About Me

My photo
I am deputy editor at The Banker, a Financial Times publication. I joined the magazine in August 2015 as transaction banking and technology editor, which remain the beats I cover. Previously I was features editor at Profit & Loss, an FX and derivatives publication and events company. Before that I was editorial director of Treasury Today following a period as editor of gtnews.com. I also worked on Banking Technology, Computer Weekly, and IBM Computer Today. I have a BSc from the University of Victoria, Canada.

Monday, 10 September 2012

ICD Harpoons US MMF Reforms Prior to SEC Vote

21 Aug 2012

The debate over the US Federal Reserve’s controversial plans to increase regulations overseeing the US$2.6 trillion money market fund (MMF) industry is coming to a head, as the Securities and Exchange Commission (SEC) prepares to vote on whether to take the Fed’s proposals forward for public comment. Many industry experts have alleged that these reforms, which would be in addition to those introduced in 2010, may prove damaging to the industry and potentially to the greater economy.

Echoing the expert viewpoint, a majority of corporate treasurers and financial professionals have reacted negatively to the Fed’s proposals. A June survey by the Association for Financial Professionals (AFP) found that organisations would be less willing to invest in MMFs and would either reduce or eliminate holdings of MMFs in their short-term investment portfolio under the three regulatory reform proposals:
  1. Shift to a floating net asset value (NAV): 77% of financial professionals say their organisation will either stop investing in MMFs or monitor the NAV and divest of holdings if its value falls.
  2. Impose redemption holdbacks: four in five financial professionals say their organisation would stop investing in MMFs if holdback provisions are enacted.
  3. Seek additional reserve capital through fees: two-thirds of financial professionals say their organisation would stop investing in MMFs if reserve capital requirements are introduced.
Across the board, nearly nine in 10 financial professionals say their organisation would make changes in MMF investment if the three reforms are enacted.


In advance of the vote on 29 August, Institutional Cash Distributors (ICD) has released a 12-point ‘myth-buster’ whitepaper, in order to convince more than 320 key regulators, stakeholders and policymakers to reject the new proposals. ICD’s Intelligencer edition ‘Closing Arguments: In Defence of MMFs’ aims to provide the facts and “get them into the hands of regulators, policymakers, corporate treasurers and industry professionals”, and draws on attorney Melanie Fein’s whitepaper entitled ‘Shooting the Messenger - The Fed and Money Market Funds’.

One of the main points of the ICD publication is to counter the argument that MMFs are systemically risky. This perception stems from the September 2008 collapse of the US$62.5bn Reserve Primary Fund, which 'broke the buck' when it received nearly US$40bn in redemption demands in a period of just two days. This resulted in a broader run on MMFs and forced others to reduce their holdings of commercial paper.

ICD argues that the market response to the 2008 panic sell, which included the 2010 reforms and increasing transparency through advanced analytics, was the “right level” of reaction. In an interview with gtnews, ICD’s chief operating officer (COO) and chief financial officer (CFO) Tory Hazard says: “With the 2010 amendments and the exposure analytics that corporate treasurers are performing now, the one run on MMFs in their 40-year history would have been prevented. Corporate treasurers are now looking at portfolio reports on a regular basis and keeping MMFs honest. In addition, the SEC itself is looking at them on a daily basis.”

“We feel the problem has been addressed, which was proven in 2011,” he adds. “At a time when he US debt was downgraded, the eurozone crisis was full-blown and the MMF industry had a similar percentage of redemptions as in 2008, MMFs held steadfast in those headwinds.”

Doug Brown, ICD’s head of global marketing, says: “There has been a transformation within five years. There is not a corporate treasurer that doesn’t have more responsibility and probably less staff today and yet they are providing the decisions that were almost impossible in 2008. The industry rapidly fixed itself.”

Unintended Consequences

Hazard outlines some of the unintended consequences of the Fed’s proposals. One is the consolidation that may happen in the industry due to the increase in capital buffers. Some MMFs will not be willing to hold back more capital, so they will exit the industry and the result will be less choice for corporate treasurers.

In addition, the floating NAV will fundamentally change the product. “The issue lies on the accounting side. Treasurers will have to mark-to-market, which makes MMFs less attractive and more costly for corporates,” says Hazard. “To do the transactions, they will have to post tiny gains or losses at some point during the day and then do the transactions after that. As a result the larger investors would get their trades through that day and put the smaller investors at a disadvantage. Therefore, many investors would be at T+1 instead of T+0, which would fundamentally change the product.”

