Published: October 01, 2013
We all firmly believe that the treasurer’s job has changed over these last five years. However it looks as if we are moving into a new phase of change and evolution for the job, a phase tinged with shades of grey. Transactions are becoming more complex and processes more burdensome because of the new regulations. Treasurers are battling to comply with these regulations and no longer have time to devote to tasks with a higher value added. This perhaps is the biggest challenge in the immediate future, not the regulations themselves.
We can expect 2013 to be the year of the plethora of regulations, even if many of them apply mostly in 2014, some of them even later. These new regulations will once again disrupt treasurers’ lives, change their organisational structure and divert them from their day-to-day work, preventing them from devoting their valuable time to tasks with a high(er) added value content. The example of EMIR and IAS 39 (soon to be replaced), which we will mention several times in this article, are good illustrations of these forthcoming gradual but profound changes. We have moved into a new era for treasury management. I would say that this job is taking on shades of grey because of the constraints and burdens weighing down upon it. Some jobs are pretty static and change little, other than from the point of view of their IT platforms. The treasurer’s job, by contrast, is relatively recent and keeps on changing by stealth, and not always for the better.
Over the last dozen years or so we have moved from zero reporting to reporting everything in full. We used to disclose nothing and now everything has to be disclosed in the annual or even the quarterly accounts. The volatility of financial products has switched from being non-existent to now being total and being recognised in the accounts, unless we adopt hedge accounting at heavy administrative cost. The idea of collateral was unthinkable only 10 years ago but has now become almost mandatory (in spite of the relative exemption under EMIR – yet to be confirmed by the EU CRD IV Directive adopting Basel 111). From an operational structure made up of around 80% front-office (against 20% back-office), we have moved to a fifty-fifty split, with half of our job now made up of proliferating back-office tasks. Who can tell whether tomorrow administrative tasks will outweigh the operational work? Quite likely they will! From few or no controls, other than that of internal audit from time to time, we have now moved to hyper-control – internal audit, Audit Committee, external auditors, ‘stock-market policeman’ (e.g., FREP, SEC, FSA, COB), etc. Internal procedures and policies have become ever more numerous and strict. This amounts to a huge funnel of rules which increasingly restricts freedom of action, for risk mitigation reasons or through failings in the new regulations. Treasurers or at least CFOs become totally risk averse. They no longer manage at all in fact, they just administer and report. The job is changing gradually and is taking on shades of grey, with ever more restrictive reporting and disclosures.
This also explains why, after starting as profit centres, the majority of treasury management units have moved to become service centres and then on to cost centres, with the latter constantly on the increase. Complying with diverse and varied regulations costs companies dear and reduces their productivity. Fortunately TRMS (treasury risk management systems) are developing continuously making it possible to fully automate some manual or semi-automatic operations. Technology has come to our rescue even if right now the ever-changing patchwork of regulations means that suppliers have to spend more time waiting than offering solutions. The current regulatory environment in no way makes it easy for SaaS software or IT solution providers to develop solutions and provide customer service.[[[PAGE]]]
The regulation paradox, as I call it, is that sometimes regulations that are supposed to give greater visibility and transparency, like EMIR for example, at this stage actually create confusion, disillusionment and unknowns. For example, we still do not know which TRs (trade repositories) will be approved by ESMA, as this will not be finalised until 7 November this year. So we have to work on the basis of assumptions, assuming that certain principal companies applying for TR status will be approved and certified by ESMA. Similarly, guidance on the allocation of LEIs (Legal Entity Identifiers), UTIs (Unique Transaction Identifiers) and UPIs (Unique Portfolio Identifiers) is currently being awaited impatiently by those affected by EMIR. Do you find this incredible on the eve of the final date for the phased introduction of EMIR, recently postponed until 12 February 2014? I would certainly agree with you. So, if you are looking for greater certainty, you will find uncertainty and a lack of information that leaves everything right up in the air. This is certainly a paradox. Using this single example – and there are plenty of others – we can be critical of the methods and bemoan the long drawn-out, hesitant and poorly organised approach which, like the Echternach procession in Luxembourg, takes two steps back for every three steps forward. There is a bitter fight amongst lobbyists to obtain dispensations and other exemptions. Everyone wants to defend their bit of turf. These uncertainties explain the response times and total absence of preparation of the parties involved (for example the developers of software applications, online dealing platforms, major consultancy firms and banks), regardless of who they may be, instead of the proactive attitude that we are entitled to expect.
It is not especially easy to ‘sell’ such projects to senior management, since they are of no use from the operational point of view and they are expensive in time, resources and in money to be invested. Obviously, CFOs have heard of the new regulations; but few of them know what EMIR, for instance, entails or what the reform of constant value money market funds will mean in market terms. A relative misunderstanding of the details of the new regulations by CFOs does not help with selling these projects in-house. Nevertheless, all these compliance projects have/will have direct costs and even indirect costs for commercial companies, the companies making up what is often called ‘the real economy’. Financial companies, which are very hard-hit, will seek to pass on and recharge the additional costs to their corporate customers. Fair enough.
