senior vice president, treasury solutions, SunGard’s corporate liquidity business

SaaS, ASP, Hosted – Which Model Is Right for a Corporate Treasury Department?

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Corporations today have various requirements. A one-size-fits all mentality doesn’t always work.  Companies of all sizes have or are implementing treasury management systems to help them improve their visibility into cash and risk across their organizations.  The treasury department however doesn’t always have a say in how the system is deployed.  They are often working closely with their IT departments or are dealing with already existing company policies. Some corporations prefer only SaaS (software as a service) solutions. Others prefer to host solutions in-house while others prefer to have the vendor host the solution. Corporations today should be looking for vendors who can provide them all of these options.

I am sharing with you a case study about a large pharmaceutical company who was looking for specific requirements in a treasury solution including how it was going to be deployed.  AstraZeneca required a solution that had the ability to seamlessly interface with other internal and external systems. Other key requirements were an ability to replace the in-house netting system and to facilitate an effective and efficient intraday liquidity management process. In addition, the solution would need to be cost neutral and business case positive.

Download the case study to learn which deployment model fit for them and the benefits they achieved.

senior vice president, treasury solutions, SunGard’s corporate liquidity business

Centralizing Your Treasury Operations

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Many organizations are still challenged by decentralized treasury operations or a lack of standardized processes and manual environments. I thought I would share best practices of a global company with a treasury department that was decentralized but moved to a centralized environment with three regional offices in the US, Europe, and Asia-Pacific.

Prior to centralizing, DuPont’s treasury functions were operating out of five regional treasury operation centers. Each center had its own standard processes including decision-making capabilities. The headcount across these centers included more than 350 treasury and cash professionals. The department was also utilizing seven different technology platforms and managing over 1,000 bank relationships and over 16,000 bank accounts which was costly to maintain.

After internal discussion and review, the company realized it needed to standardize its treasury processes and centralize not only the department but also the data in order to improve operational efficiencies, gain visibility into the global cash position, mitigate risk, improve reporting and decision-making, and increase controls. The company realized it required a technology solution to support the centralized environment.

The treasury team had two options: upgrade their ERP platform to include treasury functionality or purchase a best-of-breed treasury management system. The department issued an RFI to gather data on the two potential alternatives. They required a solution that: 

  • Encouraged a centralized global treasury operation
  • Integrated liquidity and risk management
  • Supported growth and expansion of DuPont’s treasury objectives and initiatives
  • Endorsed product innovation / development with evolving treasury capabilities
  • Improved controls

Learn why DuPont selected a specialized treasury solution and how they were able to gain 24 hour daily view of global cash position, reduce manual processes improve productivity, consolidate disparate systems and data into one global treasury solution, standardize global processes and more…
Download the complete case study here.

Are you still operating treasury in a decentralized, manual environment? I’d like to hear about your challenges.

eBAM Best Practices

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eBAM has been an industry buzzword for what seems like forever now.  However, it is now becoming a reality for some companies.  Bank account management is a manual and labor intensive effort, often requiring the dedication of multiple staff members.  The process generally lacks automation, frequently involving paper-based transactions done via fax, mail and email, and which sometimes even entails visits to local bank branches. Corporations are now beginning to lower costs and increase efficiency by managing all of their bank accounts in a single, centralized location and by introducing standardization and automation across their bank account management processes.

In the United States, companies with accounts outside the United States will need to comply with the IRS requirement to provide a report of Foreign Bank and Financial Accounts (FBAR) beginning in June 2013.  Those companies who have already implemented an eBAM solution (or are in the process of doing so) are in a good position to meet these requirements by pulling the reports directly from the eBAM solution instead of compiling them manually.

I thought I would share an article featuring a company who has implemented an eBAM solution – USI Insurance Services.  The article discusses USI’s challenges and the steps they took to automate their bank account management processes.

Stay tuned for what to look for an eBAM solution.

 Are you currently evaluating or thinking about automating your bank account management processes? I’d like to hear from you.

vp, treasury solutions, AvantGard, SunGard's corporate liquidity business

FINANCIAL RISK MANAGEMENT IN TREASURY: PART IV

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Effectiveness of Risk Management Strategies and Challenges Ahead…

In Part I of my Financial Risk Management in Treasury blog series, I discussed mitigating, identifying and defining financial risk.  In Part II, I described various types of risk. In Part III, I reviewed risk measurement methods. In Part IV, I will detail the effectiveness of treasury risk management strategies and the challenges that lie ahead for many financial professionals. 

