2012 in review: top treasury trends

December 2012

Risk management, benchmarking and web portals were hot topics in 2012, as gleaned from the most popular articles on the Treasury Today website throughout the year.

As we move into 2013, it is important to take stock of the previous 12 months. Needless to say, it has been a struggle to maintain a positive outlook as the global economy continues to limp along at a snail's pace. The Eurozone crisis remains unresolved, although the fear of an unplanned Greek exit – or Spain or Italy for that matter – seems to have receded. The threat of the US going over the fiscal cliff is on-going but there is still hope that a catastrophe will be averted. Most analysts are projecting a slow start to 2013, with a glimmer of recovery in the second half of the year.

2012 may be perceived as the year of banking scandals, from money laundering for Iranians, rogue trading, flogging sub-prime junk to clients, and manipulation of the London Interbank Offer Rate (LIBOR). The LIBOR scandal inflicted a mortal blow to the banking industry's reputation, and Barclays had to fork out $450m to UK and US authorities in the summer for its role in fixing the reference rate for $360 trillion in contracts worldwide. UBS has become the second bank to be forced to pay out – and its fine is more than triple that of Barclays at $1.5 billion. UBS was also hit with a £29.7m fine by the Financial Services Authority (FSA) for rogue trading activities.

Corporates have not had an easy ride of it either. The spectacular failure of Facebook's initial public offering (IPO) in May, which led to the company losing more than $50 billion in market value (40%) in 90 days, has made other corporates skittish about directly tapping the market for funds. More recently Hewlett-Packard (HP) also suffered a reputational hit when it revealed an $8.8 billion write-down after “serious accounting improprieties” were discovered at Autonomy, the British tech firm it acquired in 2011 for more than $10 billion.

In these turbulent times, it is not surprising that the most popular article in 2012 tackled the issue of risk management and treasury benchmarking. Centralisation, technology and regulations were also popular topics within the top ten most-read articles on the Treasury Today website this year.

1. Fostering efficiency and managing risk.
   
2. Cash and trade: a common sense convergence.
   
3. SEPA: where are we now?
   
4. A ‘centred' treasury: Uta Kemmerich-Keil, Merck.
   
5. Shell: still leading the pack.
   
6. Choosing the right FX relationship.
   
7. An holistic approach to managing liquidity.
   
8. Treasury in emerging markets: focus on Africa.
   
9. Through the portal: MMFs and risk management.
   
10. Euro break-up: stress test your treasury.
    

 

Risky business

Treasury Today's European Corporate Treasury Benchmarking Study 2011 found that although traditional risks such as foreign exchange (FX) and interest rate were key areas for respondents, other areas of risk focus emerged from the findings. These included a growing focus on enterprise risk for 13% of respondents, up from 2.9% in 2010, as well as a determination to reduce the risk of error in treasury information by eliminating spreadsheets from the treasury function.

In the article “Fostering efficiency and managing risk”, John Gibbons, Europe, Middle East and Africa, (EMEA) Regional Executive at J.P. Morgan Treasury Services, explained how risk and efficiency have never really strayed far from the treasurer's agenda – they have just become a lot more complex. “Clients' requirements for excellent service and flawless execution play strongly to the efficiency agenda. Errors cost time and money,” he said. “By definition, this demands efficient technical capabilities and a strong ethos with regard to risk management.”

The continued focus on risk and its implications for businesses is an integral part of decision-making in treasury. Almost all the articles in the top ten touched on risk management in some way. Surprisingly, however, the article on stress testing treasury in light of a Euro break-up only just made it into the top 10 reads for 2012, despite Citi's chief economist putting the likelihood of Greece leaving the euro within 18 months at 90%. Suzanne Barry, Head of Liquidity and Investments, GTS EMEA, Bank of America Merrill Lynch (BofA Merrill), said: “It is an important part of the management process to identify, analyse and manage risks in the company that are, in this case, presented by the external environment.”

Most, or all, treasurers will be asking these questions to a certain extent but some companies are tackling this exercise more enthusiastically than others. “Not everyone is doing this proactively, although in our opinion, stress testing should be part of the job description,” said John Clark, Principal Treasury Consultant and Product Manager at IT2 Treasury Solutions.

