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Cash Pooling: What Treasury Teams at Multinationals Need to Know Now

An update of a story—one of NeuGroup’s most-read articles—about physical and notional cash pooling.

By Susan A. Hillman, Partner, Treasury Alliance Group LLC

Eight months into the global pandemic, liquidity and cash remain top-of-mind for many multinational corporations coping with uncertainty over the shape and timing of economic recovery. That makes this an opportune time to reexamine a critical liquidity management tool that has been around for decades but has always required careful evaluation before implementation: cash pooling.

An update of a story—one of NeuGroup’s most-read articles—about physical and notional cash pooling.

By Susan A. Hillman, Partner, Treasury Alliance Group LLC

Eight months into the global pandemic, liquidity and cash remain top-of-mind for many multinational corporations coping with uncertainty over the shape and timing of economic recovery. That makes this an opportune time to reexamine a critical liquidity management tool that has been around for decades but has always required careful evaluation before implementation: cash pooling.

  • Further due diligence is in order now in given tax and regulatory changes in the past few years that may bring more scrutiny of the objectives of a company’s cash pool structure and affect the ability of banks to offer cash pooling services.

Cash pooling defined. Cash pooling is a short-term cash management tool whose objective is to eliminate idle cash and reduce overdrafts among subsidiary operations that have varying daily cash positions. There are two approaches: physical and notional.

Physical pooling allows funds in separate subaccounts—at the same bank—to be automatically swept to and from a header account. The participating entities’ bank (sub)accounts are either in surplus or deficit position on an end-of-day basis. The physical concentration to the designated header account effectively zero balances the subaccounts. Physical pooling can be used across multiple legal entities, located in the same or different countries—but on a currency by currency basis.

  • Movements between accounts are categorized as intercompany loans to and from the header entity and the participating subsidiaries. Specific loan documentation related to the pool structure is prepared in advance. The holding entity should be designated as an agent for the group which allows the interest paid and earned to be treated as bank interest and is not subject to withholding tax.
  • The sweeping entries are documented daily through the bank transactions and arm’s length interest is paid or charged either monthly or quarterly. Physical cash pooling is a transparent and efficient liquidity management tool. The documentation and bank transaction detail leaves a sufficient audit trail that is appreciated by corporate tax and would satisfy even a conservative interpretation in a tax audit.

Notional pooling achieves a similar result but is accomplished by creating a shadow or notional position resulting from an aggregate of all the accounts, which can be held in multiple currencies. Interest is paid or charged on the consolidated position. There is no actual movement or commingling of funds.

  • The bank (or system) managing the notional pool provides an interest statement reflecting the net offset that is similar to what would have been achieved with physical pooling. As there is no physical movement of money, intercompany loans are not required to account for the offset.
  • Notional pooling across multiple currencies requires that these currencies are brought to a common basis (usually EUR or USD) before the pooling and interest offset can take place. In essence, a short-dated swap is executed by the pooling bank. This makes the process more problematic and not as cost effective, as treasury has no control over the rates or the timing of the swaps.
  • The multicurrency appeal of notional pooling is somewhat negated due to the complexity arising from the cross- jurisdictional nature of the arrangements and the need to accommodate multiple regulatory regimes. If accounts are maintained across several banks in different countries, there are complications with cutoff times to say nothing of extra transaction costs and bank fees. Due to the opaque nature of the arrangement, it can trigger tax scrutiny.

Tax reform.  US tax reform in 2017 meant multinationals had less tax inducement to have profits booked outside the US in a lower tax jurisdiction—a significant disincentive to tax inversion through an offshore location of regional headquarters. Initially, treasurers wondered if tax reform would affect current or planned cash pooling structures.

  • The short answer is no, in part because the US Treasury said the new law would not impact short-term arrangements such as physical and notional pooling.
  • Cash pooling is an arrangement to facilitate the management of daily working capital fluctuations between related subsidiaries—it is not used to keep large cash profits offshore.
  • The entity holding the pool header account is usually an offshore company and this continues to be advisable from both a tax and practical perspective.
    • Currency accounts are not used in the US, there are reserve requirements, overdrafts aren’t permitted and interest can only be earned through sweeps—not on current accounts.
    • From a time-zone perspective, the subaccounts will be held in other countries, so an end of day concentration is not logistically efficient.
    • A US company is not allowed to be a borrower in a cash pooling arrangement.
    • Europe remains the ideal geographic location for a pool structure due to access to financial and currency markets. Singapore is often used as an Asian center; Hong Kong’s attractiveness is declining due to uncertainty and Chinese political repression.

Regulatory scrutiny. Initiatives by the OECD (Organization for Economic Co-operation and Development) and BCBS (Basel Committee on Banking Supervision) within the past few years may impact cash pooling. That said, the actual adoption of these pronouncements is undertaken separately by participating countries and their central banks or regulators.

  • The OECD’s BEPS (base erosion and profit shifting) initiative addresses tax treaties, transfer pricing and any perceived financial sleight of hand. For treasurers, it means that now is not the time to push the envelope with complicated treasury structures that involve intercompany transactions—particularly with transfer pricing which may come under scrutiny.
    • Does this mean cash pooling is threatened? Not really, because it a well-established short-term cash management tool. However, it is important that treasury has good documentation in place, particularly related to the intercompany arrangements created by cash pooling.
  • BCBS’s Basel regulations impact banking services and costs. Basel III (2017) addresses the liquidity ratios banks need to meet, so banks are scrutinizing how business is allocated between transaction services and credit.
    • Basel IV (2023) will require banks to meet even higher maximum leverage ratios—particularly larger global banks. There will also be more detailed disclosure of reserves and other financial statistics required.
    • The Basel conditions will impact certain services that were previously standard and transaction costs will likely increase—this may affect both the availability and costs of cash pooling services, especially for notional pools.

Takeaways. The benefit of cash pooling arises from allowing separate subsidiaries to use internal corporate cash instead of bank borrowing for day-to-day working capital. A few caveats have always been important, but require closer adherence given tax and regulatory updates.

  • Pooling is not an arrangement to aggregate excess offshore cash in an attempt to earn a higher rate of return as interest rates are at zero or negative in Europe—and this also may draw scrutiny from regulators.
  • Banks must consider liquidity ratio requirements, so concentrating transactional business with the pooling bank is a good idea. Keep in mind that there are only a handful of global banks that offer cash pooling.
  • Clear intercompany loan documentation is essential and rates applied must be arm’s length.
  • Excess cash should be repatriated—the 2017 tax law makes this more palatable. So it’s important that aggregate pooled balances are not excessively high.
  • Long-term deficit cash in offshore subsidiaries should be handled through separate intercompany loans or other funding—not with cash pooling.
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Digital Signatures Deliver Relief and a Few Frustrations Amid Pandemic

Corporates report success using DocuSign with many banks, but Latin America presents challenges.

“Has anyone successfully used DocuSign with banks?” one NeuGroup member asked at a recent virtual meeting. “Yes” was the resounding answer from peers—more evidence that the pandemic has accelerated automation and digitization in finance. And one goal for many treasury teams is to make “wet” signatures a thing of the past.

Corporates report success using DocuSign with many banks, but Latin America presents challenges.

“Has anyone successfully used DocuSign with banks?” one NeuGroup member asked at a recent virtual meeting. “Yes” was the resounding answer from peers—more evidence that the pandemic has accelerated automation and digitization in finance. And one goal for many treasury teams is to make “wet” signatures a thing of the past.

  • The member who posed the question wants to use DocuSign’s electronic signature solution internally and externally—for intercompany loans, signatory changes and to open, close or change bank accounts.
  • One pain point that several members brought up: difficulties using DocuSign in Latin America. See the table below.
  • The takeaway is that corporates should keep applying pressure to financial institutions and regulators to allow broad use of digital signatures across the globe.

The good news. Members reported success in using DocuSign with banks including Bank of America, JPMorgan Chase, Citi, Wells Fargo and Societe Generale.

  • “We have used it in lots of places,” said one member.
  • “The banks will do it if they want your business,” another said, recommending that others push institutions to accept digital signatures. “Unless they can produce a regulatory reason, use DocuSign.”

The problem. Regulatory issues and how banks interpret different rules and laws in dozens of countries are one reason using digital signatures can prove challenging for corporates.

  • Many companies at the meeting use Citi to bank in Latin America and most of them reported having difficulties using DocuSign in the region.
  • “They’re requiring originals for everything,” one member said.
  • “We’re hearing it’s more the regulatory environment,” said another, adding that it may also may reflect a more conservative approach by Citi.
  • Another said, “My assumption is that it is banks’ interpretation of country-specific regulatory rules that drive the compliance/non-compliance with digital signatures. But I don’t have clarity from the banks on why they will or will not accept DocuSign.” This member’s company also uses a stylus to sign documents on an iPad.

Citi and DocuSign.  Driss Temsamani, Citi’s head of digital channels and data for Latin America, told NeuGroup Insights that DocuSign is embedded in the CitiDirect BE Digital Onboarding platform, adding that onboarding is the key priority in the bank’s digital transformation strategy. In Latin America, the platform was introduced in Brazil in 2019.

  • The platform is now in use in 12 Latin American countries and Citi clients can use digital signatures in all but four of them. The exceptions include Mexico and Uruguay, where regulatory approval is pending.
  • El Salvador and Panama do not have laws covering digital signatures and the DocuSign feature on Citi’s platform is disabled in those countries.
  • Asked how he would respond to corporates expressing frustration with using e-signatures in Latin America, Mr. Temsamani said he would need each client to tell him more about its specific issue so he could better understand and address their feedback. “Whenever a client tells me something, it’s always valid and a top priority,” he added.

Editor’s Note: The table below was provided by a NeuGroup member company and is the treasury team’s documentation of its experience with various banks.

The table is not based on any information provided to NeuGroup by the banks listed and does not claim to represent the banks’ policies or the experience of any other company.

“Digital Signature” refers to the member company signing a document using a stylus on a tablet; DocuSign is its preferred method.

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A Homegrown ESG Dashboard in Search of Better Data

A tech company builds its own tool to get a holistic view of ESG ratings but bemoans social data quality.

Many companies in the NeuGroup Network are devoting significant resources to better address environmental, social and governmental (ESG) issues that are increasingly critical to how investors and other stakeholders view corporates.

  • But not many treasury teams have access to an ESG dashboard, something one member who works at a large technology company described to peers at a recent meeting of treasury investment managers

A tech company builds its own tool to get a holistic view of ESG ratings but bemoans social data quality.

Many companies in the NeuGroup Network are devoting significant resources to better address environmental, social and governmental (ESG) issues that are increasingly critical to how investors and other stakeholders view corporates.

  • But not many treasury teams have access to an ESG dashboard, something one member who works at a large technology company described to peers at a recent meeting of treasury investment managers.
  • The company built the dashboard itself, thanks in part to “people good on Python,” the member said. “We are lucky.”
  • The dashboard offers a “holistic” view of the ESG ratings of all the company’s investments—those managed internally as well as assets managed in separate accounts.
  • The member said one goal is to make sense of managers who “all have different ways of measuring ESG.” The company wants investments that are consistent with its goals of reducing carbon emissions and promoting more representation of women and minorities, among others aims.
  • The dashboard uses ESG ratings data from MSCI and the company plans to add other sources as it implements targets for its ESG investments.

Data deficit. The problem, the member said, “is that there is not that much data out there,” especially regarding social metrics. The only information some companies provide about women is how many of them are on the board of directors, she added.

  • An ESG asset manager for Morgan Stanley, sponsor of the meeting, agreed that compared to data on environmental records, there is “a massive gap on the social side.” He mentioned difficulty getting information on how companies ensure the safety of employees.
  • The manager said investors—whether or not they have a dashboard—need to take ESG scores with “a pinch of salt.” His team tries to re-rate companies and look at them through “our own lens” to make the ratings “more relevant.”
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How Corporates Are Measuring Counterparty Risk as Cash Builds

Companies reviewing limits amid Covid have varied approaches to calculating risk thresholds.

The abundance of cash corporates have collected on their balance sheets to deal with pandemic-related volatility has prompted some to review their counterparty risk limits.

Participants at a recent NeuGroup meeting of large-cap companies described a variety of approaches to the issue, which should remain especially relevant for treasury teams reducing the size of bank groups, a trend discussed in recent meetings.

Companies reviewing limits amid Covid have varied approaches to calculating risk thresholds.

The abundance of cash corporates have collected on their balance sheets to deal with pandemic-related volatility has prompted some to review their counterparty risk limits.

Participants at a recent NeuGroup meeting of large-cap companies described a variety of approaches to the issue, which should remain especially relevant for treasury teams reducing the size of bank groups, a trend discussed in recent meetings. 

  • A member explained that higher deposit rates at one bank prompted his team to consider whether to exceed the $100 million ceiling in its policy. It turned out that only the CFO had to be alerted; no approval was needed from the board or senior management.
  • The company was entering longer-term exposures, including derivative transactions, in which relatively few banks were experts and offered reasonable fees. That resulted in a concentration of business that could hit exposure ceilings. 
    • “The more of this we do, we’re faced with the issue of which banks do we execute with and how much with each bank,” the treasurer said.  

Notional vs. marked to market. The session leader said that his team updates the marked-to-market derivatives exposures monthly but has relied on notional limits. The company’s exposures have traditionally been seven days or less, but the longer-term hedges may require a more dynamic approach.

  • A peer said his company relies on mark-to-market limits and stress tests them using a third-party service offered by Reval. Initial trades shouldn’t exceed the limits, and ratings downgrades and market-moving events such as Covid halt additional trades unless the CFO approves them. 
  • The company separates derivatives from deposits because the latter don’t have a stress scenario. The derivative limit is much smaller.
  • Another member said his company also includes commodity trades, adjusts all exposures according to their remaining lifespans, then aggregates and measures them daily. His team also tracks ratings and credit default swap (CDS) spreads to capture any real-time market moves, such as news about fraud at a bank. 

Scrutinizing the banks. The member added that a vendor performing his company’s customer-credit analysis also provides an annual analysis of the net worth of each relationship bank, and along with a bank’s credit rating his team will assign a limit to it. 

  • He added that rather than a $500 million or other arbitrary limit, “It’s actually based on the balance sheet of each bank.”
  • His team has sought to automate that process and eliminate much of the “check-the-box” analysis based on financial statements that often can be stale, adding, “We’ve found you can spend a lot of time on things that 99% of the time add little value.”

Common ground. Two other members said their firms set notional limits, separating deposits from derivatives. One noted entering into a long-term interest-rate swap. “This discussion is really timely,” she said, “As I’ve been talking to my derivatives team about how we can better manage those exposures.”

  • The other member uses notional thresholds “only because it’s easier” but acknowledged that marking positions to market provides the “real exposure.” His firm has increased its investment and derivative thresholds to accommodate more cash held at banks. 
  • In terms of investments, “We can go up to a certain amount, but it also has to be diversified within the portfolio,” the treasurer said. “So as the cash balance grows we have the capacity to go higher, but the mix of the portfolio is limited as well, both with the instrument and the counterparty.”
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Helping Treasury See Beneath the Payment Iceberg

TIS makes the case for treasury as gatekeeper of payment processes.

Nearly half the members at a recent meeting of NeuGroup’s Global Cash and Banking Group (GCBG) said treasury at their companies is responsible for treasury payments only—not for, say, accounts payable (AP) or payroll. Just 15% of those surveyed said treasury completely owns payment processes and tools.

  • Treasury Intelligence Solutions (TIS), sponsor of the meeting, made a case for making treasury the overall “gatekeeper” of all payment processes—with the help of its technology solution.
  • The crux of the case is that treasurers are responsible for the entire liquidity picture of an organization and can’t afford to see only the tip of the iceberg. “You can only manage what you see,” the TIS presentation said.

TIS makes the case for treasury as gatekeeper of payment processes.

Nearly half the members at a recent meeting of NeuGroup’s Global Cash and Banking Group (GCBG) said treasury at their companies is responsible for treasury payments only—not for, say, accounts payable (AP) or payroll. Just 15% of those surveyed said treasury completely owns payment processes and tools.

  • Treasury Intelligence Solutions (TIS), sponsor of the meeting, made a case for making treasury the overall “gatekeeper” of all payment processes—with the help of its technology solution.
  • The crux of the case is that treasurers are responsible for the entire liquidity picture of an organization and can’t afford to see only the tip of the iceberg. “You can only manage what you see,” the TIS presentation said. 

Map your payment processes. This first step will reveal the number of channels to make payments, expose risks and allow for a more holistic management approach. 

  • Rolling out a payment system for various finance partners to use creates a business opportunity to collaborate across the organization, help colleagues reduce risk and increase transparency to key drivers of a fluctuating cash position. 
  • Accumulating data is the goal of inserting treasury in payment processes; it benefits treasury directly and, by yielding more accurate cash positions, can be of value for the C-Suite as well. 

Don’t get laughed out of the room. One member challenged the concept of treasury taking control of what are non-treasury payments, saying, “If I go to the treasurer and ask for those AP payments, I’ll get laughed out of the room.” 

  • TIS said the point is not that treasury should be doing the work, it’s that treasury should roll out and oversee a system that others work in for standardization of payment processes and reduction of bank portal access across the organization.
    • A presenter from TIS said, “Let them do the work, but ask them to run a standardized process” that funnels through one system.
  • Another member agreed with TIS’s logic because “if something goes wrong [with a payment/bank access], it’s treasury” that fixes the problem and needs to be in the know. 
    • If treasury is truly the gatekeeper to the banks, treasury should have authority to govern related processes. “The more you see the more you can control,” one TIS presenter said.

Payment fraud detection and the help of AI. Using machine learning and artificial intelligence to detect fraud is a hot topic in the treasury world now.

  • Whether treasury centralizes payments or divides control with accounts payable, tax departments, etc., it is important to find ways—including technology solutions—of leveraging data lakes to identify unusual behavior across networks to tighten security and reduce organizational weak points and risks. 
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Talking Shop: For a Bank KYC Refresh, Do You Complete a Beneficial Ownership Form With SSN?

Member question: “One of our banks does a biannual KYC [know your customer] refresh and asks us to complete the US Client Certification of Beneficiary Ownership (a FinCEN form).

  • “Is this something that your company also provides, and do you include Social Security number info?”

Member question: “One of our banks does a biannual KYC [know your customer] refresh and asks us to complete the US Client Certification of Beneficiary Ownership (a FinCEN form).

  • “Is this something that your company also provides, and do you include Social Security number info?”

Peer answer 1: “You do not need to provide SSN for a non-US person and you need to provide only one such person.”

Peer answer 2: “We always put the parent US company as the UBO [ultimate beneficial owner], and we would use the TIN [taxpayer identification number] number as SSN. If they don’t accept the parent company, we would use a foreign board member, which would avoid the need to provide SSN. We never ask for anyone’s SSN or provide them.”

Peer answer 3: “Our company worked out a process with our major relationship banks whereby we created our own ‘non-standard’ FinCEN CDD [customer due diligence] form identifying our beneficial owners. This form does include their SSN #.

  • “We provide the form to our US relationship contact and ask them to keep it secure and distribute internally within the bank on an as-needed basis any time FinCEN CDD requests need to be satisfied. It has worked very well for us and has eliminated providing this information multiple times.”

Peer answer 4: “We typically refuse to provide SSNs and work with the counterparty to find an alternative.”

Peer answer 5: “We do share a SSN. I believe our bank requests an update every three years; maybe you can encourage this bank to do the same.”

Peer answer 6: “I have a request right now from a bank. They won’t let us use the parent company as the BO [beneficial owner]; they insist on an individual. I pushed back, asking them to show me the regulation that calls for the SSN or work with me on an alternative.”

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Pandemic Shows Corporates Which Credit Analysts See Beyond the Crisis

Volatility and uncertainty boost the importance of analysts with experience and perspective.

The pandemic has been a first-of-its-kind challenge for corporates, their banks and investors, each trying to make sense of extreme circumstances and forecast what it all might mean. Credit rating agencies face their own challenges and are taking different approaches to the crisis that, according to participants in a recent NeuGroup meeting for large-cap companies, reflect relative strengths and weaknesses.

  • One member whose company had plenty of liquidity to weather the storm opined that Moody’s Investors Service had a “more mature attitude, looking through the crisis and not panicking,” while S&P Global was “crunching numbers and not treating this as a unique short-term situation.”
  • That corresponded with what one portfolio manager said at a different NeuGroup meeting. He called Moody’s approach more measured, the agency more willing to give companies a “Covid mulligan.”

Volatility and uncertainty boost the importance of analysts with experience and perspective.

The pandemic has been a first-of-its-kind challenge for corporates, their banks and investors, each trying to make sense of extreme circumstances and forecast what it all might mean. Credit rating agencies face their own challenges and are taking different approaches to the crisis that, according to participants in a recent NeuGroup meeting for large-cap companies, reflect relative strengths and weaknesses.  

  • One member whose company had plenty of liquidity to weather the storm opined that Moody’s Investors Service had a “more mature attitude, looking through the crisis and not panicking,” while S&P Global was “crunching numbers and not treating this as a unique short-term situation.”
  • That corresponded with what one portfolio manager said at a different NeuGroup meeting. He called Moody’s approach more measured, the agency more willing to give companies a “Covid mulligan.”
  • Several peer group members said S&P tends to rotate lead analysts regularly, whereas senior analysts at Moody’s often had followed their companies for years, even decades.

People vs. methodologies. Much about credit analysis depends on the person behind it. A member’s company whose business includes two sectors struggled with an S&P analyst who only focused on one sector and maintained the same rating for a decade. When the analyst retired early, “It was a game changer for us,” the treasurer said.

  • The Moody’s rating, however, was still a couple of notches lower, so the treasury team engaged with the rating agency, which ultimately replaced its analyst with someone who brought new perspective. The treasurer made a concerted effort over the next 18 months to educate the analyst, and the rating climbed to investment grade.
  • The company was already investment grade with Fitch Ratings and S&P, so “by the time we got our second-notch movement, spreads tightened by a good 10 basis points, and with the last move we probably saw another 10,” he said.
  • “It’s the analyst that matters; not the agency,” a peer added. “You need to get someone you click with and has a good understanding of your industry.” 

Methodologies at crossroads.  Indeed, the analyst’s understanding has become ever more important, according to a former ratings analyst now at a major bank. He told members that the rating agencies have struggled since the onset of the pandemic because debt is now dirt cheap, shareholder buybacks have grown in importance and business profiles are being disrupted.