Overall, only 6.3 percent of respondents in a recent SunGard AvantGard study* felt their risk management systems were below average. While the study turned up some indications that there may be room for improvement, the overall sense among treasurers was that their systems were satisfactory. When asked specifically how they felt regarding the reliability of their cash forecast as a support basis for either foreign exchange hedging or investment, most treasurers indicated some degree of reliability.

Measuring the effectiveness of hedging strategies is a required compliance practice under global accounting standards. Several measurements can be used to determine the level of effectiveness of hedging. When asked how they monitor the effectiveness of hedging programs, 38.1 percent of corporate treasurers identified the dollar-offset method as most frequently used. The critical terms match was almost as often employed, with 37.4 percent of respondents utilizing this method. The regression method was used least regularly, but still utilized by 24.5 percent of financial professionals. In the write-in response area, some respondents indicated either that they do not hedge or that their business was naturally hedged.

Given the concern made obvious in the study regarding market risk, it is not surprising that treasurers identified market volatility their greatest worry in the coming two years, followed by Eurozone defaults, counterparty risk, commodity prices, and the Dodd-Frank Act.

Looking back across the four-part series, I’ll summarize the Risk Management study by stating accurate risk measurement enables effective risk management. Companies are increasingly aware of the need to measure risk and monitor areas of exposure and are taking steps to ensure the security and integrity of risk reporting tools. Going forward, technology issues may surface. The use of spreadsheets in risk management actually exposes a company to operational risk, from simple keystroke errors to accidental circular references that can invalidate an entire workbook, spreadsheet risk is practically unavoidable.

Technology issues related to implementing manual processes without the benefit of a real-time view may also surface. Having a real-time view enables better liquidity management. Without real-time access to accounts and view of markets, companies are lacking a key element to risk management.

With the growing acceptance of cloud-based TMS (treasury management system) technology, more companies are choosing to reduce their technical involvement in operating a TMS by essentially outsourcing the infrastructure requirements. This enables quicker upgrades and updates if and when regulatory changes occur.

The key for corporate treasurers is to understand the importance of identifying and managing risk and the widespread effects mismanagement can have on the company. Investments in technology are an ongoing concern and should be carried out thoroughly and effectively.

[* SunGard AvantGard recently conducted a study of 222 treasury professionals in the second quarter of 2012 to better understand how corporations are addressing various aspects of financial risk. The study included respondents from around the world spanning a broad range of industry and revenue classifications, with over 62 percent of respondents from companies with more than $1 billion in revenue. ]

What are your future challenges in financial risk management?  I’d like to hear from you.

vp, treasury solutions, AvantGard, SunGard's corporate liquidity business

FINANCIAL RISK MANAGEMENT IN TREASURY: PART III

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Risk Measurement Methods…

In Part I of my Financial Risk Management in Treasury blog series I discussed mitigating, identifying and defining financial risk. In Part II, I described various types of risk. In Part III, I will discuss financial risk measurement methods.

A majority of respondents in a recent SunGard AvantGard study* utilize mark-to-market revaluation as the primary risk measurement to support decision-making. This practice of valuing an investment at its current market value was encouraged by the Sarbanes-Oxley Act, which implemented stricter accounting standards in 2002. However, as the validity of mark-to-market has more recently been called into question, firms may be moving towards additional measures to avoid future regulatory complications.

A sensitivity analysis, used by 44.1 percent of respondents, views the potential effects of a deviation in any variable, such as an increase in tax or interest rates. Other measures utilized by respondents include Value at Risk (28.3 percent), Cash Flow at Risk (27.6 percent), yield curve shift (23 percent), and duration or modified duration (17.8 percent).

The VaR method was the preferred measure of market risk under Basel II, although this method has come under scrutiny lately due to its inherent weakness of potentially underestimating the risk of extreme market events. Of the treasury professionals using the VaR method, 27.4 percent use the historical method of calculation which utilizes data to show the probability of a best and worst case scenario occurring based on past occurrences. Twenty percent use the variance/ covariance method, which assume normal distributions of stock returns, while 17.4 percent use Monte Carlo simulation a methodology for developing models for future returns and running hypothetical trials. A number of respondents (44.7 percent) chose “None of the Above,” indicating that they may use a combination of VaR methods or that they are instead using other methods such as those mentioned above, including mark-to-market revaluation or sensitivity analysis.

