Regulation & Standards

Navigating a diverse regulatory environment

Published: Mar 2021

For treasurers in APAC, managing regulatory change is a significant challenge due to the speed, volume and heterogenous nature of new developments across the region. How can treasurers stay abreast of upcoming regulatory developments? Which changes should they be aware of? And how can treasurers position themselves to take advantage of any new opportunities as quickly as possible?

A lighthouse behind a pipe in winter

Regulation is a challenge for treasurers everywhere – particularly for those that operate across multiple countries or regions. This challenge is all the greater in Asia Pacific, which is characterised by numerous disparate countries, currencies, cultures and regulatory bodies. As a result, some treasurers need to stay on top of a large volume of regulatory developments. Companies operating in multiple markets across the region may be exposed to thousands of changes each year.

As Christopher Emslie, Asian Regional Treasurer at General Mills, explained in a recent Treasury Today Asia interview: “It’s quite a diverse region, because of the different regulations and the different way things work and the different ways that people look at business. It’s also quite challenging because the environment is continually changing. You can have new regulations announced in India or China, and then you have a day to react before the new rules come into effect. So you really need to be on your toes, and have trust in your partners to give you the right information so you can overcome these challenges.”

So which regulatory developments and initiatives should treasurers be aware of in the coming months? How can treasurer stay abreast of upcoming regulatory developments – and how can they ensure they are best placed to adapt to new regulations when the need arises?

APAC’s regulatory environment: an overview

The region has a fragmented regulatory environment, with requirements varying from market to market, explains Aziz Parvez, head of Regional Corporate Sales, Global Transaction Services at Bank of America. “On one side of the spectrum, there are mature markets such as Australia, Singapore and Hong Kong which are open economies with limited currency controls – and on the other end, there are markets such as Vietnam, China and India with stricter controls,” he explains.

The latter can be more challenging, as companies may only be able to move or utilise their funds if they meet regulatory requirements, Parvez explains – “and in times of need, this may prevent the efficient use of funds. This further emphasises the importance for treasurers to have an accurate view of their funding requirements, so they can achieve optimal use of their funds.”

For treasurers trying to adopt a standardised approach throughout the region, remaining abreast of these disparate regulatory regimes is not straightforward. As Adesh Sarup, Head of Transaction Banking, North Asia, ANZ International explains, “The challenge of different regulations and rules across different countries in Asia, different currencies and available hedging options, the differing ability to physically or notionally manage liquidity pools, trade related risks and balance sheet management, are well known.”

Disparate markets

The challenge of staying on top of regulatory changes is compounded by the fact that regulators in the region are not all travelling in the same direction at any given time. Carol Mah, Global Treasury Advisory Services Senior Manager, Deloitte Southeast Asia, points out that Asia includes both free and highly regulated markets – and while some of those markets are in the process of reducing or relaxing regulatory barriers, others are tightening or changing their regulations. “Countries with currency exchange controls are usually more challenging, as they hinder cash transactions and prevent the use of financial instruments to hedge FX risk,” she adds.

At the same time, other factors can drive the regulatory landscape, including civil situations, geopolitical events, economic growth and investment opportunities. “A number of country regulators took quick action in response to the COVID-19 pandemic to support their local economies and protect their currencies and balance of payments,” says Mah. “This resulted in more countries going into negative rate territory.”

And another emerging factor is the focus on data security and privacy, says Balaji Natarajan, Head of PCM Product, Asia at ANZ Institutional. “While on the one hand, these measures strengthen local operations, they can also pose challenges if data localisation hampers ease of access and control which corporate treasurers require – and it adds to the complexity of managing the different norms/requirements imposed by different countries,” he notes.

Transition from LIBOR

As Carol Mah, Global Treasury Advisory Services Senior Manager at Deloitte Southeast Asia points out, “The LIBOR transition coming into effect by the end of 2021 is still a valid topic for companies with large debt portfolios and LIBOR-related instruments.”

