Eight Months; Six Trends – A Review of 2008 So Far

We are already into the second half of 2008 and, since January, a number of key events and announcements have underlined trends in the treasury and cash management space. The box below highlights the most-read articles on gtnews so far this year and this commentary considers the backdrop against which these articles were written and how it is likely to shape the agenda for corporate treasurers for the rest of the year.

Top 10 Most-Read Articles on gtnews: January to August 2008

1.Tackling the Cash Forecasting Challenge by Timo Hämäläinen, Exidio

2. Islamic Banking in Turkey, Indonesia and Pakistan: A Comparison with Malaysia by Paul Wouters, Bener Law Office

3. European Cash Management Strategy 2008 by Jasper Savelkoel, KBC Bank

4. What Do Corporate Treasurers Expect of Their Banks? by Vesa Kalliokoski, OpusCapita

5.  7036 by Manish Jain, Citi

6. Treasury Challenge: How to Manage a Global Subsidiary Network by Patrick Coleman, IT2 Treasury Solutions

7. Gaining Efficiency from the Silent Balance Sheet by Bruce Lynn, The Financial Executives Consulting Group

8. China’s Inflection Point by Steve Monaghan, Competitive Capital Management Group

9. The Road to Treasury Excellence by Karsten Kohl, BearingPoint

10. Macro Factors Affecting LBOs in India by Amit Plaha, S R Investments

1. Ongoing Impact of the Credit Crunch

We cannot discuss the events of the year so far without reference to the credit crunch and right now the outlook doesn’t look rosy. According to a recent survey by the Confederation of British Industry (CBI) and PricewaterhouseCoopers (PwC), the impact of the credit crunch on the UK financial services industry, for example, has worsened over the past quarter, as profitability fell at a record pace and business volumes fell at the fastest rate in 17 years. The survey also showed that credit remains expensive and in short supply with the gap between lending and borrowing rates widening more than at any time in the survey’s history.

The industry has undoubtedly been feeling the impact of the credit crunch with nine out of 10 firms from the CBI/PwC survey stating that it will take more than six months for market conditions to return to normal. “The impact of the credit crunch on financial services has deepened over the last three months and conditions look set to remain difficult for some time yet,” said Ian McCafferty, chief economic adviser at CBI. “Although credit markets have been somewhat calmer of late, the interbank lending system is still looking stagnant, and spreads have widened more than at any time in the past 18 years. The problems of the financial sector will echo throughout the wider economy and will drag economic growth down this year and next.”

At this time of restricted liquidity, the only defence for corporate treasurers is to uphold resilient and robust cash management techniques and policies. It is of no surprise, therefore, that six out of the top 10 most-read articles this year so far tackle this very issue. Cash flow forecasting, cash management strategy, managing a global subsidiary network, the corporate-to-bank relationship and treasury excellence all top the list.

Short-term investment options

One issue that gtnews has followed closely is short-term investment options for treasurers and two clear trends have emerged over the past 6-12 months. First, while yield has traditionally been a priority, the significance of security has been re-asserted and most treasurers now opt for a more cautious approach to their investments. Second, as the focus on security has heightened so has the popularity of triple-A money market funds (MMFs) as a short-term investment option for treasurers.

In his recent article on gtnews, Post Sub-prime: The Impact on Treasurers Managing Liquidity, François Masquelier, honorary chairman of the EACT and head of corporate finance and treasury at the RTL Group, explained how MMFs represent the advantage of risk diversification, professional management, security (in principle) and, under normal circumstances, a response to market volatility. “There has therefore been a growing demand for them in the last few years. But what is certainly lacking is a sufficiently clear and precise definition of what a ‘pure’ MMF is,” he argues.