Once a method of risk measurement is established, a monitoring structure must be incorporated to ensure the selected risk measurement methodology is compliant with policy and regulation. In looking at the methods used by financial professionals to manage risk, it is apparent that technology used for monitoring may be an area for improvement. Spreadsheets are used to perform short-term cash forecasting by 65.2 percent of respondents, while 45.3 percent use spreadsheets to monitor counterparty/trading limits prior to executing a derivatives trade. Treasury Management Systems (TMS), which help increase efficiency and layers of control, are also used by a significant portion of treasury professionals. Almost 24 percent use a TMS in cash management and forecasting, while 34.2 percent use a TMS to monitor counterparty/trading limits; Enterprise Resource Planning (ERP) systems are less widely used for these purposes.

The prevalence of manual data entry for monitoring, in combination with the previously mentioned tendency to view positions in retrospect rather than real time (refer to part 1 of this blog series), give some indication of areas where treasury departments may be facing technological challenges that could impede their ability to monitor positions for potential exposure. The use of spreadsheets for risk measurement and monitoring, while widely prevalent, introduce an element of operational risk into the system and open the door to user error. Corporations using a TMS will not only reduce operational risk, but also increase accuracy and efficiency by managing risk across the organization rather than on a piecemeal basis.

[* SunGard AvantGard recently conducted a study of 222 treasury professionals in the second quarter of 2012 to better understand how corporations are addressing various aspects of financial risk. The study included respondents from around the world spanning a broad range of industry and revenue classifications, with over 62 percent of respondents from companies with more than $1 billion in revenue. ]

Stay tuned for Part IV of my Financial Risk Management in Treasury blog series in which I will discuss the effectiveness of risk management strategies and the challenges that lay ahead for financial professionals.

What risk management methods do you use? I would like to hear from you.

vp, treasury solutions, AvantGard, SunGard's corporate liquidity business

FINANCIAL RISK MANAGEMENT IN TREASURY

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Part II: Types of Financial Risk

In Part I of my Financial Risk Management in Treasury blog series I discussed mitigating, identifying and defining financial risk.  In Part II, I will describe various types of risk.

Market risk

Given the tumultuous markets of the past few years, it is not surprising that financial professionals in a recent SunGard study* identified market risk as the most difficult area of risk to quantify. A possible contributing factor is that most respondents view their positions retrospectively rather than in real time. Sixty percent stated that they viewed their positions retrospectively, while 34.7 percent of respondents monitor market positions in real time and 5.3 percent are unable to monitor positions.

When estimating the effect of major market events, 57.9 percent of respondents view the effect on their entire portfolio, while 14.7 percent focus on individual derivatives. Over a quarter of respondents – 27.4 percent – stated that they cannot estimate the effect of major market events on their companies’ portfolios.

The inability to monitor markets and portfolios in real time could inhibit the ability to measure the effects of market risk and potentially undermine the ability to identify future exposure.

Counterparty risk

Counterparty risk was identified as the second most difficult measurement. A significant majority of respondents (65.4 percent) utilize credit ratings as the main criteria to measure the viability of a potential business partner. The next most utilized measurement is capital structure, with 12.1 percent of respondents using measurements like debt-to-equity ratio. Credit default swaps (CDS) spreads, which are a way of looking at the price of insurance against nonpayment, are used as a measurement by 10.4 percent of respondents. Other responses included country or region risk (six percent), industry risk (3.8 percent) and the Bank Stress Test score (2.2 percent). About ten percent stated that they use a combination of methods in determining counterparty risk.

Foreign exchange and interest rates

FX risk and interest rate risk was identified as the simplest form of risk to measure; however, I suspect that most survey participants are simply more accustom to monitoring these two risks.  Both FX and interest rate risk have been actively managed by corporate treasuries for years, while other forms of risk, specifically those previously stated above (market risk and counterparty risk) have more recently been added to a corporate treasury’s critical risk management assessment criteria.

[* SunGard AvantGard recently conducted a study of 222 treasury professionals in the second quarter of 2012 to better understand how corporations are addressing various aspects of financial risk. The study included respondents from around the world spanning a broad range of industry and revenue classifications, with over 62 percent of respondents from companies with more than $1 billion in revenue. ]

Stay tuned for Part III of my Financial Risk Management in Treasury blog series in which I will discuss risk measurement methods  and the difficulty of measuring and monitoring risk.

What type of financial risk is most challenging for you to quantify? I would like to hear from you.

vp, treasury solutions, AvantGard, SunGard's corporate liquidity business

FINANCIAL RISK MANAGEMENT IN TREASURY

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Part I: Mitigating, Identifying and Defining
Financial Risk

It is not a secret that financial risk management has become a priority in recent years. Tumultuous economic conditions have created new challenges in treasury and the headlines often feature the fallout of failed financial risk policies. Having a strategy in place to deal with risk is of utmost importance to today’s treasury professionals, and companies are re-evaluating their framework for measuring and monitoring financial risk.