  • “A lot of the standard ratings methodologies simply don’t work that well anymore,” he said, adding that treasurers have likely seen ratings that differ significantly from what the methodology inputs would dictate.
  • “It’s very perception-based at the moment, and a lot of it relies on how experienced the analyst is. So there are wide variations because the methodologies don’t work,” he said.

Time to negotiate. Change can provide leverage to negotiate. One member cited success negotiating fees with Moody’s but not S&P, although the latter agency indicated it may be open to negotiating the ratings fee on large offerings—probably in the range of $5 billion—if not the annual fee.

  • “Moody’s was the other way around,” he added. “They’ve been willing to work with us on the annual fee.”
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Taking A Second Look: Corporates Reconsider Cryptocurrencies

Members share their curiosity about embracing cryptocurrency amid more regulation.

Efforts by central banks and finance ministers to block the widespread use of digital currencies until strong regulation is in place—along with the emergence of new types of currencies—are leading some corporates to reconsider earlier decisions to avoid accepting cryptocurrencies as payment.

  • That is among the takeaways from a discussion at a recent meeting of NeuGroup for Retail Treasury, sponsored by U.S. Bank, during which one member said her company, encouraged by the outlook for regulation, is actively considering options to accept digital currency in the future.

Members share their curiosity about embracing cryptocurrency amid more regulation.

Efforts by central banks and finance ministers to block the widespread use of digital currencies until strong regulation is in place—along with the emergence of new types of currencies—are leading some corporates to reconsider earlier decisions to avoid accepting cryptocurrencies as payment.

  • That is among the takeaways from a discussion at a recent meeting of NeuGroup for Retail Treasury, sponsored by U.S. Bank, during which one member said her company, encouraged by the outlook for regulation, is actively considering options to accept digital currency in the future.

In the news. On Tuesday, the Financial Stability Board issued recommendations for the regulation, supervision and oversight of global stablecoins—such as Libra, a stablecoin proposed by Facebook—which aim to counter the high volatility of crypto assets like Bitcoin by tying the stablecoin’s value to other assets, including sovereign currencies.

  • On the same day, financial leaders of the world’s seven biggest economies reiterated their opposition to unregulated digital payment services, stating that “no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements.”
  • “You’re going to see a lot more government-related actions, and a lot more focus on that area,” the NeuGroup member whose company is now interested cryptocurrency said late last month.
    • “I think governments are taking a more detailed look at what this really needs and how that could complement their financial systems.”
  • Another member agreed that recent developments—including news about Libra—have piqued their interest, saying, “It’s something we’re keeping our eye on, but haven’t pulled the trigger yet. It’s worth watching closely.”

Mixed reactions and experiences. To be sure, not all the treasurers at the meeting had the same level of interest, with some expressing a cautious curiosity and one saying the issue “isn’t even on our radar.”

  • One member said their company attempted to accept cryptocurrency payments nearly ten years ago. “Merchants did not necessarily want to adopt because it was so volatile,” she said. “One day it could be worth $10, another day it could be a thousand. You didn’t know what you were getting on any specific day. So we shut that down as an option.”
  • Another treasurer said an online-only competitor needed to implement a workaround to accept bitcoin. “They were accepting it through a wallet that would access intermediaries that the customer wanted to use, and they would flip it to US dollars that would actually transact on site,” he said. “They were also keeping a portion of it, which created some accounting issues on their balance sheet.”
  • The member whose company stopped accepting cryptocurrency agreed that there are complications having digital currency on a balance sheet. “Accounting regulations-wise, how you deal with a crypto asset or liability isn’t that straightforward,” she said. “Depending on who you are, where you are, you have to take your own rules and decide how you deal with it.”

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A Virgin Bond Deal, Community Investment and Frustration With Banks

Takeaways from the Tech20 High-Growth Treasurers’ Peer Group 2020 H2 meeting, sponsored by Bank of the West / BNP Paribas. 

By Joseph Neu

Wanted: A better bank user experience. The user interface (UI) and user experience (UX) is a key success driver for high-growth technology companies. So when their banks fail to deliver a quality UI/UX, growth tech treasurers get frustrated. Work from home, of course, has made what used to be digital nice-to-haves into must-haves.

Takeaways from the Tech20 High-Growth Treasurers’ Peer Group 2020 H2 meeting, sponsored by Bank of the West / BNP Paribas. 

By Joseph Neu

Wanted: A better bank user experience. The user interface (UI) and user experience (UX) is a key success driver for high-growth technology companies. So when their banks fail to deliver a quality UI/UX, growth tech treasurers get frustrated. Work from home, of course, has made what used to be digital nice-to-haves into must-haves.

  • Electronic bank account management (eBAM) promises are seen by members as mostly a lie—banks seem to roll out products in line with their own agenda rather than that of their clients. So a bank that asks, “What can I do for you?” and listens and delivers on what they learn can go far with treasurers in growth tech.

Community impact appeals to a growth-tech mindset. In a session on ESG, sustainability and impact investment solutions, members said that having a positive community impact is part of their growth-company DNA and what makes employees feel good about working for an employer.

  • That means treasury needs to make room for impact investment best practices in policy early on. And that includes guiding cash toward minority and community development financial institutions (CDFIs) active in geographies where these companies have a significant presence.

A pandemic is a good time for a virgin bond. It turns out, based on a member case study, that the Covid-19 crisis is an ideal time for a virgin bond deal. Zoom sessions make it efficient to get a credit rating and work with banks as well as outside counsel.

  • It still proved time-consuming and challenging for one small treasury team, but with the help of a project manager, they were able to bring it all together and capitalize on great debt capital market conditions.
  • Add a huge appetite for tech company debt and getting lucky with the issue window, and the bond transaction ended up being a very satisfying experience. You never forget your first debt deal.
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The Cup Runneth Over: Corporates Awash in Cash Mull Options

Treasurers discuss concerns about companies rushing to deploy cash too quickly.

When uncertainty abounded at the start of the pandemic, companies drew down revolvers, issued debt, cut capital expenditures (capex), halted share repurchases—whatever it took to conserve cash for the troubling times ahead.

  • A few months later, after massive government stimulus and a recovering economy, many are awash in cash and trying to figure out what to do with it—or not do with it.
  • At a recent NeuGroup meeting for large-cap companies, several treasurers said their companies’ cash balances are several times higher than normal, echoing a refrain being heard across the NeuGroup Network this fall.

Treasurers discuss concerns about companies rushing to deploy cash too quickly.

When uncertainty abounded at the start of the pandemic, companies drew down revolvers, issued debt, cut capital expenditures (capex), halted share repurchases—whatever it took to conserve cash for the troubling times ahead. 

  • A few months later, after massive government stimulus and a recovering economy, many are awash in cash and trying to figure out what to do with it—or not do with it.
  • At a recent NeuGroup meeting for large-cap companies, several treasurers said their companies’ cash balances are several times higher than normal, echoing a refrain being heard across the NeuGroup Network this fall.

Temptation and perspective. Among the fresh insights about excess cash voiced at the large-cap meeting: Treasury’s role in keeping corporates from making potentially rash short-term decisions designed to keep activists and Wall Street analysts happy. 

  •  “I worry about the temptation for senior management and the board to deploy cash as quickly as possible,” one treasurer said. 
  • As a result, treasury may need to add perspective when C-Suite leaders who previously considered an M&A deal out of reach reconsider as cash balances rise.
  • One member said his team seeks to keep management focused more on the company’s net debt level and less on reducing cash. “That’s what we actually talk about in earnings calls—the change in net debt year to date, and when we think about deleveraging,” he said.

Better safe than sorry. The size and timing of more federal aid to address the pandemic and anticipated rise in infections remains uncertain, prompting treasurers to recommend caution.

  • “Enough uncertainty remains that we can tell the story: We’ll continue to monitor cash and slowly drift [the level] back down,” a treasurer at a large manufacturer said.
    • “That’s absorbing a lot of time and thought around just what is that strategy, and how does it look over the next year or so.”

Step out on the yield curve? Terming out cash to pick up extra basis points is the approach one member’s team is contemplating. Other treasury teams are considering alternative asset classes (see this story). 

  • Some corporates, though, may want to reduce at least some cash, especially those with higher revenues expected during the holiday season.
  • That’s not so easy when capex has already been slashed, and the social justice movement poses political risks for companies rewarding investors before employees and their communities during a pandemic. 
  • “We’ve seen some companies turn on share repurchases with the caveat that they’re increasing wages,” one member said, adding his company is thinking through when to resume repurchases given that Covid looks far from over. 

Street pressure. Some Wall Street firms are pushing liability management to take advantage of historically low rates. 

  • But one treasurer said that after paying up to issue precautionary liquidity, some companies must now pay a premium to buy back the debt, making it better to hold on to the cash in case the pandemic worsens and the extra funds are needed. “We’re in wait and see mode,” the treasurer said.
  • Another member described a recent exercise in which his team reviewed peers’ capital structures and had to explain to the board why a competitor has lower weighted average coupons and maturities. 
  • “We had to remind the board that the company had to pay up for that, put cash upfront in order to refinance into a longer term,” he said.
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Hunting Yield: Investment Managers Weigh TIPS, Munis, Credit Risk

Treasury investment managers weigh options for finding returns in a low-rate environment.

Treasury investment managers looking to boost returns in the current low interest-rate environment discussed a range of options at a recent NeuGroup meeting sponsored by Morgan Stanley, including Treasury inflation-protected securities (TIPS) and municipal bonds.

  • “We’re looking for alternative investment ideas to get attractive yield,” one member said. Her company is looking to return to investing overseas cash in low volatility net asset value (LVNAV) money market funds, an asset class it exited in March.
  • Another investment manager said, “We are flooded with short-term cash, which is not great,” adding that her company is trying “to figure out how to deal with low rates.”

Treasury investment managers weigh options for finding returns in a low-rate environment.

Treasury investment managers looking to boost returns in the current low interest-rate environment discussed a range of options at a recent NeuGroup meeting sponsored by Morgan Stanley, including Treasury inflation-protected securities (TIPS) and municipal bonds. 

  • “We’re looking for alternative investment ideas to get attractive yield,” one member said. Her company is looking to return to investing overseas cash in low volatility net asset value (LVNAV) money market funds, an asset class it exited in March.
  • Another investment manager said, “We are flooded with short-term cash, which is not great,” adding that her company is trying “to figure out how to deal with low rates.”

Why not reach for yield? In a discussion about credit risk, one member asked why investors who believe in the idea of a “Fed put” would not reach for yield during “a carry trade environment” where it “feels like fundamental research matters less and less.”

  • Earlier, a Morgan Stanley portfolio manager said that it is “hard to think credit is wildly attractive here” given the contraction in spreads since March and that recovery “will mean tighter spreads than today.”
  • In response to the member’s question, he agreed with the idea of a Fed backstop and said he has a hard time seeing a scenario where “spreads blow back out.”
  • He said that if spreads widened from about 130 now to 145 to 150, “we would buy.” But he said that things may not go as the market expects and recommends investors be selective. 

Tri-party repos, anyone? One manager is using tri-party repos, where a clearing bank acts as an intermediary and alleviates the administrative burden between two parties engaging in a repo. She said her company “disregards collateral” and proceeds if her team is “comfortable with the bank risk.” 

  • The company is also investing in three-to-five year financial and nonfinancial corporate bonds.
  • It holds short-term government paper, including some Swiss and Japanese issues swapped back into dollars and yielding about 40 basis points.
  • The manager is considering buying muni bonds, in part because she believes the timing is likely better now for investors than issuers.

Mulling munis. Other members asked about munis and one who invests in them offered to discuss offline the approach the company takes. 

  • The member who owns munis believes that another round of fiscal stimulus could benefit the asset class.  
  • A Morgan Stanley portfolio manager said munis may make sense for some corporates, depending on their tax situation and what happens to corporate tax rates after the election. 
  • A municipal strategist at Morgan Stanley estimates states will lose $180 billion and local governments $90 billion in revenue through mid-2021 because of the pandemic and recession.
  • He said while there may be downgrades and different states will make different choices affecting credit ratings, “I don’t think default is the way to frame the discussion.”

TIPS debate. In response to one member who expressed interest in TIPS but has not figured out how they fit it to the company’s overall strategy, another member offered to put the first in touch with a “TIPS expert” who has done internal modelling with machine learning.

  • A Morgan Stanley manager, who said TIPS had performed poorly in March and April, warned that “TIPS aren’t Treasuries” and that they have a “huge liquidity premium.” He said TIPS have a high correlation to high-quality corporates and “the extra yield doesn’t look that attractive.”
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Talking Shop: How Well Does Quantum Manage Interest Rate Swap Accounting?

Member question: “For those who use Quantum as their TMS, do you also leverage Quantum for hedge accounting, and if you do, does Quantum (in your opinion) manage interest rate swap accounting well?

  • “We have been using Reval for a while, but just wanted to know if people have been able to leverage Quantum V6+ for hedge accounting, including interest rate swaps.”

Member question: “For those who use Quantum as their TMS, do you also leverage Quantum for hedge accounting, and if you do, does Quantum (in your opinion) manage interest rate swap accounting well?

  • “We have been using Reval for a while, but just wanted to know if people have been able to leverage Quantum V6+ for hedge accounting, including interest rate swaps.”

Peer answer 1: “When we put our interest rate forward starting swaps in place a few years back, Quantum did not have the accounting capabilities to handle what we needed so it was kept offline in Excel. That could be different now in 6.9, but we have not explored what is possible in the new version.”

Peer answer 2: “When we deployed Quantum, we were ‘sold’ the IRS functionality, but it never materialized. We had previously used Reval for IRS and FIS’s Sungard for our TMS. We hoped Quantum would bring it under one roof, but we had to stick with Reval for the IRS piece.

  • “We ultimately moved away from Reval and to Chatham. We are very pleased with Chatham and use them for FSSs, IRSs, and XCSs.”

NeuGroup Insights offered FIS Quantum the opportunity to comment. A spokeswoman for FIS declined.

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Taking the Right Steps on the Road to Robotic Process Automation

A risk manager warns that RPA should not be used a Band-Aid.

One NeuGroup member recently described to peers the benefits and challenges of using robotic process automation (RPA) and robotic desktop automation (RDA), a form of RPA that requires humans to trigger an action performed by a bot.

  • The member adopted automation to document trades his team previously input manually into its treasury management system (TMS), a time-consuming task that also introduces the possibility of human error.
  • The new process, using software from UiPath, has required hours of training, programming and documentation, but has led to faster, more reliable tracking of data, the member said.
  • His presentation showed the steps involved in the process of documenting a cash flow hedge in the TMS.

A risk manager warns that RPA should not be used a Band-aid.

One NeuGroup member recently described to peers the benefits and challenges of using robotic process automation (RPA) and robotic desktop automation (RDA), a form of RPA that requires humans to trigger an action performed by a bot.

  • The member adopted automation to document trades his team previously input manually into its treasury management system (TMS), a time-consuming task that also introduces the possibility of human error. 
  • The new process, using software from UiPath, has required hours of training, programming and documentation, but has led to faster, more reliable tracking of data, the member said.
  • His presentation showed the steps involved in the process of documenting a cash flow hedge in the TMS.

The next stage. The member explained some of his vision for RPA use: “Right now, that bot is on a desktop, the real benefit is pushing that to the server. The long-term ambition is the trades go into our TMS, they get picked up by the bot that creates all the trade deals, and then creates the validation reports.”

  • Moving to RPA on the server will free up more time for the team.

Not so fast. Like other NeuGroup sessions on RPA, this one included a healthy dose of warning about automating a flawed process. The presenting member advises companies considering RPA first look at how their own processes can be made more efficient.

  • “Come in with the basic principle that RPA/RDA shouldn’t be used as a Band-Aid,” he said.
  • “These systems shouldn’t be used to mend a broken process. You need to go back first and look at the process itself and see if the process can be fixed rather than creating this as a patch.”
  • Custom-made bots require extensive programming to create and training to use, so the member said the first step is to evaluate if the process that they automate is truly valuable. 

Documentation and understanding. The member stressed the importance of creating documentation alongside bots, so new employees can understand the actual process itself, an additional resource commitment.  

  • “There needs to be a standard approach on how these are put together,” he said. “It’s a relatively heavy lift in terms of documentation, and what will allow us to make changes like this to the underlying systems.” 
  • Another member who uses similar software has concerns about overreliance on bots. “When I transition out of my role and someone comes in, I can familiarize them to some degree, but they have to go out there and really understand what everything is created to do,” he said. 
    • “You’re really just pushing a couple of buttons rather than performing the work in-house—you lose some of the understanding of the process.” 

The resource commitment. Though some members have had positive experiences with automation, one warned that, depending on what you are automating, it might not be worth it.  

  • “Automation needs prioritization from a senior level and buy-in on the system resource side, as it takes up a lot of time to train the users who ultimately use the process,” he said. “The initial training is time-consuming, and the resource challenge for IT is massive.” 
  • Another member found that the annual cost of creating the system and paying for a server to implement full-process automation was equivalent to the salary of two full-time employees and couldn’t justify the trade-off. “It’s not going to help me two FTE’s worth. I could never make that pay off,” he said.

Inside job. Another member who implemented RPA uses internally developed tools rather than a platform like UiPath. “We’re also implementing a lot of automatic processes that comply with our audit procedures with very intentional human intervention,” he said. “We have tools built in-house through software engineers in treasury. When it comes to interfacing, we code it directly in-house.” 

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Why Some Bankers May Root for a Democratic Sweep

Founder’s takeaways from the Bank Treasurers’ Peer Group’s first fall meeting.
 
By Joseph Neu

Members of the BTPG have been meeting in the spring for 16 years running, and debuted their Fall Edition meeting this week, sponsored by Morgan Stanley. Here are a few takeaways I want to share.

Founder’s takeaways from the Bank Treasurers’ Peer Group’s first fall meeting.
 
By Joseph Neu

Members of the BTPG have been meeting in the spring for 16 years running, and debuted their Fall Edition meeting this week, sponsored by Morgan Stanley. Here are a few takeaways I want to share.
 
Banks have enough capital. The expectation is that US banks will pass the next two stress tests, even with with Covid-19 inspired stress scenarios, indicating everyone is well capitalized.

  • This will free up buybacks and dividends for those that halted them for political reasons. 

War for deposits is over.  The massive liquidity infusion by the Fed, stimulus and an unfriendly rate environment has ended the war for deposits that banks in the US were waging pre-Covid.

  • Instead, US banks are turning away deposits, especially by adjusting pricing and fee to discourage them.
  • Indeed, if you take a close look at ECR and other fees, you may already be paying your bank to hold your money, or effective negative pricing,

A Democratic sweep is NIM (net interest margin) friendly. The outlook for the banking sector will be much improved if the Democrats take the White House and the Senate in the upcoming election.

  • This would end the logjam on fiscal stimulus, making bank reserves for credit losses suddenly excessive.
    • With infrastructure spending likely as well, this will push up inflation expectations to the point where the long end of the curve may rise and become more NIM-friendly—all good news for banks.
  • The bad news is that the regulatory edicts that raise their cost of capital and liquidity will tick up, too, and banks are already losing their competitive edge to less-regulated funding platforms.
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Tonic for Zoom Fatigue: Shorter Meetings—and a Day Without Them

NeuGroup Members discussed their approaches to making WFH situations more palatable.

“Six hours on Zoom is like 10 hours in the office,” one treasurer of a mega-cap company said during a recent NeuGroup meeting (yes, a Zoom meeting), quantifying a feeling about the side effects of virtual meetings. Almost everyone who has been working from home for seven months knows what she means.

  • At the same meeting, another treasurer said he is encouraging his team “not to book 30-minute calls, to make them 25 minutes instead. If you can, put headphones in, do one-on-ones while walking.”

NeuGroup Members discussed their approaches to making WFH situations more palatable.

“Six hours on Zoom is like 10 hours in the office,” one treasurer of a mega-cap company said during a recent NeuGroup meeting (yes, a Zoom meeting), quantifying a feeling about the side effects of virtual meetings. Almost everyone who has been working from home for seven months knows what she means.

  • At the same meeting, another treasurer said he is encouraging his team “not to book 30-minute calls, to make them 25 minutes instead. If you can, put headphones in, do one-on-ones while walking.”

Shaving time. At another meeting, of FX risk managers, members compared notes on how their companies are trying to fight virtual meeting fatigue.

  • One member kicked off the conversation, saying, “One of the things I implemented is if I’m scheduling a meeting for longer than 30 minutes, I only schedule them for 45 to 50 minutes to give people time to get up between meetings.”
    • Many other members have similar policies. “We start meetings 5 or 10 minutes after the hour or half-hour to allow for breaks and parents to help their children log into class,” one member said.
    • Another responded that “some people are going to be late anyway, why fight it?”
    • “We also implemented 25- and 50-minute internal meetings,” a third member commented.

Meeting moratoriums. In addition to shorter meetings, one member told the group, “We also have no meeting Fridays. It has been nice.” Another said his company has a no meeting Wednesday rule.

  • No surprise, the idea of a day without meetings struck a chord with peers who don’t currently have them. One said, “The no meetings on Fridays must be so nice.” Another said she “will have to implement” the policy at her company.
  • But one member, speaking on a Thursday, had a warning: His company has a no-Friday meeting rule “but somehow I have seven meetings tomorrow.”
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Retailers Assess Capital Structure Amid Signs of Rebound

As the economy revives, companies pay down revolvers, resume buybacks and assess counterparty risk. 

At a recent NeuGroup meeting of treasurers at retailers, sponsored by U.S. Bank, members discussed stock repurchase programs, paying down revolvers and monitoring the impact of capital structure changes on leverage ratios and credit ratings.

  • Members discussed moving from preparing for worst case scenarios in April and May (by increasing liquidity, initiating new revolvers) to more recent moves made in anticipation of returning to more normal operations.

As the economy revives, companies pay down revolvers, resume buybacks and assess counterparty risk. 

At a recent NeuGroup meeting of treasurers at retailers, sponsored by U.S. Bank, members discussed stock repurchase programs, paying down revolvers and monitoring the impact of capital structure changes on leverage ratios and credit ratings.

  • Members discussed moving from preparing for worst case scenarios in April and May (by increasing liquidity, initiating new revolvers) to more recent moves made in anticipation of returning to more normal operations.

Stock repurchase programs. After almost every company suspended ongoing or planned stock buyback programs, some have started up again while others are contemplating not if, but when their plans will resume. 

  • One member’s company announced the resumption of a buyback program in September which had been suspended in March.
  • There was widespread acknowledgement that restarting buyback programs can send a signal to the market that requires consistency with messaging by investor relations and other stakeholders.

