Optimal Treasury Technology for Changing Market Conditions and Evolving Organisations
There has been a shift over the past year in the corporate treasury approach to technology. As market events prompted a demand for visibility and assessment of risk, many treasuries with inadequate or outdated technology could not provide immediate answers to senior management demands for real-time information. Corporates now require technology that provides visibility to global liquidity, optimal bank and enterprise resource planning (ERP) connectivity, improved transaction controls, risk metrics and flexible architecture.
For corporations considering acquiring new treasury technology in 2010, developments in treasury management systems (TMS) and other complementary solutions have been significant over the past 12 months. Vendors have been responsive to the demands of the marketplace, and credit conditions that have forced new risk management measures, both regulatory and management-driven. As a result, organisations now have better tools that enhance visibility, manage risk, integrate data and standardise workflows and processes.
While initial arguments for global visibility to bank accounts focused on working capital optimisation, visibility now has added urgency from a risk management perspective. Senior management wants to know where a company’s cash is located, and the counterparty banks in which it is held. Too often, corporate treasuries have been unable to provide a quick answer to that question, instead taking hours or even days to produce consolidated global cash position reports.
The first step to cash visibility is access to banking information. To simplify that access, more organisations are leveraging SWIFT connectivity to gain visibility throughout the enterprise. With more options than ever before for connecting to the SWIFT network – direct infrastructure, shared infrastructure through a service bureau and internet connectivity via Alliance Lite – companies can make the case that visibility comes at a lower cost than it did previously. Most frequently, corporates start with information reporting as the initial use of SWIFT connectivity – with the objective of achieving comprehensive bank balance and transaction reporting via the one connection, whether it is MT or BAI file format.
The second step to visibility to cash is a more integrated cash forecasting activity. Too often, treasuries do not produce an independent cash forecast from the organisation’s financial planning and analysis department’s forecast, which has more of a budgetary and long-term horizon. Corporate treasuries look to their TMS to facilitate a cash forecast that includes a seamless integration of financial transaction flows, operational cashflows (accounts payable (A/P), receivable (A/R) and payroll) across a horizon that facilitates short-term and medium-term liquidity planning. The latest versions of TMS recognise this and have added functionality for supporting this effort through integration of ERP systems data as well as tools for subsidiary reporting of forecasts.
Even as SWIFT proves a valuable tool for gaining visibility to cash from a risk management point of view, TMS vendors are recognising that visibility can also be construed as the ability to report on that data. There are more flexible reporting tools in the latest versions of treasury technology. Whether digital dashboards display the information graphically, ad hoc queries are quickly performed for on-screen analysis or data exported in a variety of formats, corporate treasuries will find enhanced reporting options available in the latest versions of TMS.
Visibility also applies to bank accounts themselves – understanding what bank accounts exist across the organisation and how they are used. The administration of bank accounts is also a key pain point for organisations, especially from a compliance perspective. Many companies still track bank accounts and signatories in legacy database applications or spreadsheets that may or may not be accurate. There is a new demand for integrated bank account administration in TMS and third-party niche providers have also experienced strong interest in their products. Corporates want to be able to take advantage of the more streamlined approach banks are taking to the documentation and account administration activities (many banks have upgraded their online platforms with respect to bank account administration functionality), and corporates want their TMS to support this functionality to a greater degree than in the past. Also, as SWIFT’s programme around electronic bank account management (eBAM) progresses, TMS will need to support the standardised message types that emerge from the eBAM initiative.
Through better reporting and data, companies now seek to report on counterparty risk in a broader scope than ever before. Previously, the focus for counterparty risk centred on the valuation of an organisation’s derivative portfolio and the associated mark-to-market gain or loss with counterparty institutions. Now corporate treasuries want to add cash balances, investment portfolio holdings, deal settlements and un-utilised credit facilities to the derivative portfolio valuation to arrive at a comprehensive view of counterparty risk. TMS vendors have been tasked with customising reports or limit parameters to accomplish this.
At the same time, regulatory changes to US GAAP reporting have forced public companies to report on derivative holdings and counterparty risk under FAS 161 and FAS 157. That has required TMS vendors to add functionality for calculation of non-performance risk and financial statement recording of the adjusted value of the derivative portfolios. All vendors, whether best-of-breed or ERP, are making strides to include this functionality in new versions, if they do not already have it. Buyers of TMS or niche applications for whom this is a key requirement should examine this functionality closely.
