European Treasurers Council Examines Commodity Risk And Credit Pricing

Of the 20 treasurers from major European corporations gathered at a closed meeting of the European Treasurers Council (ETC) at The Dorchester Hotel in London on 7 February, several from the retail and travel industries identified fluctuations in commodity prices as their most pressing concern. The cost of a number of commodities, such as wheat, cotton, metals and oil, have risen dramatically recent months, affecting the prices purchasers have to pay for a range of goods. These include ‘near commodities’ – items with a high component of raw materials such as plastics and metals.

Two examples at the London meeting were a large retailer facing uncertainty in pricing and supply from suppliers who were themselves heavily exposed to commodity prices, and a large travel business indirectly exposed to fuel price fluctuations. For those treasurers the difficulty is that, whereas many financial risks can be mitigated by hedging, it can be difficult to hedge against commodities to which the organisation is not directly exposed. ETC members have continued discussions outside the meeting and the topic is likely to recur at future gatherings.

Clarifying Credit Pricing

Another discussion at the London meeting centred on credit pricing, which ETC members had previously sought clarification. Daniel Schmand, head of trade finance and cash management, Europe, Middle East and Africa (EMEA), Deutsche Bank, outlined the factors the bank took into account when calculating the pricing and explained the underlying methodology. He described the bank’s subsequent internal decision-making process, in order to explain why there was such a discrepancy in pricing between banks.

As the discussion went on, the group debated the effect that Basel III would have on credit pricing. Although it would have an impact on transaction banking products, it was thought that this would be minimal compared with more highly structured products.

ETC members had many questions around bank relationships, specifically relationship pricing. While banks may be open to taking on ‘interesting’ transactions, a transaction based on an existing relationship would be more durable in times of crisis. Given the state of the credit market for the past three years, it is hardly surprising that banks have focussed on their current client base.

Another member made the point that bank pricing, although a lot more expensive than five year ago, was still a lot cheaper than capital markets pricing, despite the crisis and initial fears of a move away from bank funding altogether. Did the bank offer flexibility, he asked, if it was a choice between this and losing the client? Schmand said this was true for Deutsche Bank.

One member noted that the market was small for strong mid-caps in the UK, while around Europe there was a larger contingent of financial services firms that aggressively targeted the mid-caps, making rates more competitive. Schmand noted: “The UK banking market is not very mid-cap friendly. There is no reason why a mid-sized company should not be AA or A-rated.”

The discussion moved on to the process of choosing a bank – and the level of importance attributed to the corporate’s business by the bank played in this. One participant made the point that most companies thought that they were a preferred client to their banks, which was statistically impossible. Schmand contended that it was possible to have a mutually open, stable relationship with a bank.

The Implications of TMS

The next item on the agenda was the level of automation that was possible – and indeed desirable – from a treasury management system (TMS). None of those present had achieved complete automation, although one member’s company was at 90%, while a few had achieved 75%. A number had below 50% of their processes automated. The reasons for this varied. Some participants gave the reason as a lack of budget and manpower in gathering information from decentralised operations. One member commented that the TMS his company would be implementing later in the year was for accounting purposes but would not be necessary for managing the treasury operation per se.

A recurrent complaint from those present was that treasury operations are not being regarded as a priority – and this perception did not change until something went wrong. One member illustrated this by explaining that, although his previous company’s treasury operation had been positively assessed by a consultant, the lack of overall systems control had led to the treasury operation being ‘marked down’. He noted that this action was a key driver, however, for management teams in authorising investment.

The discussion turned to how TMS could be improved and whether this was best driven by treasurers, vendors, or banks. Some believed vendors often promised more than their systems delivered. Many of those present relied on spreadsheets, which, as one member noted, became extremely challenging when faced with more complex transactions such as hedging. One participant noted merging TMS was particularly challenging, partly because of the differences between the two companies’ approach to treasury management. She also explained the issue was due to a high level of dependence on their respective parents who had (“rightly”) taken a step back from picking up the information shortfall as the department had started to see the level of necessary IT investment – and that it had been embraced as much for its efficiency gains as it risk management capabilities.

Headcount was determined as the key metric of when to implement a TMS. Another spoke of the increasing difficulty of getting different global hubs to talk to each other as the company expanded. Despite implementing a major overhaul of the system, they faced additional costs of “keeping the lights on” of a previous system. There was general agreement that, despite the benefits of TMS, the barriers of cost and standardisation in preparation for installing a system were still significant – and that some processes were impossible to automate.

Electronic bank account management (eBAM) was another issue causing unnecessary pain for ETC members, with familiar complaints about the length of time and disparate bank approaches for documentation and signatory lists for transaction banking relationships. One member described the process as “antiquated”, and while putting the bank account agreement in place was straightforward, the practical process of setting it up was not.

The lack of an eBAM standard was described as the main issue here. However, the point was made that, even if banks worked together to put this in place, some factors, such as the Know Your Customer (KYC) anti-money laundering (AML) regulation and harmonisation, were out of the banks’ control. The single euro payments area (SEPA) was suggested as being the ultimate driver towards harmonisation, with larger corporates also having a significant part to play. The group considered the challenges posed by having different bank account regulations in different countries. Some EU-driven initiatives were now underway, with new standards on electronic billing recently put in place. One participant noted that it was easier to bring one bank into a specific bank account management process once the others were already on board.

ETC members also took the opportunity to consider potential areas for discussion at future ETC meetings – the next is to be held in Frankfurt on 17 May. Potential topics included the use of commodities derivatives, risk management practices and the accounting around it, as well as the issues around holding information ‘in the cloud’.

Introducing the European Treasurers Council

The European Treasurers Council (ETC), established by gtnews and sponsored by Deutsche Bank, held its inaugural meeting in Zurich on 6 December 2010 with discussions around the evolution of the corporate treasurer’s role and the methodology behind benchmarking, as well as the relevance of social networking.

The first meeting of 2011 took place at The Dorchester hotel in London on 7 February. The ETC provides a forum for high-level treasury professionals to meet face-to-face to discuss issues and solutions. The locations of the ETC meetings are chosen for the wealth of high-level treasury professionals located in these centres, thought leaders who are orchestrating the treasury world’s cutting edge implementations.

In 2011, the ETC will hold further meetings in Frankfurt, Geneva and Brussels. From the discussion in London, members selected commodity risk management as the topic they’d like to discuss further in the next ETC meeting, which is taking place at the Villa Kennedy in Frankfurt on 17 May. If you are at the level of Assistant Treasurer or above and would like to apply to join the ETC, please email


Related reading