international treasurer - october 2008 - the financial crisis heats up
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T h e J o u r n a l o f G l o b a l T re a s u r y a n d F i n a n c i a l R i s k M a n a g e m e n t
OCTOBER 2008
SeptemberMadnessBy Joseph Neu
September usheredin new extremes tothe subprime-inspiredfinancial crisis andtreasurers must stayprepared for unprec-edented surprises.
page
Uncle Sam andFair ValueBy Joseph Neu
As the US governmensteps into so manyinactive markets, whawill it do to fair value?
page
AnticipatedExposures
Oversight committee
covenant remindersand dangers in short-selling bans.
page
Money FundConcernsBy Bryan Richardson
Addressing key ques-tions concerning put-ting excess cash intomoney market funds.
page
Banks Investing in
Cash BusinessBy Denise Bedell
With renewed appre-ciation for their transation services businessmore cash banks planto step up investmentin it.
page
Event risk management
September Madness: With October SurprisesTo be AnticipatedBy Joseph Neu
With madness replacing rationality and base fears trumping risk models as the operating
principles in financial markets, treasury professionals are making the best out of hard times.
Where to begin? There is so much happeningthat has never happened or been thought pos-sible, and what is true today may not be true
tomorrow. Thus, for many treasury profession-als in this financial crisis their response started
with a return to base instincts: making sure allthe cash they have is safe. This is one reason why
cash management banks are talking up new in-vestments in cash visibility solutions (see p. 14).
The question then is what besides US govern-
ment paper is safe as a store of value thesedays and how do you know (and how do you
know you can trust the US government)? Withfinancial institutions failing or at risk of failing,
each week, counterparty risk management hasgone off the charts in terms of its importance.And finally, as credit markets seize, as they have,
first financial institution and then some corpo-rate paper, where does a firm go for funding?
It is not merely frightening, it is terrifying,
noted one debt capital markets banker, when
asked about the current environment.
The system is fundamentally broken.
If ever cash can be said to trump all other kings,
and this is said often, it can be said now.Still, as bad as things are (and they may get
worse), treasury professionals that the NeuGrouphas interacted with across its peer groups in
recent weeks have shown that their heads are stillin the game and they are working hard to respondin a crisis. Already working intense schedules, the
treasury professionals weve spoken with havebeen burning their candles at both ends, yet they
have kept their humor (judging from the reactionto the mock September madness bracket that
has been making the rounds, see p. 12).
THE BIG ISSUES IN FOCUS
What follows are highlights from recent discus-sions with treasury professionals (and bankers) in
our network:nHope for corporate funding.While the situ-
ation will worsen and corporate sources of fund-ing, in particular short-term CP and asset-backedsources, are at risk, there is still hope that the
crisis of confidence that has caused fixed-incomeinvestors to stay away from financial institution
paper will not spread in the same way to the non-financial sector. While investors with cash, and
remember there is still a lot of capital out there,have a flight-to-quality instinct like everyone, noteveryone (see below) is going to get all their funds
into Treasurys or money market funds made uppurely of them (see p. 11). Thus, some may look
to diversify into corporate paper. Of course, thefront end of liquidity needs to come back before
many of the shifts can take place.Still, without liquidity to grease the wheels
continued on page 3
Featured Meeting Summa
The Treasurers Groupof Thirty
n
Is immediate funding and liquidity an issue?nWhen would it be?
nAre we over-reliant on short-term funding?
nHow secure is our contingent capital?
nDo we have sufficient cash visibility and an
emergency plan to repatriate offshore cash?
nWhere do we put excess cash, safely?
nHow well are we monitoring counterparty risk?
nHave we shifted holdings/business to institu-
tions with low CDS spreads/scores on our
rating matrix?
n
Are we comfortable with our insurers?nAre we communicating enough with the Board
and senior management?
nDo we need an oversight committee?
nWhat communication plan do we have for
external analysts, particularly from rating
agencies, in response to events?
nHave we examined the fair value accounting
impact on assets and hedges with non-perfor-
mance risk in preparation for year-end?
nWhat are our upside opportunities?
K E Y Q U E S T I O N S O F T H E D A Y
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money cannot move. Thus, treasurers should
take a long hard look at how much they are rely-ing on CP-funding, what they need, and if they
need X, they should lower expectations to Y and
be prepared to make up the difference.
The same holds with other debt issuances,
including asset-backed issuances and convert-ibles. AB issues should be structured extremely
conservatively and with terms tailored to leadinvestors. Plus, with so many arb investors being
sidelined by curbs on short-selling and their ownliquidity constraints, the uptake on convertibles
wont be there.n CP back-stops and new credit pricing.
While CP backup lines are likely to be there so
long as they are with well-capitalized institutions,going forward most providers will re-price them
severely. Banks have realized that this steadybusiness, similar to other types of mono-line in-
surance, represents a substantial concentrationof risk. CP back-stops are probably just the tipof the iceberg with regard to banks reconsider-
ing how they price credit. It may just take a fewweeks or months before credit bankers whose
natural instinct is to say yes, will be forced to sayno to even their best customers.
And when the CP-backups stop, or get cor-rectly priced, the CP market wont be the same.Indeed, bankers would like to set expectations
now for draw rates derived from CDS spreads.n New credit line commitments hard to
find. Several treasurers we have spoken withnoted that they are looking for additional credit
line commitments (some to replace Lehman) orin expectation of a reduction in commitmentfrom BofA/Merrill. Unfortunately, these treasur-
ers report, there is not much appetite out thereat the moment. The one exception mentioned
seems to be Japanese banks, which have gone
from some of the worlds worst credit providers
to the worlds best in just over a year. In additionto new commitments, treasurers are also look-
ing to reallocate credit commitments based oncounterparty concerns, either their own or their
credit insurers.
Problems with credit commitments shouldbecome an ongoing theme as banks are forced
by market conditions, or regulation, to stop treat-ing their balance sheets as a loss leader. Whether
banks are used as contingent capital or as part ofa draw-down, term-out approach to funding, the
cost is going to go up.nWatch the rating matrix.Once the fund-
ing/liquidity questions are answered, the most
important activity for treasurers is monitoringcounterparty risk. Almost everyone is talking
about their own internal ratings grids, or dash-boards (see example on p. 15). These are used to
monitor counterparty risk using some combina-tion of changes in CDS spreads, expected defaultfrequency, changes in market cap, changes in
rating agency rating, rating outlooks, VAR chang-es, change in fair/notional value and a variety of
other inputs. Every firm seems to be using onewith various levels of sophistication. Treasurers
are watching them religiously to track counter-parties on everything from FX trades to deriva-tive overlays on their pension portfolio.