Repaying revolvers. Most companies responded to the pandemic by quickly drawing down revolvers to increase liquidity in the late spring and early summer.

  • One member asked the group, “How many of you have publicly stated leverage targets, and how much did it impact the strategies you selected to respond in this environment?”
  • The end of lockdowns and signs of recovery have prompted most companies to largely pay back these defensive draws as concerns have abated.

Counterparty policies. Some members need to adjust counterparty risk policies after bumping up against volume and proportion limits with some of the banks they were using to deploy the excess cash.

  • This has kicked off critical decisions about how to balance maintaining banking relationships while increasing the scrutiny of the credit risk exposure to their most important counterparties.
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Transforming Treasury: The Power of a Data Warehouse and BI Tool

How one tech company is making use of better centralized data to improve forecasting.

Better data makes for better forecasts, reporting and data analysis. At a recent NeuGroup meeting, one member of a large technology company’s treasury team described the results of a two-year project to create a global treasury data warehouse to raise its data game.

  • The company’s vision: a centralized data repository with BI reporting that integrates and organizes bank statement, market, ERP and forecasting data.
  • The benefits of warehouses: data can be more readily viewed, analyzed with business intelligence (BI) tools and fed into dashboards for on-demand reporting.
    • Once the data is in one place, machines, algos and artificial intelligence (AI) can learn from it.

How one tech company is making use of better centralized data to improve forecasting.

Better data makes for better forecasts, reporting and data analysis. At a recent NeuGroup meeting, one member of a large technology company’s treasury team described the results of a two-year project to create a global treasury data warehouse to raise its data game.

  • The company’s vision: a centralized data repository with BI reporting that integrates and organizes bank statement, market, ERP and forecasting data.
  • The benefits of warehouses: data can be more readily viewed, analyzed with business intelligence (BI) tools and fed into dashboards for on-demand reporting.
    • Once the data is in one place, machines, algos and artificial intelligence (AI) can learn from it.

Challenges. Treasury at the company uses data from more than 25 internal and external systems with over 100 datasets.

  • Multiple applications need access to common datasets.
  • Individual teams have unique data reporting needs that may require more robust functionality than available with the TMS or other systems. Not everyone has access to all datasets, making permissions a problem.
  • Forecasting requires significant custom configuration.

Solution. An illustration of the system’s basic architecture showed that most data flows through the company’s TMS into the data warehouse, with the exception of Bloomberg market data. The member said it was “better to start with this than do everything at once.” The data from the TMS includes:

  • Incoming trade requests
  • Trade data
  • Bank statement data
  • Core treasury data

Use cases for the BI tool. Toturn the data into actionable information, treasury makes use of an internally-developed BI reporting tool that supplements TMS reporting and can embed reports in web apps. The member described three use cases:

  • Cash forecasting takes bank data from US bank partners loaded into the warehouse and makes use of machine learning (ML), a process the member said took considerable time to develop. 
    • The dashboard shows the forecast by cash flow type and by various models.  
    • The company’s future plans include using ML forecasts internationally.
    • A lesson learned: you need three years of historical data for ML.
  • Counterparty exposure uses data from the TMS and Bloomberg market data and involves numerous calculations in order to set maximum exposure levels for each bank. The tool was built with the company’s fintech team. 
    • The limits can change based on the credit perspective and the size of the company’s cash level as well as changes in the bank’s tier 1 capital.. 
    • Treasury’s cash management team gets involved if the limits are exceeded and senior leaders receive the information as well.
  • FX settlements helped address challenges faced by the company’s middle office, which can now see if the cash management team has held up settlements looking at a dashboard comparing the amount of FX trades settling to the amount of debit matching cashflows found.

Lessons and plans. In addition to the data requirements for ML, the member said treasury needs to limit data in the warehouse because a lot is “not clean” and needs to be properly categorized. “We need to be careful of the systems we integrate and make sure the data is actually useful,” he said. 

  • That said, the company plans to integrate new datasets and use new BI tools going forward. Other lessons and plans:
  • Technical program managers or data engineers are needed for data integrations. Another member at the company said the engineers are more efficient at getting data on the site. 
  • Work with the information security team to build a timeline for security reviews.
  • The company plans to add training on the systems to improve the user experience. Thus far, use by treasury has all been self-taught, the member said. 
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Impact Investing: Supporting Underserved Communities with Customized Loans

RBC’s customized investments help corporates reach specific groups and areas.

Increased attention on persistent racial disparities in wealth, income and home ownership in minority communities is motivating many corporates to look for new ways to make a difference through investments and deposits.

  • At a recent Visual Interactive Session, one NeuGroup member described the benefits of impact investing using a tailored and targeted approach offered by RBC Access Capital, part of RBC Global Asset Management.
  • “With the RBC team, we were able to develop a program that uses the money we have allocated to fund loans made by community development financial institutions and other lenders in traditionally underserved areas in support of affordable housing,” the treasurer of the member company said.

RBC’s customized investments help corporates reach specific groups and areas.

Increased attention on persistent racial disparities in wealth, income and home ownership in minority communities is motivating many corporates to look for new ways to make a difference through investments and deposits.

  • At a recent Visual Interactive Session, one NeuGroup member described the benefits of impact investing using a tailored and targeted approach offered by RBC Access Capital, part of RBC Global Asset Management. 
  • “With the RBC team, we were able to develop a program that uses the money we have allocated to fund loans made by community development financial institutions and other lenders in traditionally underserved areas in support of affordable housing,” the treasurer of the member company said. 
  • RBC’s strategy—which involves mortgage-backed securities—allows the company to “support the communities in which our employees live and work, but do it in a way that gives us confidence to ensure that we’re going to have preservation of capital consistent with our needs,” the member said.

How it works. At the core of RBC’s offering are separately managed accounts (SMAs) and mutual funds that primarily invest in pools of loans in the form of mortgage-backed securities (MBS) or other government guaranteed securities.

  • Ronald Homer, RBC’s chief strategist of US impact investing, said the firm incentivizes originators to make loans in communities targeted and specified by the investors. Those loans are then bundled into securities.
  • Not only have we found that these securities perform as well as securities made of the same type of loans in broader communities,” Mr. Homer said, “In many instances they perform better than the generic securities because of the idiosyncratic nature of the performance of the borrowers.” 
  • The minimum investment for an SMA, which the NeuGroup member is using, is $25 million. Lesser amounts are invested in mutual funds that also allow investors to target specific communities and geographies as well as those the fund already supports.
  • RBC’s strategies support low- and moderate-income individuals and communities, but can also be targeted specifically to Black, Indigenous and people of color (BIPOC) communities.

Customization. RBC Access Capital can customize for criteria including businesses owned by women, minorities and veterans. And the securities can reflect a company’s investment criteria in terms of liquidity, duration and credit quality.

  • “The client chooses the risk benchmarks and parameters,” Mr Homer said. “And we find the securities to match up to that benchmark and perform well.” 
  • In the case of the NeuGroup member, RBC designed a strategy to maximize liquidity and minimize volatility. The focus of the SMA investments are affordable housing in the San Francisco Bay Area. The member’s investments also support small businesses.
  • Whatever the focus, Mr. Homer said that to affect change, a program must have scale and sustainability. That is achieved with home loans and MBS, he said, because of the access to a liquid secondary market.
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A Green Bond Deal With Environmental and Social Benefits

Founder’s takeaways from the Treasurers’ Group of Mega-Caps 2020 H2 meeting.

By Joseph Neu

A green bond that moves the needle on E&S. One member shared insight from his company’s recent green bond offering that included a pair of African-American-owned investment banking firms among the four lead underwriters.

Founder’s takeaways from the Treasurers’ Group of Mega-Caps 2020 H2 meeting.

By Joseph Neu

A green bond that moves the needle on E&S. One member shared insight from his company’s recent green bond offering that included a pair of African-American-owned investment banking firms among the four lead underwriters.  

  • Not only is this member company breaking new ground with its second green bond, leveraging the experience and reporting infrastructure established with the first, but it is paving the way for further diversity firm involvement in this important issuance segment by bringing in firms from day one and making them true partners in the deal.
  • His company also asked the two bulge-bracket lead underwriters to assign minority bankers to leading roles on their deal teams to further promote professional diversity on the part of its vendors.
  • Few have gone farther to meaningfully tick the E and S box at the same time—well done. The economics of the bond were also groundbreaking, suggesting that it does pay to do good. 

Contingency plans for an election year. With US Presidential elections less than 40 days out, members have been working on contingency plans, including those on the outlook for the dollar, US interest rates and especially those involving a retroactive corporate tax increase well as other measures impacting multinational tax planning.  

  • Liability management trades have picked up as a result, as has analysis of global liquidity management structures including in-house banks and where to locate them. A close and contested election could also trigger market events that treasury teams should be ready for.
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Dangling Carrots in Supply Chain Finance to Boost Sustainability

HSBC’s SCF incentives help a big retailer make progress on sustainability goals.

The pandemic has prompted companies to pay more attention to their supply chains, to support key suppliers and make them more resilient and sustainable.

  • A recent HSBC survey found that 70% of companies want to improve control over supply chains, half seek more transparency, and a third want to accelerate making them more environmentally sustainable, planning investments over the next 12 to 18 months to do so.
  • The assistant treasurer (AT) of a major retailer explained to peers at a recent NeuGroup virtual meeting how his company teamed up with HSBC to use the corporate’s existing supply chain finance (SCF) programs to motivate suppliers to meet sustainability goals.
  • He noted HSBC’s publicly announced targets to provide sustainable financing and power the bank using only renewable energy, saying, “We knew the bank had strong commitments around sustainability, so we wanted to see if they wanted to put some skin in the game around our suppliers.”

HSBC’s SCF incentives help a big retailer make progress on sustainability goals.

The pandemic has prompted companies to pay more attention to their supply chains, to support key suppliers and make them more resilient and sustainable.

  • A recent HSBC survey found that 70% of companies want to improve control over supply chains, half seek more transparency, and a third want to accelerate making them more environmentally sustainable, planning investments over the next 12 to 18 months to do so.
  • The assistant treasurer (AT) of a major retailer explained to peers at a recent NeuGroup virtual meeting how his company teamed up with HSBC to use the corporate’s existing supply chain finance (SCF) programs to motivate suppliers to meet sustainability goals.
  • He noted HSBC’s publicly announced targets to provide sustainable financing and power the bank using only renewable energy, saying, “We knew the bank had strong commitments around sustainability, so we wanted to see if they wanted to put some skin in the game around our suppliers.”

Dangling carrots. The retailer had also announced significant greenhouse gas reduction goals. Working with the bank, using the existing SCF programs, it created two tiers—green and greener—in which suppliers can receive discounted invoice financing.

  • Participants must “set smart goals for sustainability, and then agree to share them publicly, because we think that’s a really important step—not just making the commitment but telling the world about it,” the AT said.
  • Partnering with a firm leveraging big data across the entire supply chain to score the sustainability of different products, the company and HSBC created a mechanism to determine if suppliers’ have succeeded in meeting their goals.
  • “So depending on the supplier’s percentage improvement, it would qualify for the better or best financing rate,” the AT said.
  • The carrots are attractive: tiers provide discounts ranging from 20% to 30% from the base rate.
  • “So not just a rounding error,” said Tom Foley, head of consumer/retail coverage, HSBC, adding, “If the pricing tiers are big enough, these are really significant savings for the green and greener suppliers.”

Suppliers give thumbs up. Among the company’s hundreds of suppliers already onboarded on to the SCF program, about 10% qualified for discount pricing, Mr. Foley said, adding that the incentives have increased the number of suppliers in the program by 40%, with 20% qualifying for the discounts.

  • “This program has seen the fastest growth of all our programs globally,” the AT said.
  • As a buyer-based program, it is “KYC light” to join, requiring relatively little data. “It’s easier to handle, and easier and faster for suppliers to be onboarded into the program,” Mr. Foley said.
  • The company ultimately worked out the supplier tiers and retains the flexibility to manage its own supplier network—HSBC at arm’s length.

Challenges? The toughest issue, Mr. Foley said, was getting far-flung bank and treasury executives to agree to the tiering concept and its benefits. Once the parties signed off, it took fewer than four months to make the necessary changes to the existing program, and the KYC-light nature made it easy to bolt on new suppliers.

  • Building the program on the existing SCF rails required minimal technology development.
  • “The bank had to make an investment into the business, and once we convinced everyone it was the right thing to do, getting it up and running didn’t take as long as one might think,” Mr. Foley said, adding that the bank anticipates making up over the long term any upfront financial losses.
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Tough Love Is What You Want From a Career Sponsor

Takeaways from the latest Women in NeuGroup event, sponsored by Deutsche Bank.

Women—and men—who seek sponsorship to help them advance professionally should expect the relationship—if it’s a good one—to involve some tough love.

  • That insight was among the key takeaways from a Women in NeuGroup virtual meeting held this week.

Takeaways from the latest Women in NeuGroup event, sponsored by Deutsche Bank.

Women—and men—who seek sponsorship to help them advance professionally should expect the relationship—if it’s a good one—to involve some tough love.

  • That insight was among the key takeaways from a Women in NeuGroup virtual meeting held this week.

Sponsorship is not mentorship. Tough love is one way to distinguish sponsors from mentors—a difference addressed at the spring WiNG event as well.

  • While mentors may offer you a shoulder to cry on and help vet your ideas, sponsors won’t sugarcoat your weaknesses. They will tell you what you need to work on to get to that next level in your career. You want someone who will talk you up to others but challenge you and help you develop.
  • A sponsor is someone who wields power over decisions at your organization and will provide unyielding promotion on your behalf when you’re not in the room, helping pave the way for advancement.

Give to get. The most effective sponsor relationships are built on the idea that you’ve got to give to get (a central tenet of NeuGroup peer groups). In other words, you need to bring value to the table to receive what you want.

  • One speaker suggests asking yourself if there something you can do for the sponsor that matters to them? Do you have insights on anything, can they learn something new from you? Also:
  • You can’t just wait for a sponsor to find you, but you can’t just target anyone either. Be strategic and think about what you’re going to contribute to a relationship.
  • Be truthful with yourself when you need a sponsor versus a mentor. If a sponsor’s advocacy is going to present a “jetpack” for your career, make sure that you’re ready to seize all opportunities that result.

Timing is everything. One panelist observed that many executives who are no longer travelling have more time to work and breathe. That means more opportunity for you to talk to them. However, since you won’t be running into them in the cafeteria anytime soon, you have to be more deliberate about asking for their time.

  • Just make sure to be specific about what you want to talk about. Provide background and questions to show that you are mindful of their time and why you are coming to them and not someone else.
  • One panelist, a treasurer, said that in one-on-one meetings, 99% of men bring a “talk sheet” to highlight their accomplishments and 95% of women don’t. However, for her it’s more important to “help me see what you are thinking” and to see that the person is forward thinking, sees the big picture and their role in it.

Hedge your bets. Beware of changing circumstances: A sponsor might leave the company or otherwise lose power so don’t have just one; this advice was from a panelist at a bank where turnover is likely higher than in your company. Other insights and advice:

  • Many meeting participants said they only realized they had a sponsor in hindsight, and they don’t know if they currently do! You won’t always know who your sponsors are, so be prepared to shine and seize opportunities when they’re presented.
  • You might think your work speaks for itself, and of course it’s very important to get the work done. But don’t be only focused on execution—also put your head up and take credit where credit is due.  
  • And don’t just execute the work, but take time to prepare for meetings you will participate in. If your boss’s presentation includes your work, ask for time to speak about that piece to get visibility.
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Sharing a Bloomberg Terminal From Home: How Long Will It Last?

Treasury teams relying on Bloomberg’s Disaster Recovery services face uncertainty.

During the pandemic, many treasury teams accustomed to sharing a Bloomberg Terminal in the office have made the most of Bloomberg’s so-called Disaster Recovery services (DRS), which has allowed multiple users, working from home, to access a Terminal subscription from different computers.

  • The value of that access has some NeuGroup members worrying about the expiration of their company’s ability to activate DRS as some workers—but not all—return to offices.
  • One member at a recent meeting of risk managers said using DRS has been very helpful, but was told their access would expire within the next month, forcing them to return to their previous workarounds.
  • Another NeuGroup member expressed frustration with the monthly renewal process and the need to prove the company still deserved access to DRS.
  • One member reported having no problems renewing the service.
  • Another, hearing about the option for the first time, saw it as a natural solution for the team’s short-term needs.

Treasury teams relying on Bloomberg’s Disaster Recovery services face uncertainty.

During the pandemic, many treasury teams accustomed to sharing a Bloomberg Terminal in the office have made the most of Bloomberg’s so-called Disaster Recovery services (DRS), which has allowed multiple users, working from home, to access a Terminal subscription from different computers. 

  • The value of that access has some NeuGroup members worrying about the expiration of their company’s ability to activate DRS as some workers—but not all—return to offices. 
  • One member at a recent meeting of risk managers said using DRS has been very helpful, but was told their access would expire within the next month, forcing them to return to their previous workarounds.
  • Another NeuGroup member expressed frustration with the monthly renewal process and the need to prove the company still deserved access to DRS.
  • One member reported having no problems renewing the service. 
  • Another, hearing about the option for the first time, saw it as a natural solution for the team’s short-term needs. 

Bloomberg’s response. A Bloomberg spokesperson, in an email, told NeuGroup Insights, “During this time, Bloomberg is extending the use of DRS for the duration of office closures or ‘work from home’ scenarios that are the result of government mandates in regards to the COVID-19 outbreak.

  • “We continue to revisit limitations to this use case in light of evolving guidance from authorities. We suggest firms contact their Bloomberg reps to understand their options.”
  • The spokesperson also wrote that DRS is intended as a temporary solution to enable remote access for “short periods of time.” 
  • Also, they said, “Bloomberg Anywhere (BBA) is the most appropriate option for long-term remote Terminal access,” confirming that BBA subscribers in effect always have DRS in place, in contrast to shared Terminal users.  
  • In May, NeuGroup Insights reported that Bloomberg had extended DRS use for users sharing a Terminal during the pandemic until the end of June and that it cost $35 per subscriber. 
  • The spokesperson this week did not comment on any end date or the price. 

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Talking Shop: Exploring Minority Bank Deposits Amid Increased Public Interest

Question: “Minority bank deposits: Is your organization active or exploring given increased public interest?”

  • “I’m looking to connect with those with experience in this area and discuss best practices. In addition, I’m looking to identify contacts at any recommend [Minority Depository Institutions].”
  • The member included a link to a Fortune article, which discusses Black-owned financial institutions amplifying the call for racial justice by drawing more private capital into their communities.

Question: “Minority bank deposits: Is your organization active or exploring given increased public interest?” 

  • “I’m looking to connect with those with experience in this area and discuss best practices. In addition, I’m looking to identify contacts at any recommend [Minority Depository Institutions].” 
  • The member included a link to a Fortune article, which discusses Black-owned financial institutions amplifying the call for racial justice by drawing more private capital into their communities. 

Peer Answer: “Hi, we are close to finalizing agreement/structure with a start-up (CNote) which works with credit unions serving disadvantaged communities. 

  • “They basically facilitate a placement of $250K deposits at CUs that they work with, which makes it risk free considering these deposits benefit from FDIC/NCUA insurance. If you want, we can connect on it, and I can provide a bit more background.”
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Talking Shop: Taking the Temperature of Today’s Credit Facilities Market

Member question: “Is anyone extending their credit facilities in this current market? Specifically, facilities with tenors of 3 or 5 years.”

Peer answer 1: “In early Sept., we closed the renewal of a 364-day facility. Given the large size of our overall facility, planning and lender discussion start months ahead of the renewal. At the time we kicked that project off, markets weren’t supportive of longer-dated renewals (none had occurred for jumbo facilities like ours). Good luck with your renewal!”

Member question: “Is anyone extending their credit facilities in this current market? Specifically, facilities with tenors of 3 or 5 years.”

Peer answer 1: “In early Sept., we closed the renewal of a 364-day facility. Given the large size of our overall facility, planning and lender discussion start months ahead of the renewal. At the time we kicked that project off, markets weren’t supportive of longer-dated renewals (none had occurred for jumbo facilities like ours). Good luck with your renewal!”

Peer answer 2: “I asked our capital markets team and they confirmed that, yes, credit facilities are being extended three to five years (based on the latest updates from BofA/JPM).”

Smooth segue to a deeper dive: Find more insights on the state of the revolving credit facility market here.

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The Revolving Credit Dance: Banks Step Out Cautiously

Bank capital challenges and economic recovery are calling the tune on revolver tenors, pricing.

The bank loan market is back in action, but even strong, investment-grade (IG) companies may want to step lightly since lenders still face challenges.

  • Bankers explained in a recent NeuGroup meeting that during the onset of the pandemic, banks’ internal credit ratings for clients often fell further than public rating agencies’, requiring lenders to set aside more capital and potentially shore it up by raising equity or selling assets.
  • Rolling over a 364-day facility should now be a walk in the park, the head of bank loan capital markets at a major global bank told members. Some borrowers with five-year credit facilities that aren’t coming due are avoiding the market, “not wanting to walk into elevated pricing and/or shorter tenors,” he said.

Bank capital challenges and economic recovery are calling the tune on revolver tenors, pricing.

The bank loan market is back in action, but even strong, investment-grade (IG) companies may want to step lightly since lenders still face challenges. 

  • Bankers explained in a recent NeuGroup meeting that during the onset of the pandemic, banks’ internal credit ratings for clients often fell further than public rating agencies’, requiring lenders to set aside more capital and potentially shore it up by raising equity or selling assets.
  • Rolling over a 364-day facility should now be a walk in the park, the head of bank loan capital markets at a major global bank told members. Some borrowers with five-year credit facilities that aren’t coming due are avoiding the market, “not wanting to walk into elevated pricing and/or shorter tenors,” he said.

The tone has changed. Just a few months ago, the banker would have told even highly rated IG companies that the five-year market was not in reach.

  • Now, the five-year market may be available, but banks are “respectfully” requesting borrowers to hold off re-upping longer-term facilities annually unless they are coming due, the banker said. 
  • The capital requirement on a new five-year facility is 100% on day one and steps down each year, “So pushing [out loan tenors] now when there’s still stress in the financial system makes it more difficult for banks,” the banker said.