The goals of visibility and risk management have merged in an effort to understand more about balances and flows across the enterprise, both for the optimisation of liquidity and for the management of operational and financial risk. TMS vendors have responded to this by integrating SWIFT connectivity in their systems and enhancing functionality for monitoring counterparty risk, administering bank accounts and reporting on treasury activities in general.
The extent to which operational data can be integrated into TMS is continuously improving. Recent partnerships among best-of-breed vendors are aimed at providing enhanced functionality and support for financial instruments, hedge accounting and exposure capture. There is recognition in the marketplace that corporations want to use their TMS as a comprehensive database, extending its use beyond basic functionality. To enable that, TMS vendors are upgrading their ability to interface with ERP systems or niche providers that can bring in data to the TMS.
One of the strengths of an ERP treasury module is the level of integration for A/P and A/R data, as well as payment execution. TMS and niche provider vendors are upgrading their interfaces to ERP or other in-house systems for the purpose of integrating that data for treasury planning and analytics. For example, there is a greater focus on the ability to facilitate foreign exchange (FX) exposure reporting on the part of divisions or subsidiaries at many corporate treasuries, and vendors have responded by improving this functionality component or partnering with best-of-breed niche providers.
As more and more organisations establish shared service centres (SSC), corporate treasury is looking to leverage the new structure and move bank office activities such as deal confirmation, settlement and accounting to those SSCs. A key component of this solution is the level of integration available both between the ERP and TMS, as well as user access to the TMS from the SSC. SWIFT also plays a role in this integration as the data received and sent over the SWIFT pipeline can streamline the integration architecture. Payment factories in SSCs are most efficient when payment files are sent over one network rather than several bank proprietary links.
Another example of TMS responses to the desire for better data integration relates to some vendors’ ability to attach and store documents in the TMS database. Trade documentation, supplier invoices and bank account legal documents are three examples of data that corporate treasuries want to associate with deals, payments or bank account records. In the past, companies have had to create hyperlinks to their internal network to reference these types of documents; now, some systems can store the documents within the TMS database, providing greater security and integration with respect to that supporting documentation.
Data integration refers not only to accessing enterprise-wide internal data for treasury use, but also external data integration for trade execution details and market price data. As more and more organisations move to execution of deals on multi-bank trading platforms, the ease with which those trade details can be imported is a key element of any TMS project. At the same time, companies also want to ensure that they can independently produce a mark-to-market valuation on their trade portfolios, so market data must be imported efficiently. All TMS have long been able to import market data, but the extent of coverage has improved for financial instruments and credit derivatives.
Vendors are increasingly responding to the organisational desire to document workflows and standardise processes. For compliance purposes, it is crucial to document treasury workflows and procedures. In the past, treasury has accomplished that with much diagramming and process documentation outside the TMS. Now, companies are finding that TMS vendors are offering the ability to embed compliance documentation within the system, both in terms of process diagrams and workflow controls around reconciliation, trade verification, confirmation and settlement.
Enhanced audit controls in TMS also aid the standardisation effort. There is more segregation of user roles and entity permissions than ever before in TMS platforms.
Standardisation considerations also characterise changes that TMS vendors have included in their latest versions with respect to remote deployment features. They are responding to marketplace demands for standardising subsidiary interaction with corporate treasuries: reporting of exposures and cash forecasts on a common template and requests for payments or trades.
A single platform for treasury to track, settle, account and report for activities is critical for standardisation across regional treasury centres. But it can also enhance any company’s ability to bring staff on board and manage staff turnover. If workflows and procedures are clear within the system itself, then that shortens time to staff deployment.
Enhancements in treasury technology applications will continue apace, particularly as corporate treasury assumes a more strategic role within the organisation. In order for treasury to make time for analytic and strategic activities, the operations related to transactions must be automated and streamlined. Corporates are recognising that standardising connectivity and processes is the basis for efficiency improvements in transaction processing. Then they look to their TMS to help them integrate data to improve analytics across many activities. The end result is one where visibility to activities across the organisation allows for optimal liquidity and strategic risk management. TMS vendors and other solution providers recognise this imperative and have responded in kind.