Published: January 01, 2013
The role and profile of the treasury function have undergone a gradual but distinct transformation in recent years, fuelled by the increased awareness of the need for effective Treasury and Risk Management during the financial crisis. In the first Executive Interview of 2013, we are pleased to feature Jiro Okochi, Chief Executive Officer of Reval, who has long held the reputation as a pioneer in risk management, and Phil Pettinato, Chief Technology Officer, who is driving solutions for Treasury and Risk Management SaaS technology.
Before the financial crisis, many treasurers lacked real-time visibility over their cash and risk positions. Since 2008-2009, however, credit risk and liquidity management have been at the forefront of corporate financial strategy, leading to a transformation in both the profile of treasury and the role it fulfils, and in the technology that facilitates visibility and control over cash and risk.
Treasury is in transformation at various stages. Many companies have been making do with what they have, but the largest companies – those with more complexities – are leading the way because of the urgency with which they need to change. Companies with manual processes or burgeoning multinational requirements are also transforming, while others are not as far along, despite the alarm. We are starting to see a growing number of companies assessing the skills, policies and technology that underpin their treasury function and seeking to enhance their capabilities. Lack of budget and resourcing are still hurdles to this transformation, however, and many treasurers are finding it difficult to make the transition from operational functions to strategic centres of expertise.
Transformation is not only an internal phenomenon, but the changing regulatory environment is placing additional and complex demands on treasurers which need to inform their decision-making alongside the internal requirements for effective liquidity and risk management. For example, treasurers are developing a deeper understanding of the implications of Dodd-Frank on areas such as hedging and bank relationships as well as the wider business environment.
Many treasury functions are fulfilling a wider range of responsibilities than in the past, such as commodities risk management, which places additional pressures in terms of policies, skills and technology. Furthermore, as existing areas of responsibility have become higher priorities, such as credit risk management, cash flow forecasting and liquidity risk management, treasurers are centralising systems and automating processes to achieve the degree of visibility, accuracy and control that are required.
The technology is now expected to handle the requirements across more of the enterprise and address the deeper complexities that treasury is now facing as a strategic partner in the global business. For example, there is greater enterprise alignment and integration of systems and decision-making than in the past, such as between commodity hedging in treasury and procurement or between sales, FP&A and treasury. Even within treasury, cash and risk now have to better aligned, as cash flow forecasting is as much a risk management tool as a device for cash and liquidity management; similarly, risk data is being fed into liquidity forecasts.[[[PAGE]]]
With these new enterprise demands, coupled with the need for more real-time visibility and efficiency, treasury is looking to technology providers who are investing in their product and services. SaaS (software-as-a-service) providers are uniquely positioned to affect rapid change to keep up with these demands as the model allows for the focus and attention to be on one hosted version of the software, rather than focusing on multiple versions or in some cases competing client server offerings. Treasury vendors marketing Cloud delivery but managing a version and database per client still have the same client server challenge of upgrading all of their clients or uniformly fixing code.
The multi-tenant aspect of a true SaaS solution also allows the ’community’ of clients the benefit of having everyone on the same platform and version of the software. If one SaaS client requires a change to improve disaster recovery or security protocols then all clients on a true SaaS offering can benefit. If another SaaS client requires a new hedging instrument then others will have the ability to leverage that enhancement.
Dodd-Frank will continue to be a major issue not only for regulators and politicians during 2013, but seminars that we have held reveal that many treasurers have yet to recognise the impact on their own business. The product landscape is changing as OTC (over-the-counter) swaps move to on-line platforms and futures exchanges and more customised solutions for commodities risk management begin to disappear. The potential additional costs and loss of market liquidity in many instruments are still unknown, but treasurers need to be prepared. This involves developing a full understanding of the rules, and working with business partners to anticipate and plan potential outcomes. For example, unless rules are amended, starting April 2013, intercompany swaps that are transacted by corporate end-users in one entity with a back-to-back internal swap would need to be reported under Dodd-Frank to Swap Data Repositories. Currently, most companies have largely ignored this rule, but some are evaluating whether to continue this practice and determine how to report or are reviewing alternatives that may have other costs, like entering into higher trade volume directly with swap dealers.
Dodd-Frank is not the only major regulation impacting corporate treasurers. Basel III is driving up capital requirements and therefore borrowing and hedging costs for corporates. Treasurers need to understand from their swap dealers how they measure return on capital, and some banks are already starting to incorporate a higher capital charge for certain activities like longer-dated cross-currency swaps.
Developing a clear understanding of regulatory change should be a priority, and modelling the effects of these changes on the business. Internal and external transformation place greater demands on treasury and risk management technology, so treasurers should ensure that they are working with vendors that are investing in their platforms to accommodate market changes promptly and efficiently.
SaaS platforms have an important role to play in this respect, as treasurers seek to balance budget and resource constraints with the need for efficient, highly functional integrated technology. SaaS enables greater cost-efficiency and price transparency than installed solutions, both upfront and over time, avoiding the risk of becoming stuck on outdated platforms, or onerous upgrade costs and resource requirements.
2013 will undoubtedly bring both opportunities and uncertainty. Treasurers best-positioned to take advantage of opportunities whilst minimising uncertainty and enhancing clarity in their decision-making will be those equipped with the most timely and complete regulatory information, and the tools to enable them to manage changing demands. To support treasurers in achieving this, Reval provides regular webinars and white papers that outline key regulatory updates and practical support on risk, on optimising the use of cash, and on Treasury and Risk Management technology. More information can be found at www.reval.com.
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