Another matrix of concern is the web of bankaffiliates that an MNC deals with around the
world. One treasurer we spoke with noted con-cern about getting explicit parental guarantees
from banks for their overseas affiliates. A fewnoted having provisions already in place in theirISDA agreements to cover this. Their bank coun-
terparties, meanwhile, are clearly also monitor-ing counterparty risk ever more closely. Banks
have added contingency risk, since in the current
TVA
RATINGS MATTER LESSAs a further sign that firms
are stepping up efforts toreduce rating agency fees
(see IT, September 2008),
we have seen treasurers andtheir investment managers
query each other abouttheir investment policy posi-
tions on high-quality paperthat is rated by just two of
the major agencies (i.e.,
Moodys and Fitch, but notS&P). Most said they would.
Would you invest in me
if . . . ?Thus has begun a
whole series of new what-if
questions that treasurers areasking of each other and
their investors to determinehow relevant ratings have
remained in the currentenvironment.
Notably, in responses
to the two-of-three ratingquestion several treasur-
ers noted that their answerwas at least partly driven by
their increasing reliance on
Expected Default Frequencyand Credit Default Swap
indicators, as opposed toratings.
How long before invest-
ment policies go from two of
three major rating servicesbeing required, to none?
September Madness, continued from page 1
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Risk management
More InternalOversight Needed?
As companies grapple with the fallout
in the financial marketplace, they areevaluating all aspects of their treasury
operations to determine how they canbetter insure they wont be stung in the
midst of a hornets nest. Investment-, FX-and credit policies are all being reviewed
for exposures. But in addition to theseactivities, perhaps in reaction to politi-cians calls for more regulation the role
of an oversight committee is also beingconsidered. While many large companies
have various committees, including riskcommittees that provide oversight and
guidance to the activities of investing,foreign exchange and credit, surprisingly,many other large companies do not.
The purpose behind such an oversightcommittee is simply to provide review
and guidance for the most critical areasof a companys financial risk exposure.
It can act as an internal regulator, or asimple control over those conductingsuch operations who might get lost in
the trees and fail to see the forest. Therole and dynamics of these committees
can vary widely. But they generally con-sist of a handful of senior finance people
who are required to meet on a periodicbasis to review the status and directionof the operation and quite often provide
reporting to the board of directors or atleast the CFO and CEO.
A QUICK REVIEW OF BEST PRACTICE
A few best practices items have arisenfrom a recent e-mail exchange amongmembers of one of the NeuGroups peer
groups, including:
nBoard Authority. Have the boardof directors officially establish the com-mittee with a clear mandate and level
of authority. We have board-deputizedcommittees for both investments andcurrency hedging stated the assistant
treasurer of a large technology firm.nDevelop a governing document
for the committee.In order to ensurethat the committee does not lose sight
of its purpose and expectations, a charter
document is helpful. The document
should address key components of thecommittees purpose, authority and
accountability. As an example, the FordFoundations charter for its investment
committee covers three basic categories:
Mission Statement (what their broadpurpose is), Organization (who and how
they operate) and Roles and Responsi-bilities (the details of their duties).
nGet the right people. Common par-ticipants for committees of this nature
can include the treasurer, CFO, controller,head of tax, and head of internal audit.We have an investment committee
consisting of CFO, treasurer, controller,and head of tax. The committee reviews
the investment portfolio policy only andprovides guidance, noted one assistant
treasurer of a large MNC.nRequire regular meetings. A
requirement to meet at established in-
tervals will ensure the responsibility doesnot get lost in the busy schedules of the
committee members. We are required tomeet at least quarterly but in practice it
is usually 2-to-3 times per quarter, statedanother assistant treasurer from a globaltechnology company.
nConsider specialized committeesand schedule according to their needs.
Different areas of risk may need to beaddressed in a specialized way and on a
different schedule. They may also need toadjust to changing dynamics in the mar-ketplace. A senior treasury official of one
large technology firm related: We have acredit committee that meets monthly to
discuss investment credit lines with thetreasurer. We also have a formal hedging
committee that meets quarterly com-prised of the CFO, the treasurer and anassistant treasurer, to discuss hedging
policies/strategies and review any
current hedging program in place.nOr, consider an all-in-one commit-
tee. With the right people, knowledge
and commitment, a single committeecovering all risks may be an appropriateapproach. There is also benefit to looking
at risk holistically rather than in silos.One assistant treasurer commented: Our
company has an executive risk manage-ment and capital committee comprised
of senior finance and operations
executives that meets at least quarterly.
The committee regularly reviews invest-ment, FX, insurance, and other financial
risks as well as certain capital spendingproposals.
With investment fraud and failure
in the news almost daily, there shouldbe comfort in knowing that a group
of seasoned finance professionals arecollectively monitoring the risks for the
company. Theres wisdom in numbers.
Cash & working capital
Know Thy Covenants
As liquidity continues to evaporateamid a widening and perniciousbanking crisis, there have been reports of
corporations drawing on their credit linesnow as a rainy day fund for situationsthat may arise later.
A recent story in The Wall StreetJournal suggests this is happening, and
names companies, such as GeneralMotors and consumer goods company
Jarden, that are drawing on these linesfor fear that a bank may withhold it orbe unable to deliver the funds down
the road.While this may or may not be a great
strategy, experts remind firms to checkthe covenants first. Thats because banks
are looking for any excuse to chargemore for credit or even to close a facility(see IT, April 2008).
BANKS HAVE THE POWER
Despite its considerably weakened statethe bank sector still holds the upper hand
when it comes to credit. Basically, fomany banks, survival is the primary direc-tive, and they accomplish this by preserv-
ing cash. This means that corporations
shouldnt give their banks any excuses todeny credit.
Corporations ought to be careful
because... most agreements give banksa lot of flexibility to in effect call the loaneven if there isnt a default, said Bob
Wrobel, counsel at law firm Day Pitney.Its better in this environment to keep
your good guy image with the bank anddont play hardball because there are an
awful lot of provisions in the normal loan
ANTICIPATED EXPOSURES
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ANTICIPATED EXPOSURES
For additional information visit iTreasurer.com nInternational Treasurer / October 2008 5
agreement where either they can find a
technical default if they want to or evenwithout a technical default they could
do things like change credit limits andthings like that.
Mr. Wrobel added that these provi-
sions have been built into loan agree-ments for years but have rarely been
used. But these are different times nowso it is best that corporations play by
the book.
STAYING STRAIGHT
Most companies intend to play by thebook when it comes to tapping their
credit lines; however, most treasurersreview their agreements only about once
a year. Whats worse, according to JimSimpson, managing partner with Corpo-
rate Finance Solutions, is that many firmsdo not have a review process. This wasconfirmed by the survey he conducted
with Bruce Lynn of the Financial Execu-tive Consulting Group, where about
40 percent of 150 companies polledsaid there was no formal review process
to manage debt covenants, whetherfinancial or non-financial.
