One way in which state-of-the-art treasury departments are achieving this transformation is by the centralisation of their operations. Examples of this include:
- The implementation of in-house banks and payment factories.
- Replacing local foreign exchange (FX) hedging and money market dealing with back to back dealing with central treasury (and settlement through the in-house bank (IHB)).
- Centralising the control of bank relationships and bank account management.
- Implementing zero-balancing structures to centralise cash (and administration of this in the IHB).
I recently spoke to a treasurer implementing a payment factory who indicated that regulatory and monetary restrictions took him completely by surprise. In fact, everyone who has ever been involved in any of these or similar initiatives, will know that in many countries regulatory and monetary restrictions can erode the business case and frustrate the implementation.
For example, local entities may not be allowed to lend to or borrow from the IHB, it may not be possible to open a non-resident account in a country from which to make ‘payments on behalf of’ (POBO) and the local entity could be restricted to only entering into FX hedges with its local banks.
Does this mean that a treasury centralisation initiative should only focus on unrestricted countries?
The answer is a clear no. Restrictions only mean that there is no one-size-fits-all model that can simply be rolled out around the world. Even in places where it is impossible to implement the full envisioned model at least part of the benefits can be realised.
Example 1: Local entity can not lend to/borrow from central IHB:
Even if a full interest bearing current account with the in-house bank is not an option, entities in restricted economies can still participate following a slightly different model. Setting up a technical, non-interest bearing account and physically settling the balance on this account on a monthly basis will mean these entities can still participate in an IHB style inter-company netting process. In this manner the benefits of reducing the amount of physical settlements and standardising the inter-company payment process are still achieved. Malaysia is an example where I’ve seen this model work.
Example 2: It is not possible to make payments of behalf from a local account owned by the central treasury vehicle:
While a POBO structure may offer great benefits, not in all countries will it be possible to open a non-resident account in the name of the central treasury entity and make payments from this account. China is a good example. There are various models which can be implemented to achieve at least part of the benefit. One of the entities in the country can be used to make payments on behalf of the other entities.
Alternatively, payments can be made from each of the entities’ individual bank accounts, while still being processed through the central payment factory system and central SWIFT connectivity, the so-called ‘payments through’ model. While this will not reduce the number of bank accounts needed or reduce cross-border payment charges, it will still mean that all payments are processed in a standardised and automated manner, providing full visibility in a centralised system.
Example 3: It is not possible for an entity to trade with the central treasury vehicle, so direct dealing with local banks is required:
While in this situation the company does not benefit from centralising and netting all its exposures into one entity and thereby achieving optimal costs of hedging, it is still possible to implement an ‘agency model’. The central treasury team could enter into the hedge or investment on behalf of the local entity, dealing directly with the local bank. The contracts would be stored in the central treasury management system and the payment would be triggered also from this system. By applying this model, the company still achieves optimal visibility, automation, standardisation and centralised control.
How to incorporate restricted economies in a project
There is a variety of monetary, fiscal and regulatory aspects that impact to what extent a corporate’s treasury operations can be truly centralised. Typical examples are the ability to hold a financing position with the central treasury vehicle, the ability to open non-resident accounts, central bank reporting requirements, withholding tax, lifting fees, currency conversion restrictions and stamp duties.
Before starting any project which will involve restrictive economies, it is important to make a thorough analysis of these aspects for each of the countries involved. Early awareness means that different models can be designed and an upfront categorisation can be made of countries into the various participation models. This results in a more realistic business case and a clear set of expectations.
It will not be a surprise that to be prepared and prevent project setbacks, early involvement of the companies’ tax and legal departments is vital.
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