In fact, at the Money Market Fund Forum in June, the definition of MMFs was one of the key discussion points. Donald Aiken, chairman of the International Money Market Funds Association (IMMFA) pointed out that not all cash fund structures are the same and some funds, for example in the enhanced cash area, have been hit hard in the market turmoil due to their portfolio mix. One of the priorities for the IMMFA in 2008 is to achieve a pan-European definition of MMFs. (Read more in the commentaries, Short-term Investment Strategies for Treasurers & Money Market Funds: Navigating a Course Through the Market Storm, by Ben Poole, section editor at gtnews.)

Looking ahead, according to Bob McDowall, research director, Europe at TowerGroup, the key challenge for corporate treasuries is predicting the duration of the credit and liquidity crisis. “Estimating the duration of the credit and liquidity crunch is critical for corporate treasuries to advise their boards of management whether to delay or proceed with investment plans,” he says. “Equally, they have to advise when to reassess them where they have been delayed.” In his article, Corporate Treasuries’ Responses to a Year of Liquidity Constraints, he explores how the financial market turbulence over the past 12 months has affected corporate investment and funding as well what techniques treasurers can develop to maintain access to working capital, investment and funding.

While the task of predicting the duration of the credit crisis might seem impossible, there are ways to rise to the challenge. The combination of a robust investment policy, portfolio diversification, a competent understanding of investment products and strong relationships with asset managers, for instance, will aid all corporate treasurers in tackling current market uncertainties.

Regulatory developments

The credit crunch has understandably led to a re-evaluation of the resilience of the banking systems and the regulatory framework in place to supervise this. In April, the Basel Committee announced a series of steps designed to make the banking system more resistant to the impact of financial shocks. For example, it plans to enhance various aspects of the Basel II Framework, including the capital treatment of complex structured credit products, liquidity facilities to support asset-backed commercial paper (ABCP) conduits, and credit exposures held in the trading book. At the same time, the Committee noted the importance of prompt implementation of the Basel II framework in order to help address a number of shortcomings identified by the financial market crisis.

The US Securities and Exchange Commission (SEC) has also been hard at work this year. In May, it agreed to formally propose using new technology to get information to investors faster, more reliably and at a lower cost. At the centre of the SEC proposal is ‘interactive data’, which is comprised of computer tags similar in function to bar codes used to identify groceries and shipped packages. The interactive data tags identify individual items in a company’s financial statement so they can be easily searched on the Internet, downloaded into spreadsheets, reorganised in databases, and put to any number of other comparative and analytical uses by investors, analysts and journalists.

In July, the SEC also launched an examination into the way it acquires information from public companies, mutual funds, brokers, and other regulated entities, and the way it makes that information available to investors and the markets. The aim of the internal inquiry, called ’21st Century Disclosure Initiative’, will be to outline the attributes of the disclosure system for the future that incorporates technology, the new ways in which investors get their information, and recent developments in how companies compile and report the information in their SEC-mandated disclosures. The first phase of the study will be completed by the end of 2008, when a follow-on advisory committee will be appointed to consider the questions in a more detailed fashion through a public and consultative process.

Most recently, the SEC released findings from its 10-month examinations of three major credit rating agencies, which uncovered significant weaknesses in ratings practices and the need for remedial action by the firms to provide meaningful ratings and the necessary levels of disclosure to investors. With the recent sub-prime market turmoil, the SEC has been particularly interested in the rating agencies’ policies and practices in rating mortgage-backed securities and the impartiality of their ratings. “We have uncovered serious shortcomings at these firms, including a lack of disclosure to investors and the public, a lack of policies and procedures to manage the rating process, and insufficient attention to conflicts of interest,” said SEC chairman Christopher Cox. “When the firms didn’t have enough staff to do the job right, they often cut corners. That’s the bad news. There’s also good news. And that’s that the problems are being fixed in real time. The recent events affecting our economy and our markets have galvanised regulators around the world to re-examine the regulatory framework governing credit rating agencies, but ultimately the responsibility for providing meaningful ratings to investors begins with the credit rating firms themselves.”

The regulators are leaving no stone unturned in their efforts to prevent another event such as the sub-prime mortgage crisis in the US happening again. Some might say that if they had been more rigid in the first place, the industry might not be in its current state but at least efforts are being made to rectify the situation going forward.