SunGard AvantGard recently conducted a study of 222 treasury professionals in the second quarter of 2012 to better understand how corporations are addressing various aspects of financial risk. The study included respondents from around the world spanning a broad range of industry and revenue classifications, with over 62 percent of respondents from companies with more than $1 billion in revenue.

Mitigating financial risk: Is there an effective framework in place?

The first step in managing risk is to identify areas that expose the company to potential risk. Once a company has a handle on the scope of exposure, it can begin to create a risk management framework.

Of the companies surveyed, 86.9 percent said that they have an established framework in place for mitigating financial risk. Furthermore, 60.4 percent of respondents felt their organizations were above average at identifying financial risk exposure, identifying their companies as somewhat to very effective.

Identifying and Defining Risk

Without a solid grasp on areas of risk exposure, it is challenging for companies to design effective risk reduction strategies. Uncertainty surrounding risk exposure makes it difficult for corporate treasurers to make informed decisions and reduce potential losses, making identifying and measuring risk crucial to a company’s survival.

The SunGard AvantGard study identified seven types of risk: commodity, counterparty, credit, currency/FX, interest rate, liquidity, and market risk. Respondents identified market risk as the most difficult to measure, followed by counterparty and commodity risk. Interest rate risk was identified as the easiest to quantify.

Stay tuned for Part II of my Financial Risk Management in Treasury blog series in which I will discuss various types of risk and how our market study participants responded about their actions around these types of risks.

Are you able to mitigate, identify and define your financial risk management in treasury? I would like to hear from you.

 

product director, SunGard’s corporate liquidity business

SEPA Uptake in Belgium: More than coincidence?

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It was nice to read some positive news related to  SEPA in the article, Why Belgium is a SEPA hotspot.  Belgium is performing well in its migration efforts to SEPA payment instruments.  The market share of SEPA Credit Transfers reached 58% in July 2012.  This is higher than in most SEPA countries. And according to the European Central Bank the adoption of SEPA Direct Debits stands at 13% in that same month – again much higher than in other Eurozone countries where the average SEPA Direct Debit market share is about 0.50%.

As the article underscores, the relative success of SEPA migration in Belgium can be attributed to two main things: government adoption of SEPA payment instruments (both as a payer and payee) and widespread, targeted communication campaigns to drive awareness.

Being a first row witness living in Belgium, I would like to add two observations. First, the Belgian banks have a long history of cooperation when it comes to payment standardisation, both in retail and corporate banking. In corporate banking, Belgian banks worked together on standardisation of payment files for domestic and international credit transfers (CIRI), direct debit transactions (DOM 80), and account statements (CODA). These standards have been around for decades and are used by thousands of Belgian companies. Belgian banks have also invested in a standardised e-banking channel via Isabel. This channel allows companies to access payment services and transaction reporting services of Belgian banks via one standardised channel rather than bank specific channels.

As a result, Belgian payment users and service providers have been accustomed to high levels of standardisation and automation resulting in an efficient payment system with low transaction fees. Payment users are not willing to pay more for SEPA instruments compared to domestic instruments, forcing banks and service providers to be just as efficient and automated.  This in turn, has forced banks to be well prepared when it comes to migration to SEPA.

Secondly, Belgium is one of the most open economies in the world. Because of the small domestic market, Belgian companies are forced to invest in products and services that can be exported to other markets, in particular the European market.  This creates an open mind when it comes to adopting European ‘requirements’ such as the SEPA payment instruments.

Related to this, Belgium has also been at the forefront of treasury and cash management centralisation.  In the nineties, it became possible for multi-national companies to setup ‘coordination centres’ which are tax friendly vehicles to centralise cash management on a European or even global scale in a shared services environment.  Hundreds of multi-nationals came to Belgium to establish such centres, thereby creating demand for international cash management and payment services (i.e., cash pooling, payments on behalf, in-house banking, etc.). This created additional demand for providers of treasury and payments technology.  As many of the coordination centres were created to provide shared services to European entities of the group, it created a ‘European’   mind-set for banks and other service providers to meet pan-European requirements.  The SEPA initiative nicely fits into this mind-set and could explain the high adoption of SEPA payments in Belgium in the enterprise segment.

Belgium is on track to meet the 2014 SEPA deadline.  That is good news. But, there is undoubtedly still a lot of work to be done in Belgium as well as other European countries.