Messrs. Lynn and Simpson also sur-
veyed banks, asking them what they dowith firms that come to them revealing
theyve breached an agreement. Manysay that if you come in and surprise us
with a breach, well charge you fees, wellincrease your spread and some say theymay even pull the line, according to
Mr. Simpson.So in the current environment it is
critical to have agreements studied andbuttoned up. For those companies that
have a good communication with theirbank and understand their debt agree-ments really well, banks are more than
willing to work with you, Mr. Simpson
said. Dont go to the banks after the factand say Oops! because you may pay.
GIVE IT TIME
Messrs. Lynn and Simpson also suggestthat companies that know they need to
draw on their lines alert the bank aheadof time. Gone are the days where you call
the bank and get the funds the same day.The big question is Will the bank have
the money when [a company] wants it,Mr. Simpson said. The problem could be
that when a bank goes out to its syndi-
cate banks to satisfy a $1bn loan, and itmight be the case in this environment
where only half of them come up withthe money.
And if they cant meet your draw-
down request, theres nothing you canreally do, Mr. Simpson said. Anecdotally
Im hearing of banks who are being askedif they can get the money in three days
but are telling customers they can get itto them in a week and a half.
RAINY DAY FUND A GOOD IDEA?
Whether or not more companies will
draw on funds from their relationshipbanks just to have it remains to be seen.
But given the current crisis and wideningspreads, it probably doesnt make sense.
There are a number of issues doingthis, particularly the negative cost ofcarry, said Mr. Simpson. Hypotheti-
cally, youre borrowing from the bank atmaybe 5 percent and what are you going
to do with it? Youre going to invest it.
But where do you go to invest? In the
current environment, the best a com-pany may do is 2 percent, Mr. Simpsonadded. So its costing you 3 percent to
hold that cash.This strategy might make sense in
certain situations -- perhaps if yourea net borrower trying to cover payroll,
etc. But it is not a good idea if you thinkthe company might face going out ofbusiness. The bank can still try to get its
money back.
Capital markets
Following Shorts
Into China
Despite hedge funds pleas to end the
short-selling ban, the SEC has onlyexpanded its temporary curbs. At presstime, the ban was covering close to 1,000
stocks, 15 percent of total US listings,ranging from manufacturers and infor-mation technology firms such as Ford
and IBM. Other market regulators aroundthe world have followed suit, but have
so far limited their restrictions more tofinancial stocks.
Running counter to this trend isChina. As the Financial Timesreported,
Chinese market regulators chose to
announce the start of a trial to testmargin trading and short-selling of
shares amidst moves by the US andthe UK to shut shorts down.
In its announcement, the China
Securities Regulatory Commission (CSRC)made no reference to its countertrend
timing, but did note it as a move tointroduce new vitality into its financial
markets, the FTreported.In the works since 2006, the timing
of the trial is likely more a political shotacross the bow.
The short-selling, margin-trading
experiment in China will be carefullycontrolled, and only made available with
carefully selected brokerages, so short-selling hedge funds are not likely to all
pick up and move to China soon.Still, with talk of the global financial
epicenter starting to move from New
York and London, China is planting
another seed for people to start think-
ing more about the relative position ofcapital markets in China.
Where to the shorts, there to themarket.
Counterparty risk
Are Hedge Funds Next?
Apart from pension investments, few
corporate treasurers are directly exposedto hedge funds as investors, but thefallout from massive hedge fund failures
would have adverse consequences fortreasury activities, from FX hedging to
using CDS spreads. Hedge funds will behard pressed to earn the returns and fees
that they have become accustomed to incurrent markets (especially if they cannotshort sell), and many face redemptions
from investors that have lowered their
risk appetite. This will eat away certainfunds on the margins.
All hail, collateral.However, what
may keep hedge funds as market par-ticipants viable is the extent to whichthey were required by counterparties
to ratchet up their collateral require-ments over the last 13-14 months. Since
the funds have been posting margin ondaily marks over that period, their risk as
counterparties and concerns about theirliquidity have been lessened.
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Fall 2008 Meeting
FX Managers Peer Group 2
September 1718, 2008
We would like to thank the participants at the Fall 2008
Meeting of the FX Managers Peer Group 2 for their opendialogue and relevant contributions to our discussions.
Your active involvement continues to make the FXMPG2a highly valued contributor to our network of forums forpeer knowledge exchange.
Thank you!
The FXMPG2 is a NeuGroup meeting alternative.SM
Facilitated by:Sponsored by:
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However, while dearer credit maynot always show up in pricing, it willcertainly show up in other aspects of bankrelationships.
5) Still, certain credit departments may
flag you.Pricing aside, certain members
reported that banks participating in a facilitygot cold feet when asked to re-up due to theincreased sensitivity of their credit depart-ments to protecting hard-hit bank balancesheets. This experience was most commonfor members that tried to do somethingfrom February on, particularly when theywere looking for term out options. Forexample, one firm faced a credit departmentred light from a bank in mid-March, whenit was looking to term out its facility fromone to five years. One large bank in thefacility, representing some 17 percent of a
$350mn-plus facility said no. That amountfor "used to be a rubber stamp."
6) Timing is critical, so be proactive.Anecdotes like these underscore the impor-tance of timing in renegotiating credit terms.In the current environment, treasurers haveto anticipate credit needs and negotiate pro-actively. One member who presented on hisrevolver negotiations made this point aboutseeking credit when it is not perceived asneeded: At first glance, it is hard to seewhy [our] firm with 80 percent operating
margins would be all that concerned with itsrevolver. Whats more, the firm has verylow debt and is currently only halfwaythrough its share repurchase authorization.
However, it was planning ahead of itsliquidity needs and wanted ample funds onhand to move forward with any M&A activ-ity that would help it grow.
So when the firm looked at liquidityin its capital structure, it took a 10-year
horizon and started planning its liquidityneeds using Monte Carlo simulation. Thesesimulations resulted in a high level ofconfidence that it would meet its fundingrequirements over the next few years. It hasmodest CAPEX expenditures driven byspending on its HQ expansion and relatedinfrastructure.
Projected cash flow, existing cash andrevenuebarring any issues, such as apatent problemshowed creditors a highprobability that it would avoid a liquidityevent, which is also why the firm has been
deploying cash to buy back shares.
CONCLUSION: It's more important than everto assess your funding needs. Several mem-bers reported being in the debt marketsrecently in hopes of shoring up liquidity inthe midst of an ongoing credit crunch. Themajority of members felt fortunate that theyhad gone into the debt markets last year.The importance placed on having criticalfunding needs addressed reflected membersexpectations that debt markets would be on
a rollercoaster over the next 18 months,meaning any new funding would need tobe timed to increasingly volatile marketwindows or creatively sourced.
