asia,” says Tanuja Randery, CEO at MarketPrizm. This can make trading quite costly and complex in terms of trying to gain access to the multiple markets. “Access is a big word for a lot of things: in order to trade, clients need to be immersed in the market or they may just want to receive data from and send their orders back to the market. This involves the maintenance of development and network staff.

“But we are seeing increasing demand for these services in Australia and also continuing demand in Tokyo. Other emerging countries are also becoming more attractive such as Taiwan and Indonesia. In addition, China looks very interesting but it is early days yet.”

An integrated offer from a provider that actually has its own network, data and software is therefore becoming an attractive option – a trend growing more in Asia because the penetration in the region in terms of electronic and algorithmic trading is much lower than its Western counterparts, according to Randery. And Asia is expensive for low latency networks and collocation. While FX electronic trading has existed for quite a few years, the growth of high frequency trading (HFT) and algorithmic trading is emerging as a relatively recent trend, she says. “The reason this has happened is because clients are no longer able to make money in the placid markets, such as equities, so they have entered the FX space as a means of diversifying asset classes. This trade landscape is also becoming more global in nature and as a result we have seen the number of interested buy side and HFT players increasing significantly.”

Although the data volumes are much fewer in the FX arena than those seen in equities (most of the work happening with five or six currency pairs), in terms of fragmentation and the complexity deriving from that, in addition to the customisation required for the FX venue itself, trade is almost more complicated as a result. Says Randery: “You may not need as much bandwidth from a network perspective to reach the venue and trade but you do need it for many functions, particularly when it comes to managing each of the FX venues in an extremely bespoke manner for provisioning/onboarding set-up.”

In turn, these enormous complexities encourage traders to look towards a managed services model; they are looking for players to simplify and extract the infrastructure for them, and provide the infrastructure and data as a service model. The region is therefore seeing a shift towards the high speed, low latency service – a trend that looks set to continue. “A lot of our clients are saying that they want to avoid the spaghetti mess of multiple pipes, vendors, cross-connects, etc, which is time-consuming and costly. They are looking for very simplified infrastructure – and we act like the master switch that the clients plug into. We feed the venue, becoming a flow aggregator distributing each of those clients to where they need to go through the pricing engines. We manage the process so that it almost looks like the one stream – leveraging our infrastructure to mutualise cost and channel customers.”

Onwards and upwards

As the Asian landscape is composed of many diverse markets at different stages of development, companies operating in Asia – both MNCs and domestic – must be prepared to combat a number of different challenges. When it comes to the management of treasury, a one-size-fits-all strategy is therefore unlikely to be appropriate, so corporates should be equipped to deal with the policies and procedures that are bespoke to the region.

A key challenge for regulators across the Asian landscape in the coming years will be ensuring that monetary policies continue to favour sustained growth. Given that many of the economies are still in nascent stages, maintaining a favourable regulatory environment is crucial. Nonetheless, Asia – with its economic titans such as China and India – remains set to be one of the key drivers of global growth in the coming year.

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