Risk and Efficiency in 2016

An Interview with Steve Elms, EMEA Region Sales Head, Corporate and Public Sector, Treasury and Trade Solutions, Citi

As budget processes start in earnest for many companies, treasurers and their banks are looking to the year ahead. In this edition, Steve Elms, EMEA Region Sales Head, Corporate and Public Sector, Treasury and Trade Solutions at Citi outlines some of the priorities and challenges amongst treasury clients.

What do you see as your corporate customers’ key priorities in 2016?

The themes that have dominated 2015 are inevitably shaping 2016, with high levels of market volatility, a slowdown in the fast-growing Asian economies, and instability across parts of the Middle East, Turkey and Russia. In this environment, treasurers are focused on managing uncertainty and reducing the impact on their business. Secondly, many are aiming to capitalise on significant technology investments made over the past few years in their treasury management system (TMS) and/or enterprise resource planning (ERP) tool to drive further efficiencies through processing optimisation, enhanced reporting and financial analytics.

As treasurers plan their investments in the year ahead, they are keeping a critical eye on potential returns, so they are becoming more selective, accelerating projects that offer the greatest cost efficiency, operational or market risk management, and holding off on others.

Given this diversity of priorities, what challenges would you particularly identify?

Financial regulation has been a dominant topic over the past six or seven years, and regulations have risen to the fore as they reach the final implementation and adoption stages. Although many have had direct implications for financial institutions there have been a significant knock-on effect and implications for corporations.

For example, the increasing cost of regulation and compliance across a diverse local network has challenged banks to remain competitive whilst still offering a comprehensive end-to-end service unless they are strong players in that market or product line. As a result, we have seen a number of well-publicised network retrenchments and strategic exits. These can be extremely disruptive to clients’ day-to-day business and strategic investment plans. Consequently, treasurers and CFOs are seeking assurance that their banks will continue to support their needs across the markets and product lines that are essential to their business, and in doing so they are revisiting their bank relationships accordingly.

In addition, treasurers have been focusing on bank-agnostic connectivity and standards to streamline the flow of transactions and reporting across systems and counterparties. This is resulting in treasurers, and their banks, working to achieve the delicate balance of counterparty and operational risk management whilst seeking banks’ continuing support and commitment to the network and product lines that are essential to their business

Another key implication of current regulatory change is the change in banks’ appetite and ability to offer specific products and services as they implement Basel III and CRD IV. There are questions, for example, about the sustainability of notional pooling, and the divergence seen between banks on how such products are offered depending on their country of incorporation, balance sheet and regulatory capital implications. Consequently, some corporate treasurers will find that their banks are no longer in a position to offer products they have offered in the past, or that the pricing or presentation of these solutions changes. Understanding these changes and in some cases seeking alternatives will be a major priority for many treasurers, given the importance of cash pooling to regional and global liquidity management.

To what extent have corporate treasurers already started this process?

One issue that is important to note is that solutions such as notional pooling are not only impacted by Basel III and CRD IV: BEPS (Base Erosion and Profit Shifting) implications have also driven the increase in the number of treasurers reviewing their regional and global liquidity arrangements with a number considering physical pooling (e.g., zero balancing) as an alternative. Given Citi’s long-standing commitment to notional and physical pooling and proven expertise in regional and global liquidity management, a large number of clients are engaging with us.[[[PAGE]]]

Are you also seeing an impact in cash investment strategies, such as the decision to invest in bank deposits and/or money market funds (MMFs)?

Absolutely – with the MMF reform in the US combined with banks’ changing appetite for certain types of deposit on the back of Liquidity Coverage Ratio (LCR) requirements, we are seeing changes in the duration and characteristics of some deposits. Corporate treasurers are attracted to these term deposits given the appetite for higher yield. We also see the emergence of new asset classes from MMFs and new investment and deposit offerings from banks. For example, Citi has launched Earning Credit Rates which can offset the deposit return against fees, making it an attractive solution for both corporates and the bank.

Corporate treasurers will continue to seek a return on cash, and will continue to review the instruments and currencies that allow them to achieve this without compromising their risk and liquidity objectives.

How are you seeing the treasurer’s role evolving in this changing market and regulatory environment?

The role of senior management is often to facilitate business growth and the treasurer is no exception. Increasingly, treasury is expanding its role, and the value it adds, more widely across the business, not only in the traditional areas of liquidity and risk management, but through collaborative enterprises such as working capital optimisation. For example, many treasury functions are successfully co-ordinating with procurement departments to achieve end-to-end working capital efficiency, improve liquidity and secure the financial supply chain using techniques such as supplier and distributor financing. Based on the success of these initiatives, we are now seeing treasurers driving further collaboration in areas such as sales financing to facilitate sales growth solutions such as virtual cards to equip accounts receivables teams with speedier reconciliation and account posting.

Banks such as Citi are responding and indeed, facilitating treasurers’ emerging role by providing solutions that support centralisation, cost efficiency and automation, but they are also proving instrumental in enhancing controls, transparent decision-making and financial efficiency. For example, we see increasing demand for payment solutions with an embedded FX element, which allows treasurers to avoid maintaining foreign currency accounts and can drive process efficiency whilst still mitigating FX and operational risk, and ensuring transparent and auditable FX rates.

Given the priorities that we have discussed, how is Citi supporting corporate clients in overcoming challenges and leveraging opportunities?

Key to Citi’s value proposition is commitment to our network. Not only is our network the largest of any bank globally, but we are focused on making it work for our clients. This means not only by having a presence in the countries in which our clients need a strong banking partner, but by providing the depth of solutions and services that will support their current business and future aspirations in those markets. Furthermore, we recognise the complexities that many clients face in doing business internationally. For example, we connect into more than 270 clearing systems around the world, each of which operates according to different standards and practices. We look to provide access to each clearing system seamlessly through standardised solutions that allow clients to centralise, harmonise and automate processes on a global basis.

An important area is the use of data to create value for our clients. Not only do we look to provide consistent, rich and timely reporting, but also to harness data in providing analytical, client-specific insights. The value is in creating actionable information that helps clients drive better processes and decision-making. For example, we provide analytical and benchmarking tools in areas such as liquidity, payable and receivable flows and working capital to identify opportunities to improve operating models and working capital efficiencies.

With risk and control being a top priority for our clients, cyber security has become a significant area of focus. Continued collaboration with our clients is critical as we look to fight against this continued threat. We continue to advise through the sharing of best practices, we have created training tool-kits that our clients can use in their own organisations and continue to add functionality to our platforms and systems. For example, our pre- and post-payment release workflow tools identify exceptions and unusual behaviour, to support our clients with additional controls.

As we move into 2016, the market and regulatory environment remains challenging, but treasurers are moving in the right direction in overcoming obstacles, mitigating risks and leveraging opportunities. Those that are doing so most successfully are those who take a collaborative approach, both with internal departments such as IT, procurement and sales, and external partners such as their banks.