REACH OUT TO TAX
AUTHORITIESWith more cash beingthrown off from off-shore operations,MNC liquidity has
also become morevulnerable to changesin tax rules and inter-pretations thereof.
While this is anotherreason for tax andtreasury coordination,members stressed thatit is also a reason toenter into dialoguewith tax authorities inkey markets so thatthey know whatmight be coming and
can figure out how toaddress the changes.Canada, for example,has fundamental taxchanges every fewyears and big changesare coming this year.China is also on manyradar screens.
Dialogue can beextended to advancednegotiation. Forexample: A key areaof concern for manymembers is withtransfer pricing, par-ticularly that concern-ing special incentivesUS firms have withChina, which the IRSis investigating. Beingproactive is critical.One member firmparticipates alongwith 30-plus compa-nies in a complianceassurance program(CAP), whereby theIRS audits the tax
books in real time andsigns off on them.
PEER INSIGHT: T30
Source: NeuGroup Peer Research 2008
FUNDING SOURCES ON THE RISEPercentage of respondents increasing the amounts of funding from key sources
Structured finance
US term debtissuance ex-US
Non-$ debtissuanc ex-US
WC ex-US
Asset sales
LT debt issuance
CP
Bank financing 25%
25%
29%
29%
33%
33%
35%
46%
50%Tappingoffshore cash
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Members have continued to express theirfears that the economy will continue todecline as inflation risk continues to rise.While at the time of the meeting, inflationwas just starting to come on the radar screen
after a period of deflation, key retailers wereexpecting inflation to become a larger issueby the end of the year. Other members con-curred, pointing to rising labor costs in placeslike China, where as consumers they alsohave more money to drive up the price ofconsumer goods globally. Their demand forbetter living standards will also boost com-modity prices, which was viewed at themeeting as already having impacted oil andagricultural goods.
KEY TAKEAWAYS
1) Familiarity will bring finger-pointing.Asmore investors, from private equity to pen-sion funds, become familiar with commodi-ties as an asset class they are likely to raisetheir expectations regarding how firms man-age commodity exposures, and investors willnot allow them to blame commodity priceincreases as a reason for earnings surprises.Along with investors, rating agencies arebecoming increasingly focused on firmsability to mitigate financial risks, which nowincludes commodity risk. Many academic
studies showing how risk management bene-fits share price multiples for companies pointto risk management efforts as a reason onecompany performs better than its peers. Themost common examples are found with FX,but commodity risk is becoming more com-mon, such as airlines and the managementof jet fuel exposure.
Unfortunately, as a few members noted,some of the finger-pointing may comefrom efforts to hedge. Because of the wayFAS 133 forces firms to account for com-modity hedging, more hedging strategies
(compared with FX) must be marked tomarket and thus can generate significantnoise in the P&L for companies with largeexposures. The problem will intensify whencommodity prices fall.
2) Get treasury involved to focus on
liquidity risk and controls. Despite theaccounting and short-term earnings pres-sures, most members conceded that manag-ing commodity risk would make economicsense. To manage it successfully, however,treasury should be involved either directly
or indirectly.What dooms most commodity programs
is liquidity risk, thus commodity risk man-agement should not be buried in procure-ment, which is not part of a firms day-to-
day liquidity management. Also, membersnoted that if you compare the processes andprocedures surrounding risk managementactivities at most firms, you will find goodones around FX and interest rates, but feweraround commodities. ISDA agreements, forexample, tend to leave out provisions forcommodity contracts.
3) Consider as an investment asset class.
With more and more investors turning tocommodities, treasurers might also considerthem for pension or even cash portfolios. Ascommodity markets grow and deepen, there
is an increasing array of more standardized,index-based products that make it easier toparticipate in the asset class while beingdiversified in terms of contracts and counter-parties.
One decision is how much to tie commod-ity exposure on the investment side toagricultural commodities versus energy ormetals. Different index products will letinvestors mix and match depending upontheir view. Investors worried about the vola-tility generated by hedge funds and other
speculators should note that the futuresmarkets, as one member pointed out, areincreasing their limits and margin require-ments in order to curb speculative activity.
Going forward the liquidity constraints onspeculators will be more of a challenge andthe exchange-traded markets, in particular,will become friendlier to volatility-aversecorporate investors and hedgers.
CONCLUSION: With unprecedented risesin commodity prices and renewed fearsof inflation, member firms were also
reprioritizing their risk assessments. Goneare concerns about being under-leveraged,having been replaced by worries aboutavailable liquidity; and without access toready capital, cash investment losses, andrising input costs loom larger. If the top linestalls due to a further economic decline,more firms will be under pressure to man-age rising input prices, including hedgingcommodity risk. In so doing, they willbecome more like their Asian counterparts,whose appetite for managing risk seems
ERM & FX PORTALSOne session at themeeting discussedtrends in ERM and FXportals.
The key ERMthemewas customization:how firms choose tointegrate risk to bemanaged under anERM frameworkshould be determined
by what best fits theculture of the compa-ny, not some standard-ized, best-practiceframework that is one-size-fits-all. The samecan be said for wholeads it. For example,of the members at the
meeting with ERMprograms, half said itwas being led by inter-nal audit and half bytreasury.
For the FX portalsdiscussion, practitio-ners revealed that theyare looking beyondFXall. The reason
behind this trend isthat, perhaps in partas the novelty of elec-tronic trading and STP
have worn off, thefocus has shifted tovalue for money, orpurely cost. The twoleading alternativeson the FX side appearto be 360T andBloomberg.
Responding to New Risks: Rising Prices
PEER INSIGHT: T30
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insatiable. One member company took peergroup colleagues through some of the les-sons his firm had learned in dealing withcash investments during recent turmoil.
KEY TAKEAWAYS1) Boards wake up to investment portfolio
in a crisis.One of the clear lessons from theproblems in fixed income securities broughton by the mortgage crisis, according to thefirm's treasurer, is that Boards will suddenlystart to take an interest in the risk in corpo-rate cash portfolios, and their main focus willbe seeking to avoid headline risk. Whiletreasury can take numerous steps to educatethe Board on its investment policy and themandates it seeks to balance yield enhance-ment with risk/earnings volatility, much of
this will go out the window in a crisis, so it isbest to err on the side of risk mitigation.
2) Having a technical person on the
investment management team who under-
stands this is critical.The treasurer creditshis investment manager for being experi-enced enough to be on top of news thataffected key investments in the portfolio andget the companys money out before theywere hurt. Being a good technical manageralso means he understood the corporateinvestment dynamics, including Board sensi-
tivity to headline risk. For example, the com-pany had in its portfolio significant exposureto equity-linked paper that went from AAAto single-B in three days. The dynamics ofthe waterfall meant that some tranches wereonly getting 40 cents on the dollar if soldimmediately. While on a hold-to-maturityperspective, the company's positions were
over-collateralized and money good, themark-to-market losses were there and theresulting impairments would have impactedearnings, so it was better not to hold them.