The brighter side. Most IG borrowers, except those in the travel, oil and gas, and retail sectors, have repaid most of their drawdowns, and consequently pricing has come down. One example:

  • A low IG borrower put in place an eight-month, $1 billion revolver at the height of the crisis, with covenant protections including duration fees and spread steps.
  • Pricing was 40 basis points over Libor undrawn, 200 basis points drawn, and 40 basis points in upfront fees; its recent redo was priced at 25 undrawn, 162.5 drawn, and 20 basis points upfront. Pricing on its core facility before the amendments was 11 basis points undrawn and 112.5 drawn.
  • Banks will now overcommit for attractive credits and participate in syndications, with Chinese banks the exception, the banker said, adding, “We’re seeing declines from them on every capital request and we’ve been told it’s a capital issue, but I believe it’s also a political issue.”

Going forward. Longer tenors will gradually return on a case-by-case basis, the banker said, but when remains uncertain given the pandemic’s unknowns. “To come back entirely, I think we need to see earnings stability with borrowers, and that’s going to be sector by sector,” the banker said.

  • On the pricing front, wallets still count. For the highest-quality companies with large global wallets and minimal Covid-19 impact, there will be plenty of capacity, the banker said, and little if any change in pricing from pre-Covid levels, except maybe a few more basis points upfront. 
    • “Banks will request borrowers to stay at maturities of three years and under, but five years will always get done” for high-quality borrowers, the banker added.
  • In terms of loan size, best not to upsize and if necessary, supplement in the bond market. “Bank facilities are already underpriced, so upsizing them increases that pressure,” the banker said.  

Next summer. Companies skipping the annual re-upping of their five-year facilities may want two-year extensions—a challenge today—come next summer. Banks will still face capital pressure, but given their desire to please clients in hopes of ancillary business, “I wouldn’t be surprised if we get back to the five-year market completely,” the banker said.

  • The banker’s colleague suggested borrowers with that intent start signaling the relationship managers of their lead banks well in advance. “That gives everybody enough time to do their client plans, socialize it internally, and go to their capital committees,” he said.
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Recent Stories

Cash Pooling: What Treasury Teams at Multinationals Need to Know Now

An update of a story—one of NeuGroup’s most-read articles—about physical and notional cash pooling.

By Susan A. Hillman, Partner, Treasury Alliance Group LLC

Eight months into the global pandemic, liquidity and cash remain top-of-mind for many multinational corporations coping with uncertainty over the shape and timing of economic recovery. That makes this an opportune time to reexamine a critical liquidity management tool that has been around for decades but has always required careful evaluation before implementation: cash pooling.

An update of a story—one of NeuGroup’s most-read articles—about physical and notional cash pooling.

By Susan A. Hillman, Partner, Treasury Alliance Group LLC

Eight months into the global pandemic, liquidity and cash remain top-of-mind for many multinational corporations coping with uncertainty over the shape and timing of economic recovery. That makes this an opportune time to reexamine a critical liquidity management tool that has been around for decades but has always required careful evaluation before implementation: cash pooling.

  • Further due diligence is in order now in given tax and regulatory changes in the past few years that may bring more scrutiny of the objectives of a company’s cash pool structure and affect the ability of banks to offer cash pooling services.

Cash pooling defined. Cash pooling is a short-term cash management tool whose objective is to eliminate idle cash and reduce overdrafts among subsidiary operations that have varying daily cash positions. There are two approaches: physical and notional.

Physical pooling allows funds in separate subaccounts—at the same bank—to be automatically swept to and from a header account. The participating entities’ bank (sub)accounts are either in surplus or deficit position on an end-of-day basis. The physical concentration to the designated header account effectively zero balances the subaccounts. Physical pooling can be used across multiple legal entities, located in the same or different countries—but on a currency by currency basis.

  • Movements between accounts are categorized as intercompany loans to and from the header entity and the participating subsidiaries. Specific loan documentation related to the pool structure is prepared in advance. The holding entity should be designated as an agent for the group which allows the interest paid and earned to be treated as bank interest and is not subject to withholding tax.
  • The sweeping entries are documented daily through the bank transactions and arm’s length interest is paid or charged either monthly or quarterly. Physical cash pooling is a transparent and efficient liquidity management tool. The documentation and bank transaction detail leaves a sufficient audit trail that is appreciated by corporate tax and would satisfy even a conservative interpretation in a tax audit.

Notional pooling achieves a similar result but is accomplished by creating a shadow or notional position resulting from an aggregate of all the accounts, which can be held in multiple currencies. Interest is paid or charged on the consolidated position. There is no actual movement or commingling of funds.

  • The bank (or system) managing the notional pool provides an interest statement reflecting the net offset that is similar to what would have been achieved with physical pooling. As there is no physical movement of money, intercompany loans are not required to account for the offset.
  • Notional pooling across multiple currencies requires that these currencies are brought to a common basis (usually EUR or USD) before the pooling and interest offset can take place. In essence, a short-dated swap is executed by the pooling bank. This makes the process more problematic and not as cost effective, as treasury has no control over the rates or the timing of the swaps.
  • The multicurrency appeal of notional pooling is somewhat negated due to the complexity arising from the cross- jurisdictional nature of the arrangements and the need to accommodate multiple regulatory regimes. If accounts are maintained across several banks in different countries, there are complications with cutoff times to say nothing of extra transaction costs and bank fees. Due to the opaque nature of the arrangement, it can trigger tax scrutiny.

Tax reform.  US tax reform in 2017 meant multinationals had less tax inducement to have profits booked outside the US in a lower tax jurisdiction—a significant disincentive to tax inversion through an offshore location of regional headquarters. Initially, treasurers wondered if tax reform would affect current or planned cash pooling structures.

  • The short answer is no, in part because the US Treasury said the new law would not impact short-term arrangements such as physical and notional pooling.
  • Cash pooling is an arrangement to facilitate the management of daily working capital fluctuations between related subsidiaries—it is not used to keep large cash profits offshore.
  • The entity holding the pool header account is usually an offshore company and this continues to be advisable from both a tax and practical perspective.
    • Currency accounts are not used in the US, there are reserve requirements, overdrafts aren’t permitted and interest can only be earned through sweeps—not on current accounts.
    • From a time-zone perspective, the subaccounts will be held in other countries, so an end of day concentration is not logistically efficient.
    • A US company is not allowed to be a borrower in a cash pooling arrangement.
    • Europe remains the ideal geographic location for a pool structure due to access to financial and currency markets. Singapore is often used as an Asian center; Hong Kong’s attractiveness is declining due to uncertainty and Chinese political repression.

Regulatory scrutiny. Initiatives by the OECD (Organization for Economic Co-operation and Development) and BCBS (Basel Committee on Banking Supervision) within the past few years may impact cash pooling. That said, the actual adoption of these pronouncements is undertaken separately by participating countries and their central banks or regulators.

  • The OECD’s BEPS (base erosion and profit shifting) initiative addresses tax treaties, transfer pricing and any perceived financial sleight of hand. For treasurers, it means that now is not the time to push the envelope with complicated treasury structures that involve intercompany transactions—particularly with transfer pricing which may come under scrutiny.
    • Does this mean cash pooling is threatened? Not really, because it a well-established short-term cash management tool. However, it is important that treasury has good documentation in place, particularly related to the intercompany arrangements created by cash pooling.
  • BCBS’s Basel regulations impact banking services and costs. Basel III (2017) addresses the liquidity ratios banks need to meet, so banks are scrutinizing how business is allocated between transaction services and credit.
    • Basel IV (2023) will require banks to meet even higher maximum leverage ratios—particularly larger global banks. There will also be more detailed disclosure of reserves and other financial statistics required.
    • The Basel conditions will impact certain services that were previously standard and transaction costs will likely increase—this may affect both the availability and costs of cash pooling services, especially for notional pools.

Takeaways. The benefit of cash pooling arises from allowing separate subsidiaries to use internal corporate cash instead of bank borrowing for day-to-day working capital. A few caveats have always been important, but require closer adherence given tax and regulatory updates.

  • Pooling is not an arrangement to aggregate excess offshore cash in an attempt to earn a higher rate of return as interest rates are at zero or negative in Europe—and this also may draw scrutiny from regulators.
  • Banks must consider liquidity ratio requirements, so concentrating transactional business with the pooling bank is a good idea. Keep in mind that there are only a handful of global banks that offer cash pooling.
  • Clear intercompany loan documentation is essential and rates applied must be arm’s length.
  • Excess cash should be repatriated—the 2017 tax law makes this more palatable. So it’s important that aggregate pooled balances are not excessively high.
  • Long-term deficit cash in offshore subsidiaries should be handled through separate intercompany loans or other funding—not with cash pooling.
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Digital Signatures Deliver Relief and a Few Frustrations Amid Pandemic

Corporates report success using DocuSign with many banks, but Latin America presents challenges.

“Has anyone successfully used DocuSign with banks?” one NeuGroup member asked at a recent virtual meeting. “Yes” was the resounding answer from peers—more evidence that the pandemic has accelerated automation and digitization in finance. And one goal for many treasury teams is to make “wet” signatures a thing of the past.

Corporates report success using DocuSign with many banks, but Latin America presents challenges.

“Has anyone successfully used DocuSign with banks?” one NeuGroup member asked at a recent virtual meeting. “Yes” was the resounding answer from peers—more evidence that the pandemic has accelerated automation and digitization in finance. And one goal for many treasury teams is to make “wet” signatures a thing of the past.

  • The member who posed the question wants to use DocuSign’s electronic signature solution internally and externally—for intercompany loans, signatory changes and to open, close or change bank accounts.
  • One pain point that several members brought up: difficulties using DocuSign in Latin America. See the table below.
  • The takeaway is that corporates should keep applying pressure to financial institutions and regulators to allow broad use of digital signatures across the globe.

The good news. Members reported success in using DocuSign with banks including Bank of America, JPMorgan Chase, Citi, Wells Fargo and Societe Generale.

  • “We have used it in lots of places,” said one member.
  • “The banks will do it if they want your business,” another said, recommending that others push institutions to accept digital signatures. “Unless they can produce a regulatory reason, use DocuSign.”

The problem. Regulatory issues and how banks interpret different rules and laws in dozens of countries are one reason using digital signatures can prove challenging for corporates.

  • Many companies at the meeting use Citi to bank in Latin America and most of them reported having difficulties using DocuSign in the region.
  • “They’re requiring originals for everything,” one member said.
  • “We’re hearing it’s more the regulatory environment,” said another, adding that it may also may reflect a more conservative approach by Citi.
  • Another said, “My assumption is that it is banks’ interpretation of country-specific regulatory rules that drive the compliance/non-compliance with digital signatures. But I don’t have clarity from the banks on why they will or will not accept DocuSign.” This member’s company also uses a stylus to sign documents on an iPad.

Citi and DocuSign.  Driss Temsamani, Citi’s head of digital channels and data for Latin America, told NeuGroup Insights that DocuSign is embedded in the CitiDirect BE Digital Onboarding platform, adding that onboarding is the key priority in the bank’s digital transformation strategy. In Latin America, the platform was introduced in Brazil in 2019.

  • The platform is now in use in 12 Latin American countries and Citi clients can use digital signatures in all but four of them. The exceptions include Mexico and Uruguay, where regulatory approval is pending.
  • El Salvador and Panama do not have laws covering digital signatures and the DocuSign feature on Citi’s platform is disabled in those countries.
  • Asked how he would respond to corporates expressing frustration with using e-signatures in Latin America, Mr. Temsamani said he would need each client to tell him more about its specific issue so he could better understand and address their feedback. “Whenever a client tells me something, it’s always valid and a top priority,” he added.

Editor’s Note: The table below was provided by a NeuGroup member company and is the treasury team’s documentation of its experience with various banks.

The table is not based on any information provided to NeuGroup by the banks listed and does not claim to represent the banks’ policies or the experience of any other company.

“Digital Signature” refers to the member company signing a document using a stylus on a tablet; DocuSign is its preferred method.

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A Homegrown ESG Dashboard in Search of Better Data

A tech company builds its own tool to get a holistic view of ESG ratings but bemoans social data quality.

Many companies in the NeuGroup Network are devoting significant resources to better address environmental, social and governmental (ESG) issues that are increasingly critical to how investors and other stakeholders view corporates.

  • But not many treasury teams have access to an ESG dashboard, something one member who works at a large technology company described to peers at a recent meeting of treasury investment managers

A tech company builds its own tool to get a holistic view of ESG ratings but bemoans social data quality.

Many companies in the NeuGroup Network are devoting significant resources to better address environmental, social and governmental (ESG) issues that are increasingly critical to how investors and other stakeholders view corporates.

  • But not many treasury teams have access to an ESG dashboard, something one member who works at a large technology company described to peers at a recent meeting of treasury investment managers.
  • The company built the dashboard itself, thanks in part to “people good on Python,” the member said. “We are lucky.”
  • The dashboard offers a “holistic” view of the ESG ratings of all the company’s investments—those managed internally as well as assets managed in separate accounts.
  • The member said one goal is to make sense of managers who “all have different ways of measuring ESG.” The company wants investments that are consistent with its goals of reducing carbon emissions and promoting more representation of women and minorities, among others aims.
  • The dashboard uses ESG ratings data from MSCI and the company plans to add other sources as it implements targets for its ESG investments.

Data deficit. The problem, the member said, “is that there is not that much data out there,” especially regarding social metrics. The only information some companies provide about women is how many of them are on the board of directors, she added.

  • An ESG asset manager for Morgan Stanley, sponsor of the meeting, agreed that compared to data on environmental records, there is “a massive gap on the social side.” He mentioned difficulty getting information on how companies ensure the safety of employees.
  • The manager said investors—whether or not they have a dashboard—need to take ESG scores with “a pinch of salt.” His team tries to re-rate companies and look at them through “our own lens” to make the ratings “more relevant.”
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How Corporates Are Measuring Counterparty Risk as Cash Builds

Companies reviewing limits amid Covid have varied approaches to calculating risk thresholds.

The abundance of cash corporates have collected on their balance sheets to deal with pandemic-related volatility has prompted some to review their counterparty risk limits.

Participants at a recent NeuGroup meeting of large-cap companies described a variety of approaches to the issue, which should remain especially relevant for treasury teams reducing the size of bank groups, a trend discussed in recent meetings.

Companies reviewing limits amid Covid have varied approaches to calculating risk thresholds.

The abundance of cash corporates have collected on their balance sheets to deal with pandemic-related volatility has prompted some to review their counterparty risk limits.

Participants at a recent NeuGroup meeting of large-cap companies described a variety of approaches to the issue, which should remain especially relevant for treasury teams reducing the size of bank groups, a trend discussed in recent meetings. 

  • A member explained that higher deposit rates at one bank prompted his team to consider whether to exceed the $100 million ceiling in its policy. It turned out that only the CFO had to be alerted; no approval was needed from the board or senior management.
  • The company was entering longer-term exposures, including derivative transactions, in which relatively few banks were experts and offered reasonable fees. That resulted in a concentration of business that could hit exposure ceilings. 
    • “The more of this we do, we’re faced with the issue of which banks do we execute with and how much with each bank,” the treasurer said.  

Notional vs. marked to market. The session leader said that his team updates the marked-to-market derivatives exposures monthly but has relied on notional limits. The company’s exposures have traditionally been seven days or less, but the longer-term hedges may require a more dynamic approach.

  • A peer said his company relies on mark-to-market limits and stress tests them using a third-party service offered by Reval. Initial trades shouldn’t exceed the limits, and ratings downgrades and market-moving events such as Covid halt additional trades unless the CFO approves them. 
  • The company separates derivatives from deposits because the latter don’t have a stress scenario. The derivative limit is much smaller.
  • Another member said his company also includes commodity trades, adjusts all exposures according to their remaining lifespans, then aggregates and measures them daily. His team also tracks ratings and credit default swap (CDS) spreads to capture any real-time market moves, such as news about fraud at a bank. 

Scrutinizing the banks. The member added that a vendor performing his company’s customer-credit analysis also provides an annual analysis of the net worth of each relationship bank, and along with a bank’s credit rating his team will assign a limit to it. 

  • He added that rather than a $500 million or other arbitrary limit, “It’s actually based on the balance sheet of each bank.”
  • His team has sought to automate that process and eliminate much of the “check-the-box” analysis based on financial statements that often can be stale, adding, “We’ve found you can spend a lot of time on things that 99% of the time add little value.”

Common ground. Two other members said their firms set notional limits, separating deposits from derivatives. One noted entering into a long-term interest-rate swap. “This discussion is really timely,” she said, “As I’ve been talking to my derivatives team about how we can better manage those exposures.”

  • The other member uses notional thresholds “only because it’s easier” but acknowledged that marking positions to market provides the “real exposure.” His firm has increased its investment and derivative thresholds to accommodate more cash held at banks. 
  • In terms of investments, “We can go up to a certain amount, but it also has to be diversified within the portfolio,” the treasurer said. “So as the cash balance grows we have the capacity to go higher, but the mix of the portfolio is limited as well, both with the instrument and the counterparty.”
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Helping Treasury See Beneath the Payment Iceberg

TIS makes the case for treasury as gatekeeper of payment processes.

Nearly half the members at a recent meeting of NeuGroup’s Global Cash and Banking Group (GCBG) said treasury at their companies is responsible for treasury payments only—not for, say, accounts payable (AP) or payroll. Just 15% of those surveyed said treasury completely owns payment processes and tools.

  • Treasury Intelligence Solutions (TIS), sponsor of the meeting, made a case for making treasury the overall “gatekeeper” of all payment processes—with the help of its technology solution.
  • The crux of the case is that treasurers are responsible for the entire liquidity picture of an organization and can’t afford to see only the tip of the iceberg. “You can only manage what you see,” the TIS presentation said.

TIS makes the case for treasury as gatekeeper of payment processes.

Nearly half the members at a recent meeting of NeuGroup’s Global Cash and Banking Group (GCBG) said treasury at their companies is responsible for treasury payments only—not for, say, accounts payable (AP) or payroll. Just 15% of those surveyed said treasury completely owns payment processes and tools.

  • Treasury Intelligence Solutions (TIS), sponsor of the meeting, made a case for making treasury the overall “gatekeeper” of all payment processes—with the help of its technology solution.
  • The crux of the case is that treasurers are responsible for the entire liquidity picture of an organization and can’t afford to see only the tip of the iceberg. “You can only manage what you see,” the TIS presentation said. 

Map your payment processes. This first step will reveal the number of channels to make payments, expose risks and allow for a more holistic management approach. 

  • Rolling out a payment system for various finance partners to use creates a business opportunity to collaborate across the organization, help colleagues reduce risk and increase transparency to key drivers of a fluctuating cash position. 
  • Accumulating data is the goal of inserting treasury in payment processes; it benefits treasury directly and, by yielding more accurate cash positions, can be of value for the C-Suite as well. 

Don’t get laughed out of the room. One member challenged the concept of treasury taking control of what are non-treasury payments, saying, “If I go to the treasurer and ask for those AP payments, I’ll get laughed out of the room.” 

  • TIS said the point is not that treasury should be doing the work, it’s that treasury should roll out and oversee a system that others work in for standardization of payment processes and reduction of bank portal access across the organization.
    • A presenter from TIS said, “Let them do the work, but ask them to run a standardized process” that funnels through one system.
  • Another member agreed with TIS’s logic because “if something goes wrong [with a payment/bank access], it’s treasury” that fixes the problem and needs to be in the know. 
    • If treasury is truly the gatekeeper to the banks, treasury should have authority to govern related processes. “The more you see the more you can control,” one TIS presenter said.

Payment fraud detection and the help of AI. Using machine learning and artificial intelligence to detect fraud is a hot topic in the treasury world now.

  • Whether treasury centralizes payments or divides control with accounts payable, tax departments, etc., it is important to find ways—including technology solutions—of leveraging data lakes to identify unusual behavior across networks to tighten security and reduce organizational weak points and risks. 
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Talking Shop: For a Bank KYC Refresh, Do You Complete a Beneficial Ownership Form With SSN?

Member question: “One of our banks does a biannual KYC [know your customer] refresh and asks us to complete the US Client Certification of Beneficiary Ownership (a FinCEN form).

  • “Is this something that your company also provides, and do you include Social Security number info?”

Member question: “One of our banks does a biannual KYC [know your customer] refresh and asks us to complete the US Client Certification of Beneficiary Ownership (a FinCEN form).

  • “Is this something that your company also provides, and do you include Social Security number info?”

Peer answer 1: “You do not need to provide SSN for a non-US person and you need to provide only one such person.”

Peer answer 2: “We always put the parent US company as the UBO [ultimate beneficial owner], and we would use the TIN [taxpayer identification number] number as SSN. If they don’t accept the parent company, we would use a foreign board member, which would avoid the need to provide SSN. We never ask for anyone’s SSN or provide them.”

Peer answer 3: “Our company worked out a process with our major relationship banks whereby we created our own ‘non-standard’ FinCEN CDD [customer due diligence] form identifying our beneficial owners. This form does include their SSN #.

  • “We provide the form to our US relationship contact and ask them to keep it secure and distribute internally within the bank on an as-needed basis any time FinCEN CDD requests need to be satisfied. It has worked very well for us and has eliminated providing this information multiple times.”

Peer answer 4: “We typically refuse to provide SSNs and work with the counterparty to find an alternative.”

Peer answer 5: “We do share a SSN. I believe our bank requests an update every three years; maybe you can encourage this bank to do the same.”

Peer answer 6: “I have a request right now from a bank. They won’t let us use the parent company as the BO [beneficial owner]; they insist on an individual. I pushed back, asking them to show me the regulation that calls for the SSN or work with me on an alternative.”

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Pandemic Shows Corporates Which Credit Analysts See Beyond the Crisis

Volatility and uncertainty boost the importance of analysts with experience and perspective.

The pandemic has been a first-of-its-kind challenge for corporates, their banks and investors, each trying to make sense of extreme circumstances and forecast what it all might mean. Credit rating agencies face their own challenges and are taking different approaches to the crisis that, according to participants in a recent NeuGroup meeting for large-cap companies, reflect relative strengths and weaknesses.

  • One member whose company had plenty of liquidity to weather the storm opined that Moody’s Investors Service had a “more mature attitude, looking through the crisis and not panicking,” while S&P Global was “crunching numbers and not treating this as a unique short-term situation.”
  • That corresponded with what one portfolio manager said at a different NeuGroup meeting. He called Moody’s approach more measured, the agency more willing to give companies a “Covid mulligan.”

Volatility and uncertainty boost the importance of analysts with experience and perspective.

The pandemic has been a first-of-its-kind challenge for corporates, their banks and investors, each trying to make sense of extreme circumstances and forecast what it all might mean. Credit rating agencies face their own challenges and are taking different approaches to the crisis that, according to participants in a recent NeuGroup meeting for large-cap companies, reflect relative strengths and weaknesses.  

