Many treasuries around the world are in transition from
an operational function that is gathering and reporting historical financial
data to a more strategic function, which is focused on providing highly
analytical and forward-looking data in support of a firm´s globalisation and
growth strategies. Real-time reporting, cash visibility and risk assessment and
mitigation are all increasingly part of a treasurer’s job in Australia and New
Zealand, especially with the historical functions in commodities prices and
foreign exchange (FX) rates when mining products are in demand.
examining treasury transformation projects and best practice, treasuries in
Australia and New Zealand tend to be considered among the most advanced and
peers from around the world can often learn some useful lessons from their
Antipodean cousins. According to a poll conducted by Reval last year, close to
70% of this region´s finance executives have been able to centralise key roles
in their treasury departments and automate finance processes. Among these, 25%
have succeeded in establishing treasury as a strategic advisor to senior
In Australia and New Zealand, there are three primary
reasons why treasury has accelerated in its transition from an operational
function towards becoming a strategic centre of expertise, with the ear of the
boardroom: the prevalence of commodity-based industries; the strict regulatory
environment; and the evolution of modern technology have all contributed. I
intend to explore how modern Software-as-a-Service (SaaS) cloud-delivered
technology can accommodate such complex risk, compliance and reporting needs for
corporate treasury and risk management procedures.
Commodity-heavy Industries and Challenging Price Volatility Drive
Rich in natural resources, Australia is a major
exporter of agricultural and mining products, particularly wheat and wool,
minerals such as iron-ore and gold, and energy in the forms of liquified natural
gas and coal. The rise of China and its demand for raw materials has only added
to the strength of this sector in recent years. New Zealand´s principal export
industries are horticulture, fishing and forestry.
High volatility in
commodity prices has put commodity risk on top of many Australian and New
Zealand treasurers´ risk concerns. By contrast, many corporates in the US and
Europe are only belatedly prioritising risk as a treasury issue in the wake of
the company failures, credit crunch and counterparty risk unleashed by the 2008
financial crisis. Treasurers in Australia and New Zealand tend to have focused
on these risk-related issues for longer and are traditionally very strong in
effectively handling commodity and FX risk.
Many treasurers in the
region find support for commodity hedging programmes from SaaS solutions aimed
at treasury and risk management (TRM) as these types of integrated platforms can
provide reliable market data in a more convenient fashion. For instance,
volatility curves for pricing over-the-counter (OTC) option products are often
not available, or are very expensive to access via data providers. Typically
only exchange-trade option prices are publicly available for OTC options, but
not the volatilities themselves. SaaS TRM solutions that offer integrated market
data as part of their core offering reverse engineer volatilities with all their
users and, hence, facilitate automated, accurate valuations of OTC options.
Using Technology to Handle Commodities and FX Risk
Forecasting prices is another challenge for treasurers operating in the
commodities arena, as many Australian and New Zealand professionals do. Due to
the fact that quotable indexes for commodity prices are not 100% correlated with
physical prices, given the quality and locational factors often involved, it is
common practice to model historical pricing trends and predict future prices on
that basis. SaaS TRM solutions can examine price correlations between physical
transactions and those priced on a quotable index to build out future pricing
expectations on the underlying commodity being consumed or produced. This type
of analysis is invaluable from both a risk management and hedge accounting
perspective and can considerably aid treasuries.
The vast majority of
commodity prices are denominated in US dollars (USD), so organisations in
Australia and New Zealand that are exposed to commodity risk have an associated
FX risk to manage because their company’s functional currency is the Australian
or New Zealand dollar (AUD/NZD). SaaS TRM solutions with advanced commodities
capabilities are able to capture the commodity volumes in metric tonnes, troy
ounces or pounds and determine both the price risk and the associated FX risk
automatically. This is particularly important as commodity and FX prices can be
highly volatile and must be managed simultaneously.
The correlation of
commodity and FX risk has further treasury implications. A general trend of
strong commodity prices and strong currencies, weak commodity prices and weak
currencies is in place so many companies in the region rely on this ‘natural
hedge’ in managing their price and FX risk. As the currency/commodity
correlation has broken down over the past 12 months, however, many finance
professionals have been caught out. SaaS TRM solutions are equipped with
sophisticated modelling techniques to monitor the correlation impact and to
determine the level of the natural hedge in place and the residual position at
Strong Compliance Regimes Encourage Real-time
Increasing the scope and responsibility of the
treasury function is not the only influencer for treasury transformation.
External factors, such as the changing regulatory environment, impact upon
treasurers and finance executives significantly as well.
are able to leverage internal expertise, established processes and professional
software reporting and oversight tools, will not only be able to successfully
manage regulatory projects better than peers, but they will also be able to
determine the financial impact of new standards such as IFRS
9, published by the International Accounting Standards Board (IASB)
as a new standard for hedge accounting. IFRS 13 is equally as important for
treasurers to understand. Leveraging TRM solutions, treasurers can access
advanced capabilities to analyse the impact of these new standards and similar
stipulations to facilitate better internal and external audits. With SaaS
technology, accessible anywhere at any time via a web browser, every single user
in the community is also working in the same environment and on the latest
software version, making collaboration easier. When addressing changes in
regulation, upgrades should theoretically be done in a seamless fashion
enterprise-wide. All relevant data will also be available to all users of the
TRM system in a timely fashion.
Under constant risk exposure Australian
and New Zealand treasurers have already built the effective compliance regimes
that some other corporates lack. Therefore, this region´s finance professionals
have policies, processes and technologies in place to handle the avalanche of
regulation following the 2008 crash.
Risk Drives Treasury
Centralisation and Automation
High risk awareness and on-going
regulatory pressure have been key drivers for treasury centralisation and
automation in Australia and New Zealand. Many treasurers in the region have felt
increasingly constrained by their legacy solutions, whether they are using
spreadsheets, traditional treasury management systems (TMS) or a combination of
these. Some practitoners have already moved to new technology such as integrated
TRM solutions or added bolt-ons to existing systems, in order to provide the
advanced analytics across cash, reporting and risk activities that corporates
As treasuries in Australia and New Zealand are tasked
with fulfilling a wider range of responsibilities, particularly in commodity
management and hedge accounting, they are well underway in assessing and
leveraging modern technologies to enable their treasury functions to evolve
towards being strategic nerve centres within their organisation, rather than
just operational departments. Treasurers from elsewhere in the world would be
well advised to look ‘down under’ for guidance, innovation and best practice.
Tim de Knegt, treasurer for the Port of Rotterdam, discusses how he is looking to bring more value to the Port's clients using blockchain.
Regulation technology is fast gaining currency by transforming how financial institutions can tackle compliance in a swift, comprehensive and less expensive manner.
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.