EuroFinance day 1: Centralisation, MiFID II and how to cope with Brexit

Treasurers, banks and journalists alike were greeted by a verbose robot and an array of coffee (and wine) as they poured into this year’s EuroFinance conference in Barcelona on Wednesday.

The key points of discussion were how to deal with the geopolitical uncertainty that is being seen the world over, regulation, automation and cybersecurity.

How to prepare for Brexit: timing, technicalities and talent

Erik Berlof, professor and director of the Institute of Global Affairs at the London School of Economics UK, discussed how businesses can best prepare for Brexit in the ‘Essential analytics’ session on Wednesday morning.

There are three ‘T’s to keep in mind according to Berlof: timing, technical and talent.

On timing, Berlof said: “There is this brutal ticking clock which means that contingency plans have to be made for Brexit because you can’t just sit and wait.

“If you’re a bank, you have to, for example, prepare for there to be no banking licence. You already see banks moving to places like Dublin, Frankfurt or Paris.

The second T is for technical. As the March 2019 Brexit deadline gets closer, there is a lot of examination of the fine print, said Berlof.

“Businesses are asking, ‘are my contracts going to be valid?’ There is a lot of talk about derivatives for example. Examining the technicalities of contracts is typically quite tedious but really important. Sector after sector will have to look at these matters,” Berlof explained.

Berlof described the third T as being “really quite important” in the day to day running of a business: talent.

“Individuals are making decisions about where they want to live and work,” said Berlof.

In a separate session, Darrell Thomas, vice president and treasurer for Harley-Davidson also emphasised the importance of talent.

“Once you get the team right you have a much better chance of success,” said Thomas.

After laying out both the optimistic and pessimistic view of how Brexit will play out, Berlof weighed in with his own predictions.

“There will be a [Brexit] deal but it will all happen in the last minute. It won’t happen as quickly as businesses want it to and businesses desperately want certainty, but they won’t get it, at least not for some time,” said Berlof.

“There will be a transition period of some time to avoid a cliff edge Brexit for possible two years, perhaps even more. It will lead to a lot of uncertainty and suck up all of the political oxygen in Britain.

“There will also be a lot of currency fluctuations during that period as the negotiations get good and bad press. You can already see how sterling can move depending on the Brexit news,” predicts Berlof.

Treasurers advocating centralisation

Treasurers hosted many of the sessions at EuroFinance on Wednesday. Jeremy Hamon, head of group treasury at Primetal Technologies argued the case for mitigating risks via in-house banking in a centralised location.

Every business should negotiate foreign exchange (FX) rates from a central location so that they can get a better deal, he argued.

“I’d rather be an important customer for a few key banks than an average one for many,” Hamon said.

Johan Nystedt, vice president treasurer and chief risk officers for ConAgra Foods US, agreed with this sentiment: “FX needs to be centralised, otherwise how can you benefit from portfolio effects if it is managed separately in silos?”

Nystedt, who previously worked for Kraft Foods, explained that FX used to be the responsibility of the affiliates at ConAgra but the central treasury took back the role.

By centralising some treasury processes including cash forecasting, ConAgra has “vastly improved” cash flow forecasting, according to Nystedt.

Cash flow forecasting seems to be one of those areas that everyone seems to work at but it is very hard to get it right,” commented Nystedt.

Ultimately “cash is the result of the success of the business itself,” said Nystedt in his session titled ‘The perfect partner for the business’.

“How do you forecast that? You need to have a good sense of the business performance of the different units. How do you get that sense? You need to be in the loop. The only way to have better cash forecasting is to be connected to the business units themselves,” he argued.

 

 

Miffed about MiFID II?

While there was understandably plenty of focus on Europe’s revised Payment Services Directive (PSD2), several treasurers that met with GTNews said that The Markets in Financial Instruments Directive (MiFID II) was currently a greater concern.

“Most of the market is unsure if they are ready for MiFIDII. We are expecting a slow start,” commented Vincenzo Dimase, head of market development for trading for Continental Europe at Thompson Reuters in Italy.

“MiFID II is a big data exercise. The more data you can ingest and crunch to analyse, the more opportunities you will get from this regulation,” said Dimase.

One of the advantages of MiFID II is transparency, explained Dimase. The European Securities and Markets Auithority (ESMA) put MIFID II in place “exactly for this reason – to provide information to the players to make the market more transparent,” he continued.

Dimase described the dramatic shift MiFID II’s demand for transparency will bring to several financial markets, one example being commodity trading.

“Commodity trading has previously taken place on chat tools like WhatsApp. MiFID II will bring a big shift,” said Dimase.

MiFID II’s transparency rules can be divided into pre-trade and post-trade regulation, Dimase explained in his session titled, ‘The many faces of MiFId II’,”

“There are no pre-trade requirements for FX as it has been deemed as illiquid by ESMA. For the next year to 18 months, FX would benefit from a set of waivers thanks to this illiquidity status,”

On the topic of FX, he added: “Many transaction cost analysis (TCA) tools were built as equity tools but used for FX. It is important to use tools built for FX under MIFID II”

At EuroFinance, GTNews interviewed Bank of America Merrill Lynch, ING Bank, Standard Chartered, C2FO, individual treasurers and more. Keep an eye out for our interviews next week.

 

 

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