You learn the value of a skilled technical
person, the treasurer noted as an outcomeof the crisis. They can save you a lot ofmoney, if you have a lot of cash. Takingthis lesson to heart, members should ensurethey have the personnel in place if they wantto seek extra yield in anything other thansqueaky clean paper. The problem will onlyget worse as FAS 157 gets implemented andfirms consider how they will price anasset class before they consider allowing itin their portfolios.
3) Liquidity needs also driving capital
preservation incentives.Weighing the risks
in the current environment along withliquidity needs, the company was alsoadjusting its investment policies to shortenduration. Like other members it was alsolooking at changing its allocations towardconservative assets like time deposits andagencies and even dropping asset-backedholdings altogether. The company has mostof its liquidity offshore, cash that it maymove onshore, as it has done recently; soit has also been rethinking the idea of corecash being onshore and more structured
excess cash for the offshore portfolio.
CONCLUSION: It's never a good idea to waituntil the Board's attention is diverted in yourdirection to start getting prepared. Have askilled team that understands this and onethat is also able to navigate the market andprep your portfolio for possible worse times.
T30 Conclusions & Next Steps
TO LEARN MORE
Contact:
Joseph Neu
914-232-4069
or
Sandra Shen
203-353-1151
PEER INSIGHT: T30
SUPPLY CHAINS &
LIQUIDITY ISSUESGiven the liquidityand funding concernsof the member firms,and the economicpressures being felt
on their suppliers,it stands to reasonthat more treasuriesshould considerreviewing their firmssupply-chain financeinitiatives.
KEY TAKEAWAYS
1) Note the pressure
on smaller suppliers
and buyers.As bad asit is for T30 members,they should fully con-sider the impact ofactions to squeezetheir balance sheets onsuppliers and buyers,particularly small- andmiddle-market enter-prises (SMEs).
2) Take credit risk
into account across the
size spectrum.WhileSMEs are hit the hard-est, credit risk should
be a considerationacross the spectrum ofsuppliers.
3) Banking partner-
ships under account-
ing scrutiny. Theviability of bank fac-toring/inverse factor-ing-related programsin the US have comeinto question and mayend up back on the
balance sheet as debt.
While all the members had been respond-
ing in various ways to the credit crunchand softening economic situation, allagreed that they will have to be more pro-active going forward with all aspects ofmanaging the balance sheet. Capital struc-ture leverage clearly is no longer the topicdu jour, as one member mused.
And while buybacks and dividends maybe impacted by tax rate changes after theelection, that does not mean members cansimply allow their firms to de-lever and
hoard cash. Treasurers will face major
questions if they sit around and do nothingfor four years and watch 40 percent oftheir balance sheet become cash, thismember noted.
NEXT MEETING
The following topics have been suggested,
so far, for the next T30 meeting:
nCredit markets: where to we go from here?
nM&A on their effect on treasury
nTreasury benchmarking: whats world class.
Investment Management with Internal Capital Needed
10 International Treasurer / October 2008 nFor additional information visit iTreasurer.com
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8/13/2019 International Treasurer - October 2008 - The Financial Crisis Heats Up
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While waiting for the US Congress to
pass a plan to rescue both credit andmoney markets, treasury investment
managers at non-financial corporationsdiscussed some of their key questions
concerning money market funds in aNeuGroup-facilitated conference call.Here are some of those they sought to
address in the aftermath of the ReservePrimary Fund breaking the buck.
nWhat are the details of the govern-ment decision to insure money-market
funds?The US Treasury Department andFederal Reserve announced a numberof programs in September, including
actions aimed at stemming the flows outof money market funds perceived to be at
risk. The objective of the insurance pro-gram to be put in place was to stem the
tide of fund outflows in a panicked flightto quality without creating competitionwith bank deposit insurance.
According to Evergreen Investments,the insurance program would be put in
place for one year to guarantee paymentto investors in a participating money mar-
ket fund should the net asset value (NAV)fall below one dollar. To help protectfunds from dipping below a $1 NAV, the
US Federal Reserve would provide a lend-ing program to enable banks and other
financial institutions to purchase high-quality asset-backed commercial paper
(ABCP) out of money market funds.There are a few important details
about Treasurys insurance program that
treasury investment managers must be
aware of:1) the program is voluntary, so inves-
tors must ensure that their funds are
participating to benefit;2) the program is limited to 2a-7 funds
and excludes government and agency
funds;3) while the insurance has no cap, Trea-
sury will cover the shortfall in NAV onlywhen a fund has been determined to be
liquidated;4) there is no coverage for anyone
investing in the fund subsequent to
September 19.Many money fund observers believe
that once major 2a-7 funds start to par-ticipate, all will avoid the perception that
their holdings are not money good. ICD,a prominent money market fund portal,plans to highlight which of their partici-
pating funds have the insurance.n Should cash investment manag-
ers focus on shopping for new money
market funds or watching each of the
individual holdings in the cash portfo-lio?While some cash investment manag-ers were busy shopping around for the
best safety/rate combination, others werefocused on the relationship element with
fund managers to pull out any problemassets from the portfolio.
For many, shopping for new funds hasbeen a frustrating exercise in trying toshoehorn cash into Treasury-only funds
that are increasingly reluctant to take it.The alternative is a careful approach
based on building a strong relationshipwith their money funds managers and
a corresponding comfort level that theywill do the right thing in periods of stress.Doing the right thing means they are
going through a painstaking review withcorporate clients monthly (or even week-
ly) to ensure that no SIV-holdings or othernon-pure assets have sneaked into some
funds though the back door.This process is too time-consuming
to be applied to too many funds. Plus,
cash investment managers that take this
approach will have little time left to shopfor new funds. We spend more time onthe credit of individual names in the exter-
nal portfolio. There is no time to researchnew funds, cited one treasury investmentmanager.