  • One member whose company had plenty of liquidity to weather the storm opined that Moody’s Investors Service had a “more mature attitude, looking through the crisis and not panicking,” while S&P Global was “crunching numbers and not treating this as a unique short-term situation.”
  • That corresponded with what one portfolio manager said at a different NeuGroup meeting. He called Moody’s approach more measured, the agency more willing to give companies a “Covid mulligan.”
  • Several peer group members said S&P tends to rotate lead analysts regularly, whereas senior analysts at Moody’s often had followed their companies for years, even decades.

People vs. methodologies. Much about credit analysis depends on the person behind it. A member’s company whose business includes two sectors struggled with an S&P analyst who only focused on one sector and maintained the same rating for a decade. When the analyst retired early, “It was a game changer for us,” the treasurer said.

  • The Moody’s rating, however, was still a couple of notches lower, so the treasury team engaged with the rating agency, which ultimately replaced its analyst with someone who brought new perspective. The treasurer made a concerted effort over the next 18 months to educate the analyst, and the rating climbed to investment grade.
  • The company was already investment grade with Fitch Ratings and S&P, so “by the time we got our second-notch movement, spreads tightened by a good 10 basis points, and with the last move we probably saw another 10,” he said.
  • “It’s the analyst that matters; not the agency,” a peer added. “You need to get someone you click with and has a good understanding of your industry.” 

Methodologies at crossroads.  Indeed, the analyst’s understanding has become ever more important, according to a former ratings analyst now at a major bank. He told members that the rating agencies have struggled since the onset of the pandemic because debt is now dirt cheap, shareholder buybacks have grown in importance and business profiles are being disrupted.

  • “A lot of the standard ratings methodologies simply don’t work that well anymore,” he said, adding that treasurers have likely seen ratings that differ significantly from what the methodology inputs would dictate.
  • “It’s very perception-based at the moment, and a lot of it relies on how experienced the analyst is. So there are wide variations because the methodologies don’t work,” he said.

Time to negotiate. Change can provide leverage to negotiate. One member cited success negotiating fees with Moody’s but not S&P, although the latter agency indicated it may be open to negotiating the ratings fee on large offerings—probably in the range of $5 billion—if not the annual fee.

  • “Moody’s was the other way around,” he added. “They’ve been willing to work with us on the annual fee.”
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Taking A Second Look: Corporates Reconsider Cryptocurrencies

Members share their curiosity about embracing cryptocurrency amid more regulation.

Efforts by central banks and finance ministers to block the widespread use of digital currencies until strong regulation is in place—along with the emergence of new types of currencies—are leading some corporates to reconsider earlier decisions to avoid accepting cryptocurrencies as payment.

  • That is among the takeaways from a discussion at a recent meeting of NeuGroup for Retail Treasury, sponsored by U.S. Bank, during which one member said her company, encouraged by the outlook for regulation, is actively considering options to accept digital currency in the future.

Members share their curiosity about embracing cryptocurrency amid more regulation.

Efforts by central banks and finance ministers to block the widespread use of digital currencies until strong regulation is in place—along with the emergence of new types of currencies—are leading some corporates to reconsider earlier decisions to avoid accepting cryptocurrencies as payment.

  • That is among the takeaways from a discussion at a recent meeting of NeuGroup for Retail Treasury, sponsored by U.S. Bank, during which one member said her company, encouraged by the outlook for regulation, is actively considering options to accept digital currency in the future.

In the news. On Tuesday, the Financial Stability Board issued recommendations for the regulation, supervision and oversight of global stablecoins—such as Libra, a stablecoin proposed by Facebook—which aim to counter the high volatility of crypto assets like Bitcoin by tying the stablecoin’s value to other assets, including sovereign currencies.

  • On the same day, financial leaders of the world’s seven biggest economies reiterated their opposition to unregulated digital payment services, stating that “no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements.”
  • “You’re going to see a lot more government-related actions, and a lot more focus on that area,” the NeuGroup member whose company is now interested cryptocurrency said late last month.
    • “I think governments are taking a more detailed look at what this really needs and how that could complement their financial systems.”
  • Another member agreed that recent developments—including news about Libra—have piqued their interest, saying, “It’s something we’re keeping our eye on, but haven’t pulled the trigger yet. It’s worth watching closely.”

Mixed reactions and experiences. To be sure, not all the treasurers at the meeting had the same level of interest, with some expressing a cautious curiosity and one saying the issue “isn’t even on our radar.”

  • One member said their company attempted to accept cryptocurrency payments nearly ten years ago. “Merchants did not necessarily want to adopt because it was so volatile,” she said. “One day it could be worth $10, another day it could be a thousand. You didn’t know what you were getting on any specific day. So we shut that down as an option.”
  • Another treasurer said an online-only competitor needed to implement a workaround to accept bitcoin. “They were accepting it through a wallet that would access intermediaries that the customer wanted to use, and they would flip it to US dollars that would actually transact on site,” he said. “They were also keeping a portion of it, which created some accounting issues on their balance sheet.”
  • The member whose company stopped accepting cryptocurrency agreed that there are complications having digital currency on a balance sheet. “Accounting regulations-wise, how you deal with a crypto asset or liability isn’t that straightforward,” she said. “Depending on who you are, where you are, you have to take your own rules and decide how you deal with it.”

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A Virgin Bond Deal, Community Investment and Frustration With Banks

Takeaways from the Tech20 High-Growth Treasurers’ Peer Group 2020 H2 meeting, sponsored by Bank of the West / BNP Paribas. 

By Joseph Neu

Wanted: A better bank user experience. The user interface (UI) and user experience (UX) is a key success driver for high-growth technology companies. So when their banks fail to deliver a quality UI/UX, growth tech treasurers get frustrated. Work from home, of course, has made what used to be digital nice-to-haves into must-haves.

Takeaways from the Tech20 High-Growth Treasurers’ Peer Group 2020 H2 meeting, sponsored by Bank of the West / BNP Paribas. 

By Joseph Neu

Wanted: A better bank user experience. The user interface (UI) and user experience (UX) is a key success driver for high-growth technology companies. So when their banks fail to deliver a quality UI/UX, growth tech treasurers get frustrated. Work from home, of course, has made what used to be digital nice-to-haves into must-haves.

  • Electronic bank account management (eBAM) promises are seen by members as mostly a lie—banks seem to roll out products in line with their own agenda rather than that of their clients. So a bank that asks, “What can I do for you?” and listens and delivers on what they learn can go far with treasurers in growth tech.

Community impact appeals to a growth-tech mindset. In a session on ESG, sustainability and impact investment solutions, members said that having a positive community impact is part of their growth-company DNA and what makes employees feel good about working for an employer.

  • That means treasury needs to make room for impact investment best practices in policy early on. And that includes guiding cash toward minority and community development financial institutions (CDFIs) active in geographies where these companies have a significant presence.

A pandemic is a good time for a virgin bond. It turns out, based on a member case study, that the Covid-19 crisis is an ideal time for a virgin bond deal. Zoom sessions make it efficient to get a credit rating and work with banks as well as outside counsel.

  • It still proved time-consuming and challenging for one small treasury team, but with the help of a project manager, they were able to bring it all together and capitalize on great debt capital market conditions.
  • Add a huge appetite for tech company debt and getting lucky with the issue window, and the bond transaction ended up being a very satisfying experience. You never forget your first debt deal.
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The Cup Runneth Over: Corporates Awash in Cash Mull Options

Treasurers discuss concerns about companies rushing to deploy cash too quickly.

When uncertainty abounded at the start of the pandemic, companies drew down revolvers, issued debt, cut capital expenditures (capex), halted share repurchases—whatever it took to conserve cash for the troubling times ahead.

  • A few months later, after massive government stimulus and a recovering economy, many are awash in cash and trying to figure out what to do with it—or not do with it.
  • At a recent NeuGroup meeting for large-cap companies, several treasurers said their companies’ cash balances are several times higher than normal, echoing a refrain being heard across the NeuGroup Network this fall.

Treasurers discuss concerns about companies rushing to deploy cash too quickly.

When uncertainty abounded at the start of the pandemic, companies drew down revolvers, issued debt, cut capital expenditures (capex), halted share repurchases—whatever it took to conserve cash for the troubling times ahead. 

  • A few months later, after massive government stimulus and a recovering economy, many are awash in cash and trying to figure out what to do with it—or not do with it.
  • At a recent NeuGroup meeting for large-cap companies, several treasurers said their companies’ cash balances are several times higher than normal, echoing a refrain being heard across the NeuGroup Network this fall.

Temptation and perspective. Among the fresh insights about excess cash voiced at the large-cap meeting: Treasury’s role in keeping corporates from making potentially rash short-term decisions designed to keep activists and Wall Street analysts happy. 

  •  “I worry about the temptation for senior management and the board to deploy cash as quickly as possible,” one treasurer said. 
  • As a result, treasury may need to add perspective when C-Suite leaders who previously considered an M&A deal out of reach reconsider as cash balances rise.
  • One member said his team seeks to keep management focused more on the company’s net debt level and less on reducing cash. “That’s what we actually talk about in earnings calls—the change in net debt year to date, and when we think about deleveraging,” he said.

Better safe than sorry. The size and timing of more federal aid to address the pandemic and anticipated rise in infections remains uncertain, prompting treasurers to recommend caution.

  • “Enough uncertainty remains that we can tell the story: We’ll continue to monitor cash and slowly drift [the level] back down,” a treasurer at a large manufacturer said.
    • “That’s absorbing a lot of time and thought around just what is that strategy, and how does it look over the next year or so.”

Step out on the yield curve? Terming out cash to pick up extra basis points is the approach one member’s team is contemplating. Other treasury teams are considering alternative asset classes (see this story). 

  • Some corporates, though, may want to reduce at least some cash, especially those with higher revenues expected during the holiday season.
  • That’s not so easy when capex has already been slashed, and the social justice movement poses political risks for companies rewarding investors before employees and their communities during a pandemic. 
  • “We’ve seen some companies turn on share repurchases with the caveat that they’re increasing wages,” one member said, adding his company is thinking through when to resume repurchases given that Covid looks far from over. 

Street pressure. Some Wall Street firms are pushing liability management to take advantage of historically low rates. 

  • But one treasurer said that after paying up to issue precautionary liquidity, some companies must now pay a premium to buy back the debt, making it better to hold on to the cash in case the pandemic worsens and the extra funds are needed. “We’re in wait and see mode,” the treasurer said.
  • Another member described a recent exercise in which his team reviewed peers’ capital structures and had to explain to the board why a competitor has lower weighted average coupons and maturities. 
  • “We had to remind the board that the company had to pay up for that, put cash upfront in order to refinance into a longer term,” he said.
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Hunting Yield: Investment Managers Weigh TIPS, Munis, Credit Risk

Treasury investment managers weigh options for finding returns in a low-rate environment.

Treasury investment managers looking to boost returns in the current low interest-rate environment discussed a range of options at a recent NeuGroup meeting sponsored by Morgan Stanley, including Treasury inflation-protected securities (TIPS) and municipal bonds.

  • “We’re looking for alternative investment ideas to get attractive yield,” one member said. Her company is looking to return to investing overseas cash in low volatility net asset value (LVNAV) money market funds, an asset class it exited in March.
  • Another investment manager said, “We are flooded with short-term cash, which is not great,” adding that her company is trying “to figure out how to deal with low rates.”

Treasury investment managers weigh options for finding returns in a low-rate environment.

Treasury investment managers looking to boost returns in the current low interest-rate environment discussed a range of options at a recent NeuGroup meeting sponsored by Morgan Stanley, including Treasury inflation-protected securities (TIPS) and municipal bonds. 

  • “We’re looking for alternative investment ideas to get attractive yield,” one member said. Her company is looking to return to investing overseas cash in low volatility net asset value (LVNAV) money market funds, an asset class it exited in March.
  • Another investment manager said, “We are flooded with short-term cash, which is not great,” adding that her company is trying “to figure out how to deal with low rates.”

Why not reach for yield? In a discussion about credit risk, one member asked why investors who believe in the idea of a “Fed put” would not reach for yield during “a carry trade environment” where it “feels like fundamental research matters less and less.”

  • Earlier, a Morgan Stanley portfolio manager said that it is “hard to think credit is wildly attractive here” given the contraction in spreads since March and that recovery “will mean tighter spreads than today.”
  • In response to the member’s question, he agreed with the idea of a Fed backstop and said he has a hard time seeing a scenario where “spreads blow back out.”
  • He said that if spreads widened from about 130 now to 145 to 150, “we would buy.” But he said that things may not go as the market expects and recommends investors be selective. 

Tri-party repos, anyone? One manager is using tri-party repos, where a clearing bank acts as an intermediary and alleviates the administrative burden between two parties engaging in a repo. She said her company “disregards collateral” and proceeds if her team is “comfortable with the bank risk.” 

  • The company is also investing in three-to-five year financial and nonfinancial corporate bonds.
  • It holds short-term government paper, including some Swiss and Japanese issues swapped back into dollars and yielding about 40 basis points.
  • The manager is considering buying muni bonds, in part because she believes the timing is likely better now for investors than issuers.

Mulling munis. Other members asked about munis and one who invests in them offered to discuss offline the approach the company takes. 

  • The member who owns munis believes that another round of fiscal stimulus could benefit the asset class.  
  • A Morgan Stanley portfolio manager said munis may make sense for some corporates, depending on their tax situation and what happens to corporate tax rates after the election. 
  • A municipal strategist at Morgan Stanley estimates states will lose $180 billion and local governments $90 billion in revenue through mid-2021 because of the pandemic and recession.
  • He said while there may be downgrades and different states will make different choices affecting credit ratings, “I don’t think default is the way to frame the discussion.”

TIPS debate. In response to one member who expressed interest in TIPS but has not figured out how they fit it to the company’s overall strategy, another member offered to put the first in touch with a “TIPS expert” who has done internal modelling with machine learning.

  • A Morgan Stanley manager, who said TIPS had performed poorly in March and April, warned that “TIPS aren’t Treasuries” and that they have a “huge liquidity premium.” He said TIPS have a high correlation to high-quality corporates and “the extra yield doesn’t look that attractive.”
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Talking Shop: How Well Does Quantum Manage Interest Rate Swap Accounting?

Member question: “For those who use Quantum as their TMS, do you also leverage Quantum for hedge accounting, and if you do, does Quantum (in your opinion) manage interest rate swap accounting well?

  • “We have been using Reval for a while, but just wanted to know if people have been able to leverage Quantum V6+ for hedge accounting, including interest rate swaps.”

Member question: “For those who use Quantum as their TMS, do you also leverage Quantum for hedge accounting, and if you do, does Quantum (in your opinion) manage interest rate swap accounting well?

  • “We have been using Reval for a while, but just wanted to know if people have been able to leverage Quantum V6+ for hedge accounting, including interest rate swaps.”

Peer answer 1: “When we put our interest rate forward starting swaps in place a few years back, Quantum did not have the accounting capabilities to handle what we needed so it was kept offline in Excel. That could be different now in 6.9, but we have not explored what is possible in the new version.”

Peer answer 2: “When we deployed Quantum, we were ‘sold’ the IRS functionality, but it never materialized. We had previously used Reval for IRS and FIS’s Sungard for our TMS. We hoped Quantum would bring it under one roof, but we had to stick with Reval for the IRS piece.

  • “We ultimately moved away from Reval and to Chatham. We are very pleased with Chatham and use them for FSSs, IRSs, and XCSs.”

NeuGroup Insights offered FIS Quantum the opportunity to comment. A spokeswoman for FIS declined.

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Taking the Right Steps on the Road to Robotic Process Automation

A risk manager warns that RPA should not be used a Band-Aid.

One NeuGroup member recently described to peers the benefits and challenges of using robotic process automation (RPA) and robotic desktop automation (RDA), a form of RPA that requires humans to trigger an action performed by a bot.

  • The member adopted automation to document trades his team previously input manually into its treasury management system (TMS), a time-consuming task that also introduces the possibility of human error.
  • The new process, using software from UiPath, has required hours of training, programming and documentation, but has led to faster, more reliable tracking of data, the member said.
  • His presentation showed the steps involved in the process of documenting a cash flow hedge in the TMS.

A risk manager warns that RPA should not be used a Band-aid.

One NeuGroup member recently described to peers the benefits and challenges of using robotic process automation (RPA) and robotic desktop automation (RDA), a form of RPA that requires humans to trigger an action performed by a bot.

  • The member adopted automation to document trades his team previously input manually into its treasury management system (TMS), a time-consuming task that also introduces the possibility of human error. 
  • The new process, using software from UiPath, has required hours of training, programming and documentation, but has led to faster, more reliable tracking of data, the member said.
  • His presentation showed the steps involved in the process of documenting a cash flow hedge in the TMS.

The next stage. The member explained some of his vision for RPA use: “Right now, that bot is on a desktop, the real benefit is pushing that to the server. The long-term ambition is the trades go into our TMS, they get picked up by the bot that creates all the trade deals, and then creates the validation reports.”

  • Moving to RPA on the server will free up more time for the team.

Not so fast. Like other NeuGroup sessions on RPA, this one included a healthy dose of warning about automating a flawed process. The presenting member advises companies considering RPA first look at how their own processes can be made more efficient.

  • “Come in with the basic principle that RPA/RDA shouldn’t be used as a Band-Aid,” he said.
  • “These systems shouldn’t be used to mend a broken process. You need to go back first and look at the process itself and see if the process can be fixed rather than creating this as a patch.”
  • Custom-made bots require extensive programming to create and training to use, so the member said the first step is to evaluate if the process that they automate is truly valuable. 

Documentation and understanding. The member stressed the importance of creating documentation alongside bots, so new employees can understand the actual process itself, an additional resource commitment.  

  • “There needs to be a standard approach on how these are put together,” he said. “It’s a relatively heavy lift in terms of documentation, and what will allow us to make changes like this to the underlying systems.” 
  • Another member who uses similar software has concerns about overreliance on bots. “When I transition out of my role and someone comes in, I can familiarize them to some degree, but they have to go out there and really understand what everything is created to do,” he said. 
    • “You’re really just pushing a couple of buttons rather than performing the work in-house—you lose some of the understanding of the process.” 

The resource commitment. Though some members have had positive experiences with automation, one warned that, depending on what you are automating, it might not be worth it.  

  • “Automation needs prioritization from a senior level and buy-in on the system resource side, as it takes up a lot of time to train the users who ultimately use the process,” he said. “The initial training is time-consuming, and the resource challenge for IT is massive.” 
  • Another member found that the annual cost of creating the system and paying for a server to implement full-process automation was equivalent to the salary of two full-time employees and couldn’t justify the trade-off. “It’s not going to help me two FTE’s worth. I could never make that pay off,” he said.

Inside job. Another member who implemented RPA uses internally developed tools rather than a platform like UiPath. “We’re also implementing a lot of automatic processes that comply with our audit procedures with very intentional human intervention,” he said. “We have tools built in-house through software engineers in treasury. When it comes to interfacing, we code it directly in-house.” 

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Why Some Bankers May Root for a Democratic Sweep

Founder’s takeaways from the Bank Treasurers’ Peer Group’s first fall meeting.
 
By Joseph Neu

Members of the BTPG have been meeting in the spring for 16 years running, and debuted their Fall Edition meeting this week, sponsored by Morgan Stanley. Here are a few takeaways I want to share.

Founder’s takeaways from the Bank Treasurers’ Peer Group’s first fall meeting.
 
By Joseph Neu

Members of the BTPG have been meeting in the spring for 16 years running, and debuted their Fall Edition meeting this week, sponsored by Morgan Stanley. Here are a few takeaways I want to share.
 
Banks have enough capital. The expectation is that US banks will pass the next two stress tests, even with with Covid-19 inspired stress scenarios, indicating everyone is well capitalized.

  • This will free up buybacks and dividends for those that halted them for political reasons. 

War for deposits is over.  The massive liquidity infusion by the Fed, stimulus and an unfriendly rate environment has ended the war for deposits that banks in the US were waging pre-Covid.

  • Instead, US banks are turning away deposits, especially by adjusting pricing and fee to discourage them.
  • Indeed, if you take a close look at ECR and other fees, you may already be paying your bank to hold your money, or effective negative pricing,

A Democratic sweep is NIM (net interest margin) friendly. The outlook for the banking sector will be much improved if the Democrats take the White House and the Senate in the upcoming election.

  • This would end the logjam on fiscal stimulus, making bank reserves for credit losses suddenly excessive.
    • With infrastructure spending likely as well, this will push up inflation expectations to the point where the long end of the curve may rise and become more NIM-friendly—all good news for banks.
  • The bad news is that the regulatory edicts that raise their cost of capital and liquidity will tick up, too, and banks are already losing their competitive edge to less-regulated funding platforms.
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Tonic for Zoom Fatigue: Shorter Meetings—and a Day Without Them

NeuGroup Members discussed their approaches to making WFH situations more palatable.

“Six hours on Zoom is like 10 hours in the office,” one treasurer of a mega-cap company said during a recent NeuGroup meeting (yes, a Zoom meeting), quantifying a feeling about the side effects of virtual meetings. Almost everyone who has been working from home for seven months knows what she means.

  • At the same meeting, another treasurer said he is encouraging his team “not to book 30-minute calls, to make them 25 minutes instead. If you can, put headphones in, do one-on-ones while walking.”

NeuGroup Members discussed their approaches to making WFH situations more palatable.

“Six hours on Zoom is like 10 hours in the office,” one treasurer of a mega-cap company said during a recent NeuGroup meeting (yes, a Zoom meeting), quantifying a feeling about the side effects of virtual meetings. Almost everyone who has been working from home for seven months knows what she means.

  • At the same meeting, another treasurer said he is encouraging his team “not to book 30-minute calls, to make them 25 minutes instead. If you can, put headphones in, do one-on-ones while walking.”

Shaving time. At another meeting, of FX risk managers, members compared notes on how their companies are trying to fight virtual meeting fatigue.

  • One member kicked off the conversation, saying, “One of the things I implemented is if I’m scheduling a meeting for longer than 30 minutes, I only schedule them for 45 to 50 minutes to give people time to get up between meetings.”
    • Many other members have similar policies. “We start meetings 5 or 10 minutes after the hour or half-hour to allow for breaks and parents to help their children log into class,” one member said.
    • Another responded that “some people are going to be late anyway, why fight it?”
    • “We also implemented 25- and 50-minute internal meetings,” a third member commented.

Meeting moratoriums. In addition to shorter meetings, one member told the group, “We also have no meeting Fridays. It has been nice.” Another said his company has a no meeting Wednesday rule.

