The increasing amount of regulation covering the treasury, finance and banking sector, with everything from the supranational US Foreign Account Tax Compliance Act (FATCA) to the international Basel III capital adequacy regime impacting treasuries, is a concern for Séverine Le Blévennec, Director of Treasury, Europe, Middle-East and Africa (EMEA), Honeywell.
Speaking to gtnews recently, Le Blévennec cited regulation as a current treasury ‘pain point’ even though Honeywell itself is conscientious in this regard. It is, for example, already compliant with the single euro payments area (SEPA) harmonisation rules, which are due to come into effect on 1 February 2014 when the migration end date enforcing standardised SEPA credit transfer (SCT) and direct debits (SDD), plus mandatory XML ISO 20022 messaging, hits. Honeywell long ago overhauled its payment structures and processes to comply with these new stipulations and its lack of reliance on a ‘quick fix’ SEPA conversion service proves its conscientiousness.
Le Blévennec is aware of other regulations ahead, however, and how they have the potential to impinge on everyday treasury activities and future planning. The amount of regulation is simply too much at the moment, in too concentrated a timeframe, with the European Financial Transaction Tax (FTT) – currently facing a legal challenge that may impede its progress – just one more example of the numerous changes that are underway following the 2008 financial crisis.
The Pittsburgh G20 meeting back in 2009 laid down many post-crash rules, including the demand for more transparency in the over-the-counter (OTC) derivatives market which many treasurers use for hedging and risk mitigation purposes, and is yet another change afoot. The requirement to introduce centralised repositories, clearing and so forth in OTC trading has been actioned in regional legislation like the US Dodd Frank Act and the European Market Infrastructure Regulation (EMIR), in accordance with the wishes of the Pittsburgh G20, and it too will affect the way treasury and finance professionals operate.
Lack of International Cooperation
“What concerns me is the lack of coordination on the global level,” says Le Blévennec. “I work for a US corporate in Europe so I see this all the time. For example, the rules surrounding Dodd Frank and EMIR in the OTC space should be more aligned than they are, if we want to avoid regulatory arbitrage and unnecessarily complicated rules. The US and European Union (EU) should be talking to each other now to ensure commonality in accordance with the wishes of the Pittsburgh G20 meeting.”
“With FATCA you have the strange situation of some banks calling American citizens and organisations, and saying that they wouldn’t mind if they wanted to close their account – all because it costs too much and is too complicated to monitor and track the tax liabilities of third-parties across national borders. The onus should be on governments themselves to close tax havens and loopholes.”
“In regard to Basel III I am particularly worried about the potential it has to negatively impact trade finance pricing as banks may pass on some of the extra capital adequacy costs of these instruments to end user corporate treasury clients.”
Risk is Key New Treasury Focus
“Traditionally, a treasurer’s duties have been about attending to cash management needs and ensuring that the money is where it needs to be to pay bills, staff and to fund acquisitions, deals and so forth, but as more and more of this activity has been automated the treasurer’s role has increasingly focused on risk,” says Le Blévennec.
“Usually a treasurer’s risk-related work has been about foreign exchange (FX) risk, commodity risk and so forth, but that is changing post-crash with counterparty bank risk and other risk factors now moving up the agenda, including regulatory risk.
“In my opinion, we now have compliance risk as well – regulation has become something that we have to concern ourselves with. The fact that some treasuries are now creating the role of ‘treasury compliance officer’ – and that this job title even exists – shows how important the topic of regulation is.” It is one more risk to be monitored.
Bank Relationships Matter
For Le Blévennec it is important to have a good relationship with your bank, and vice versa, as both can help each other in terms of meeting regulatory obligations. “Corporates are understandably demanding of banks and we at Honeywell’s treasury are no different. We want good pricing, technology support, standardisation and sometimes compliance assistance, while still maintaining a bank agnostic approach that avoids proprietary systems or too concentrated a risk. That being the case, I still believe that treasurers and bankers should work together, to advocate financial regulation that is focused on reducing the risks inherent in our global financial system. On the topic of Basel III and trade finance, for instance, if the capital requirements around instruments such as Bank Guarantees (BGs) go up then it is only fair for the banks to price it in [and a good relationship will give you forewarning]. Complaining about the new rules does not change the facts; indeed it is up to both parties to ensure that rules are not implemented in such a way that could restrict world trade.”
“If we as treasurers’ want banks to cooperate, support corporate treasuries, and drive forward initiatives like electronic e-invoicing or eBAM (electronic bank account management) then we have to be willing to engage with the banks ourselves and come to mutually beneficial arrangements,” she concludes.
Honeywell is a manufacturing company after all, and the treasury’s finance-related support role is to serve the business, continues the Brussels-based treasurer. “Banks help us fulfil this role, so it makes sense to talk to them and to harness their additional financial expertise, where relevant, in support of the business.”
Technology Can Help With Compliance and Risk
Technology is also a present preoccupation for Le Blévennec as she believes it can help treasuries to more easily and efficiently meet the regulatory demands that are currently high on her agenda. Banks can help here too, she believes, but you have to avoid the proprietary trap and ensure cross-border interoperability as much as possible. eBAM and other standardised approaches are the best support.
“Multinational corporations (MNC) need extensive and integrated technology to help cope with the compliance burden, risk obligations and other challenges presently facing treasurers – a mere Excel spreadsheet won’t do the job any longer.”
As an example of the central role of technology, Honeywell uses its treasury management system (TMS) to do a lot of analysis, risk monitoring, compliance and other work, explains Le Blévennec, although this does require a lot of manual effort in the initial stages to get an automated workflow set up that can deliver simple reports from complex data. “It takes a lot of effort to achieve simplicity,” she says, with the spectre of ‘garbage in, garbage out’ always something to be mitigated by effective planning. “A good report should clearly present and summarize the relevant information that you need – what is underneath it does not matter – but of course there has been a lot of work put into ensuring simplicity and a solid delivery foundation.”
Hopefully the same solid, background work is now going on in treasuries around the world to ensure easy compliance with SEPA, FATCA, Dodd Frank, EMIR and the raft of other regulations facing corporate treasuries and other financers around the world. Meeting the regulatory burden depends upon it.