The people of the UK voted to exit the European Union (EU) on 23 June 2016 by a narrow margin. Brexit will have major consequences for the economy, corporate treasuries and associated centralisation technology – not to mention the free movement of data, people, money and UK’s wider relationship with the EU and the world.
The UK pound (GBP) plummeted once the result was announced on 24 June and stock prices initially fell, prompting Mark Rutte, the Dutch prime minister, to say that the UK had “collapsed politically, monetarily, constitutionally and economically”.
Rutte was referring to the resignation of the then Prime Minister David Cameron; and the threat of Scotland and Northern Ireland, which voted to remain in the EU, leaving the not so ‘United Kingdom’; plus the FX volatility, initial market turmoil, and downgrading of the country by the credit ratings agencies.
Since Rutte’s comments, the stock market has recovered and the falling pound may help exporters, but the Bank of England cut interest rates from 0.5% down to 0.25% in August and relaunched its quantitative easing (QE) programme ahead of a feared economic downturn. The IHS Markit Purchasing Managers Index (PMI) survey of 650 UK companies in July 2016 showed a large fall in business confidence to 47. A reading below 50 indicates economic contraction.
It is clear that Brexit has increased risks – to short-term growth; FX stability; predictable business environments; continued UK access to the EU single market and the ‘passporting’ rules that enable firms to operate cross-border as if they were in their own EU country.
Trade and international business cooperation will obviously continue. But the question is in what form and how will it impact treasuries and their supporting treasury management systems that rely on centralised operations?
Payment factories (PFs) and many other such aggregation techniques need centralised structures, automated technology and cross-border cooperation. This cannot necessarily be taken for granted anymore in a world where national borders are strengthening – at least until a UK/EU bilateral agreement is thrashed out. The presumption must be that the UK will eventually invoke article 50, which is the legal framework for exiting the EU once the new PM Theresa May settles in, following through on the advisory result of the national referendum.
Coping with risk
In an environment where risk is multiplying, corporate treasurers need to be able to model different scenarios, anticipate what hedging positions or funding arrangements they may want to put in place, and use technology and risk data to support these decisions and execute them.
“In an increasingly dynamic, unpredictable and volatile economy, treasury operations are ever more focused on risk awareness,” says Bruce Manson, head of treasury and risk management solutions at Bloomberg TRM. “Recent developments like Brexit and the changing regulatory environment have accentuated the need further. It is our expectation that this trend will continue.”
According to Bob Stark, VP of strategy at Kyriba, the Brexit fallout has driven treasurers to re-evaluate their level of financial risk preparedness as the currency volatility was greater than most expected. “Any time there is significant financial loss to a firm’s bottom line, it leads to higher risk awareness in not only treasury but also the boardroom,” he says.
What corporate treasurers must decide is the best solution to help them cope with a world of increasing risk, whether it emanates from inter-related political and economic risks, enhanced stock market volatility, or more national tax transparency demands. Whatever the source, supporting technology should help treasuries plan strategies and execute trades in order to mitigate risk.
Humans will ultimately always have to make the big decisions about what to hedge, when, and where to base treasuries or look for growth. But if fast, relevant data and modelling software are available, alongside trade execution capabilities, it can help.
The role of technology
Treasurers can use a TRM system, with integrated risk metrics and analytics, or use a traditional TMS that ‘bolts-on’ this risk functionality to the customary cash management functionality. Both usually provide connectivity to financial market data and trading platforms to allow treasurers to easily execute their policies.
The third option for a corporate treasurer is to use a data service and trading toolkit provider, such as Bloomberg, which launched its own TRM solution in 2014 to try to integrate everything into one platform. Reval did a similar thing in 2011 when it entered the treasury technology field using the TRM name to denote it was attempting to integrate risk management functionality with the traditional cash management functionality of a TMS. Reval was previously a traditional risk vendor that offered credit valuation reports, stress tests and other risk metrics. Its software-as-a-service (SaaS) platform now offers risk, cash, liquidity and compliance all-in-one.
The TRM name is not trademark registered, however, and some view it as merely a marketing term, especially as older TMS’ have all rushed to add risk capabilities to their own platforms anyway, as much as they can retrospectively.
