Managing Risk, Managing Change: A View of 2017

Steve Elms talks to Helen Sanders, Editor, about how priorities for treasurers have evolved following a year of uncertainty and turbulence.

This time last year, risk and efficiency were the watchwords for corporate treasurers. To what extent has this changed?

As we are all aware, 2016 has been a year of unexpected shocks, not least the result of the EU referendum in the UK, and the US election. At a macro-economic level too, while there have been some price increases and stability in commodities, market volatility including FX markets, remain a concern given the continued uncertainties. 

Global trade has continued to weaken with a slowdown in China’s economic performance, which is often used as a proxy for EM growth. There are still growth opportunities, but company boards have had to be more conservative in their expectations and focus on risk as well as return.

Geopolitical risk and uncertainty are also emphasising the need to go back to the fundamentals of risk management. Indeed, what would previously have been considered ‘black swan’ events are now taking place with greater frequency, leading to more volatile markets. This is likely to continue into the next year as the new US presidency takes shape, the Brexit process begins, and national elections take place in Germany, France and the Netherlands.

What are the implications in terms of treasury priorities?

Treasurers are looking at the internal impact of external events and working to ensure that the structure of their organisation is optimal and that it is equipped to mitigate the impact of market volatility. For example, many corporations are engaging in M&A but also divestitures as they review their underlying business model and risk management approach to reflect the ongoing volatility in commodity prices and macro-economic picture. These projects are often taking on new challenges as they need to integrate new entities and divest others such as continuation of dual treasury management structures and processes for a period of time post purchase or sale.

This year has seen increased awareness of fraud and cybersecurity: presumably this will continue?

Absolutely, this issue has taken centre stage in 2016 and as the frequency and severity of fraud and cybersecurity threats increases, this will continue. Treasurers are working with their banks not only to prevent and minimise the impact of fraud and cybersecurity breaches, but also to educate their teams on threats such as CEO impersonation fraud and phishing. This is an ongoing process as staff members change, and new entities become part of the group. Subsidiaries located outside the company’s central functions are often targeted by hackers and fraudsters as they may be perceived to have weaker controls, which is an important driver of centralisation and standardisation of processes, controls and technology.

How is regulatory change likely to drive treasurers’ priorities in 2017?

Treasurers are tackling the impact of regulatory change at different levels: both international regulations such as BEPS, and also rules in specific jurisdictions. As many companies have centralised all or most of their treasury activities, they often do not have ‘on the ground’ resources to understand these new local regulations at a detailed level. Similarly, smaller treasuries often lack the resources to research numerous local and international regulations and develop an overall strategy to achieve compliance whilst still enabling the business to function efficiently. Understanding the changing regulatory environment, including practical ways to achieve compliance, is therefore a key area in which they rely on insight and expertise from their partner banks, particularly as regulations in some markets are changing quickly. 

This is apparent in the OECD’s Base Erosion and Profit Sharing (BEPS) rules that corporations are already focusing on, and will increasingly prioritise in 2017. Many treasurers are reviewing their operating and organisational models and assessing the degree to which it reflects business flows, with implications for the location of treasury centres, and decision-making in business entities. This in turn will affect liquidity models and which entities are incorporated, bank account structures and the location of header accounts.

Although Brexit is a longer-term consideration, treasurers will be considering the impact on current EU directives such as the Interest and Royalties Directive and Parent and Subsidiaries Directive as part of a wider analysis. Depending on the outcome of the negotiations that are generally expected to begin during the first quarter of 2017, there may be an impact on liquidity, how entities are funded and where they are located. This in turn is linked to wider issues such as banks’ access to the single European market and access to Financial Market Infrastructure such as SEPA.

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Given the breadth and complexity of issues facing treasurers in 2017, what are the bank’s priorities in supporting clients?

Treasurers and finance managers rely on banks such as Citi to help them to manage change and reduce uncertainty, whether as a result of developments in their own business, or as a result of the broader market and regulatory environment. As a result, they are looking for both advisory services to understand emerging challenges and their implications, and solutions that help treasurers to overcome them. In many cases, treasurers are engaging with their banking partners in new ways. For example, the implications of historically low and negative interest rates are prompting treasurers to review their liquidity and investment policies and strategies. As yield becomes more important, companies are becoming more willing to consider instruments with a longer tenor and liquidity profile than in the past. Similarly, a growing number of treasurers are looking at techniques such as dynamic discounting as a way of using surplus liquidity to support its supply chain whilst generating yield. Multi-currency techniques such as multi-currency pooling and using FX to offset the cost of negative yield, including synthetic or actual swaps, are also gaining traction. 

Receivables are becoming a more important focus for treasurers and finance managers, not only by centralising and standardising processes, but also by taking advantage of emerging solutions such as virtual accounts and advanced analytics to manage customer risk more effectively and free up credit limits to facilitate new business more quickly.

Treasurers are also working with other senior managers to assess the implications of changing dynamics in global trade. For example, while Asia remains a key growth region for companies in many industries, a growing number of corporations are expanding their focus to Africa as parts of the continent start the economic trajectory that China has experienced and India is experiencing.

As treasurers explore these themes and develop their response to support changing business needs, they are approaching their banks for advice and solutions, but also seeking assurance of their banks’ long-term commitment to their business. In particular, with many banks reviewing their own strategy in response to changing regulatory and economic dynamics, some have exited selected markets or product lines, which can create significant issues for clients that rely on them. Consequently, it is not only coverage, advice and solutions that are important to treasurers, but sustainability and reliability over time.

We’ve heard a great deal over the past year about the role of fintechs and digital disruption: what is this likely to mean in 2017?

Undoubtedly we will continue to see innovations emerging and maturing over the course of 2017, particularly as both banks and fintechs leverage the opportunities created by open APIs and the PSD2. However, in many cases, these initiatives are at a relatively early stage of development as both banks and fintechs consider their investment priorities and often work together to create new value propositions for customers. While treasurers should continue to stay informed and aware of new initiatives, these are unlikely to have a widespread impact until 2018 and beyond.

Key to the value proposition of new, and potentially disruptive innovations, will be their ability to solve customer problems. Working capital optimisation, risk management and cost efficiency will remain treasury priorities in 2017, whether centralising treasury and finance activities into shared service centres, payment factories and in-house banks, or leveraging new solutions such as virtual accounts for B2B payments.