The replacement of the London Interbank Offered Rate (LIBOR) was set in motion following discovery of a widespread rate-rigging scandal in the wake of the financial crisis. As a result of the subsequent investigations, banks around the world were fined more than US$9bn in relation to the manipulation of rates. The Intercontinental Exchange (ICE) took over the administration of LIBOR in 2014, and working groups began looking into how the rates could be reformed. Then in 2017, Andrew Bailey, the chief executive of the UK’s Financial Conduct Authority (FCA), announced the intention that banks would no longer be required to submit to LIBOR after the end of 2021.

The deadline for transitioning to LIBOR alternatives is fast approaching. By the end of this year, the ICE Benchmark Administration is expected to cease the publication of LIBOR in CHF, EUR, GBP and JPY, as well as one-week and two-week USD LIBOR. For the remaining USD rates, a stay of execution is expected: in December, the IBA published a consultation paper proposing to extend the cessation of the remaining USD LIBOR tenors until June 2023. However, the delay is intended to allow outstanding contracts to mature, and the market has been advised to stop entering into new USD LIBOR contracts as soon as practicable.

Rather than relacing LIBOR with another single rate, each currency will have its own risk-free rate – these include the Swiss average overnight rate (SARON), Euro short-term rate (€STER), the Sterling Overnight Index Average (SONIA) for GBP; Tokyo Overnight Average Rate (TONAR) and the Secured Overnight Financing Rate (SOFR) for USD. Different administrators are responsible for each of the risk-free rates.

For treasurers, navigating the transition away from LIBOR is a significant undertaking. References to LIBOR can be embedded into many different types of transaction, including bank loans, bonds, derivatives and commercial contracts. As such, identifying and addressing all of a company’s exposures can take time – and may involve working with colleagues across the organisation, from tax and legal to sales and purchasing. In some cases, existing contracts may need to be renegotiated. Treasurers also need to make sure that their treasury systems and processes are ready for the transition from LIBOR.

Further challenges

While the region’s disparate and complex nature is well understood, another challenge for treasurers is the speed at which regulations can change. “Recently, regulatory changes have been quick, and have sometimes made it difficult for treasurers to keep up or even take advantage of the evolving environment,” explains Mah.

She adds: “The speed of change has exacerbated the need for treasurers to quickly and effectively interpret the changes in order to ensure compliance within the timeframes, and respond accurately to a change in regulation.”

As well as these issues, Sarup also notes that treasurers are having to deal with emerging challenges relating to operational risk. “An example of that is the risk of sudden business change, eg a business model change on account of geopolitical tensions, or the current COVID-19 pandemic,” he says. “Another example is the challenge imposed by cyber threats and events – these can vary widely in different Asian markets.”

Where the current pandemic is concerned, he notes that the trapped cash challenge has been exacerbated: “While monetary policy across Asia has focused on enabling adequate liquidity, this has reduced yield and restricted the ability to effectively move trapped cash where required.”

Help or hindrance?

While managing the speed and volume of regulatory change can be a challenge, different regulatory changes can also bring new opportunities to manage cash in the region more effectively – depending on the direction of travel in individual markets. As BofA’s Parvez points out, “In recent years, we have seen improvements in the regulatory climate, with regulators bringing changes to ease controls to facilitate businesses operating in the region.”

He explains that regulations play a very important role in effective cash management, especially when it comes to liquidity management: “In today’s environment, as companies look to consolidate liquidity, regulations can play a critical role. Markets that permit free movement of currencies allow companies to have better control and more efficient use of their funds.”

Natarajan, meanwhile, says that regulators and central banks across Asian countries are encouraging digitisation. And with greater digitisation – ie business volumes being transacted via digital platforms – payment services have opened up to newer players, such as non-banks that compete with banks and traditional service providers. “This is good as it leads to innovation and growth of the industry,” he says.

In addition, he says there is a push towards building real-time national infrastructure, “which is driving faster real-time collections, reduced days sales outstanding (DSO) and better control over cash flows – all of which are advantageous to regional treasurers.”