Better fund transparency would help,but while fund transparency is important
and advantageous, it is very time-con-suming to review the myriad of holdings
within the many funds a large companymay own. The transparency tool offered
by Clearwater (see IT, September 2008
is very attractive but it only includes twofunds reporting once or twice per month
n Are bank funds or independentfunds better in a crisis?When investmen
managers consider the relationship ap
proach to being careful they say they getmuch better service from independent
funds. This may have something to dowith the way they are compensated: they
are motivated by the portfolio results andnot just new asset growth. However, some
treasury investment managers believethat there is more counterparty comfortin going with bank-owned funds, particu
larly if they favor institutions showing thelowest CDS spreads or deemed too big to
fail: e.g., Citi, Wells Fargo and JPMorganBurned by the lack of bank support in
auction-rate securities auctions, howeversome fear a similar support failure couldalso result should banks be called upon
to support the NAV of their money marketfunds as they grow larger.
nWill settlement risk concerns curbportal use? As rate shopping has grown
less important, the convenience of MMFportals has given way to concerns aboutsettlement risks as money funds close and
investors seek redemptions. With a portathere is one more layer between you and
the fund. Another disadvantage to portals is the lack of daylight overdrafts, thus
an investor needs to get out of one fundand collect his money before purchasinganother fund.
nWhere to go for safety and returns?With US Treasurys paying almost noth
ing, money fund investors are looking atgovernment-backed agencies or aban
doning paper from the financial sectoaltogether. One option is corporate paper, in particular the purer industrials. But
the opportunities are limited due to the
lack of qualified issuances, particularly inshorter durations. For instance: Caterpillar recently issued for 3-5 years at 300 bps
over T-bills, but what cash investors wantare terms under 360 days. If you can findindustrial paper inside a year, its a pretty
safe bet, noted one treasury pro.Hey, if every cash rich corporate would
invest in another less fortunate onesshort-term paper, then maybe the corpo
rate sector could keep itself going untithe banks start lending again.
For additional information visit iTreasurer.com nInternational Treasurer / October 2008 11
INVESTMENT MANAGEMENT
Risk management
Top MMF Concerns for Treasurys IMsBy Bryan Richardson
Nuts and bolts issues for treasury investment managers in an intensifying crisis
in money markets.
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illiquid market, trades are more likely to have
turned against clients.n Staying with AIG. Many treasurers noted
that they have significant insurance coveragewith AIG. All those we spoke to about this said
they were planning to stick with AIG for now.
One company renewing recently noted that itasked for and received a ratings trigger that al-
lows it to replace AIG without penalty, however.There were also some questions being asked
about New York allowing asset shifts to the
holding company, which AIG made before the
government bailout and the scrutiny surround-ing this. Given the D&O coverage AIG provides,treasurers who negotiate it sounded confident
that key concerns are likely to be assuaged at theBoard level as their Board members communi-
cate with those at AIG.n Non-performance risk and other fair
value accounting a looming nightmare.Giventhe ongoing accumulation of non-performancerisk, and confusion surrounding the (a)symmetry
in the recognition of a bank counterpartys non-performance risk versus the corporates own,
treasurers are not looking forward to accountingin line with FAS 157 at year end. The list of fair
value accounting concerns does not end there.
They extend from the FX hedging portfolio, to
impaired assets in the investment portfolio, andon to the derivative overlays used to manage
pension funds. Treasurers at non-bank firms willikely be joining their bank treasury peers in call-
ing for relief from FAS 157 (see p. 2).
n Offshore cash questions. In a carryover from peer group meetings the NeuGroup
conducted in the spring (see IT, September 2008and p. 7), treasurers have reported continu
ing questions from rating agencies concern-ing offshore cash and more serious discussions
with senior management and Boards regardingrepatriation. Near-term expectations for an HIA2.0 have lowered, if anything; though the recent
IRS relaxation of rules on borrowing from offshore affiliates (from a 30- to 60-day window) is
encouraging.nCommunicate, communicate, communi
cate. Internal communications are on the risebecoming more frequent and more detailedaccording to treasurers. This is in line with
crisis management 101: the more communica-tion the better. One treasurer we spoke with
noted that the latest monthly report on treasuryactivities to the Board was the longest it has eve
been. Other senior treasury professionals noted
TWO TAKESCredit risk can be tracked in a
variety of ways (see below):1) Create a betting pool.
Borrow from a sports book (left;and perhaps assign probabili-
ties from the bets made)
2) Create a dashboard.Thesample from Royal Dutch Shell
(right) combines:
nCredit Default Swap pricing,
used to reflect current risk per-ceptions in the market. Many
treasurers use daily quotes (or
calculate default probabilities)to compare relative risks.
nA Statistical Approachincluding current market value
of company assets. MoodysKMV predictive modeling, for
example, includes asset volatili-ties, equity price and credit data
history.
nEnhanced Ratings:Currentratings are still a valid source
of credit assessment, however,they are slow to change; thus
ratings outlooks should be partof the risk picture.
TVA
12 International Treasurer / October 2008 For additional information visit iTreasurer.com
S E P T E M B E R M A D N E S S
T W O T A K E S O N C O U N T E R P A R T Y R I S K M O N I T O R I N G
Goldman Sachs /
Berkshire Hathaway
Wachovia /
Citigroup
Merrill Lynch (bye)
Bank of America
FHFA
The U.S.Federal Reserve
The U.S. Federal
Reserve / AIG
FHFA /
Fannie Mae
Countrywide /
Bank of America
Merrill Lynch /
Bank of America
FHFA /
Freddie Mac
Wells Fargo (bye)
Freddie Mac (bye)
Barclays
The U.S. Congress
Morgan Stanley /
Mitsubishi
Lehman Brothers /
Barklays
The Bailout Fund /
The U.S. Congress
Washington Mutual
/ PNC MortgageWashington Mutual
/ JP Morgan Chase JP Morgan Chase /
Bear Stearns
The Queen of England
/ Northern RockThe Queen of England/ Lloyds
HBOS /
Lloyds
Barack Obama /
John McCainJP Morgan Chase
Courtesy of Spumonti
September Madness, continued from page 3
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8/13/2019 International Treasurer - October 2008 - The Financial Crisis Heats Up
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making senior executive or Board-level reports
on the day of each new crisis and issuing follow-ups three days after. ERM risk committees were
also cited as a communication clearinghousethat has proven useful. More firms are thus
considering oversight committees of some
kind to provide internal governance (see p. 4)and coordination of compliance with new and
existing policies and procedures in response tothe crisis.
TVA , CYA, OR SOL
Effective communication, working hard to an-swer the right questions and staying in goodspirits will only carry treasurers so far, however.
Arguably the value added by treasury will neverbe higher for most firms than it is right now. And,
it is moments like these that separates:1)The TVAtreasurers who have added value
to their firms by working with the CFO to be in aposition to weather a perfect financial storm likethis one;
2) The lucky CYA treasurers that can covertheir backsides fast enough to stay in their jobs;
and then there are3)The SOLtreasurers who just will be shown
door (along with the CFO) once senior man-
agement and shareholders realize that they
positioned the firm poorly from a capital struc-ture and liquidity standpoint.
Our hope is that most of the treasury practi-tioners reading this, and certainly the ones that
participate in The NeuGroups peer network fit
into the TVA category. But, not all treasurers will.Perhaps what is terrifying capital markets
bankers is the belief that the capital structureproblems that brought down certain banks,
including too much reliance on short-term fund-ing to cover leveraged asset positions, will start
taking down non-bank corporates, starting withthose with large finance companies.