A number of important questions are also raised: by making a drastic change and significantly reducing an important product in the marketplace, both on the investment and the financing side, what is the alternative for investors? Where are the investments going to go? How will this affect the US and global economy? According to Brown: “There are many local municipalities and cities on the brink [of insolvency]. If suddenly it becomes harder and more expensive for them to get short-term credit, then we could witness the collapse of a major city such as Detroit, Chicago or Los Angeles.”

Predicting the Outcome

ICD is waiting on “pins and needles” for the result of the vote, says Brown. When asked if he had any inkling of which way the vote might divide among SEC commissioners, Hazard says: “Rumour has it that Luis Aguilar may break ranks with [chairperson] Mary Schapiro and Elisse Walter and vote against [the proposals moving to the next stage].”

But even if the Fed’s proposals fall at this stage, the battle is far from over. Brown adds: “There is also speculation from insiders that if the SEC fails to pass these reforms for public consultation, then this issue would likely be reviewed at the FSOC [Financial Stability Oversight Committee], which includes the likes of [Timothy] Geithner and [Ben] Bernanke.” Both Bernanke and Geithner have been vocal in their support for the reforms.

This news focus was first published on www.gtnews.com.

Unpredictable Risks are of Growing Concern to Corporate Treasurers

20 Aug 2012

For three years running, gtnews’ Treasury Risk Survey has tracked the challenges that corporates face in mitigating risk and benchmarked best practice in risk management. According to the 2012 results, liquidity risk will continue to be a paramount issue for corporate treasurers, followed by counterparty and foreign exchange (FX) risk.

Liquidity, counterparty and foreign exchange (FX) are perceived to be the most important risks facing corporate treasurers in the next 12 months. Although retaining the top spot since 2010, liquidity risk saw a drop in importance: 5% fewer respondents than in 2011 chose it as a top risk for the year ahead, down to 23% of the total. This may be indicative of growing confidence in effective liquidity management. Reflecting the relative stability of the currency markets at the beginning of 2012, FX risk dropped in importance to third place behind counterparty risk, which picked up 6% more votes.

The increasing importance attributed to counterparty risk (chosen by 22% of the respondents; an increase of 29% compared with 2011), financial crime (a 100% increase on last year) and operational risk (40% increase) as important risk factors for treasury clearly testifies to the problems the treasury department faces in handling unpredictable situations.

“To some extent FX, interest rate, investment and liquidity risk can be anticipated by interpreting market statistics and public data sources,” according to Enrico Camerinelli, contributing editor, gtnews. “In fact, these risk factors show a decline in the attention attributed not because they are unimportant, but likely because they are manageable. Counterparty risk, on the other hand, depends on the ability of the bank or client to perform as expected.”

Liquidity Risk

Liquidity warranted its top ranking position in 2011, when the survey results showed that market conditions had worsened for a large portion of respondents and it was more difficult for them to access liquidity than in the previous two years. In 2012 a greater number of respondents find liquidity “a little harder” or “much harder” to access (34%, compared with 13% in 2011 and 30% in 2010), while those who find it “easier” or “a little easier” have dropped almost 50% since 2011.

However, looking at those who have noticed no change, despite the many difficulties, the overall situation seems less dramatic in terms of accessing liquidity. If you combine those who declared “I’ve noticed no change (it was, and still remains, rather easy)” together with the positive evaluations (i.e. “much easier” and “a little easier”), this totals 60% of all respondents.

From a geographical standpoint, no region expressed a completely negative outlook on their access to liquidity. Only Asia-Pacific shows signs of difficulty, with 45% reporting that they have found access to liquidity “a little harder” or “much harder” than in previous years. According to Camerinelli, this could be explained by mounting inflationary heat in the region. “Given the current issues in the eurozone, it is no surprise that western Europe faces problems as well, with 42% reporting issues,” he adds.

Respondents from the Middle East/Africa region actually show signs of an abundance of liquidity, which might be the direct consequence of increasing volumes of trade in these regions. Only 13% of North American respondents report some difficulty, whereas 58% report that they have seen no change in liquidity availability, either to easier or harder.

Counterparty Risk

The current economic climate demands that companies constantly update their positions with bank partners and anticipate any disruptive events: 33% of companies review the credit standing of their banking partners at least once a month (compared with 27% in both 2010 and 2011). Only 6% of respondents do not review their banks at all.

