Cash & Liquidity ManagementPaymentsThe biggest challenges facing treasurers in the year ahead

The biggest challenges facing treasurers in the year ahead

Like it or not, 2020 is going to be another busy year for the global treasury space. Nash Riggins explores some of the key challenges facing corporate treasurers in the year ahead and how those challenges can be overcome.

The last 12 months have been a pretty bumpy ride for corporate treasurers. Between huge currency movements, the escalation of trade wars, political tensions, rapidly emerging fintech developments and major commodity price shifts, keeping tabs on cash flows, payments and risk management has never been more difficult. Unfortunately, it’s looking like many of these challenges will only intensify throughout 2020.

This is set to be another incredibly busy year for treasury teams, with regulatory uncertainty on the rise, LIBOR on its way out and real-time payments creating just as many problems as they are creating solutions. Fortunately, there are already a number of viable paths forward corporates can take in order to overcome these challenges – but treasurers have got to be diligent in 2020, and they’ll certainly have their work cut out for them.

Farewell to LIBOR

Everybody knows that LIBOR is on its way out. After all, it’s been almost a year-and-a-half since the Financial Conduct Authority announced plans to phase out the use of the London Inter-Bank Offered Rate. Yet as we inch ever-closer to LIBOR’s eventual termination at the end of 2021, the global treasury ecosystem is now finding itself under more pressure than ever to ensure a safe and secure transition away from this once omnipotent benchmark that still represents some $350 trillion worth of contracts.

The rationale for LIBOR’s demise has been sound, and regulators have definitely provided the industry with plenty of time to respond to these changes – but evidence suggests both banks and corporates alike are still woefully unprepared for the transition.

According to researchers at McKinsey & Company, up to 75% of banking models still involve LIBOR and have yet to be redeveloped. Dozens of document types will likely need repapering in the weeks and months to come, and almost all systems are going to need some form of remediation. Worse yet, most banks have yet to comprehensively translate their exposures into quantified risks – and in lieu of any single sweeping, cross-border legislative solution, next year’s LIBOR transition will likely lead to fragmented markets, a hike in trading costs and an inevitable increase in litigation risks.

While the bulk of this transition work will need to be carried out by financial institutions, corporate treasurers will need to take a few matters into their own hands across 2020 in order to mitigate the impacts of LIBOR’s departure. That journey starts with an audit to establish where and how LIBOR is being references in commercial contracts, intercompany lending, valuation models, trade products and everything in between. From there, teams will need to start working to identify and implement alternative reference rates that can be introduced into said contracts in order to replace LIBOR.

Fortunately, there are already a few viable options gaining traction. Uptake in the Secured Overnight Financing Rate (SOFR), which is a daily rate based on transactions in the US Treasury repurchase market, jumped from $2 billion in September 2018 to $50 billion in August 2019. Meanwhile, the Bank of England-backed Sterling Overnight Index Average (SONIA) is already being used to value £30 trillion worth of assets each year.

In some cases, it could be beneficial for corporates to deploy different reference rates for different contract types – but the clock is certainly ticking on this one, and 2020 will be the year treasurers have got to do everything they can to prepare for the end of LIBOR.

Regulatory uncertainty

The financial sector has experienced a flurry of new regulatory burdens over the course of the last decade, and in many cases this has been beneficial. After all, regulatory convergence across key markets has helped to speed up cross-border payments and simplify quite a few compliance processes. Yet rising socio-political tension across the globe has pushed many corporates into murky waters in which regulatory convergence and certainty are rapidly dissipating.

Instability in Hong Kong, America’s escalating faceoff with China and the European Union, an impending Brexit and ongoing trade disputes between Japan and South Korea have all created an uncertain climate riddled with complex and contradictory sanctions regulations. Unfortunately, all of these new sanctions and tit-for-tat tariffs seem to be introduced and then repealed at the drop of a hat – and it unsurprisingly falls upon an organisation’s treasury function to stay on top of these developments and respond both quickly and appropriately. After all, it’s treasurers who are responsible for enterprise-wide risk, right?

That means constantly working to oversee and ensure the security of funds, keep tabs on supply chains to ensure that affiliates are not in breach of any sort of trade regulations and horizon scanning to ensure the C-level has as much strategic visibility as humanly possible over upcoming changes.

KYC obligations have become particularly complex over recent months, with corporates often left stumbling to meet different requirements from different banks in multiple jurisdictions. Yet these requirements will only continue to mount in 2020. At the start of January, the EU’s 5th Anti-Money Laundering Directive (5MLD) came into effect – which calls for enhanced due diligence for all business relationships in high-risk third countries, new requirements on endorsement of electronic verification and clarity on Politically Exposed Persons (PEPs).

As regulators continue to roll out new KYC and AML requirements like 5MLD across 2020, corporates should also expect an increased legislative effort to audit and penalise companies for non-compliance. Treasurers have got to stay on top of this over the next 12 months, or risk serious consequences in the near future.

Keeping up with real-time payments

Real-time payments have totally revolutionised and streamlined operations for a wide range of businesses, and it looks like 2020 is set to be another landmark year for real-time payments and real-time banking. Instant confirmation, settlement finality, faster communication flows and the delivery of immediately-available funds are being rolled out in markets across the globe – and while that’s good news for corporates looking to leverage these new payment technologies in order to unlock growth potential, it could also pose a serious headache for treasury teams over the next few months.

That’s because treasurers and financial decision makers have now got to drop what they’re doing and reassess how they can and must support new business models that rely on streamlined processes and new types of instant bank communications. These strategic shifts will inherently pose an impact upon an organisation’s liquidity and working capital management, too – which means that treasury teams must take an enterprise-wide lead to identify how cash management processes can be simplified, the types of technology that may need to be incorporated into existing systems to support real-time functionality and any potential risks that may go hand-in-hand with adoption.

Cybersecurity is going to be particularly critical as banks and corporates embrace real-time services, which means improved monitoring, fraud detection and mitigation are going to be more important than ever. That’s why treasury teams have been flocking to join new networks like SWIFT gpi, which offers the promise of full visibility into cross-border payments at each processing stage.

While there are obviously some pretty intense challenges ahead for treasurers, that doesn’t mean 2020 is going to be a year filled with doom and gloom. Rapidly evolving tech solutions and improving business climates across multiple emerging markets also mean huge growth opportunities for both banks and corporates alike.

Yet in order to leverage those opportunities and unlock potential, organisations have got to make sure they’ve got the basics down first – and that starts with preparing for the LIBOR transition, mitigating regulatory uncertainty and staying on top of real-time payments.

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