  • No surprise, the idea of a day without meetings struck a chord with peers who don’t currently have them. One said, “The no meetings on Fridays must be so nice.” Another said she “will have to implement” the policy at her company.
  • But one member, speaking on a Thursday, had a warning: His company has a no-Friday meeting rule “but somehow I have seven meetings tomorrow.”
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Retailers Assess Capital Structure Amid Signs of Rebound

As the economy revives, companies pay down revolvers, resume buybacks and assess counterparty risk. 

At a recent NeuGroup meeting of treasurers at retailers, sponsored by U.S. Bank, members discussed stock repurchase programs, paying down revolvers and monitoring the impact of capital structure changes on leverage ratios and credit ratings.

  • Members discussed moving from preparing for worst case scenarios in April and May (by increasing liquidity, initiating new revolvers) to more recent moves made in anticipation of returning to more normal operations.

As the economy revives, companies pay down revolvers, resume buybacks and assess counterparty risk. 

At a recent NeuGroup meeting of treasurers at retailers, sponsored by U.S. Bank, members discussed stock repurchase programs, paying down revolvers and monitoring the impact of capital structure changes on leverage ratios and credit ratings.

  • Members discussed moving from preparing for worst case scenarios in April and May (by increasing liquidity, initiating new revolvers) to more recent moves made in anticipation of returning to more normal operations.

Stock repurchase programs. After almost every company suspended ongoing or planned stock buyback programs, some have started up again while others are contemplating not if, but when their plans will resume. 

  • One member’s company announced the resumption of a buyback program in September which had been suspended in March.
  • There was widespread acknowledgement that restarting buyback programs can send a signal to the market that requires consistency with messaging by investor relations and other stakeholders.

Repaying revolvers. Most companies responded to the pandemic by quickly drawing down revolvers to increase liquidity in the late spring and early summer.

  • One member asked the group, “How many of you have publicly stated leverage targets, and how much did it impact the strategies you selected to respond in this environment?”
  • The end of lockdowns and signs of recovery have prompted most companies to largely pay back these defensive draws as concerns have abated.

Counterparty policies. Some members need to adjust counterparty risk policies after bumping up against volume and proportion limits with some of the banks they were using to deploy the excess cash.

  • This has kicked off critical decisions about how to balance maintaining banking relationships while increasing the scrutiny of the credit risk exposure to their most important counterparties.
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Transforming Treasury: The Power of a Data Warehouse and BI Tool

How one tech company is making use of better centralized data to improve forecasting.

Better data makes for better forecasts, reporting and data analysis. At a recent NeuGroup meeting, one member of a large technology company’s treasury team described the results of a two-year project to create a global treasury data warehouse to raise its data game.

  • The company’s vision: a centralized data repository with BI reporting that integrates and organizes bank statement, market, ERP and forecasting data.
  • The benefits of warehouses: data can be more readily viewed, analyzed with business intelligence (BI) tools and fed into dashboards for on-demand reporting.
    • Once the data is in one place, machines, algos and artificial intelligence (AI) can learn from it.

How one tech company is making use of better centralized data to improve forecasting.

Better data makes for better forecasts, reporting and data analysis. At a recent NeuGroup meeting, one member of a large technology company’s treasury team described the results of a two-year project to create a global treasury data warehouse to raise its data game.

  • The company’s vision: a centralized data repository with BI reporting that integrates and organizes bank statement, market, ERP and forecasting data.
  • The benefits of warehouses: data can be more readily viewed, analyzed with business intelligence (BI) tools and fed into dashboards for on-demand reporting.
    • Once the data is in one place, machines, algos and artificial intelligence (AI) can learn from it.

Challenges. Treasury at the company uses data from more than 25 internal and external systems with over 100 datasets.

  • Multiple applications need access to common datasets.
  • Individual teams have unique data reporting needs that may require more robust functionality than available with the TMS or other systems. Not everyone has access to all datasets, making permissions a problem.
  • Forecasting requires significant custom configuration.

Solution. An illustration of the system’s basic architecture showed that most data flows through the company’s TMS into the data warehouse, with the exception of Bloomberg market data. The member said it was “better to start with this than do everything at once.” The data from the TMS includes:

  • Incoming trade requests
  • Trade data
  • Bank statement data
  • Core treasury data

Use cases for the BI tool. Toturn the data into actionable information, treasury makes use of an internally-developed BI reporting tool that supplements TMS reporting and can embed reports in web apps. The member described three use cases:

  • Cash forecasting takes bank data from US bank partners loaded into the warehouse and makes use of machine learning (ML), a process the member said took considerable time to develop. 
    • The dashboard shows the forecast by cash flow type and by various models.  
    • The company’s future plans include using ML forecasts internationally.
    • A lesson learned: you need three years of historical data for ML.
  • Counterparty exposure uses data from the TMS and Bloomberg market data and involves numerous calculations in order to set maximum exposure levels for each bank. The tool was built with the company’s fintech team. 
    • The limits can change based on the credit perspective and the size of the company’s cash level as well as changes in the bank’s tier 1 capital.. 
    • Treasury’s cash management team gets involved if the limits are exceeded and senior leaders receive the information as well.
  • FX settlements helped address challenges faced by the company’s middle office, which can now see if the cash management team has held up settlements looking at a dashboard comparing the amount of FX trades settling to the amount of debit matching cashflows found.

Lessons and plans. In addition to the data requirements for ML, the member said treasury needs to limit data in the warehouse because a lot is “not clean” and needs to be properly categorized. “We need to be careful of the systems we integrate and make sure the data is actually useful,” he said. 

  • That said, the company plans to integrate new datasets and use new BI tools going forward. Other lessons and plans:
  • Technical program managers or data engineers are needed for data integrations. Another member at the company said the engineers are more efficient at getting data on the site. 
  • Work with the information security team to build a timeline for security reviews.
  • The company plans to add training on the systems to improve the user experience. Thus far, use by treasury has all been self-taught, the member said. 
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Impact Investing: Supporting Underserved Communities with Customized Loans

RBC’s customized investments help corporates reach specific groups and areas.

Increased attention on persistent racial disparities in wealth, income and home ownership in minority communities is motivating many corporates to look for new ways to make a difference through investments and deposits.

  • At a recent Visual Interactive Session, one NeuGroup member described the benefits of impact investing using a tailored and targeted approach offered by RBC Access Capital, part of RBC Global Asset Management.
  • “With the RBC team, we were able to develop a program that uses the money we have allocated to fund loans made by community development financial institutions and other lenders in traditionally underserved areas in support of affordable housing,” the treasurer of the member company said.

RBC’s customized investments help corporates reach specific groups and areas.

Increased attention on persistent racial disparities in wealth, income and home ownership in minority communities is motivating many corporates to look for new ways to make a difference through investments and deposits.

  • At a recent Visual Interactive Session, one NeuGroup member described the benefits of impact investing using a tailored and targeted approach offered by RBC Access Capital, part of RBC Global Asset Management. 
  • “With the RBC team, we were able to develop a program that uses the money we have allocated to fund loans made by community development financial institutions and other lenders in traditionally underserved areas in support of affordable housing,” the treasurer of the member company said. 
  • RBC’s strategy—which involves mortgage-backed securities—allows the company to “support the communities in which our employees live and work, but do it in a way that gives us confidence to ensure that we’re going to have preservation of capital consistent with our needs,” the member said.

How it works. At the core of RBC’s offering are separately managed accounts (SMAs) and mutual funds that primarily invest in pools of loans in the form of mortgage-backed securities (MBS) or other government guaranteed securities.

  • Ronald Homer, RBC’s chief strategist of US impact investing, said the firm incentivizes originators to make loans in communities targeted and specified by the investors. Those loans are then bundled into securities.
  • Not only have we found that these securities perform as well as securities made of the same type of loans in broader communities,” Mr. Homer said, “In many instances they perform better than the generic securities because of the idiosyncratic nature of the performance of the borrowers.” 
  • The minimum investment for an SMA, which the NeuGroup member is using, is $25 million. Lesser amounts are invested in mutual funds that also allow investors to target specific communities and geographies as well as those the fund already supports.
  • RBC’s strategies support low- and moderate-income individuals and communities, but can also be targeted specifically to Black, Indigenous and people of color (BIPOC) communities.

Customization. RBC Access Capital can customize for criteria including businesses owned by women, minorities and veterans. And the securities can reflect a company’s investment criteria in terms of liquidity, duration and credit quality.

  • “The client chooses the risk benchmarks and parameters,” Mr Homer said. “And we find the securities to match up to that benchmark and perform well.” 
  • In the case of the NeuGroup member, RBC designed a strategy to maximize liquidity and minimize volatility. The focus of the SMA investments are affordable housing in the San Francisco Bay Area. The member’s investments also support small businesses.
  • Whatever the focus, Mr. Homer said that to affect change, a program must have scale and sustainability. That is achieved with home loans and MBS, he said, because of the access to a liquid secondary market.
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A Green Bond Deal With Environmental and Social Benefits

Founder’s takeaways from the Treasurers’ Group of Mega-Caps 2020 H2 meeting.

By Joseph Neu

A green bond that moves the needle on E&S. One member shared insight from his company’s recent green bond offering that included a pair of African-American-owned investment banking firms among the four lead underwriters.

Founder’s takeaways from the Treasurers’ Group of Mega-Caps 2020 H2 meeting.

By Joseph Neu

A green bond that moves the needle on E&S. One member shared insight from his company’s recent green bond offering that included a pair of African-American-owned investment banking firms among the four lead underwriters.  

  • Not only is this member company breaking new ground with its second green bond, leveraging the experience and reporting infrastructure established with the first, but it is paving the way for further diversity firm involvement in this important issuance segment by bringing in firms from day one and making them true partners in the deal.
  • His company also asked the two bulge-bracket lead underwriters to assign minority bankers to leading roles on their deal teams to further promote professional diversity on the part of its vendors.
  • Few have gone farther to meaningfully tick the E and S box at the same time—well done. The economics of the bond were also groundbreaking, suggesting that it does pay to do good. 

Contingency plans for an election year. With US Presidential elections less than 40 days out, members have been working on contingency plans, including those on the outlook for the dollar, US interest rates and especially those involving a retroactive corporate tax increase well as other measures impacting multinational tax planning.  

  • Liability management trades have picked up as a result, as has analysis of global liquidity management structures including in-house banks and where to locate them. A close and contested election could also trigger market events that treasury teams should be ready for.
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Dangling Carrots in Supply Chain Finance to Boost Sustainability

HSBC’s SCF incentives help a big retailer make progress on sustainability goals.

The pandemic has prompted companies to pay more attention to their supply chains, to support key suppliers and make them more resilient and sustainable.

  • A recent HSBC survey found that 70% of companies want to improve control over supply chains, half seek more transparency, and a third want to accelerate making them more environmentally sustainable, planning investments over the next 12 to 18 months to do so.
  • The assistant treasurer (AT) of a major retailer explained to peers at a recent NeuGroup virtual meeting how his company teamed up with HSBC to use the corporate’s existing supply chain finance (SCF) programs to motivate suppliers to meet sustainability goals.
  • He noted HSBC’s publicly announced targets to provide sustainable financing and power the bank using only renewable energy, saying, “We knew the bank had strong commitments around sustainability, so we wanted to see if they wanted to put some skin in the game around our suppliers.”

HSBC’s SCF incentives help a big retailer make progress on sustainability goals.

The pandemic has prompted companies to pay more attention to their supply chains, to support key suppliers and make them more resilient and sustainable.

  • A recent HSBC survey found that 70% of companies want to improve control over supply chains, half seek more transparency, and a third want to accelerate making them more environmentally sustainable, planning investments over the next 12 to 18 months to do so.
  • The assistant treasurer (AT) of a major retailer explained to peers at a recent NeuGroup virtual meeting how his company teamed up with HSBC to use the corporate’s existing supply chain finance (SCF) programs to motivate suppliers to meet sustainability goals.
  • He noted HSBC’s publicly announced targets to provide sustainable financing and power the bank using only renewable energy, saying, “We knew the bank had strong commitments around sustainability, so we wanted to see if they wanted to put some skin in the game around our suppliers.”

Dangling carrots. The retailer had also announced significant greenhouse gas reduction goals. Working with the bank, using the existing SCF programs, it created two tiers—green and greener—in which suppliers can receive discounted invoice financing.

  • Participants must “set smart goals for sustainability, and then agree to share them publicly, because we think that’s a really important step—not just making the commitment but telling the world about it,” the AT said.
  • Partnering with a firm leveraging big data across the entire supply chain to score the sustainability of different products, the company and HSBC created a mechanism to determine if suppliers’ have succeeded in meeting their goals.
  • “So depending on the supplier’s percentage improvement, it would qualify for the better or best financing rate,” the AT said.
  • The carrots are attractive: tiers provide discounts ranging from 20% to 30% from the base rate.
  • “So not just a rounding error,” said Tom Foley, head of consumer/retail coverage, HSBC, adding, “If the pricing tiers are big enough, these are really significant savings for the green and greener suppliers.”

Suppliers give thumbs up. Among the company’s hundreds of suppliers already onboarded on to the SCF program, about 10% qualified for discount pricing, Mr. Foley said, adding that the incentives have increased the number of suppliers in the program by 40%, with 20% qualifying for the discounts.

  • “This program has seen the fastest growth of all our programs globally,” the AT said.
  • As a buyer-based program, it is “KYC light” to join, requiring relatively little data. “It’s easier to handle, and easier and faster for suppliers to be onboarded into the program,” Mr. Foley said.
  • The company ultimately worked out the supplier tiers and retains the flexibility to manage its own supplier network—HSBC at arm’s length.

Challenges? The toughest issue, Mr. Foley said, was getting far-flung bank and treasury executives to agree to the tiering concept and its benefits. Once the parties signed off, it took fewer than four months to make the necessary changes to the existing program, and the KYC-light nature made it easy to bolt on new suppliers.

  • Building the program on the existing SCF rails required minimal technology development.
  • “The bank had to make an investment into the business, and once we convinced everyone it was the right thing to do, getting it up and running didn’t take as long as one might think,” Mr. Foley said, adding that the bank anticipates making up over the long term any upfront financial losses.
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Tough Love Is What You Want From a Career Sponsor

Takeaways from the latest Women in NeuGroup event, sponsored by Deutsche Bank.

Women—and men—who seek sponsorship to help them advance professionally should expect the relationship—if it’s a good one—to involve some tough love.

  • That insight was among the key takeaways from a Women in NeuGroup virtual meeting held this week.

Takeaways from the latest Women in NeuGroup event, sponsored by Deutsche Bank.

Women—and men—who seek sponsorship to help them advance professionally should expect the relationship—if it’s a good one—to involve some tough love.

  • That insight was among the key takeaways from a Women in NeuGroup virtual meeting held this week.

Sponsorship is not mentorship. Tough love is one way to distinguish sponsors from mentors—a difference addressed at the spring WiNG event as well.

  • While mentors may offer you a shoulder to cry on and help vet your ideas, sponsors won’t sugarcoat your weaknesses. They will tell you what you need to work on to get to that next level in your career. You want someone who will talk you up to others but challenge you and help you develop.
  • A sponsor is someone who wields power over decisions at your organization and will provide unyielding promotion on your behalf when you’re not in the room, helping pave the way for advancement.

Give to get. The most effective sponsor relationships are built on the idea that you’ve got to give to get (a central tenet of NeuGroup peer groups). In other words, you need to bring value to the table to receive what you want.

  • One speaker suggests asking yourself if there something you can do for the sponsor that matters to them? Do you have insights on anything, can they learn something new from you? Also:
  • You can’t just wait for a sponsor to find you, but you can’t just target anyone either. Be strategic and think about what you’re going to contribute to a relationship.
  • Be truthful with yourself when you need a sponsor versus a mentor. If a sponsor’s advocacy is going to present a “jetpack” for your career, make sure that you’re ready to seize all opportunities that result.

Timing is everything. One panelist observed that many executives who are no longer travelling have more time to work and breathe. That means more opportunity for you to talk to them. However, since you won’t be running into them in the cafeteria anytime soon, you have to be more deliberate about asking for their time.

  • Just make sure to be specific about what you want to talk about. Provide background and questions to show that you are mindful of their time and why you are coming to them and not someone else.
  • One panelist, a treasurer, said that in one-on-one meetings, 99% of men bring a “talk sheet” to highlight their accomplishments and 95% of women don’t. However, for her it’s more important to “help me see what you are thinking” and to see that the person is forward thinking, sees the big picture and their role in it.

Hedge your bets. Beware of changing circumstances: A sponsor might leave the company or otherwise lose power so don’t have just one; this advice was from a panelist at a bank where turnover is likely higher than in your company. Other insights and advice:

  • Many meeting participants said they only realized they had a sponsor in hindsight, and they don’t know if they currently do! You won’t always know who your sponsors are, so be prepared to shine and seize opportunities when they’re presented.
  • You might think your work speaks for itself, and of course it’s very important to get the work done. But don’t be only focused on execution—also put your head up and take credit where credit is due.  
  • And don’t just execute the work, but take time to prepare for meetings you will participate in. If your boss’s presentation includes your work, ask for time to speak about that piece to get visibility.
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Sharing a Bloomberg Terminal From Home: How Long Will It Last?

Treasury teams relying on Bloomberg’s Disaster Recovery services face uncertainty.

During the pandemic, many treasury teams accustomed to sharing a Bloomberg Terminal in the office have made the most of Bloomberg’s so-called Disaster Recovery services (DRS), which has allowed multiple users, working from home, to access a Terminal subscription from different computers.

  • The value of that access has some NeuGroup members worrying about the expiration of their company’s ability to activate DRS as some workers—but not all—return to offices.
  • One member at a recent meeting of risk managers said using DRS has been very helpful, but was told their access would expire within the next month, forcing them to return to their previous workarounds.
  • Another NeuGroup member expressed frustration with the monthly renewal process and the need to prove the company still deserved access to DRS.
  • One member reported having no problems renewing the service.
  • Another, hearing about the option for the first time, saw it as a natural solution for the team’s short-term needs.

Treasury teams relying on Bloomberg’s Disaster Recovery services face uncertainty.

During the pandemic, many treasury teams accustomed to sharing a Bloomberg Terminal in the office have made the most of Bloomberg’s so-called Disaster Recovery services (DRS), which has allowed multiple users, working from home, to access a Terminal subscription from different computers. 

  • The value of that access has some NeuGroup members worrying about the expiration of their company’s ability to activate DRS as some workers—but not all—return to offices. 
  • One member at a recent meeting of risk managers said using DRS has been very helpful, but was told their access would expire within the next month, forcing them to return to their previous workarounds.
  • Another NeuGroup member expressed frustration with the monthly renewal process and the need to prove the company still deserved access to DRS.
  • One member reported having no problems renewing the service. 
  • Another, hearing about the option for the first time, saw it as a natural solution for the team’s short-term needs. 

Bloomberg’s response. A Bloomberg spokesperson, in an email, told NeuGroup Insights, “During this time, Bloomberg is extending the use of DRS for the duration of office closures or ‘work from home’ scenarios that are the result of government mandates in regards to the COVID-19 outbreak.

  • “We continue to revisit limitations to this use case in light of evolving guidance from authorities. We suggest firms contact their Bloomberg reps to understand their options.”
  • The spokesperson also wrote that DRS is intended as a temporary solution to enable remote access for “short periods of time.” 
  • Also, they said, “Bloomberg Anywhere (BBA) is the most appropriate option for long-term remote Terminal access,” confirming that BBA subscribers in effect always have DRS in place, in contrast to shared Terminal users.  
  • In May, NeuGroup Insights reported that Bloomberg had extended DRS use for users sharing a Terminal during the pandemic until the end of June and that it cost $35 per subscriber. 
  • The spokesperson this week did not comment on any end date or the price. 

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Talking Shop: Exploring Minority Bank Deposits Amid Increased Public Interest

Question: “Minority bank deposits: Is your organization active or exploring given increased public interest?”

  • “I’m looking to connect with those with experience in this area and discuss best practices. In addition, I’m looking to identify contacts at any recommend [Minority Depository Institutions].”
  • The member included a link to a Fortune article, which discusses Black-owned financial institutions amplifying the call for racial justice by drawing more private capital into their communities.

Question: “Minority bank deposits: Is your organization active or exploring given increased public interest?” 

  • “I’m looking to connect with those with experience in this area and discuss best practices. In addition, I’m looking to identify contacts at any recommend [Minority Depository Institutions].” 
  • The member included a link to a Fortune article, which discusses Black-owned financial institutions amplifying the call for racial justice by drawing more private capital into their communities. 

Peer Answer: “Hi, we are close to finalizing agreement/structure with a start-up (CNote) which works with credit unions serving disadvantaged communities. 

  • “They basically facilitate a placement of $250K deposits at CUs that they work with, which makes it risk free considering these deposits benefit from FDIC/NCUA insurance. If you want, we can connect on it, and I can provide a bit more background.”
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Talking Shop: Taking the Temperature of Today’s Credit Facilities Market

Member question: “Is anyone extending their credit facilities in this current market? Specifically, facilities with tenors of 3 or 5 years.”

Peer answer 1: “In early Sept., we closed the renewal of a 364-day facility. Given the large size of our overall facility, planning and lender discussion start months ahead of the renewal. At the time we kicked that project off, markets weren’t supportive of longer-dated renewals (none had occurred for jumbo facilities like ours). Good luck with your renewal!”

Member question: “Is anyone extending their credit facilities in this current market? Specifically, facilities with tenors of 3 or 5 years.”

Peer answer 1: “In early Sept., we closed the renewal of a 364-day facility. Given the large size of our overall facility, planning and lender discussion start months ahead of the renewal. At the time we kicked that project off, markets weren’t supportive of longer-dated renewals (none had occurred for jumbo facilities like ours). Good luck with your renewal!”

Peer answer 2: “I asked our capital markets team and they confirmed that, yes, credit facilities are being extended three to five years (based on the latest updates from BofA/JPM).”

Smooth segue to a deeper dive: Find more insights on the state of the revolving credit facility market here.

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The Revolving Credit Dance: Banks Step Out Cautiously

Bank capital challenges and economic recovery are calling the tune on revolver tenors, pricing.

The bank loan market is back in action, but even strong, investment-grade (IG) companies may want to step lightly since lenders still face challenges.