 

Benchmarking and best practice

When asked why treasurers should devote time to benchmarking activities, Gibbons said: “Every business unit needs the opportunity to understand how they are performing, versus a best-in-class benchmark. This helps to make sure that their aspirations are market-leading and that they know where they are headed going forward. That is simply a question of best practice.

“In terms of the benefits of benchmarking, I believe that it's not so much a question of how your organisation scores vis-à-vis a competitor, but whether your company or department is asking the right questions of itself. If you have a group of treasurers that have become very actively involved in supply chain finance for example, and your treasury department is not doing that, you need to understand why. It's about making active choices.”

While participating in benchmarking studies is vitally important, examples of best practice is also very popular with Treasury Today's readership. This year two case studies from the coal-face of treasury made it into the top ten reads in 2012, both of which highlighted the increasing significance of centralisation. In her article, Uta Kemmerich-Keil, Executive VP, Head of Corporate Finance at Merck, outlines how Merck moved from a decentralised structure with globally independent local subsidiaries to a highly centralised structure where all risk management and core treasury tasks are performed at the company's headquarters in Darmstadt. “The more you centralise treasury risks, the better you can handle them. The same is true for cash management. There is a natural hedge potential with a more centralised structure and economies of scale. The same holds true for external financing,” she said.

Royal Dutch Shell's journey to centralisation is pretty much complete, as documented in the article “Shell: still leading the pack”. Shell's treasury is divided into two core parts. The first is treasury operations. Headed by Nick Wakefield, Vice President of Treasury Operations, it represents the bulk of Shell treasury, focusing on day-to-day funding and supporting the business. Capital market activities, credit rating agency interaction, and bond issuances all fall under the remit of its head, Cheryl Sunderland, Vice President of Financial Markets. Wakefield said: “We have centralised all our liquidity and FX to three treasury centres. The main ones are located in Singapore and London, but we also have one situated in Rio de Janeiro that handles regulated markets such as Brazil as well as Argentina. All our treasury centres operate on standard processes and are under common management.”

 

Through the portal

Technology is such a large part of treasury operations, and two of the top ten articles focused on portals – one from an FX perspective and the other from a money market fund (MMF) perspective.

Although many of the largest corporates have shunned portals in favour of voice trading, multi-bank FX portals are undoubtedly convenient because in order to determine the best price, corporates can simply log-on to the portal, see prices from a selection of liquidity providers, and achieve best execution. “The beauty of trading via a multi-bank portal is that many corporates aren't focused on making money from FX, it's simply a hedging tool which enables them to carry on as usual with their business,” according to Peter D'Amario, Consultant, Greenwich Associates. “They don't necessarily want all of the paraphernalia that comes with a proprietary platform, which is often more suited to financial institutions. So the multi-bank portal reduces administrative costs and reduces the potential for error.”

Similarly in the MMF environment, the acceptance of portals means that a corporate treasurer can buy all of their MMFs in one place. Even if the treasurer is only interested in using one fund, a portal can be useful because of its market discovery capability – a treasurer can look at what other funds are on the market, how they are performing and how big they are – with all documentation available from a single site. If the treasurer is doing due diligence, looking for new funds or for fund comparisons, they can do this from one platform instead of going to every site.

Interestingly, there is a trend towards convergence of short-term instruments and FX onto MMF portals in response to client demand for a single venue on which a full portfolio can be managed and where the reporting, compliance and transparency tools can be leveraged, according to Greg Fortuna, Global Head of State Street Fund Connect.

There is a shift towards integrating risk management capabilities into portal functionality that treasurers need to be aware of. The ability to establish investment exposure to market events in near real time is critical for investment decisions, as well as reporting.

 

Looking ahead

Risk management and efficiency gains through technology will remain on the treasurer's agenda well into 2013. Despite some optimism with regards to the second half of the year, we are still not in the clear. As a transaction banker recently said: “It's a bit like running a marathon. We have hit the 22nd mile wall, the euphoria is gone and the pain is excruciating. We now need to pull together and push through to the finish line.” Then it will be silver jackets and Mars bars all round.

First published on www.treasurytoday.com