Corporate TreasuryCentralisationSSCs/Payment FactoriesRisk and the Expanding Remit of a Corporate Treasurer

Risk and the Expanding Remit of a Corporate Treasurer

Over the past 10 years, the role of the corporate treasurer has developed to become much more involved and complex. Working capital, liquidity and risk are key topics, and increasingly they are being analysed by executive level management in large corporates. The group treasurer’s role is also expanding, with a remit over a broader sphere of financial and commercial activities.

But at the same time, treasury teams have either stayed the same size or, in most cases, are smaller due to an increased pressure to cut costs. In a modern corporate treasury team, this has forced a crossover between different job functions and departments, and the role of the treasurer is to pull together and co-ordinate the team.

As a result, treasurers have had to become more effective at appropriating resources from other teams, such as accounts payable (A/P) and accounts receivable (A/R) departments. In doing this, they are able to demonstrate the efficiency gains that can be made for the corporate as a whole, and not only the treasury. This change enables treasurers to focus on driving solutions across many departments, which gives the role a greater strategic importance.

In addition to expanding responsibilities, the changing banking landscape presents a number of new challenges to corporate treasurers. Regulations, such as Basel III and Solvency II, and the introduction of tighter over-the-counter (OTC) derivative rules continue to have a profound impact on the treasurer’s role. On top of this, the changing accounting rules under International Financial Reporting Standards (IFRS) have meant that treasurers must look at how best they can manage multi-currency flows.

Identifying those changes that will impact most in the future has become an important skill for the corporate treasurer. In turn, their banking partners must demonstrate that they are engaged at the most senior level, across multiple functions with multiple regulators, as corporates are frequently looking to them to provide information and analysis, in order to give the corporate a clear picture of the current regulatory landscape.

As a result of the external pressure, it is instrumental that the corporate treasury’s needs are reviewed, so that the treasury team can develop a deep understanding, not only of what they say their banking needs are, but also how to carry out their internal processes. This understanding would help them make the necessary judgements as to what the appropriate next steps are.

Liquidity and Counterparty Risk

Liquidity and counterparty risk are key topics for corporates in today’s environment, with the liquidity crisis of 2008 greatly accelerating the evolution of the corporate treasurer’s role. In response to the crisis, there has been increased activity around the centralisation of liquidity, as treasurers responded by moving cash into more easily-accessible accounts.

Corporates are not only concerned with their own liquidity, but are also looking more closely into the liquidity of their entire value chain. This includes buyers as well as suppliers, who are also potentially vulnerable to market shocks. Previously corporate treasurers have needed to focus on many different types of risk, such as liquidity, interest rate, foreign exchange (FX) and counterparty – but largely from a credit perspective, i.e. would debtors repay the company? In recent years, however, counterparty risk has risen in importance and corporate treasurers have been forced to ask the question: what would happen if a key buyer or supplier goes out of business?

In addition to supply chain partner risk, today banks also make up a component of counterparty risk. Many banks weathered the financial storms caused by the crisis by taking on support from either governments or sovereign wealth funds. As a result, corporates have become more attuned to counterparty risk when dealing with banking partners.

A corporate must have a good understanding of its risk appetite in terms of how willing it is to concentrate its cash deposits with a single bank. Before the economic crisis, the trend was for large corporates to move towards centralising their banking operations to a single bank model. However, in recent years, the trend has reversed and corporates are looking to maintain multiple bank relationships to distribute risk. The continued interest by corporates to diversify funding sources, alongside the rebound in the debt market, means there is an increased interest in structured trade solutions that also provide liquidity to corporates as alternative funding sources.

Despite the reasons against it, the drive towards consolidation and centralisation persists due to the need to drive down costs. Therefore, corporate treasurers are increasingly looking for a select number of trusted banking partners in various product areas.

Managing Risk Through Payments Centralisation

In recent years, Deutsche Bank has helped many corporate clients revise their overall treasury strategy to more effectively combine their commercial interests, risk and financial agendas. Quite a number have successfully implemented more centralised payment strategies with the aim of unlocking further benefit to their suppliers.

A regional payment factory solution is a good example of this type of revision. Spurred on by the recent launch of single euro payments area (SEPA) direct debits, many more corporates are investigating the benefits of a central payments hub, as well as collections factories in Europe, with the aim of centralising the receivables end of the cash management spectrum.

A payment factory is beneficial to the corporate treasury, because all payables’ details are known in advance, including the supplier, the invoice amount, terms, etc. This means that this information can be effectively used to offer financing services to suppliers.

The payment factory model has gained further momentum due to the necessity of large corporates to support their key suppliers with liquidity in the form of supply chain or trade finance. Within the world of corporate cash management and trade finance, it is not only liquidity from a cash management perspective that has become prevalent. Providing liquidity by means of trade financing to either buyers or suppliers of our corporate clients, using trade financing principles and technology, is now just as important.

Therefore, payment factories enable corporate treasurers to ask relevant questions in a bid to drive the centralisation process, as well as to take a fresh look at their internal processes. No payment factory looks exactly like another, and there are many details to be considered to drive efficiencies and gain control of cash flow with the aim of reducing risk. It is important for both corporates and treasurers to analyse their current situation and engage with their trusted banking partners and advisors so that they may improve their internal operations and make further use of modern banking technology.

In addition, in many countries corporates use receivables as an alternative funding source. This is either on the confirmed payable side or the straight A/R structuring side, which often sits outside of the general corporate financing function. This is not only applicable to large corporates but also to small and medium-sized enterprises (SMEs).

Trade products that are subject to thorough risk assessments – be that from a counterparty or country risk mitigation perspective – have gained an increasing amount of coverage over the past few years. There are frequent discussions centring on system integration and information quality, as corporates look to improve reconciliation, straight-through processing (STP) and streamline their internal processes.

Many clients have faced numerous challenges when attempting to rationalise the number of bank accounts and their structures. Corporates are now looking to streamline the bank account models to reduce costs and improve visibility and liquidity management. Many treasurers are evaluating the types of access technology they wish to use, and the past 12 months has seen an increased demand for SWIFT-based solutions that can create an agnostic banking interface.

Next Steps

Corporates today are facing a broad spectrum of changes in terms of their own role within the company and also external pressures from new regulations.

Until early this year the focus was still on the funding side of the equation, and many treasurers just did not have the time to analyse their current situation. In order to take advantage of the opportunities presented in a time of great upheaval, treasurers should be looking at how to best restructure and improve their processes, as well as how to make use of more modern banking cash and trade technology to drive benefits.

To read more from Deutsche Bank, please visit the company’s gtnews microsite.

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