As one market observer noted, this situation is
going to shed a l ight on weak treasury managersand their CFOs. Unfortunately, there are many
of them that have shown themselves to havea relatively unsophisticated understanding of
financial structures and have put their compa-nies in an extremely compromising position.
As some of the compromised get caught out,
outside of the financial sector, this will put evenmore pressure on all treasurers to get ahead of
the curve by communicating convincingly thatthey are not in a similar position to peers in trou-
ble. Capital (most especially cash) will help.
TVA
For additional information visit iTreasurer.com nInternational Treasurer / October 2008 13
T W O TA K E S O N C O U N T E R P A R T Y R I S K M O N I T O R I N G
C O U N T E R P A R T Y R I S K D A S H B O A R D
Acceptable risk Cautionary risk Higher risk
FX Deals - Period to MaturityFX
Total
InvestInvestTotal
GrandTotal
Moodys Rating KMV:ExpectedDefault
Frequency
1 YearCDS
Spread(bps)
0 to6mth
7 to12mth
13 to24mth
15 to36mth
37 to48mth
49 to60mth
60mth+
0 to6mth
Current Outlook Alert
BarclaysBank
Aa1 *- negative R 160.7
BNP Paribas Aa1 stable G 52.1
Citibank Aa3 *- negative R 418.9
Credit Suisse Aa2 stable G 42.7
DeutscheBank
Aa2 stable G 107.6
GoldmanSachs
International
Aa1 stable G 650
Merrill Lynch(B of A)
Aa2 *- negative R 102.6
MorganStanley
A1 stable R 1919.4
StandardChartered
BankA3 stable R 76.2
UBS AG Aa2 stable G 186.7
LIBOR IN TRANSFER
PRICING
Transfer pricing is of growing
concern to treasury (IT, August
2008), and LIBOR volatility and
spreads over Fed rates are
wreaking havoc on MNC effortto set revenue-neutral transfer
pricing on interco loans. In a se
sion at the recent EuroFinance,
Philippe Vyncke, a partner in
PWCs Belgian tax consultancy
noted that firms can:
1) Play it safe and stick wit
the policy document rate, e.g
the 1-month local-currency LI
BOR, no matter its gyrations; o
2) State that the rates are
temporarily irrational, and
use a reasonable rate to beset by treasury, e.g., the prior
months 30-day average rate.
The latter approach will invite
the ire of auditors and taxmen
so take extreme care to docu-
ment the approach and why a
change has been made.
Numbers indicative only. Template Courtesy of Royal Dutch Shel
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It used to be that product heads of transaction
banking services would deliver a healthy andsteady stream of revenue to their banks yet get
little appreciation from their superiors who en-couraged higher returning, albeit riskier busi-
ness. Today, however, the transaction bankingworld is in a state of change, as the fallout fromthe credit crisis, including the most recent round
of failures and banking mergers, begins to befelt. As a result, the annuity stream offered by
transaction banking (including cash manage-ment, payments and trade) is not only being
appreciated, it is warranting new investment asother sources of earnings fall from the table.
This could be good timing for their corporate
customers, who themselves are reeling fromthe fallout of tight credit markets and the need
to balance their external liquidity requirementswith the desire to improve the efficiency of inter-
nal liquidity resources.
A SILVER LINING IN THE CRISIS?
While no transaction banker welcomes thecurrent market situation, if forced to find a silver
lining, it is that transaction banking has become abeacon in the dark waters faced by many banks.
According to Andrew Long, group generalmanager and head of global transaction bank-ing at HSBC, from a group-wide P&L perspective
every bank is looking at where they are makingrevenue and where they are losing money. With
a high degree of volatility in earnings, they arelooking at what is keeping the ship running. And
the answer is transaction banking.For David Conroy, Americas head of trade
finance and cash management for corporates
at Deutsche Banks Global Transaction Banking
unit: Recent events have just made the focusand priority of the transaction banking businesseven greater. Stable revenues that grow organi-
cally are particularly important right now in thefinancial institution space.
Erik Zingmark, global head of cash manage-
ment at SEB, concurred: Although it is unfortu-nate that it took the current crisis to show the
value of our business, this was probably thesingle most important thing that has happened
to our area . . . a leap forward in how transactionbanking is viewed in the bank world.
Of course, the renewed interest in transaction
services is not driven solely by banks. As DavidAldred, managing director, co-head of corpo
rate sales EMEA at JP Morgan noted: Clientshave stressed the importance of improving thei
supply chain in order to access trapped cash, andthey are looking for us to help them mobilizecash so they can ultimately make investment de
cisions around that cash. Never has it been moreimportant for corporates to have that visibility
over cash.
REALITIES THAT STAND IN THE WAYWhile milking more from the transaction services annuity stream at a time when custome
demand for it is high sounds great in theorythere are several realities that stand in the way.
nNot all banks have capabilities that theycan instantly scale up. Because many transac
tion banking units faced a struggle to competefor internal resources, these resource-intensiveunits often received only the investment that
was absolutely necessary and often required for core infrastructure and compliance needs
Transaction banking has a strong history oannuity earnings, but it requires heavy technol
ogy spend which restricts access to a limitednumber of providers. In addition, there is a lim-ited base pool of expertise in the field, which can
limit growth. Thus, more banks will be investingto catch-up to their (remaining) competitors
than investing to keep their lead.
Any bank that wants to compete must invest
in this space, corporates expect us to. We are
working with corporates to try and deliver val-
ue and the question is what banks will be able
to continue to do that as the market continuesto evolve and deal with the current situation.
David Aldred, Managing Director, co-head
of corporate sales EMEA at JP Morgan.
Ability and will are two different things
The challenge most of the transaction servicesorganizations within banks face is getting the
investment money needed to stay competitive,noted SEBs Mr. Zingmark. To make the necessary
investment in transaction banking, he explainedrequires a longer-term perspective: Over a three
WHAT CASH BANKS
ARE INVESTING INRecent comments indicateinvestment in these transac-
tion (cash) services at the
following banks:
nCiti:Focused on improv-
ing and strengtheninginfrastructure, continuing to
innovate, and broadeningthe distribution footprint.