2. Expansion into Asia-Pacific

The Asia Pacific region continues to attract attention and business and this is reflected by the fact that two of the articles in the top 10 list are about China and Asia: China’s Inflection Point and Macro Factors Affecting LBOs in India. Recently, the research and advisory firm, Financial Insights, released a report titled ‘Packaged Cash Management Review: Mobilising your Money in Asia’, ich highlighted the packaged cash management solutions market in the Asia Pacific, and how deployment of these solutions by financial institutions has evolved.

According to Li-May Chew, senior research manager for Financial Insights Asia-Pacific, there is a tremendous amount of change happening in the cash management environment, calling for ongoing technology investments to support this transformation. On how the future for packaged solutions is unfolding, Chew says that “the principal trends that could impact the cash management vendor scene include continuous consolidation of Asian banks (which could either accelerate or impede cash management investments), sun-setting of legacy systems and rethinking of proprietary solutions”.

Earlier in the year, Financial Insights released its annual report identifying the top 10 IT initiatives that would be of strategic importance for risk management in the Asia-Pacific region during 2008. The report, entitled ‘Asia/Pacific Risk 2008 Top 10 Strategic Initiatives: Striking an Optimal Balance between Risk and Reward’, highlighted initiatives that would help financial institutions balance their trajectory of growth with managing the risk profile for 2008. The first three of the top 10 initiatives are data systems improvements, focus on Basel II and managing operational risk.

These trends are reflected in the wave of development in technology and products that have occurred throughout the first eight months of the year. One example is FRSGlobal’s launch of its FinancialAnalytics solution in Asia-Pacific and Japan in June. (FRSGlobal is a provider of regulatory reporting, compliance and risk management solutions.) The launch was designed to enable banks in the region to standardise and consolidate their procedures while automating risk and regulatory reporting across multiple countries and entities. “If you can consolidate regulatory reporting from non-centralised locations, with data from regional management information systems (MIS) and head office reporting, it makes a lot of sense to do so using one system,” said FRSGlobal VP for Asia-Pacific and Japan, Stephen Thurley, about the launch.

Furthermore, vendors, corporates and banks all continue to expand their business operations and appointments in the region. For instance, Alaric International, which supplies technology solutions to the card payments industry, opened a new Asia-Pacific headquarters in Malaysia in March and SmartStream Technologies, a provider of enterprise-wide, real-time transaction lifecycle management solutions, announced new investment across the Asia-Pacific region as well as the appointment of Richard Cummings as regional director in June. In August, Fundtech, a provider of financial supply chain and corporate banking solutions, announced a new managing director for the region in the form of Gil Gadot. Also, Citibank Japan and Oracle Corporation Japan entered into a partnership in May to provide global cash management solutions to Japanese corporate customers.

Developments in China

With all eyes on the Olympics in China, the country is making global headlines daily, but outside the Bird’s Nest Stadium and Beijing, there have been developments that specifically affect treasury and cash management this year.

Back in April, the Financial Accounting Standards Board (FASB) and the China Accounting Standards Committee (CASC) issued a Memorandum of Understanding (MOU) articulating their commitment to strengthen co-operation and communication between the two standards-setting organisations. FASB chairman Robert Herz, and Liu Yuting, member of the CASC and director general of the Accounting Regulatory Department of the Ministry of Finance, signed the MOU at a meeting held at the FASB headquarters in Norwalk, Connecticut. The meeting was intended to facilitate dialogue between the US and China on how the countries can work together on issues pertaining to international convergence of accounting standards. “The MOU signed by FASB and CASC represents our shared interest in moving to a common set of high-quality, global accounting standards, a goal that will ultimately facilitate economic relations between the US and China,” said the FASB’s Herz. “We look forward to continuing our dialogue with CASC, and to work with our counterparts in China to make international convergence of accounting standards a reality.”

