GTNews speaks to Carsten Jaekel, KPMG partner for consulting, finance and treasury management based in Germany and heading the European treasury team about the different aspects of treasury and how the professional services company helps corporates to deal with their treasury, financial- / commodity-risk management and payments topics. Alongside this, Jaekel highlights how KPMG are involved in “everything treasury” and as a unique proposition, they offer end-to-end services where internal treasury IT professionals help corporate clients implement high end systems such as Wall Street Suite, SAP Treasury, SunGard Quantum and Reval.
What regulations are in place in European countries such as Germany to ensure that treasury risk is effectively managed?
What we all see is the increasing impact on corporates of EU financial market regulations initially created for the financial markets and ongoing adjustments are further affecting corporates. Take EMIR for example where adjustments might result in cost intense clearing obligations and the upcoming regulations like MIFID II which might result in the application of CRD IV capital rules. Furthermore REMIT, MAD and regulations in the G20 countries do have a significant impact on large corporates. As a matter of fact, the administrative burden, complexity and compliance risk increases dramatically. Firms do question the added value of financial market regulations for corporates to lower the risk in Europe. Their main business is not trading in financial instruments and corporates do have a very minor share of trading volume in the derivatives market compared to financial institutions, and do in my opinion not cause systemic risks. It all started with SEPA a couple of years ago, which was the first big one to hit treasury and which eventually added long term value and in relation to that, when working on payments projects, we currently have to deal with the corresponding EU payments directives.
How is Germany preparing for new regulations that will come to the surface in 2016?
I would say that there are no Germany specific regulations that will come to the surface, but EU or G20 regulations will be prevalent. The interesting question always is how an EU directive on a certain topic ranging from financial markets to payments is implemented in each country. Unfortunately, Germany has always been very strict with how to adopt EU regulations. For example in Germany, the yearly EMIR audit is mandatory but it is something that does not exist in various other European countries. So how certain rules are chosen and then implemented is debatable, in my opinion, especially when looking at multinationals who have to deal with many different regulation nuances in various countries they’re operating in.
What is your opinion on treasury technology solutions being available on the cloud?
To direct this towards the financing side of treasury, looking at this, when we think about the “middle man issue” here, the role of the traditional bank comes under scrutiny as the bank is the most well-known financial middle man, as the institution bears certain risks and brings stakeholders and markets together. Given that, the possibilities that technology offers are ever more increasing, but at the same time it questions whether traditional banks are still necessary. Attempts have been made to answer this big question as many fintech companies have provided a product or a service to the market, which does cut out the middle man. But, to what extent, will that be possible when looking at large scale financing requirements? I think there is no one out there currently that is checking this space, but it is only a matter of time. Once fintechs that are currently focusing on markets like private clients or peer to peer trading tools have gained experience dealing with smaller clients, they will move onto the bigger corporate world. To take an example not directly linked to financing, but with real time payments, the technology is already there and used in B2C and C2C, but it is debatable whether banks will be able to provide something for large scale B2B as quickly as potential non-banks. It could be very well that banks will lose a big chunk of their market share in payments, which contributes to a substantial part of their profit.
How does the role of the treasurer and the trader differ in this day and age?
We have just come up with a position paper called Treasury 4.0 where we say that the traditional trader in a corporate treasury is no longer needed and that the role has dramatically changed. I think that answers your question to a certain extent as the traditional trader is trying to optimise profits by taking advantage of particular market movements – knowing both market and instruments was key. Corporate treasury has a certain objective and usually it is to hedge certain risks hence there is no longer room for a traditional trader type. It is no longer needed to observe the markets as in the past. It’s more and more rule driven and you have a certain methodology and the system tells you exactly when to act and what kind of instrument to deploy, as other instruments may not have the desired result.
Has the influx in mergers and acquisitions affected the position of the treasury?
In organisations which have been involved in a certain transaction, the role usually changes. Whether it’s integration and the question “what risks are we adding?” or carve-outs with a newly build treasury and a CFO having no longer access to unlimited funding from the headquarter. But the major upgrade for treasury comes from major market movements somewhere or the global financial crisis. It’s a natural development for treasury to gain more importance but treasury is still not where it should be. This becomes clear if one does the math looking at potential bottom line contribution of treasury versus other departments.
How do you see the treasury landscape evolving?
I think treasury will become much more important in the future mainly due to the fact that volatility of financial markets has already increased and will further increase, so the rules of the past are not valid any longer. Correlations of the past between the stock market and the bond market or between currencies are no longer valid. In addition we see dramatic changes in the business models or global footprints of corporates including short term changes in their sourcing strategy which all might significantly impact the FX exposure. In order to avoid this, you have to react very quickly, be able to provide ad hoc scenario analysis and anticipate changes by having the relevant tools and processes in place to see the new environment immediately. If you are not able to do this, it will have a dramatic impact on a company’s profitability. In addition we will see further significant development in the IT space allowing to move to pure exception based treasury management which will both reduce process costs and eventually free resources to deal with that ever changing world. That will then be close to Treasury 4.0.
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