Improving Performance with a Regional Treasury Centre in Asia
In
the past, setting up a RTC in Europe rather than Asia was a straightforward
decision, as corporates could take advantage of better controls and
advantageous tax rates in locations such as Luxembourg or Belgium. Since there
was more fixed income trading expertise in Europe and North America than in
Asia, the RTC in Europe concentrated on using intellectual capital, while
operations in Asia focused more on execution.
As these MNCs have
begun to generate a rapidly-growing percentage of their cash from Asia,
however, they have started looking at how to set up a RTC in Singapore or Hong
Kong. By doing so they can have faster access to their cash, rather than
sweeping their funds to London and New York, and also take advantage of
attractive investments in the region.
While Asia-headquartered MNCs
tended to be decentralised or have their RTCs located in London or New York, a
more recent trend is for these MNCs is to step up to the next level of
financial management and look at developing RTCs in Asia. This is so they can
manage cash better, enhance risk management and improve controls by operating
in a central location in their home region.
Setting the
Right Objectives for RTCs
As they look at shifting their
focus to setting up their RTC in Asia, there is a tendency for some corporates
to consider factors such as location or structure first. For more strategic
corporates, however, the optimal starting point is to concentrate on aligning
the RTC structure to support the company in achieving its key objectives of
expanding their customer base, increasing revenue and growing the business.
While treasury clearly has a far more strategic role than in the past, it
provides a support function and should focus on preserving corporate assets and
driving a satisfactory return within a specified risk framework.
For the RTC itself, the key objectives are to increase control and
visibility, improve regulatory and internal compliance, enhance yield, reduce
financing costs and improve operational efficiency. As businesses continue to
expand in countries throughout the region and become more entrenched locally,
corporates are also considering how to set up a structure to deal with an
increasing number of diverse and internationally-focused counterparties in each
market.
While some corporates are starting to target a higher, yet
riskier return – especially as risk appetites grow larger in a more benign
market – more strategic corporate treasurers are adopting a cautious approach
whereby they assess treasury risk scenarios fully and make decisions that
optimise their business. This more cautious approach does not mean that
corporates ignore solutions that work well, but work to maximise the potential
of their funds despite operating in Asian markets where currencies are
restricted.
The Optimal Location for the RTC
Once a MNC has decided to shift its RTC to the Asia-Pacific region and
has established its goals, Singapore and Hong Kong stand out as optimal
locations to be considered. Both offer well-established tax and legal
structures, a solid business environment, competitive banking services and
effective netting and pooling regulations that can be more attractive than many
other locations in the Asia Pacific.
For companies based in
Northeast Asia, Hong Kong may be preferred because of its closer proximity to
their counterparties.
For many corporates throughout the Asia
Pacific, however, Singapore is becoming the preferred location because it is
considered very business-friendly, has the most freely regulated market in the
region, offers strong tax incentives, delivers fewer surprises in financial
regulation, has a legal structure in line with English law, uses English as the
common business language, and receives support from government agencies such as
the government’s Economic Development Board (EDB). In addition, it has
developed an experienced and broader talent pool, due to MNCs having set up
their RTCs in Singapore.
The net result is that many companies
consider Singapore the more strategic location in the region to locate their
RTC.
Establishing an Effective RTC
Along with employing standard practices such as efficient cash and balance
sheet exposure management in the RTC in the location they select, corporates
need to design their RTC so that they have the right skills for oversight
functions. To increase their talent pool and manage these activities better, in
the past corporates typically brought in expertise from outside the region to
manage investments and knowledge transfer to regional staff in the management
of a RTC. Today, leading corporates are increasingly tapping into Asian talent
and benefiting from hiring staff that have received training abroad and are
returning to apply their expertise in Singapore or Hong Kong.
As
they set up the RTC, corporates will need to develop strong processes and
procedures that include an effective credit risk management structure, as well
as to set up the systems and information management practices that fully
support the business. Treasurers are also assessing whether to centralise funds
in a single location, or alternatively to use sweeps or pooling to generate a
comprehensive view of their funds and optimise yields.
While some
corporates prefer to work with a fund manager in Asia with a strong portfolio
management expertise, others set up their own cash management structure
internally so that they can manage funds in a corporate environment that
leverages internal management, accounting and investment expertise. Locating
the RTC in the Asia-Pacific offers easier access to investments such as
commercial paper, structured notes or fixed income that provides attractive
returns, as the treasurers allocate the cash into different buckets of
investments.
As they establish the RTC structure, corporates can
also work towards rationalising accounts by consolidating funds in fewer
accounts by using sweeps, pooling or other practices that generate better
returns and ensure a strong risk management process.
Taking Full Advantage of a Global Bank
As Asian
and Western multinationals alike move towards setting up a new RTC or shifting
an existing one to Asia, working with a global bank can offer many benefits and
focusing on three factors as they select a bank, will enable them to achieve
their goals more easily.
Firstly, corporates can tap into the
bank’s global expertise so they can identify best practices from around the
world quickly and benefit from leading-edge developments in the US, Europe or
other locations immediately, rather than waiting for months. A small number of
global banks have been working with MNCs to set up RTCs for many years, and
corporates can take advantage of the lessons they have learned in Asia as well
as other regions to develop better models and an optimal framework for their
RTC.
Secondly, corporates can benefit from assessing the key
functional currencies they will use and selecting a bank with expertise and
connections in those currencies. A corporate with a majority of their
operations in US dollars, for example, can benefit from selecting a bank with a
strong US dollar framework and liquidity platform, as well as an extensive
correspondent bank network that enables them to move cash more quickly.
Finally, a global bank can provide treasurers with the core products or
services that are central to their profitability and help them to preserve the
firm’s capital. While high-return opportunities might look attractive, they
come with risks and corporates can benefit from working with a bank that
focuses on standard products, such as fixed income products or commercial
paper, rather than risky new ones, and taking the time to understand details of
these investments fully.
Conclusion
Setting up an RTC in Singapore or shifting from another region, can give
corporates better access to their cash and to investment opportunities in the
region that generates more of their cash, and offers more dynamic business
prospects. Corporates that fully leverage the capabilities of a global bank can
achieve the efficiencies they seek while managing treasury better, and focus on
the core competencies that drive their business.