Companies with revenues of more than US$250m absolutely need to keep a tight control on their bank partners, particularly because they likely have a geographically dispersed set of banking relationships to deal with. Companies below the US$250m mark give less attention to their banks’ credit standing, mainly because the number of bank relationships tends to be smaller for these companies and therefore more controllable without the need to increase the level of scrutiny. “It is, however, advisable that these companies start giving more attention to their financial institutions in order to avoid adverse surprises,” says Camerinelli.

Many companies are increasing their attention toward the credit standing of their banking partners in the next 12 months. Although a minority (37%) of respondents answered “yes” and “would like to” to this question, the percentage is up from 31% in 2010. “This is a clear sign that companies are becoming more aware of the importance of regularly reviewing their financial partners as they would normally do with any supplier of goods or services,” Camerinelli adds.

Asia-Pacific-based companies confirm their intention to keep a high level of attention to improving bank relationships: more than half (53%) say they will or would like to increase the frequency with which they review their banking partners’ credit standing. Western European companies, on the other hand, show a balanced approach, which is odd given the tight conditions under which they must operate and the extremely strategic relevance of working with reliable bank partners: 32% said they were not planning to increase the frequency with which they review the credit standing of banking partners in the next 12 months.

Many companies have turned to alternative sources to measure counterparty risk of banking partners other than credit rating agencies (CRAs), with a consistent jump from 25% in 2010 to today’s 33%. The significant portion of “unsure” responses (35%) betrays a profile of respondents who are not responsible for taking decisions on this matter.

When respondents were asked how often a respondent review the credit standing of clients, 23% stated they did so at least once a month. However, the same percentage admits to doing a credit check merely randomly, while 8% do not review their clients at all. “Collecting receivables is a key area to watch, particularly under the current tight economic circumstances,” says Camerinelli. “The ability to anticipate issues in collecting credits represents a do-or-die competitive differentiator. There is still a worrying 31% of respondents who do not have a clear credit evaluation of their clients in place, to the detriment of their own company’s working capital ratios.”

FX Risk

More than six out of 10 (63%) respondents indicated that the primary objective of their FX hedging strategy is to “protect the company from adverse markets”. Only 7% say that they hedge to gain competitive advantage. However, even more interesting, an increasing number of organisations say that they do not have an FX hedging policy (17% today versus only 7% in 2010). It appears that respondents either hedge to protect from adverse conditions or simply have no reasons to hedge.

The number of respondents whose primary objective for their FX hedging strategy is different than the presented options dropped by a dramatic 35% in two years (20% in 2010 down to 13% in 2012). This leads one to believe that FX hedging - when performed - is done for the sole purpose of protecting the organisation from adverse markets.

Only 5% of companies based in the Asia-Pacific region say that they do not have an FX hedging policy, compared with 28% of their North American peers. This is a result of the number of intra-regional currencies and the level of intra-regional trade in Asia-Pacific.

Unsurprisingly, 86% of the smallest companies (those with revenue under US$50m) report that they do not have an FX hedging policy. Companies of this size are more likely to be purely domestic players and therefore are not exposed to FX risk.

When asked if their organisation’s strategic approach to FX risk management has changed in the past 12 months, the results indicate that economic conditions have worsened over the past year. After a small decline in 2011, the percentage of respondents reporting a more conservative approach has surpassed the 2010 level (23% in 2012 versus 21% in 2010). At the same time, for most respondents the approach has remained much the same during the past year (76% in 2011 versus 71% today).

Camerinelli says: “FX risk management plays a pivotal role in an ever globalising economy and the financial distress suffered by many companies requires close examination for any possible improvement in financial efficiency. Regions that show growing trade volumes, such as Asia-Pacific and Middle East/Africa, are the ones adopting a much more conservative strategic approach to FX risk management.”

The gtnews 2012 Treasury Risk Survey was conducted between 17 February and 8 March 2012, with a total of 158 respondents. Western Europe-based readers accounted for 42% and North American readers represented 29% of the responses. Respondents from Asia-Pacific made up 14% of the responses, while CEE, Latin American and Middle Eastern/African respondents made up the remaining 15%. Almost a third (32%) of respondents came from companies with annual revenues between US$1bn and US$9.9bn. Companies with revenues between US$250m-US$999.9m and also the largest companies, with annual revenues greater than US$10bn, made up 21% of the respondents respectively. Those companies with revenues between US$50m and US$249.9m made up 19% of respondents. Only 7% of respondents were from companies with revenue under US$50m. 

This article was first published on www.gtnews.com.