There have also been a range of appointments in China as well as new partnerships formed – once again highlighting business expansion in the country. In January, for example, Saxo Bank appointed Craig Howard Russell as its chief market strategist for China in order to strengthen its market presence in Asia, while Digital China Financial Software (DCFS) and Misys signed a strategic co-operation agreement to deliver a new, hosted, banking solution targeted at the estimated 30,000 small and medium-sized banks in China. In February, it was confirmed that all of the regulatory and shareholder requirements for the Commercial Bank of China (ICBC) to purchase a 20% stake in Standard Bank valued at R36.7bn had been approved. In May, Euroclear and Companhia Brasileira de Liquidação e Custódia (CBLC), the Brazilian clearing and depository corporation, signed a MOU to build and develop a co-operative relationship in securities clearing and settlement matters.

China and the Asia-Pacific region will continue to draw interest and business from around the world. To keep up-to-date with all the latest developments, visit the Asia-Pacific section on gtnews.

3. Is SEPA Going to Take Off?

In Europe, one of the most significant events of the year so far was the introduction of the single euro payments area (SEPA) with the launch of the SEPA Credit Transfer (SCT) – the new file format for mass euro payment transactions – on 28 January (read the gtnews commentary, Update 2008: The Year SEPA Went Live, for further background). Since then, there have been numerous technology and infrastructure announcements around SEPA and the number of SCTs processed on the various EU platforms. The latest figures released by José M Beltrán, director of STEP2 Services at EBA CLEARING, indicated that STEP2 SCT (the first pan-European ACH for bulk payments in euros) currently processes 185,000 payments a day.

While the infrastructure around SEPA is progressing, there is still concern about corporate adoption of the new SEPA formats and services. This was one of the overriding themes at EBADay in Helsinki in June. Speaking at the two-day conference, Peter Hasfeld, in charge of specialist cash management projects, including the SEPA implementation project, at German chemical company BASF, said that in the short term he could only see costs and no benefits, and challenged the banks to provide incentives for corporates to move across to SEPA. He also added that until the implementation of SEPA Direct Debits (SDDs) in November 2009, the benefits to be gained from closing down multiple national euro accounts wouldn’t be realised. (Read more in the commentary by Joy Macknight, section editor at gtnews: Corporates Still Not Sold on SEPA.)


Furthermore, the Payments Services Directive has now taken centre stage, with attention turning to its relationship with SEPA. In April, Logica released the results of its survey of 22 banks across the EU and EEA, which upheld the need for pan-European co-ordination to ensure a consistent PSD roll-out if the November 2009 deadline is to be achieved.

The results of the survey raise issues as to how PSD transposition can support the achievement of SEPA implementation and migration without such consistency. Inevitably, this puts additional emphasis on the significance of the PSD Transposition Group led by the European Commission. The survey also revealed that a lack of clear dates for PSD transposition and the likelihood of geographical variation in the implementation of the PSD make planning difficult for banks. Significantly, the results of the study showed that less than a third of the banks questioned were in a position to know exactly when the directive will be transposed into national law.

“The PSD will have a profound impact on the payments business because every legal contract between banks and corporate clients will need to be re-written and re-negotiated before it comes into force in November 2009,” explained Gareth Lodge, senior analyst, European payments at TowerGroup at the Payment Strategies Day in June, hosted by Experian Payments. “Right now, every contract that a corporate has with its bank will be in conflict with the PSD and 15 months is not a long time to address this challenge.” Read more in Payments: Making the Right Strategic Choice.


One trend that has been generated by SEPA is that of payments processing outsourcing. In June, Equens announced that it had begun processing payments for OP-Pohjola Group, a Finnish finance group. “A key factor in the OP-Pohjola Group’s decision to outsource was the introduction of SEPA, which highlighted the fact that the bank’s existing payment systems and infrastructure would not be able to handle the new SEPA formats or instruments,” explains Harald Kreuger, regional manager for Scandinavia, Austria and Eastern Europe at Equens, in the article, US Financial Sector Still in the Thick of It. “The bank didn’t want to invest in a new system, nor did it want to have to make further changes as a result of SEPA going forward. It therefore made the decision to outsource its payments processing to a service provider with the necessary software solution.”

