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Since the pandemic shook financial markets in mid-March, volatility across global equities, foreign exchange (FX) and commodities has remained high. And with Brexit just weeks away, corporate treasurers, risk managers and the technology that underpins their hedging strategies face yet another test of their resilience and flexibility.
Thankfully, the technology market is a large and diverse place with a wide range of risk management tools to help corporates understand the dangers their company is exposed to and help them define hedging strategies to mitigate those risks effectively.
For treasurers at FTSE 100 companies, many have access to sophisticated treasury management systems and electronic trading tools like Deutsche Börse Group’s 360T, an award-winning multi-bank, multi-asset trading platform for over-the-counter (OTC) financial instruments that is effective in helping corporates execute plain vanilla hedging strategies.
But for smaller companies, the story can be quite different, with treasury departments, if they exist at all, often left with old-fashioned systems due to the management team too often prioritising front-office operations over back-office functions in their digital transformation journey, according to Laurent Descout, group CEO and founder of Neo, a corporate banking platform based in Barcelona.
“From our point of view, all clients, whether big or small have an accounting system of some sort in place, but the way smaller businesses carry out their risk management function differs considerably,” Descout says. “FX risk is still heavily reliant on spreadsheets. Execution is still largely done over the phone. Contracts are often stored on a local hard drive with data too often exchanged in the form of a PDF over email because they lack a cloud-based solution where data is safely secured and easily accessible.”
“For those smaller corporates that do have a treasury management system in place, many don’t know how to deploy it effectively, often depending on a third-party to implement the solution which can destroy the firm’s ability to effectively manage risk,” he adds.
A catalyst for change
Before the coronavirus pandemic strangled the global economy, few corporates had taken the time to thoroughly review their operational risk management processes. But with the coronavirus forcing companies to work remotely and accelerate and expand their digitisation roadmap, corporate treasurers have found it easier to access capital to explore the benefits of automating their transactional FX workflows.
“When the world went into lockdown, treasury staff were faced with the reality of making FX-related payments, dealing with foreign currency receipts, and managing the company’s working capital in multiple currencies, via remote channels,” Sat Khuntia, head of FX sales at Barclays said in a blog post. “Initially, many struggled to access the necessary systems from home and the amount of manual work involved in transactional FX workflows was highlighted.”
“The inherent risks involved in manual FX processes also became apparent – and the crisis has provided a huge incentive for treasurers to take greater control of risks, maximise operational efficiencies and unlock growth opportunities,” he adds. “At the start of 2020, the economic environment was relatively benign… By mid-March, the US dollar was in enormous demand as investors looked for a safe haven and a number of corporate treasurers were taken by surprise. FX volatility quickly rose up their list of concerns.”
The right tool
Unsurprisingly, demand for treasury management systems is at an all-time high as businesses attempt to identify their net exposures and create hedging strategies to offset risk. But with so many different software vendors offering a wide array of solutions with varying levels of functionality corporate treasurers can end up overwhelmed. In order to identify the right tool for the job, according Karlien Porre, treasury advisory lead at Deloitte, corporations should assess the maturity level of their treasury and risk management function, as well as recognising the types of risks their business is exposed too.
For smaller, domestically focused businesses, where things like FX risk are less of an issue and where their treasury and risk management function plays a more modest role, companies may find that running Microsoft Excel alongside an open-source database management system like MySQL, developed by Oracle, will do the trick.
At the other end of that spectrum, large corporates that operate within the commodity trading space and, therefore, require a far higher degree of sophistication from their treasury and risk management function will likely see them employ a hybrid setup, according to Porre. This potentially sees corporates with in-house systems developed overtime supported by third-party software vendors that offer additional functionality to allow them to identify their net exposure and hedge risk more effectively.
"ERP systems can fall into this category and typically provide broad functionality for managing debt, investments and risk management. Because they are much more customisable, these systems are usually not deployed in as SaaS [Software as a Service] option," according to recent Treasury Management Systems overview by EY. "They are ideal for corporates who are looking for a complex offer that integrates well with ERP initiatives or are looking for best-in-breed systems."
"These systems are geared towards large Fortune 100 corporates and financial institutions with very complex treasury operations. They offer similar functionality and scalability to mid-market systems but allow for more customisation, are more risk-focused, can handle commodities and are built to handle higher transaction volumes."
Companies looking for a cost-effective treasury management system should also consider more “out the box solutions” which often offer a decent degree of functionality but without much in the way of customisation. However, even these solutions could appear too expensive for cash-strapped companies attempting to stay afloat amid national lockdowns. But businesses should not assume that they cannot afford to invest in treasury management systems, according to Naresh Aggarwal, associate policy & technical director at the Association of Corporate Treasurers (ACT).
“Go speak with vendors, even if you don't have any capital to invest today, or even this year, because suppliers may be able to find a flexible commercial solution for your business,” he says. “Without doubt, treasurers have got a good story to tell the board as to why they need investment dollars, especially if management is eager to have accurate cash forecasting to navigate the challenges ahead. After all, the number one thing that's going to serve the company this year is liquidity.”