Specifics includes Treasury-
Vision, digital signaturestechnology and Banking-
Vision (a banking platformto be launched in 2009). Citi
Global Transaction Services
has more than a $1 billionannual budget.
nJP Morgan: Recently an-nounced a $1bn plus invest-
ment program aimed at thelaunch of single global trea-
sury platform, expansion of
payments offering, financialsupply chain, prepaid card
expansion, and extension ofits online A/R offering.
nDeutsche Bank:Invest-
ing in financial supply chain,including trade and supply
chain finance, launchedFX4Cash (a cross-border
payments and foreign
exchange solution) and just
announced launch of newp-card business. Budgetcontinues to increase in line
with growth expectations.nHSBC:Investing in pay-
ments infrastructure around
SEPA and other regulatorydevelopments, integrated
payables and receivablesplatform (Lionheart), launch-
ing an integrated supply-
chain platform. Recentlyapproved largest budget
increase in many years for
transaction banking unit.nSEB: Investing in liquid-
ity management, cashvisibility, customer service
platform, and paymentsinfrastructure. SEB also part-
ners with external IT provid-ers to bring new technology
to clients, alongside internal
investment.
GLOBAL CASH MANAGEMENT
Bank relations
Banks Investing in Global Transactions BusinessesBy Denise Bedell
With everyone facing a horrific credit environment, the annuity stream from transaction
services business has become so deeply appreciated by banks as to warrant new investment.
14 International Treasurer / October 2008 nFor additional information visit iTreasurer.com
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8/13/2019 International Treasurer - October 2008 - The Financial Crisis Heats Up
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or five year relationship, then you can create
good value on that investment.Also, while the situation is changing, there
is still the psychological challenge we face toget that complete long-term understanding,
Mr. Zingmark noted. This will be doubly impor-
tant when the current moment passes and in-ternal competition from other areas of the bank
with shorter payoff horizons resumes.n Not all competing projects are gone.
While it is true that competition for resourceshas eased, it is far from true that banks have only
transaction banking to think about. And beforetransaction banking services can be improvedthere is much to sort out from ongoing market
events. Several of the largest transaction bank-ing players have been and will be involved in
hastily agreed-upon acquisitions of other banks,and the fallout from bank failures is still to be felt.
For example, WaMu had correspondent bankingrequirements around the world that will be af-fected by its failure. The competing bids for Wa-
chovia by Citi and Wells Fargo will also have a pro-found impact transforming not only these banks,
but the US transaction banking landscape.At the same time, all the big banks continue to
face huge required investments in their transac-tion services businesses to comply with regula-tory and legislative initiatives that have not gone
away. There is SEPA in Europe and the PaymentServices Directive in the UK, which has forced
massive investments in payments infrastructurefor every bank operating in Europe. Whether
they put through 100 transactions a day or 1000,the infrastructure investment is the same. Thenon the investment side there is MiFID and Target
2 Securities. All affect the cost of doing businessand leave less for other developments.
nNot all customers will get access to bet-ter services. Recent market events will have a
profound impact on corporate-bank relation-ships. From a corporate perspective, the struggleto manage transaction banks has just gotten
more difficult. Ensuring adequate liquidity is a
prime consideration right now. At the same time,ensuring liquidity providers will be around foreven the short term is an even bigger concern.
In other words, credit (funding and credit risk),not transaction services capabilities, still drivesrelationships.
Banks, meanwhile, must be evermore carefulabout the corporates they provide balance sheet
to. Mr. Long at HSBC noted: In the current mar-ket you have to look from a risk perspective at
who your clients and suppliers are. While bankswant more business from both corporate and
institutional customers as they rebalance their
risk profiles, he added: When looking at cashmanagement customers, we have to look at
transaction flows in light of the credit quality ofthat customer in order to keep flows in balance.
And in addition to credit risk concerns, going
forward, the earnings contribution of transactionservices will be closely scrutinized.
Noted one transaction banking head:
The ability to allocate capital to my corporate
customers is directly related to the stable
business growth that we can achieve in
transaction banking.
Seen another way, as the wallet opportunityof existing relationships begins to play a bigger
and bigger role in bank decisions to providebalance sheet, more customers will be asked to
pay up for transaction services, if not also thecredit directly, or take their business elsewhere.
nMore corporates are looking to improve
their own transaction services.While transac-tion services from banks are needed, they only
go so far. As one global cash manager noted:Our banking partners are proposing several
value added services related to cash. . . However,they do not solve the problem of data aggrega-tion in our ERP system where this information is
more useful across several business units.For this reason, he said, his company is leaning
more toward data-warehousing within their ERPand utilizing database analytics tools to run very
similar reports to the bank products. The advan-tage is that it allows the company to populate allbanking data into its ERP system as opposed to
utilizing several different proprietary bank sys-tems. This approach should only get easier as
more corporates join SWIFT and there is furtheradvancement of standards.
In other words, for some new services the in-vestment by banks must complement what cor-porates are doing on their own. Further, as corpo-
rates find alternative ways to gain cash visibility
and manage liquidity, the value added elementsof transaction services may lose some appeal.
Thus, banks should ensure they truly understand
their customers needs before investing.As one global cash manager pointed out, the
more important thing for banks to get right is
the transaction processing itself. Weve lookedto our banks to provide consistency in transac-
tion processing in the current market situation,and their ability to maintain this annuity stream
is dependent on their timely processing of trans-actions in good times and bad.
CAN CITI HOLD ITS
GLOBAL LEAD?With other banks investing to
step up their global transactiobanking platforms, will Citi,
which has traditionally beenable to rely on its global trans-
actions banking footprint,
invest to maintain its coveragelead?
Senior management is committed to this business as part
of the universal bank model,noted Michael Guralnick,
global head of sales for Citis
Treasury and Trade SolutionsUnit. They see Global Transac
tion Services as an invest-ment destination within the
company, and understand tha
we must continue to innovateeven in this challenging time.
According to a recent surveby Treasury Strategies (high-
lighted in the September issu
of the UK publication FX&MM
while Citi is among the top
three transaction banks usedby large corporates in the
US, Asia and Europe, it is onlynumber 1 in Asia (and tied; se
below). If accurate, this survey
would suggest more invest-ment in GTS is a good idea.
Rank Provider %*
Asia
1 Citi 28
1 Standard Chartered 28
1 Maybank 28
4 HSBC 22
Europe
1 RBS 29
2 Deutsche Bank 28
3 Citi 25
US
1 Bank of America 86
2 JPMorgan Chase 62
3 BoNY Mellon 42
3 Citi 42
* Percentage of large corporates (with
turnover greater than USD5bn);
25 percent of the 970 survey respondent
Source: Treasury Strategies
GLOBAL CASH MANAGEMENT
For additional information visit iTreasurer.com nInternational Treasurer / October 2008 15
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These are challenging timesso dont look for solutions alone
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nInternal Auditors Peer Group
To learn more, go to www.neugroup.com/peergroups
Help us form new groups:
Sr. Exec. Peer Groups:Insurance CFOs, Oil and Gas (Energy) CFOs and Treasurers, CFO 30
Regional Peer Groups: Europe, Asia Pacific, China
Functional Peer Groups: Payments, Risk Finance and ERM, Healthcare Transactions Services