Of course, regulation can also be a “double-edged sword”, as Mah explains. “Even a positive change, such as an easing of cash repatriation back to the home country, has some implications on ‘business as usual’ activities,” she says.

Companies in specific sectors will have to comply and provide environmental data to ensure their financing needs and issue debt on the capital markets.

Carol Mah, Global Treasury Advisory Services Senior Manager, Deloitte Southeast Asia

Likewise, Natarajan points out that any regulatory change that arises due to protectionism or a single country’s national interests “can often hinder effective regional cash management.”

Developments to watch

“While corporate treasury is not as regulated as financial institutions, they are indirectly impacted by the regulations that banks have to abide to,” comments Mah. “A case in point is the Basel III regulation which impacted corporate use of notional pooling structures.”

As such, there are a number of regulatory developments and initiatives that treasurers should be aware of in the coming months. These include:

  • LIBOR transition.

  • The rise of open banking.

  • The growing use of central bank digital currencies.

  • The adoption of ISO 20022 in correspondent banking.

  • Changes to foreign exchange management rules.

  • Data and digital initiatives intended to drive digital adoption across industry and business sectors.

Treasurers may also need to be aware of regulatory changes that affect specific industries and their supply chains.

Parvez says another a key development this year is in the use of technology in reporting processes. “A number of countries are moving in this direction, and that should help companies create efficiency in their own practices,” he says, adding that treasurers should look forward to see how they can adopt these developments.

In addition, he says that China has announced regulations to further facilitate cross-border trade and investment. “They have also eased some of the cross-border borrowing and lending quota,” he says. “These can help companies in managing excess liquidity.”

And as Mah notes, sustainability and green finance are key topics for financial institutions. “Companies in specific sectors will have to comply and provide environmental data to ensure their financing needs and issue debt on the capital markets,” she says.

Staying abreast of changes

Keeping up to date with regulatory change is important, not only to avoid any compliance issues, but also to enable the company to take advantage of any new opportunities that may emerge.

There are a number of ways that treasurers can keep informed about upcoming changes. One important source is the regulators themselves, so treasurers should subscribe to any relevant circulars and news alerts. That said, keeping track of changes across multiple markets can be challenging – so treasurers should also consult other sources that may be able to help them collate and digest relevant changes.

The company’s bank partners should be able to provide regulatory updates that can help treasurers understand which regulatory developments are relevant to their businesses. “At Bank of America, we stay close to the regulators in each of the markets that we operate in and as such, we are able to provide quick updates to our clients, whenever changes are released,” says Parvez.

Other useful sources of information include:

  • In-house tax, legal and compliance teams.

  • Local in-country management teams.

  • Consultancies and advisory practices.

  • Government and industry trade associations.

  • Treasury peer groups and local associations.

Adapting to new regulation

While it is important to stay abreast of any relevant regulatory changes, treasurers also need to be able to adapt to any developments in order to avoid any fines or other penalties that could arise from non-compliance. As Deloitte’s Mah points out, “Treasurers need to act quickly when new regulations are announced, not when they take effect.”

She adds: “Getting new procedures or systems in place ahead of time can help ensure that organisations can finesse any delays, educate or train employees, and find the right support from different business communities.”

“Needless to say, adapting and planning for regulatory changes is important for every business,” says ANZ’s Sarup. He notes that to an extent, treasurers can mitigate challenges and changes by:

  • Implementing/adopting an effective treasury platform that caters to the changes and has the ability to be future-proofed.

  • Adopting optimum and effective heedging solutions to address short-to-medium-term geopolitical disruptions.

  • Having an ongoing programme management function in place to cater for regulatory changes so that they are not hampered by a lack of resources or a lack of information.

But some regulatory changes are more pressing than other. BofA’s Parvez points out that while some regulatory changes are mandatory, and must be adopted within specified timelines, “in other instances, adoptions may vary depending on the impact and timeline stipulated by the regulators.” Likewise, some changes are more complicated than others. “In any case, it is in companies’ best interests to react promptly and aim to incorporate the changes required sooner in order to ensure minimal disruptions to operations,” he says.

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