  • Bankers explained in a recent NeuGroup meeting that during the onset of the pandemic, banks’ internal credit ratings for clients often fell further than public rating agencies’, requiring lenders to set aside more capital and potentially shore it up by raising equity or selling assets.
  • Rolling over a 364-day facility should now be a walk in the park, the head of bank loan capital markets at a major global bank told members. Some borrowers with five-year credit facilities that aren’t coming due are avoiding the market, “not wanting to walk into elevated pricing and/or shorter tenors,” he said.

Bank capital challenges and economic recovery are calling the tune on revolver tenors, pricing.

The bank loan market is back in action, but even strong, investment-grade (IG) companies may want to step lightly since lenders still face challenges. 

  • Bankers explained in a recent NeuGroup meeting that during the onset of the pandemic, banks’ internal credit ratings for clients often fell further than public rating agencies’, requiring lenders to set aside more capital and potentially shore it up by raising equity or selling assets.
  • Rolling over a 364-day facility should now be a walk in the park, the head of bank loan capital markets at a major global bank told members. Some borrowers with five-year credit facilities that aren’t coming due are avoiding the market, “not wanting to walk into elevated pricing and/or shorter tenors,” he said.

The tone has changed. Just a few months ago, the banker would have told even highly rated IG companies that the five-year market was not in reach.

  • Now, the five-year market may be available, but banks are “respectfully” requesting borrowers to hold off re-upping longer-term facilities annually unless they are coming due, the banker said. 
  • The capital requirement on a new five-year facility is 100% on day one and steps down each year, “So pushing [out loan tenors] now when there’s still stress in the financial system makes it more difficult for banks,” the banker said.

The brighter side. Most IG borrowers, except those in the travel, oil and gas, and retail sectors, have repaid most of their drawdowns, and consequently pricing has come down. One example:

  • A low IG borrower put in place an eight-month, $1 billion revolver at the height of the crisis, with covenant protections including duration fees and spread steps.
  • Pricing was 40 basis points over Libor undrawn, 200 basis points drawn, and 40 basis points in upfront fees; its recent redo was priced at 25 undrawn, 162.5 drawn, and 20 basis points upfront. Pricing on its core facility before the amendments was 11 basis points undrawn and 112.5 drawn.
  • Banks will now overcommit for attractive credits and participate in syndications, with Chinese banks the exception, the banker said, adding, “We’re seeing declines from them on every capital request and we’ve been told it’s a capital issue, but I believe it’s also a political issue.”

Going forward. Longer tenors will gradually return on a case-by-case basis, the banker said, but when remains uncertain given the pandemic’s unknowns. “To come back entirely, I think we need to see earnings stability with borrowers, and that’s going to be sector by sector,” the banker said.

  • On the pricing front, wallets still count. For the highest-quality companies with large global wallets and minimal Covid-19 impact, there will be plenty of capacity, the banker said, and little if any change in pricing from pre-Covid levels, except maybe a few more basis points upfront. 
    • “Banks will request borrowers to stay at maturities of three years and under, but five years will always get done” for high-quality borrowers, the banker added.
  • In terms of loan size, best not to upsize and if necessary, supplement in the bond market. “Bank facilities are already underpriced, so upsizing them increases that pressure,” the banker said.  

Next summer. Companies skipping the annual re-upping of their five-year facilities may want two-year extensions—a challenge today—come next summer. Banks will still face capital pressure, but given their desire to please clients in hopes of ancillary business, “I wouldn’t be surprised if we get back to the five-year market completely,” the banker said.

  • The banker’s colleague suggested borrowers with that intent start signaling the relationship managers of their lead banks well in advance. “That gives everybody enough time to do their client plans, socialize it internally, and go to their capital committees,” he said.
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SOX-Like Framework Needed for ESG/Sustainability Disclosures

Moving ESG/sustainability information from the web to the 10-K warrants attention.

By Joseph Neu

Members of our group for treasurers at mega-cap companies recently heard a partner from the law firm White & Case share the findings of the firm’s latest annual survey of ESG disclosures in SEC filings by the top 50 companies by revenue in the Fortune 100.

  • The presentation built on a topic raised by the head of ESG at a member company in a NeuGroup session last month.

Moving ESG/sustainability information from the web to the 10-K warrants attention.

By Joseph Neu

Members of our group for treasurers at mega-cap companies recently heard a partner from the law firm White & Case share the findings of the firm’s latest annual survey of ESG disclosures in SEC filings by the top 50 companies by revenue in the Fortune 100.

  • The presentation built on a topic raised by the head of ESG at a member company in a NeuGroup session last month. 

From website to 10-K. Maia Gez, partner in the firm’s public company advisory group based in Silicon Valley, said the volume of ESG disclosures is rising to the extent that more of the information normally found on the corporate website is now finding its way into the 10-K. 

  • “The two tracks are merging,” Ms. Gez noted, “and there is not much clarity on how to blend the two.” 
  • Normally, bringing information from the corporate website to SEC reporting automatically elevates the level of governance required on what is disclosed. 

Disclosure debate. Institutional investors seem to be content with having ESG and sustainability information disclosed on the website, where 11 of the surveyed companies said they follow SASB or TCFD.

  • However, other constituents, starting with the Human Capital Management Coalition, have pressed for disclosures to be made in SEC reporting, emphasizing quantitative measures and the need for greater assurance. 
  • The Commission, however, has thus far been reluctant to impose a mandatory ESG framework or other prescriptive sustainability disclosure requirements for SEC filings. It preferers instead to stay with a more principles-based approach. 
  • SEC Chairman Jay Clayton has noted, for example, that E, S and G are “quite different baskets of disclosure matters and that lumping them together diminishes the usefulness, including investor understanding, of such disclosures.” They vary significantly from sector to sector and by country. 

Due diligence. Still, the trend to incorporate the website information directly or by reference in SEC reporting, including with green or sustainability bond issuance, is already increasing the due diligence on it by financial market counsel. 

  • Any section that remains on the website should have every line vetted and properly backed up.
  • Ms. Gez noted the trend is on the radar screen at her firm and that lawyers dealing with SEC reporting and equity or debt offerings (and 10b-5 opinions) are being brought up to speed quickly on this topic. 
  • ESG and sustainability releases should likely be reviewed by counsel now.
  • Eventually, an expansion of SOX or creating a SOX-like governance and control framework to provide assurance for ESG and sustainability controls will be needed.

Control and compliance. The growing use and importance of ESG and sustainability disclosures will force more companies to bring more of a legal or control and compliance mindset to their ESG/sustainability teams.

  • Internal and outside legal counsel and SOX control and audit teams will likely start playing catch-up quickly to establish governance frameworks around ESG-related disclosures. 

Human capital. First on the list is likely to be human capital management statements, where the SEC has offered specific guidance (90% of companies surveyed make disclosures on this and 70% increased them). Also important:

  • Employee welfare, health and safety and BCP, where 76% included such disclosures.
  • Board oversight of E and S risk is a factor (88% disclosed, 44% increased disclosure).

Materiality. Of course, information on websites is also going to be subjected to additional scrutiny. There, as well as in SEC reporting, treasurers should be advising their companies to be consistent and accurate. 

  • The more material that the information is to the financial picture and value of the firm, the more important it is to get right.
  • If the information is less material, then perhaps leave it out of SEC reporting or even off the website. 
  • Also, ask about the controls and procedures you have in place for incorporating ESG/sustainability information into SEC reporting/offering documents. 
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Busting Talent Silos and Reading the Signs on Hong Kong

Highlights from the Assistant Treasurers’ Group of Thirty 2020 H2 meeting sponsored by HSBC.

By Joseph Neu

Talent development is focused on silo busting. There are two silos in focus for AT members at the moment. The first is the diversity of hires, especially Black and Hispanic professionals along with women, into finance roles.

Highlights from the Assistant Treasurers’ Group of Thirty 2020 H2 meeting sponsored by HSBC.

By Joseph Neu

Talent development is focused on silo busting. There are two silos in focus for AT members at the moment. The first is the diversity of hires, especially Black and Hispanic professionals along with women, into finance roles. 

  • There is also a mandate to make this a long-term effort to build up the capacities and pool of potential candidates for corporate finance roles.
  • The other silo to bust open (though some in treasury are reluctant) is the one dividing treasury, at some companies, from the rest of finance on leadership development rotational programs. This is being evaluated at multiple levels—undergrads, MBA graduates and more senior positions. 
  • Both efforts are made more challenging by the duration of the current work from home environment. Working remotely poses more general challenges, too, for training and development and, with that, succession planning. Both are a perennial talent priority. 
  • However, one member noted a pre-pandemic initiative that is paying dividends working from home: it involves an internal website where employees from across all functions can post projects and needs, even just to have someone do in their spare time, to which anyone in the company can volunteer to help.
    • This uncovers new talent from a diverse pool across any silo to uncover hidden interest in finance or anything else.

Hong Kong signs. Having Hong Kong in its name (and Shanghai), HSBC was asked by a member what corporates should look for to signal that Hong Kong’s role as a capital market center in Asia might be about to sunset. 

  • The answer has to be seen in the context that Hong Kong’s capital market role is not easy to replace and benefits China and the international community; so there is reason to remain optimistic.
  • Financial sanctions, as opposed to carefully worded threats by the US, obviously wouldn’t help the situation.
  • But significant commercial law changes made by China, even if done in response to US moves, would probably be the best signal to indicate when capital flight moves from a contingency plan to an action plan for the majority now still committed to Hong Kong and its capital markets.
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Payments Ownership by Treasury and Other Founder KTAs from GCBG 2020 H2 Meeting

By Joseph Neu

During NeuGroup’s second meeting of the fall season, Global Cash and Banking Group members discussed a variety of cash and payment topics in sessions sponsored by TIS. Below are a few takeaways I wanted to share.

Cash forecasting: one size doesn’t fit all. One member shared the conclusion reached after six months of benchmarking to find an appropriate third-party vendor to improve cash forecasting, that there is no one-size-fits-all solution.

By Joseph Neu

During NeuGroup’s second meeting of the fall season, Global Cash and Banking Group members discussed a variety of cash and payment topics in sessions sponsored by TIS. Below are a few takeaways I wanted to share.

Cash forecasting: one size doesn’t fit all. One member shared the conclusion reached after six months of benchmarking to find an appropriate third-party vendor to improve cash forecasting, that there is no one-size-fits-all solution.

  • The approach has to be tailored to each company and how simple or complex their cash flow model is, how many legal entities they have, etc. This realization has driven the member’s company to approach cash forecasting in a more detailed way for the first time.
  • Their aim, like that of most, is to lower the resource burden and get the same or better forecasting accuracy. This means much-improved access to data to model their cash flows.
  • Once you have the data, you can find the algo, through backtesting, that fits the cash flow stream you want to forecast using AI. A portfolio of different cash flows will logically require a portfolio of algos to get the forecast right–a point driven home in another member’s sharing about the implementation of an AI-cash forecasting tool.

Remote work for higher pay.  Several members from companies based in lower cost of living locations noted a visible trend of top talent choosing to work from home at a new company that pays more. This is particularly pronounced with West Coast tech companies poaching talent.

  • The war for talent is no longer limited to geography, nor by relocation packages to equalize the cost of housing and other costs to maintain an employee’s standard of living.

Own all your payments. While treasury may not own the processing of all payments flowing in and out of the enterprise, the idea of getting more oversight and control over them is compelling.

  • Global transaction banks, meanwhile, are increasingly adding payment solutions of all kinds, especially digital offerings. Covid-19 has just accelerated the trend.
  • Technology firms like TIS and others recognized it early and for years have been building gateways to bridge the divide between banks and their enterprise customers. 

Take full advantage of the opportunity.  Treasury, as the primary bank relationship manager, needs to rethink how it interacts with internal payment functions (AR/AP) to coordinate or manage teams to procure, implement and integrate payment and related data solutions from banks and technology solution providers in a smarter way. 

  • This is important as banks revamp transaction banking services to incorporate merchant services (serving B2C, B2B and the omnichannels in between), into treasury and trade/payment solutions.
  • Looking across the procure-to-pay-cycle for all payment forms and incorporating payment data will make treasury that much better at cash and exposure forecasting/management. That includes by deploying ML, algos and AI on the data.
  • New ideas bred from these efficiencies will flow to supply chain and customer delivery models to open new business opportunities. 
  • And of course, a global bank/digital technology overlay on all transactions, will help keep payments more secure from fraud and other cyber and security risks. 
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Transforming Data Reporting and Analytics With a BI Tool

Qlik Sense has made one treasury risk manager’s team more efficient and nimble.

A financial risk manager at a manufacturer with a decentralized global treasury told peers at a recent NeuGroup meeting that the self-service BI analytics platform Qlik Sense has transformed the company’s data reporting and analysis.

  • A comprehensive report that used to take the member’s team several days to prepare can now be done in a matter of hours with Qlik Sense.
  • “[The data] impacts recommendations to leadership for currencies and commodities,” the member said. “The on-the-fly app creation can lead to on-the-fly analysis.”

Qlik Sense has made one treasury risk manager’s team more efficient and nimble.

A financial risk manager at a manufacturer with a decentralized global treasury told peers at a recent NeuGroup meeting that the self-service BI analytics platform Qlik Sense has transformed the company’s data reporting and analysis.

  • A comprehensive report that used to take the member’s team several days to prepare can now be done in a matter of hours with Qlik Sense.
  • “[The data] impacts recommendations to leadership for currencies and commodities,” the member said. “The on-the-fly app creation can lead to on-the-fly analysis.”

More efficient. “We became a lot more efficient,” she said. “This has made us a lot more nimble and provided additional value to the organization as well.”

  • The BI tool has made the difficult task of melding data from different regions for reporting far less cumbersome, in part by transforming data from the company’s multiple treasury management systems (TMSs) into a format that’s easy to use.
  • “It helps us organize, show rankings, visualize and pull basically any analytics,” the member said.
  • That’s especially important because the manager’s team is being asked to do more analysis and management reporting, including knowing the drivers of FX exposures down to specific product models and volumes.

How it works: inputs. In broad terms, Qlik Sense takes data inputs from a variety of sources and allows the company to analyze and output the data in a multitude of reports. The inputs include:

  • FXall
  • The company’s TMS
  • Exposure templates
  • Essbase (product volume data)
  • SAP

How it works: outputs. Once the data has been processed by Qlik Sense, the risk manager can “slice and dice” information using multiple parameters and filters to produce reports and dashboards showing:

  • Exposure analysis. Qlik Sense allows the team to monitor monthly product volume forecasts to identify potential exposure changes between collection periods, a feature the member called extremely useful.
    • Filters include countries of production, and dashboard pages show the country of sale.
  • Hedge position on a forward, 12-month, forward basis. Dashboards can be exported for management presentations.
  • Counterparty performance.
  • Share of wallet.
  • Volume analysis.
  • Cash flow at risk (CFaR)—period to period analysis, including which currencies and commodities contributed the most to CFaR.
  • SOX control performance.

Learning curve. The risk manager taking advantage of Qlik Sense has a technical background which has made learning and using the tool relatively easier than for some members of treasury who find it intimidating. A small subset of people within treasury use Qlik Sense, the member said.

  • This underscores the need for companies to provide appropriate training to employees who have a range of technical skills.
    • Treasury professionals will in all likelihood need to learn how to use self-service BI analytic tools to stay relevant as more finance teams are asked to do more work with fewer resources.
  • The risk manager is trying to learn more about other BI tools, including those used by many NeuGroup members: Power BI and Tableau.
  • Another member whose treasury team will be using Alteryx, said everyone the company is hiring seems to have a deep knowledge of Python, a programming language.
  • The member using Qlik Sense said she is teaching herself to use Python to keep up, saying, “I don’t think you’re going to get out of Python.”
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Looking Beyond Libor: Engage Vendors, Expect Some Frustrations

Corporates preparing for a transition to SOFR may need to push some systems vendors.

NeuGroup members appear to be making headway to transition floating-rate exposures to the secured overnight financing rate (SOFR) or an alternative Libor replacement. However, in a meeting in which two members detailed their preparations, a major concern arose about third-party vendors’ progress and the need to push them along.

  • Responding to polling questions during the meeting session, 70% said they have compared notes with peer companies about their efforts and progress toward the transition.
  • In terms of their current status, 57% said they were in decent shape, 13% far along, and 30% behind for various reasons.

Corporates preparing for a transition to SOFR may need to push some systems vendors.

NeuGroup members appear to be making headway to transition floating-rate exposures to the secured overnight financing rate (SOFR) or an alternative Libor replacement. However, in a meeting in which two members detailed their preparations, a major concern arose about third-party vendors’ progress and the need to push them along.  

  • Responding to polling questions during the meeting session, 70% said they have compared notes with peer companies about their efforts and progress toward the transition. 
  • In terms of their current status, 57% said they were in decent shape, 13% far along, and 30% behind for various reasons.  

Finding Libor. Systems involving Libor must be upgraded, including treasury management systems (TMSs) and asset systems, if a company has a captive financing arm.  It’s a process one member estimated taking 10 months.  

  • There may also be exposures to Libor, anticipated to no longer function as a benchmark after 2021, that are buried in late fees, intercompany agreements and other contractual arrangements. 
  • “So we’re working with our legal services team and general counsel to identify any agreement that may mention Libor,” an assistant treasurer said.  

Tight timetable. Given the time to implement systems changes and test them, the timetable is already tight, according to one member in discussions with regulators about large multinationals’ challenges, especially if new requirements such as the recently discussed credit-sensitive spread are introduced. 

  • “If market parameters change, and we’re not on that upgrade, that’s a challenge for us,” the member said. “So we’ve been very vocal with regulators about the time it takes to implement those systems.” 

Vendor concerns. No matter how vigilant corporates may be, much depends on vendors upgrading their systems, not just to accommodate using the new benchmarks, but also by transitioning legacy agreements and transactions.   

  • Noting “good engagement” with its vendor, one member said, “We’ve tried to engage them early and often, because a big part of our success will be around getting the consultants we want” to help with the upgrade. 
    • Another peer group member seconded the importance of reserving a consultant who understands the company’s systems. 
  • And good engagement doesn’t mean the upgraded system will solve all the issues. The AT said the TMS will still require treasury to terminate and re-enter new financial instruments, “and that’s a major undertaking.”  

Frustration rising. Another AT said attempts to seek updates on system upgrades from a different TMS vendor went unanswered for months. When the vendor responded to questions about fallback language to transition legacy transactions, it became clear this upgraded system would also require closing and re-entering every contract.  

  • “They claim that they have not been in contact with the ARRC (Alternative Reference Rates Committee, which is guiding the transition to SOFR), which was surprising to me, and they’ve been relying on auditors and customers for feedback on how to implement this,” the AT said.
  • Another member using the same vendor said his team had heard something similar. “There’s not a way to easily make the transition today,” the member said.  
  • Said the first member: “I don’t know who else is using [this vendor], but I would encourage you to get on the phone and push them as hard as possible.”  
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Talking Shop: Methods for Pulling Cross Rates From Central Bank Published Rates

Question:How does your company pull cross rates that are required to be pulled from central banks’ published rates?

  • “Looking for some teams to benchmark on how you all pull the cross rates that are legally required to be pulled from central bank published rates. Pulling these rates from central banks’ websites is inefficient and we wanted to know how others are doing this.”

Question: How does your company pull cross rates that are required to be pulled from central banks’ published rates? 

  • “Looking for some teams to benchmark on how you all pull the cross rates that are legally required to be pulled from central bank published rates. Pulling these rates from central banks’ websites is inefficient and we wanted to know how others are doing this.” 

Peer Answer 1: “We use Bloomberg’s data license program to get the rates via a file and upload them automatically to our enterprise accounting system. Refinitiv/Eikon/Reuters provides a similar service. We recently migrated to Bloomberg.”

  • In a follow-up, the responder confirmed using Bloomberg for both central bank published FX Rates (published once a day) as well as standard market FX quotes (traded continually).

Peer answer 2: We manually put the required central bank rates into our ERP system, the old school style.” : (

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Reality Check: Banks Dial Back PPP Loan Forgiveness Expectations

Delays in applications and action by Congress will affect banks’ NIM and NII forecasts.

Forget about forgiveness until early 2021. That, in a nutshell, was among the takeaways from a recent conversation between members of NeuGroup’s Bank Treasurers’ Peer Group.

  • The forgiveness at issue is for loans that banks made under the federal government’s $669 billion Paycheck Protection Program (PPP), part of the CARES Act enacted to help small businesses struggling during the pandemic.
  • The loans can be forgiven if companies used the money to maintain payrolls and meet certain other requirements.
    • The Small Business Administration (SBA) opened a portal for forgiveness applications in August, but some borrowers and banks are waiting for Congress to take action on legislation to automatically convert the smallest loans into grants.

Delays in applications and action by Congress will affect banks’ NIM and NII forecasts.

Forget about forgiveness until early 2021. That, in a nutshell, was among the takeaways from a recent conversation between members of NeuGroup’s Bank Treasurers’ Peer Group.

  • The forgiveness at issue is for loans that banks made under the federal government’s $669 billion Paycheck Protection Program (PPP), part of the CARES Act enacted to help small businesses struggling during the pandemic.
  • The loans can be forgiven if companies used the money to maintain payrolls and meet certain other requirements. 
    • The Small Business Administration (SBA) opened a portal for forgiveness applications in August, but some borrowers and banks are waiting for Congress to take action on legislation to automatically convert the smallest loans into grants (see below).

Changing views. “We don’t think there will be any forgiveness until early next year,” one bank treasurer said, asking peers how their views had changed. His bank had originally expected half the amount of its PPP loans to be forgiven by year-end. “We’ve pushed everything into 2021.”

  • Another treasurer said his bank has “dialed back” its initial projections for forgiveness in Q4 2020. Another member agreed, saying he expects to wait “weeks into 2021.”

Ripple effects. In a follow up, one of the treasurers described how delays by the SBA in forgiving PPP loans will affect banks.

  1. “These are low yielding assets (1% coupon), so holding these longer than anticipated is a negative to net interest margin (NIM).
  2. “Many banks were anticipating that the forgiveness program would be more efficient; there is a fee component to these loans that the SBA is paying to banks as the loans are forgiven.  Currently, banks are accreting the total amount over the two-year maturity.
    1. “But if the loan is forgiven early, all of the remaining fee to accrete will accelerate to the forgiveness date.  So this also has net interest income (NII) and NIM forecasting implications.”
    2. This poses potential problems preparing investor decks that include NIM and NII guidance used by CFOs and CEOs.
  3. “Since PPP loans are 0% risk-weighted, they do not affect regulatory ratios. They do however affect the TCE (tangible common equity/tangible assets) ratio. The longer the PPP loans stay on bank balance sheets, the longer this ratio will be depressed.”