This is the first case of a Finnish bank outsourcing its payments processing to a service provider based abroad and we wait to see whether other FI and banks take a similar route.

In May, the UK’s payment transaction specialist, VocaLink, signed a contract with the Swedish national processor Bankgirocentralen (BGC) to process the majority of Sweden’s automated payments. BGC has outsourced the processing of the majority of Swedish direct debit and credit transfer payments to VocaLink. The Swedish firm will continue to manage its customer relationships while IT development and operations will be transferred to VocaLink. The migration of payments to the VocaLink infrastructure is underway and should be completed by the beginning of 2010, at which point VocaLink will manage the day-to-day operations of the Swedish Bankgiro system.

This partnership between BGC and VocaLink is a step forward in the consolidating European payment market and a reflection of how SEPA is breaking down borders and allowing players to bid for business outside their traditional boundaries. For more information, take a look at the SEPA Section

4. E-invoicing Gaining Traction

The promotion of e-invoicing is an ongoing challenge and, back in February, the Euro Banking Association (EBA) released its reference guide on electronic invoicing, ‘E-Invoicing 2008 – European Market Description and Analysis’. The report (a joint product of the EBA and Innopay) provided a description and analysis of the current invoicing and e-invoicing landscape in the European single market. “After the delivery of the SEPA payment instruments, approaching the subject of electronic invoicing at a pan-European level will be a further step for the financial industry towards achieving a truly integrated and dematerialised European payment environment,” said Hansjörg Nymphius, chairman of the EBA.

The release of this report coincided with the launch of the European Commission Expert Group, led by chairman and TietoEnator VP, Bo Harald, whose aim is the delivery of a European e-invoicing framework by the end of 2009. In fact, at EBAday at a session titled ‘E-SEPA – Unlocking the full potential’, Harald stated that paper invoices had no future and laid out the business case for e-invoicing, starting with the European Commission’s statistic that e-invoicing could potentially save €238bn in the business-to-business marketplace and €30-40bn in the business-to-consumer arena. He also pointed out that e-invoicing is mandatory in five countries, with another 10 countries looking to move to “e-invoice or no invoice.”

The gtnews commentary, #gtnFeature(267)#, highlighted Harald’s arguments as well as the latest activity within the e-invoicing market space, such as the partnerships between RBS and Fundtech’s Accountis as well as Citi and Ariba. In an interview for the commentary, Duncan Jones, senior analyst at Forrester and author of ‘The Forrester Wave: AP-EIPP, Q2 2008’ explained that: “The banks see invoice processing as a way of expanding the services that they offer to their clients. If they are helping a corporate pay its suppliers while giving them treasury and working capital advice, then the corporate thinks it is a good service. The banks also see an opportunity for selling added services to more companies.”

And this is not just a business model for banks: Fundtech, for example, acquired Accountis in February this year. According to the company, adding EIPP capabilities to Fundtech’s existing product lines “expands its end-to-end corporate banking systems, and adds to the company’s capabilities in enabling the emerging financial supply chain.” More recently, Nordic financial technology firm, TietoEnator, and Seeburger, a German integration specialist, announced their plans to embark on a global cooperation to focus on e-invoicing and long-term archiving.

5. Going Green

One trend that could boost the uptake of e-invoicing is the theme of ‘going green’. According to Tuija Sipila, director of cash management solutions at OpusCapita, in the forthcoming years, environmental values are likely to become major drivers of e-invoicing. “Paper consumption and traffic emissions due to the transportation of invoices may well find their way into companies’ sustainability programmes. For the moment, companies remain taciturn about the ‘greenness’ of their e-invoices,” she says in her article, How Can We Accelerate Electronic Invoicing?. “However, since ‘Green IT’ is making a breakthrough, promoting more ecological system solutions, the image value of e-invoicing may lead to a remarkable increase in its use.”

