Corporate TreasuryCentralisationTechnological Challenges for Global Treasuries

Technological Challenges for Global Treasuries

The Commercial Context

There is a strong global trend towards the centralisation of finance and treasury. Initially, in leaner economic times, this was driven by the cost efficiencies accruing from centralised treasury operations and shared service centres. Today, there are added business drivers in the form of complex hedge accounting, regulatory compliance and risk management demands that are being imposed on the treasurers of multinational corporations.

The situation could be loosely compared to a rolling millennium/euro implementation, in terms of its impact on technology. The market is increasingly buoyant, as treasurers seek to implement more powerful solutions to meet the range of contemporary demands.

The following are some of the factors that are presently affecting treasurers’ investment in technology.

  • Classic centralisation: in-house banking
  • Use of the web to disseminate information globally.
  • The reality of FAS133, and the roll-out of IAS39.
  • The reality of the Sarbanes-Oxley Act.
  • The return of risk management.

In-house Banking in the Global Treasury

The benefits of in-house banking have long been established, and the evolution of in-house banks has been a primary technology driver for over ten years. The issues are of course still utterly relevant, and few would argue with the need to use powerful technology to support the in-house bank.

Some of the specific disciplines generally included within in-house banking are:

  • Running internal bank accounts, supported by complex interest management facilities such as stepped debit and credit interest calculation.
  • Facilities to transfer money internally, and to optimise interest cost and expense through internal funding and investing. These functions work best when automated into a controlled, STP environment.
  • Monitoring of cash pooling – technology allows treasurers to check and verify banks’ pooling operations, to identify and reverse errors.
  • Some companies extend this to the next logical level, using their treasury management system to define pooling operations.
  • Users of zero balance accounts (ZBA) need technology to unscramble the header account statement, so that interest is correctly allocated to the participating entities.
  • Recently, the emergence of global account sharing has enabled centralised treasurers to realise truly dramatic bank charge and interest savings. It is virtually unthinkable to operate global account sharing without the necessary technology.
  • Inter-company lending and borrowing is another sensitive operation that is preferably supported by strong technology, to provide the appropriately high level of control. Security and documentation.
  • Multilateral netting requires technology to achieve bank independence.

The Web

Treasurers have been historically reluctant to entrust sensitive treasury and finance operations (such as payments) to the web. This reluctance has eroded recently, through the widening acceptance of the high standards of encryption, authentication and security that can now be achieved.

The clear technical advantages that are presently being realised include:

  • 24×7 system availability for the subsidiaries.
  • No need for remote software to be installed or maintained at remote subsidiaries (beyond a web browser).
  • The lack of subsidiary training needed through using intuitive, tailored software.
  • Freeing of the subsidiaries to concentrate on their commercial roles, while central treasury concentrates on cash, treasury and risk management.

So, what information are today’s multinational corporate treasurers entrusting to the web, and why?

  • Commercial cash forecasts. The use of intuitive data entry processes eases the forecasting burden for subsidiaries, and increases the accuracy of the data processing operation.
  • Deal requests – the web makes it easy for subsidiaries to submit cash, FX, money and capital markets requests to the centre in a secure way. The company can thus earn the benefits of interest optimisation and central dealing efficiency through taking advantage of this cheap and flexible technology.
  • Multilateral netting: remote subsidiaries can submit invoices plus offer of – and requests for – foreign currency, thus easing and controlling the netting process.
  • Reporting: a strong central system can automatically schedule and distribute reports via the web, achieving enhanced standards of accuracy and efficiency.

Hedge Accounting

The exigencies of implementing hedge accounting have inclined companies to centralise the solution, given the need to meet some very demanding requirements summarised below:

  • Computer programmes are highly suited to managing closed-end problems such as many-to-one, one-to-many and many-to-many exposure-hedge relationships, as they change over time.
  • Some forms of hedge accounting require quite complex mathematics, which again are best provided by tested, secure computer software.
  • The rules of hedge accounting require the enforcement of prospective testing; and prospective testing itself needs the support of risk management logic to operate the necessary scenarios.
  • Great value can also be achieved with real time monitoring of hedge effectiveness, with the issuance of appropriate warnings as hedges approach ineffectiveness. Real time revaluation logic is of course needed to support this function.

You could perform all of these functions on spreadsheets, on a decentralised basis; but how can you be sure that everything (and everyone) is working properly, without the assurance of strong technology to control and manage the vast complexities that underlie professional hedge accounting. Or are nasty surprises on the balance sheet a better option?

Sarbanes-Oxley

Some less charitable European treasurers may even have sniggered at the thought of their counterparts in the United States having to go through the technical and operational hoops necessary to demonstrate full and transparent compliance with Sarbanes-Oxley. The latest round of scandals have eliminated that view, and there are multiple reasons why non-American corporates are increasingly moving towards compliance – these include demonstrable high standards of corporate governance, and preparation for a US listing. And valuable American innovations like Sarbanes-Oxley have a history of eventually being adopted universally.

Sarbanes-Oxley compliance is aided by a strong central system, and once again this is best facilitated by powerful technology, so that the group treasurer can be confident that things are being done properly on a global basis. Systems clearly offer complete audit trails, with the added benefit of on-demand drill-down, enquiry and reporting.

A further benefit for central compliance is the linking together of supporting documentation, to facilitate the auditing process.

The Return of Risk Management

The emergence of Sarbanes-Oxley has once again brought risk management back into prominence.

Some years ago, value at risk derivation was in vogue for corporate treasurers, and substantial investments were made in technology to support the underlying data processing and mathematics. In time, value at risk was revealed as having limited value to most corporates (because their future cash flows tend to be less predictable than those of banks), and so its prominence faded.

However, there are several areas of risk management that have emerged recently, and are often given as reasons for investment in powerful technology to support central treasury operations:

  • Counterparty limit management.
    Managing limits on a decentralised basis is an administrative nightmare. If limits are centralised, they need to be monitored and managed in real time on a global basis, and there is no practical alternative to using technology to achieve this.
  • Derivative pricing.
    You still occasionally hear ‘My bank does it for me’ but many treasurers have taken advantage of central, bank-independent pricing functionality (especially for FX options) to check and correct banks’ quotations. In a real example, a global hotel chain had hedged the predicted costs of an overseas expansion with a series of FX options; then the deal was cancelled, and the options (now themselves an exposure) had to be unwound. The use of an appropriate treasury system to see inside the banks’ prices resulted in a saving of more than half a million dollars.
  • Scenario and stress testing.
    We have mentioned the importance of this facility in prospective testing; but it also aids the group treasurer in answering the nightmare question, (such as: What would be the corporate bottom line consequences if the euro depreciates 10%?) That’s another tough one to answer without a centralised treasury approach supported by strong technology.

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