Whatever you call it – TRM or TMS – and regardless if the risk data and/or execution platform is bolted on externally, the key thing is how you align people, process and technology. All three ‘legs’ in this tripod are important and should be addressed as such. There is no magic tech ‘silver bullet’ that will improve a corporate’s risk awareness, mitigation and hedging. Instead treasury technology should merely be the support mechanism for a well thought out strategic approach to risk from boardrooms and treasuries that are increasingly charged with implementing a comprehensive policy.
Who is programming in the key risk indicators (KRIs), and why, is as important as the technology reporting on them. Humans matter. Equally, a treasury technology system should be able to offer KRIs, as well as the more traditional performance-related KPIs.
“There are always going to be unexpected events and shocks to markets. This year it is Brexit, negative interest rates, the China slowdown and strengthening dollar,” says Peter Seward, VP of product strategy at Reval. “Corporates need a variety of risk analytics and metrics to quantify the impact of unexpected events to cash flows with regards to the timing, duration and lasting impact of the shocks. Collectively, scenario analysis, valuations and simulation techniques provide the essential technology toolkit to understand future uncertainty.”
According to Enrico Camerinelli, senior research analyst at the Aite consultancy, you should not get too hung up on the name, but rather concentrate on the capabilities of a treasury technology system, whatever the vendor decides to call it. “Treasurers merely need a risk intelligence component that relates to the metadata associated with potential risk events and quantifies individual risk probabilities. An ordinary TMS can provide risk management modules in its portfolio, although it can be disconnected so it’s worth checking the integration. The value of an intelligent in-built TRM is its ability to build interdependent risk modules that allow treasury users to build correlations among risk elements. For example, counterparty risk with cash and liquidity risk; market volatility and FX risk; and so on.”
Risk management functionality within most TMS platforms still appears to be relatively trivial, warns James Bateman, advisory director at the Covarius consultancy, citing a proliferation of takeovers and lack of research and development (R&D) focus on the hard task of developing specific corporate risk management functionality. “It is often behind the times and in some cases only serves up basic risk reports,” he says. “Those vendors that do offer stronger risk management capabilities have expanded on these functionalities – perhaps offering cash-flow-at-risk (CFaR) calculations – but many appear to be looking more towards leveraging the power of business intelligence (BI) tools and analytics platforms.”
“We feel most treasury technology vendors still do not have a genuine grasp of risk management,” continues Bateman. “This causes them to integrate specialist risk vendor platforms into their package via application processing interface (API) services or use advanced BI data discovery and analytics platforms to mine deeper insights and relationships between treasury and corporate behaviours.”
Whether you decide to go with a vendor that tries to integrate risk functionality via a TRM approach or one that bolts it on to a traditional TMS depends on your treasury needs, legacy IT, cost, support and other individual considerations. It is up to corporate treasurers to decide what is best for them but whatever route is chosen aligning the people, process and technology is the key requirement.
This article is taken from the newly-published bobsguide/GTNews Treasury Management Systems Guide 2016-17.
Transactions that encounter different currencies naturally bring the added risk of currency fluctuations – one of the many risks a firm operating in international markets must acknowledge and actively deal with. Indeed, for companies stretching across national boundaries, either through regional subsidiaries or with a client base in different geographies, the pitfalls of foreign exchange (FX) risk can – if not dealt with efficiently – put significant strain on a company’s financial health.
Since the financial crisis, national regulators have been tasked by industry bodies and international market participants to create frameworks that reflect the global nature of financial markets. However, with national regulators driving their own agenda, informed by regional political climate, regimes have diverged somewhat, creating both frictions and opportunities for those market participants active in different geographies.
There’s no getting away from the fact that cash forecasting is a vital, core functionality for treasury operations. No organisation, regardless of their size and sector, can afford to lose sight of their cash and liquidity positions – yet in an increasingly complex business landscape, this can be easier said than done.
Algorithmic trading is becoming an indispensable tool for corporate treasurers as they seek new and efficient ways to manage their foreign exchange exposures, writes Curtis Pfeiffer.