In fact, a new report by Carbon Footprint Limited released last week found that the carbon emissions generated by an ongoing direct debit are around 65 times smaller than that of a regular cheque payment. According to the figures in the report, the carbon footprint of an ongoing direct debit commitment is 0.76g CO2 per process, compared to cheques, which it was found to generate carbon emissions of 49.28g CO2 each time they are used. The analysis, undertaken in conjunction with Bacs, the membership based industry body responsible for the processing of more than 5.5 billion payments a year, showed a comparison that looked at the overall impact of each payment method over the course of a year. Assuming that each payment method was used once a month, for a year, Carbon Footprint Limited concluded that 12 cheques would generate 591.36g CO2 per annum, including set-up. In comparison, paper direct debits would create 73.36g CO2 (eight times smaller) and paperless direct debit transactions would generate an even smaller 35.51g CO2 (16 times smaller).

While the term ‘going green’ still seems like a buzzword rather than a call for action within treasury and cash management, there have been some developments this year that do support a greener future. In March, for example, London’s role as a world centre for green finance was given a boost with the launch of a new network for City financiers and renewable energy entrepreneurs. The Finance Network for Sustainable Energy (FiNeSse) was created to support investment in renewable energy by enabling financiers, entrepreneurs and professional advisers to build deeper relationships and educate one another about this growing sector.

Outlook in the UK

In the UK, aside from its recognition for ‘green finance’, there have been a number of significant events. In May, we witnessed the rollout of Faster Payments, which, for the first time, allows customers to make phone and Internet same-day payments on any day and at any time, enabling them to be processed within a few hours rather than three days. While concerns about the advent of fraud have been expressed, the focus has remained on the advantages for customers in the UK. “Although the rollout will be gradual, it is clear that Faster Payments could fundamentally change the payments landscape in the UK,” says Sandra Quinn, communications at APACS, the UK trade association for payments, in her article, A Payment Service for the 21st Century. “In the long term, it is likely that Faster Payments will fuel the growth in remote banking. All in all, it is forecast that over the next few years Faster Payments will help to push volumes of interbank online, phone and standing order payments from the 2007 figure of 472 million to 622 million in 2017.”

Bacs also celebrated its 40th anniversary this year and the delivery of over 68 billion automated transactions for UK consumers and businesses since the company was first established in 1968. For the last four decades, Bacs has been processing automated payments on behalf of the UK banking industry, providing individuals and commercial companies with a secure means of transferring money.

And finally, in June, Lord Adair Turner was appointed as the new chairman of the Financial Services Authority (FSA) for a period of five years. Lord Turner will take up his appointment next month when Sir Callum McCarthy steps down.

6. Credit Crunch Fuels Interest in Islamic Banking

There continues to be interest and development around Islamic banking with a number of interesting announcements over the last six months. In January, the Dow Jones Indexes launched the Dow Jones Islamic Market Malaysia Titans 25 Index, which measures the performance of the top 25 stocks in the Dow Jones Islamic Market Malaysia Index, which comprises Malaysia-domiciled companies that pass screen for Shari’a compliance. More recently, the Shariah-compliant version of Standard Chartered Bank’s Online Treasury (OLT) proprietary foreign exchange trading and hedging platform was re-launched under the bank’s global brand for Islamic products – Standard Chartered Saadiq. The bank’s online services in Islamic FX utilise the Wa’ad structure to allow Islamic companies and institutions to hedge forward FX exposures under a Shariah-compliant structure.

In addition, the Family Shariah Fund Limited, a multi-asset class fund providing investors with exposure to a variety of Shariah compliant investments predominantly outside of the GCC region, has commenced trading on AIM. The company will seek to provide investors with a diversified pool of Shariah compliant assets, geographic diversification (predominantly outside the GCC), liquidity through trading of the company’s shares on AIM and a stable return profile across a market cycle.

More recently, one global news source expressed the opinion that the credit


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