‘Every little helps’

Straight Through Processing (STP) and optimal control over treasury processes is an objective of every corporate treasurer. In this interview, Helen Sanders, Editor, talks to Matthew Shelley, Treasury Operations Manager at Tesco plc, one of the world’s leading international retailers, about the benefits of e-trading and STP at Tesco.

Our primary motivation for e-trading was to achieve genuine STP in our dealing environment, which I'm delighted to say we now have.

How is Tesco’s treasury department structured?

The aim of our treasury department is to be ranked within Europe’s top five and we are certainly moving in the right direction. Although Tesco’s overseas business has continued to expand during the last decade, our team still consists of 12 individuals, across four main activities. A four-strong dealing team runs cash management and foreign exchange for the UK and overseas operations. Regional treasurers act as the interface between Tesco as a corporate entity and its various subsidiaries, promoting the treasury agenda in each country where the group operates. A middle-office team handles systems, management information and analysis, and two staff are designated to look at more complex pieces of funding. Outside Tesco’s treasury, accounting, settlement and confirmations are handled by Tesco’s back office team.

FX trading at Tesco is a mixture of liquidity hedging, goods for resale hedging and balance sheet hedging. Our liquidity hedging is primarily short-term as a result of mismatches in forecasting. For goods for resale hedging, we have different hedging strategies depending on the product (e.g. petrol versus food). Where appropriate, we aim to do all trades over dealing portal 360T. However, we recognised that electronic trading is a tool which needs to be used wisely and some currency pairs are best suited to telephone trading.

Our money market activity is based around 6-month cash flow forecasts. We therefore tend to have short-term (typically overnight) requirements to deposit and borrow funds with ECP, USCP and our MTN programs supporting liquidity. All this activity is managed through 360T, as we can now invest in money market funds through 360T/ICD.

What was your motivation for e-trading?

At the outset, our primary motivation for e-trading was to achieve genuine STP in our dealing environment, which I’m delighted to say we now have. In fact, once a trade has been executed on 360T, our position in AvantGard Quantum (Tesco’s TMS - treasury management system) is updated within a few seconds without the need for any manual intervention. Secondary objectives included improving our dealing/audit controls, operational efficiency, and increasing the price tension across our bank counterparties. In our opinion, FX trading has become highly commoditised (particularly the vanilla instruments) and we believed that more competition in this area would offer tighter dealing margins. This has certainly been the case. With the benefit of hindsight, greater transparency and the ability to share our FX and MM business evenly across multiple counterparties have been other motivational factors for e-trading. [[[PAGE]]]

Why did you decide to use 360T?

When we decided to look for a multi-bank e-trading partner, we invited all of the prevalent market participants to demonstrate their offerings. Although 360T was seen as a relatively new entrant in the UK market, we were very impressed with their core functionality, track record in continental Europe, and the fact that they have developed the platform with a ‘treasury’ focus in mind. This is apparent across the scope of functionality and the platform feels like it was designed / developed by corporate treasurers to be used in a treasury environment. We also believed that 360T was in the best position to offer real end-to-end STP, which accorded with our key motivation for e-trading. This was backed up by a reference from another corporate treasury which had already achieved genuine STP using 360T and AvantGard Quantum. Other determining factors included the variety of instruments available on 360T and their reputation for training and support.

How did the integration process of the 360T solution take place?

360T’s installation of TEX Multidealer Trading System® and the interface to AvantGard Quantum was outstanding and has raised my expectations of what is possible within the scope of a technology project. The implementation was both on time and under budget and we are delighted with the STP we have achieved as a result. I would like to make particular mention of 360T’s integration team. The support we received during the project exceeded our expectations and this continues to be the case. We are currently looking to install I-TEX Intra Group Trading System, 360T’s solution for linking and routing subsidiary requests to central treasury.

What are the key benefits of e-trading for your day-to-day-operations?

The end-to-end STP we have achieved has been a real benefit in terms of operational efficiency, time savings, error reduction, and overall treasury control. To have our positions updated in AvantGard Quantum within 15 seconds of a trade being executed with a bank (with no manual intervention), is something we would not have anticipated 12 months ago. Other benefits include tighter spreads as a result of competitive bidding and increased price tension across our banking partners. In fact, the direct impact this has had on operating profit has been a real bonus. Furthermore, the ability to negotiate our dealing spreads based upon real reporting figures has been invaluable. The reporting that is generated out of 360T offers some real insight into how we spread our counterparty risk and trading activity. However, we still feel this is an area that can be explored further by 360T.

What instruments do you commonly trade on 360T and what percentage of your overall transaction volume is traded electronically v. manually?

At Tesco, we are primarily executing the following instruments on 360T:

FX - Spot, Forwards, MFTs, Swaps

MM - Loans, Deposits, MMF

IR - FRAs

We are currently trading 60% of our transaction numbers on 360T. This will grow to around 85 - 90% when we start using I-TEX. [[[PAGE]]]

Has e-trading affected your relationship with the banks?

It has, but I would say that this has been to the overall benefit of the business. All of the banks understand why we have moved to an e-trading environment and some banks have won more business. In my opinion, we now have a much fairer way of sharing our business out amongst our various counterparties. The banks are then rewarded indirectly through telephone trades or other business for the quality of support they provide to the business.

We now have a much fairer way of sharing our business out amongst our various counterparties.

Are there any additional instruments which you would like to see supported by a trading platform?

We don’t necessarily need to see a large number of new instruments added to the platform (although diesel commodities would be nice) as we feel 360T already has a good coverage here. Instead, we would just like to see more liquidity in terms of banks pricing FRAs and IR Swaps. I suspect that this will come in time with more customers requesting this from the banks and I will start to drive this forward myself over the next 12 months.

Do you think that e-trading is a ‘must-have’ for corporate treasuries?

Yes, I see it as an absolute necessity regardless of the size of the treasury operation. My only caveat to that is that it must be used sensibly, always considering the liquidity of the currency pair being traded.

What are the next steps in e-trading for Tesco’s treasury?

Over the next three to six months, we look forward to automating our in-house banking environment via 360T’s I-TEX solution, which will extend our STP infrastructure even further. In terms of treasury activities, I see a growth in centralised buying and an increase in our currency exposures. I think we will take a more balanced approach to managing these exposures, where central treasury will continue to manage any large, complex hedging requirements and smaller transactions will be managed locally.