How, then, can we find reasons other than just statutory obligations to explain the costs incurred by these regulations? We need to think positive and not do what all too many of us are doing. In a SWOT analysis (Strengths-Weaknesses-Opportunities-Threats) they focus on the W and T only. Certainly there will be costs (i.e., a Weakness) and certainly Threats will arise. The trick, however, is to rethink your organisational structure, to improve it wherever possible. For instance, how you handle and deal in OTC derivatives. This process can be revisited due to the obligation to report all transactions, both external and internal. IFRS 13 and the future IFRS 9 (successor to the famous IAS 39) can, similarly, be used as an opportunity and pretext for a comprehensive review of hedge accounting and the strategies adopted for hedging financial risk. The reform of money market funds and developments on the economic front in an environment of low interest rates could be used as an opportunity to review investment strategies and the risks that we are prepared to bear. As a final example, the rules applying to reporting internal controls require us to disclose these and their level of maturity (see the Eighth European Directive and its transposition into national law). Here again, a change that needs to be made could be used as a dream opportunity for a detailed and in-depth review of our internal controls, to strengthen and test them.
“The desperate search for cash and cash equivalents” could be the slogan. To achieve this, pressure is mounting on cash flow forecasts (short-term and medium-term). Being able to produce reliable figures is a major challenge. When refining these forecasts, we have to work on shortening the financial supply chain even more, particularly through automation and going paperless. Here again, the EU is working to harmonise legislation on standardised electronic invoicing. Having passed through various stages (i.e., profit centres; cost centres; service centres), treasury management centres could go back to the profit centre model, through using this shortened financial supply chain and through generating added value for the company. This is a probable future development of the centralised function.
Keeping down working capital requirement is a crucial objective for efficiency, since payment times are lengthening steadily, in spite of national legislation. The European Commission has not been slow to launch a green paper and a huge consultation of stakeholders to measure the impact of the various regulations on long-term business financing. The problem with regulations comes from their quantity, their accumulation and juxtaposition. All of this, if you add the new Financial Transactions Tax (FTT) will be so burdensome for financial institutions that they will have to pass on the costs, or part of the costs, to the end users – businesses (amongst other victims). By strata and by a tectonic plate approach that superimposes swathes of new regulations one on top of the other, we end up with a costly agglomeration, of doubtful effectiveness. We might call this the collateral damage of the new post-G20 regulations. Clearly the regulators and supervisors have failed to make a conscientious assessment of the impact of these proposed measures. Lobbying has mitigated the damage in many cases – but not completely, unfortunately. All this happens very (too) slowly and the fragile economic environment that we have seen over the last few years gives no grounds for optimism. Perhaps we are now in the process of overreacting a few years after the problems emerged. Surely they risk falling flat when these rules are finalised. We may reasonably fear it.
Another trend that is gaining traction and changing the ground rules is the hyper-automation of the job and straight-through processing (STP). From a process that was purely manual and then moved to spreadsheets (which are still the most expensive TMS on the market), we moved to partial automation, interfacing, then gradually onto full STP’ as well as to TRMS software and decision-making software, also called TiMS (treasury intelligence management system) software. The three benefits of change and maturity come from (1) efficiency (2) compliance and finally (3) software to help with decision-making. We should now put behind us the job of simply ‘reporting’ – compiling financial information – along with the risk manager function, to move towards a more strategic and more dynamic role; a role more involved in evaluation and making recommendations to help the CFO/CEO with decision-making. The job has shades of integration, going paperless, and digitalisation (with the arrival of solutions such as the cloud and SaaS). The job needs to move towards a role of internal consultant, by using more powerful and efficient software making the famous ‘Business Intelligence’ possible. It is about making better decisions faster, reacting more swiftly or even to being proactive through accessing and processing information in real time. This will be one of the technical challenges for the Chief Performance Officer, with plenty of help from the treasurer on a number of fronts. Finally, we should remember that payment factories (particularly thanks to SEPA), shared service centres and global centralisation of treasury operations are back in the limelight, particularly with a view to cutting costs.[[[PAGE]]]
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Treasurers are far from being the heroes of popular novels. Their job will continue to evolve and to become more complex, with ever tighter constraints. Adaptability and the ability to reinvent themselves will be advantages in facing the many challenges that are emerging. This is the famous tsunami of regulations people have been telling us about since the 2009 G20. Giving birth to regulations is a laborious and difficult process. It is a fair bet that the babies (and there will be babies) will be that much harder to handle. The real challenge is in setting up a flexible structure and organisation that allows you to readjust fast and continuously. Using EMIR as an example, even though we may have been talking about it for several years, we find that at the end of the day there is a finite amount of time to comply with it. In spite of all the uncertainties and the current lack of guidelines, EMIR came into force on 15 September 2013, with the first reports due in to ESMA on 1 November - recently postponed to 1 January 2014. Shorter notice and a longer preparation period might have been more normal. But does ‘normal’ still exist in these troubled economic times? What do you think? What can anyone think? At least, as suggested by Sun Tzu in The Art of War, “The success lies in the rapid responses to changing situations”.
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