Lessons learned
On top of the pandemic, treasurers are doing their best to prepare for Brexit (December 31). Even at this late stage, nobody knows whether the UK will bail out of the trading bloc with a deal or not. But one thing is certain, the impact of Brexit on businesses in the UK and across Europe will be huge and risk managers will need to apply the lessons they have learned from the coronavirus crisis to navigate the approaching storm.
Having the right technology in place to cope with the economic fallout from Brexit and the ongoing crisis is critical. The pandemic has illustrated the value of cloud-based solutions that can easily be deployed from any location and treasurers realised the importance of having access to up-to-date information that is correct.
“Having data in different places makes it time consuming to collect, and more prone to error,” adds Aggarwal. “And so, whether it's FX hedging, cash management, forecasting, any of these things, one of the big lessons I think that treasurers have been reminded of is that the more manual their processes, the more painful it gets.” Read more
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As the pandemic has impacted treasurers in all sectors on a global scale, even the most pressing issues in finance have been overshadowed. With the transition period ending just before 2020 is out, and LIBOR drawing to a close in just under a year, we looked at the regulatory changes that treasurers should look out for in 2021, and how they should navigate them.
Libor to end
Financial regulators in the US urged market participants to make progress with LIBOR this month, with the benchmark due to end in December 2021. LIBOR based transactions have decreased since the financial crash in 2008, with investigations in the US and the UK leading authorities discover that traders had been manipulating it, resulting in banks being fined billions of dollars. In 2014, the Alternative Recommended Rates Committee (ARRC) developed the Secure Overnight Finance Rate (SOFR). SOFR is entirely based on actual transactions as opposed to “expert judgement.” There is a risk, however, that banks may refuse to lend, meaning that transactions won’t occur. The Federal Deposit Insurance Corporation (FDIC) and the Office of Controller Currency have said that banks should begin transitioning away from LIBOR right away. “Failure to prepare for disruptions to USD LIBOR, including operating with insufficiently robust fallback language, could undermine financial stability and banks’ safety and soundness,” the FDIC said in a statement.
Tax changes after Brexit
As the transition period for Brexit ends on 31 December 2020, there are expected to be a multitude of changes in tax. These include customs declarations- including all imports and exports- requiring formal declarations and documentation and changes to VAT, as purchases from and to the UK become imports and exports retrospectively.
Meanwhile, the EU had put several directives in place aimed at reducing tax burdens within the single market, including withholding taxes. The future of talent supply remains uncertain as the country continues to grapple with how it approaches immigration. While acknowledging that many of these changes will be outside of businesses’ control, EY has put together a checklist for 2021, and emphasised the importance of understanding the impact these changes will have on their firms.
Open banking implementation
The Competition and Markets Authority (CMA) final open banking implementation roadmap is due to end in early 2021, with the banking and finance industry then required to keep the OB function running.
Open Banking in the UK was implemented as part of the Open Banking Implementation Entity (OBIE), established by the CMA in 2016. It is also enclosed in the Second Payment Services Directive (PSD2) – a European legislation created in 2018 to offer third party providers the access of bank account information of consumers and payments requests to provide innovative services.
Open banking has been divisive, with slow adoption and security acting as concerns. The Financial Conduct Authority, however, hopes that by making it simpler for businesses and consumers to compare prices and products, open banking could benefit a range of areas.
Recommendations for fintech strategic review announced
Led by Ron Kalifa, chairman of Network International, the fintech strategic review was launched in July 2020 to support growth in the sector. The HM treasury confirmed that they would provide recommendations on five areas; skills and talent, investment, international attractiveness, connectivity and policy. The review has been carried out independently, with the recommendations expected to be brought back to the treasury at the start of next year.
Retirement outcomes review
The conclusion of the Retirement Outcomes Review for non-advised customers is set out in the regulator’s Policy Statement PS19/21. The main change is the introduction of mandatory, governed investment retirement pathways from February 2021. Direct-to-consumer providers must offer retirement pathways to their customers. Platforms that are both advisory and direct-to-consumer must offer retirement pathways to both their advised and non-advised customers; and advisers need to consider retirement pathways when assessing suitability for their clients considering drawdown.
The purpose of this policy intervention is to deliver better retirement outcomes for non-advised investors, who may not have the confidence to make informed investment decisions. PWC has highlighted the importance of giving consumers guidance on the reforms without offering “advice”.
Operational resilience policy
In 2018, the Bank of England, the Financial Conduct Authority and the Prudential Regulation Authority published a joint discussion paper on the importance of upholding the operational resilience of firms.
The paper sets out the regulator view that business continuity is essential to operational resilience. It’s designed to shake up how firms think about disruption, from cyber security incidents, to operational events, and more.
The UK financial services regulators have called on the sector to change the way they anticipate the potential impact of failures in their systems, or those of third parties, on customers, firms and market infrastructure.
After some setbacks due to the pandemic, regulatory policy is expected to be finalised in Q1 2021.
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