Action by Congress? The member also noted that many banks had hoped Congress would “come together and automatically forgive all loans that were under $150,000. This would account for a majority of the loans that were granted.  However, Congress doesn’t appear to be able to come together on any legislation at this time.”

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Risk Managers Face an Inflection Point Without a Clear Direction

NeuGroup Founder and CEO Joseph Neu shares his key takeaways from the FX Managers’ Peer Group 2 2020 H2 Meeting, sponsored by Societe Generale.

By Joseph Neu 

NeuGroup’s second-half meeting season got off to a great start with the FX Managers’ Peer Group 2. Here are my takeaways from the two-days’ sessions last week.

We are at an inflection point, but to what? With the economic impact of Covid-19 on business, early crisis concerns about liquidity pushing out liabilities, unprecedented monetary intervention and fiscal stimulus, plus a Fed policy shift to make it harder for inflation fears to move US rates off the zero bound, it feels like we are at an inflection point that requires MNCs to adjust their FX hedging. Yet to what exactly is a more difficult question:

  • Not everyone is convinced that the dollar is going from structurally strong to weak (even against the euro), for example.
  • And, while volatility is higher than pre-Covid, it’s higher off of extreme lows.
  • Plus exposure forecasts of underlyings are starting to become less cloudy.

So maybe its time to get more sophisticated at the margins such as to extend a layering program out another year or collar hedge gains, rather than make wholesale changes to your FX program.

  • Tail risk hedging would make sense, but given how markets are behaving what would work?

Key takeaways from the FX Managers’ Peer Group 2 2020 H2 Meeting, sponsored by Societe Generale.  

By Joseph Neu 

NeuGroup’s second-half meeting season got off to a great start with the FX Managers’ Peer Group 2 last week. Here are some key takeaways:

We are at an inflection point, but to what? It feels like we are at an inflection point that requires MNCs to adjust their FX hedging. The reasons include the economic impact of Covid-19 on business, early crisis concerns about liquidity pushing out liabilities, unprecedented monetary intervention and fiscal stimulus—plus a Fed policy shift to make it harder for inflation fears to move US rates off the zero-bound. Less clear is where we go from here. 

  • Not everyone, for example, is convinced that the US dollar is going from structurally strong to weak (even against the euro). 
  • And while volatility is higher than pre-Covid, it’s higher off extreme lows. 
  • Plus, forecasts of underlying exposures are starting to become less cloudy. 

So maybe it’s time to get more sophisticated at the margins and, perhaps, extend a layering program out another year or collar hedge gains, rather than make wholesale changes to your FX program. 

  • Tail risk hedging would make sense—but given how markets are behaving, what would work? 

Data repositories are in vogue. Despite working from home and the turmoil of Covid-19, several members have continued to push ahead. Their technology projects bring data into lakes, warehouses and other containers where it can be more readily viewed, analyzed with BI tools and fed into dashboards for on-demand reporting. 

  • Progress is promising and once quality data is in one place machines, algos and AI can learn from it. 
  • Bonus question: If the TMS is not relied on to be the data repository and the reporting and analysis are taking place outside of it, then how valuable is the TMS? 

Users vs. builders. Much of the code, analysis and BI tool building starts with power users in treasury who teach themselves to become builders. The trouble is that not everyone is a builder, nor can they always find the time to sustain their building skill and maintain the code to scale securely. 

  • The problem compounds when everyone is free to use whatever tool they have taught themselves to use on the web. 
  • This is where it is important to hand off to an IT center of excellence, which needs to have good finance function acumen, and a subgroup with good treasury function acumen. 

It’s the lack of ready access to these COEs that drives interested professionals in treasury to a self-service model and to teach themselves to become builders. 

  • So, CFOs and treasurers would do well to determine a balance between power users that become builders and investing in sufficient, dedicated builder professionals to serve the needs of their important specialty functions.
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Weighing Reward vs. Risk, Cash Investors Make Moves or Hunker Down

Some take advantage of opportunities to pick up yield; others play it safer and stick to government money funds.

The Covid crisis has illuminated where corporate cash investors sit on the risk tolerance spectrum—a point underscored in a Virtual Interactive Session sponsored by ICD this week that gave some NeuGroup members a clearer picture of where they stand relative to their peers.

Career risk vs. opportunity for yield. Hearing what some peers have done “reinforces how conservative we really are,” said one member whose company “took a hit” in an ultra-short duration fund as the pandemic unfolded and “was not used to seeing a dip” in its portfolio.

Some take advantage of opportunities to pick up yield; others play it safer and stick to government money funds.

The Covid crisis has illuminated where corporate cash investors sit on the risk tolerance spectrum—a point underscored in a Virtual Interactive Session sponsored by ICD this week that gave some NeuGroup members a clearer picture of where they stand relative to their peers.

Career risk vs. opportunity for yield. Hearing what some peers have done “reinforces how conservative we really are,” said one member whose company “took a hit” in an ultra-short duration fund as the pandemic unfolded and “was not used to seeing a dip” in its portfolio.

  • The company’s resulting risk aversion, “with everyone gun-shy,” has made taking any chances to “get a few more bips” an unacceptable “career risk kind of thing,” he said. The company is now sticking with government money market funds.
  • On the other end of the risk spectrum sat a multinational that, like others, raised lots of cash and liquidity in the early days of the pandemic. A member from this company took the stance that “we have to look for opportunities to invest that cash,” this member said.
  • “Although we didn’t know the exact timing or size of our cash needs, we were able to assume that the majority of this balance would be around for at least a number of months, so in that situation prime funds worked out.”

How to decide it’s time for prime. This member, whose company had never invested in prime money market funds, said the funds “eventually turned into opportunities” to “generate some yield.”

  • The company made the move after computing “the minimum number of days (how long) we need to stay invested in a prime fund to offset a small drop in NAV of that fund,” he said.
  • It calculates the number by taking “the additional yield that prime funds offer over the next best alternative investment. Using this, we back into the number of days the principal needs to be invested for, so that this incremental return is equal to the loss caused by a drop in NAV.
  • “For us, this just sets a baseline for what we deem to be the shortest possible duration, and we evaluate from there if we wish to proceed. If we do, we continually monitor the investment and any movements in the NAV.”
  • Another member said his company “didn’t do a good enough job of measuring the risk; we should have moved back sooner to prime, more proactively.”

Source: ICD

Identifying opportunities with the efficient frontier. ICD described a model it developed, based on modern portfolio theory, to help clients assess the relative risk-weighted investment opportunities in money markets by using efficient frontier analysis.

  • As the chart shows, prime money market funds (PMMF) and Federally Insured Cash Accounts (FICA) appeared above the beta line of one-month Treasury bills from May to June of 2020.
    • That indicates those investments provided more return than the risk associated with them, according to the model. One member said she wants to get more info on FICAs.

Beyond prime: deposits. Several members said they are making use of time deposits and short-term deposits with approved counterparties, suggesting that technology that helps assess and monitor counterparty risks is timely.

  • “We do time deposits and we’ve got approved counterparties that we will trade with. And we are able to pick up a good return, well into 25 to 35 basis points range on a one-month time deposit. That’s what we are doing to pick up additional yield and optimize,” one member said.
  • “30-day, that seems to be the [point] where you start to see rates a little bit better,” another member said. “And we stagger them so they’re every couple of weeks, so that way every few weeks we have our vision point to be able to collect cash back in and let it mature, or let it roll over. We’ve done a couple longer tenor, but nothing more than three months.”

Beyond the credit facility banks?  One member said his company had “maxed out” on depositing cash in interest-bearing accounts using banks in its credit facility. He turned to highly-rated banks outside the group that had approached the company offering attractive rates.

  • Another member, in the process of moving cash out of government MMFs and into demand deposit accounts, said he “hadn’t thought of going outside the credit facility.”
  • But, reflecting the range of risk appetite among companies, another member said he was staying away from bank deposits to avoid counterparty risk.
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Talking Shop: The Philosophy of Fees on Revolving Credit Facilities

Question:  “Do you pay the same arrangement fee for a 364-day revolver renewal as for a 5-year renewal?”

“We executed our first 364-day revolving credit facility last year (in addition to a five-year) and it is time to renew the 364-day facility. We only have 50% of the banks participating in the 364-day renewal.

  • We were thinking to pay a proportionate amount of arrangement fees to the lead banks. I don’t think they have to do very much since we have contacted all the banks; however, our lead arranger bank has suggested we should pay exactly the same arranger fee, i.e. a minimum fee.
  • What is your philosophy?”

Question:  “Do you pay the same arrangement fee for a 364-day revolver renewal as for a 5-year renewal?”

“We executed our first 364-day revolving credit facility last year (in addition to a five-year) and it is time to renew the 364-day facility. We only have 50% of the banks participating in the 364-day renewal.

  • We were thinking to pay a proportionate amount of arrangement fees to the lead banks. I don’t think they have to do very much since we have contacted all the banks; however, our lead arranger bank has suggested we should pay exactly the same arranger fee, i.e. a minimum fee.
  • What is your philosophy?”

Peer Member Answer: “We only pay an arranger fee to the admin agent on our 364 day renewal.  When we did the original 364 day deal, we also paid a fee to one other bank (who was the syndication agent).

  • We don’t pay arrangement fees to any of the other JLAs (joint lead arrangers), as they aren’t doing any work (other than what they need to do internally to provide their own commitment) and a 364-day extension is a pretty easy process. 
  • So we only pay those banks that are actively involved in the arrangement process, and not all of the JLAs.” 
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Friedman, Profits and Treasury’s Role in Stakeholder Capitalism

50 years after Milton Friedman’s landmark essay on profits, treasurers are trying to embrace stakeholder capitalism responsibly.

By Joseph Neu

Milton Friedman’s essay, “The Social Responsibility of Business Is to Increase Its Profits,” turned 50 this past Sunday. Many commentators are seeking to mark the occasion with efforts to either square stakeholder capitalism with Friedman’s view—helping stakeholders is good for long-term profitability—or call him out as myopic to the more equal, inclusive and sustainable future that young people—and others—now want.

50 years after Milton Friedman’s landmark essay on profits, treasurers are trying to embrace stakeholder capitalism responsibly.

By Joseph Neu

Milton Friedman’s essay, “The Social Responsibility of Business Is to Increase Its Profits,” turned 50 this past Sunday. Many commentators are seeking to mark the occasion with efforts to either square stakeholder capitalism with Friedman’s view—helping stakeholders is good for long-term profitability—or call him out as myopic to the more equal, inclusive and sustainable future that young people—and others—now want.

Milton Friedman

Today’s reality. The timing is telling. We see more and more of our members seeking to find a way to support corporate social responsibility, the S in ESG (environmental, social, governance), along with addressing racial inequality in favor of inclusiveness, helping the communities in which they operate and supporting a more sustainable future.

  • A repeating theme, however, is that members want to use capital, if not capitalism, to accomplish these good goals.
  • They also want to support stakeholders and communities in need in a manner that rewards authentic efforts to build their capabilities. And in ways that justify capital contributions (investments) with success measured in real key performance indicators (KPIs)—dare I say profits—as they might be more broadly defined.

Fiduciary duty. It is hard for treasury professionals to give up their fiduciary duty, be it to shareholders or some larger cohort of beneficiaries. So their first instinct is to do something to help disadvantaged stakeholders without doing anything they would not otherwise do—business as usual (BAU). For example:

  • Treasury needs to deposit excess cash in a bank, so why not a minority-owned bank lending to disadvantaged communities?
  • Treasury needs to retain broker-dealers to assist with buying back shares or to issue bonds or commercial paper; why not use some that are minority owned?
  • Treasury is being asked to invest corporate funds in a manner consistent with a risk-adjusted return mandate. Might investments in disadvantaged stakeholders mitigate risk (through diversification and supporting political-economic stability) to the extent that they meet that risk-return profile?

A goal for government. More prominent than 50 years ago, today’s backdrop to all this is the concern that the political process and government are too slow, ineffective or no longer capable of socially responsible actions sufficient to help stakeholders.

  • This would be less true if politicians took seriously their fiduciary obligation to act in their stakeholders’ best interests in the same way that treasury professionals do.
  • That is, if they sought to do good via BAU and to measure success with real KPIs, if not profits.
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Excitement Borne of Frustration Greets Ameribor 30-day Term Rate

Bank treasurers facing Libor’s end welcome news on a forward rate from the AFX.

Libor’s days are numbered and bank treasurers eager for the development of a forward-looking, term interest rate that has a credit component got some good news last week:

  • The American Financial Exchange (AFX) announced an indicative 30-day forward rate called Ameribor30 whose base rate is overnight Ameribor, which reflects the unsecured borrowing costs of more than 1,100 American lenders.
  • “I’m pretty excited about it,” one member of NeuGroup’s Bank Treasurers’ Peer Group said during a call with peers. “This is a step in the right direction that we haven’t seen yet.”
  • AFX said ServisFirst Bank will use the Ameribor30 rate to price a $20 million loan.

Bank treasurers facing Libor’s end welcome news on a forward rate from the AFX.

Libor’s days are numbered and bank treasurers eager for the development of a forward-looking, term interest rate that has a credit component got some good news last week:

  • The American Financial Exchange (AFX) announced an indicative 30-day forward rate called Ameribor30 whose base rate is overnight Ameribor, which reflects the unsecured borrowing costs of more than 1,100 American lenders.
  • “I’m pretty excited about it,” one member of NeuGroup’s Bank Treasurers’ Peer Group said during a call with peers. “This is a step in the right direction that we haven’t seen yet.”
  • AFX said ServisFirst Bank will use the Ameribor30 rate to price a $20 million loan.

Frustration with SOFR. Some of the enthusiasm for Ameribor30 voiced on the call stems from the frustration of many regional bank treasurers with the development of the secured overnight financing rate (SOFR), the overnight rate alternative to Libor endorsed by the Alternative Reference Rates Committee (ARRC).

  • The response by ARRC to banks’ desire for term rates and a credit spread adjustment was met with “that’s your problem, not our problem or charge,” one of the bank treasurers said. “It felt like it was being jammed down banks’ throats.”
  • By contrast, he said, Ameribor is “stepping forward—we got something we think could work” so banks can ultimately price term loans for borrowers, including corporates.

How will it work? AFX, in announcing the new rate, said Ameribor30 uses “methodology and transactions” that align “with macroeconomic theory and academic research on the term structure of interest rates.” Another source tells NeuGroup Insights:

  • The rate will be computed with a model that uses overnight Ameribor, some sort of commercial credit spread as well as employment rates and an inflation indicator.
  • In back testing, Ameribor30 aligned well with Libor but did not “gap out as much as Libor,” the source said.
  • AFX is looking at one of the rating agencies to serve as a calculation agent and will have a third party verify the model.
  • The new 30-day rate will begin appearing on the AFX website in the next week or two.
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Talking Shop: Disclosing Option Premium Expenses in Revenues

Context: In 2017, the FASB issued ASU 2017-12, which simplified and expanded the eligible hedging strategies for financial and nonfinancial risks.

  • The update goes into effect for all corporates this year, and some NeuGroup Members recently collaborated to share their approach to updated guidance on disclosing option premium expenses in their revenues.

Question: “Does anyone disclose option premium expense in their revenues due to ASU 2017-12?”

Context: In 2017, the FASB issued ASU 2017-12, which simplified and expanded the eligible hedging strategies for financial and nonfinancial risks.

  • The update goes into effect for all corporates this year, and some NeuGroup Members recently collaborated to share their approach to updated guidance on disclosing option premium expenses in their revenues.

Question: “Does anyone disclose option premium expense in their revenues due to ASU 2017-12?”

  • “As a consequence of the revised accounting for hedge costs under ASU 2017-12, our company is reviewing our typical script for option impact. Previously, we reported option premium expense to OiOE (other income/other expenses) but now it goes to revenue. Thus, our ‘script’ is no longer applicable.”

Peer answer 1: “We don’t directly call out option premium expense in the 10Q/K, but it’s embedded in the hedge results in the I/S line we’re hedging, e.g., revenue or expense.”

Peer answer 2: “Here, it has been long-standing practice to realize the premiums in our revenues. I don’t think we disclose the premiums anywhere.

  • “I recall all of our disclosed amounts represent a net gain/loss across applicable positions (e.g., disclosing one number for all securities maturing, which would be a mix of options and forwards across multiple currencies, with no further breakdown).”

Expert opinion: NeuGroup Insights reached out to hedge accounting expert Rob Baer, head of derivative accounting at Derivative Path. He said that from a rates perspective, his company sees disclosure of fair market value (FMV) and notional, but not premium.

  • “Typically we don’t see premium cost as a disclosure item,” he said.  “However, under the new hedge accounting rules, we see most clients exclude premium from the effectiveness assessment and amortize it straight line (the most common systematic and rational method).”
  • Other analysis: “To some extent, the premium might be disclosed when stating amounts excluded from hedge effectiveness assessments.”
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ESG Transparency Goals Create Hard Resource Allocation Decisions

The struggle to prioritize reporting requirements for a growing list of ESG standards and frameworks.

Some NeuGroup member companies are struggling to prioritize how to allocate the resources necessary to satisfy a growing list of reporting and disclosure standards as corporates strive to be more transparent about their environmental, social and governance (ESG) records.

  • That was among the key takeaways at a recent Virtual Interactive Session where an ESG officer raised the subject of determining what information is truly useful to investors evaluating companies on sustainability criteria.
  • “I’m just throwing that out as something we’re struggling with internally right now, trying to figure out how to prioritize, because we really recognize that we can’t do everything,” the executive said.
  • In a poll at the meeting, 65% of attendees said they are putting resources toward enhancing their disclosures, suggesting that the issue of resource allocation is widespread.

The struggle to prioritize reporting requirements for a growing list of ESG standards and frameworks.

Some NeuGroup member companies are struggling to prioritize how to allocate the resources necessary to satisfy a growing list of reporting and disclosure standards as corporates strive to be more transparent about their environmental, social and governance (ESG) records.

  • That was among the key takeaways at a recent Virtual Interactive Session where an ESG officer raised the subject of determining what information is truly useful to investors evaluating companies on sustainability criteria.
  • “I’m just throwing that out as something we’re struggling with internally right now, trying to figure out how to prioritize, because we really recognize that we can’t do everything,” the executive said.
  • In a poll at the meeting, 65% of attendees said they are putting resources toward enhancing their disclosures, suggesting that the issue of resource allocation is widespread.

Operational data: how useful? In response to a question, the executive said that a lot of what is called for by various disclosure frameworks is detailed operational data—some of questionable value.

  • For example, certain frameworks recommend disclosing a company’s number of cyberbreaches, something the ESG officer said raised several questions.
  • “Number one, whether or not you ought to be disclosing that,” the executive said. “How an investor would look at that? What’s a breach? We all know that we’re all vulnerable every day and so some of those numbers aren’t remotely useful to an investor.”
  • One recommendation for navigating all the various disclosure frameworks: Determine what the quality of the data ought to be and allocate resources only to the most useful programs.
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Auditors Eye Risks of Not Knowing Where Remote Workers Call Home

Employees who move to other states or countries raise tax issues, and others, for employers.

Everyone knows that millions of people are still working from home (WFH). But not every employer knows exactly where every employee is working—a potential headache discussed by members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) at a recent virtual meeting.

  • “We’re super worried about it,” said one auditor about the various tax, legal and compensation issues WFH can raise for corporates.
  • It is critical that employers know where their employers are performing services, tax attorney Larry Brant of Foster Garvey said in a recent article. “The consequences of not knowing where your employees are working could be costly,” he wrote.

Employees who move to other states or countries raise tax issues, and others, for employers.

Everyone knows that millions of people are still working from home (WFH). But not every employer knows exactly where every employee is working—a potential headache discussed by members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) at a recent virtual meeting.

  • “We’re super worried about it,” said one auditor about the various tax, legal and compensation issues WFH can raise for corporates.
  • It is critical that employers know where their employers are performing services, tax attorney Larry Brant of Foster Garvey said in a recent article. “The consequences of not knowing where your employees are working could be costly,” he wrote.

Tax troubles? Taxes are a big source of the potential problems raised by employees who have used the pandemic to relocate to states or even countries other than where the company operates.

  • Having an employee working in another state subjects employers to the tax regimes of that jurisdiction, Mr. Brant explained. Those may include income taxes, gross receipts taxes as well as sales and use taxes.
  • Employees working remotely in another state—even temporarily—could also affect withholding requirements that apply to the employer.

Lower taxes, lower pay? Compensation is another issue members discussed in the context of workers who have taken the opportunity presented by the pandemic to move to states with lower taxes and costs of living.

  • If an employee is Webexing in from low-tax Nevada vs. high-tax Silicon Valley in California, the employer may choose to pay them less—a subject that came up at a recent meeting of treasurers at life sciences companies.
  • At the IAPG meeting, one auditor said, “Salaries might get adjusted down if they’re in a cheaper place.” This auditor is one of a few members who have been investigating some WFH situations at their companies.

Where’s Waldo working? Auditing a corporation’s policies around remote work right now is challenging for members because there’s not much companies can do aside from asking employees where they are.

  • Unless there is a full-blown audit investigation, there is no way of knowing if employees are telling the truth. So far, no one in the IAPG has said their company is actively tracking where people are WFH.
    • That said, one company located an employee through the virtual personal network (VPN) the person used to access Netflix.
  • At least one company has told employees they need to declare where they are by Jan. 1, 2021.
  • Another member said his company is predicting that 10% to 20% of employees won’t come back to work in the office once the pandemic threat has abated.
    • The company has started using a document (via Microsoft’s SharePoint) for employees to “self-declare” where they are or where they will be working from.
    • “No one is going to say no” to the employee, the auditor said; he had decamped to Europe temporarily. “We just need to know when [they go] and where they are” to manage the related tax issues.

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Pandemic Clouds CECL’s Impact on Corporate Loans and Lending

New accounting may prompt more conservative lending terms post-Covid.

FASB’s new accounting for loan-loss reserves, current expected credit losses (CECL), directly impacts banks and other lenders and ultimately the loans they provide.

  • Tim McPeak, principal industry consultant in the risk research and quantitative solutions division of SAS, the data analytics provider, said that the current pandemic and economic downturn have blurred the impact of CECL, effective for larger banks and most public companies since the start of 2020.
  • Nevertheless, CECL will be a key factor in lenders’ credit decisions, and borrowers should query them about its impact on their loans.
  • Bankers may not point to specific changes in terms, but CECL could impact banks’ risk appetites, Mr. McPeak said, adding that in regulatory filings such as 10Ks management discloses the effects of accounting policy.

New accounting may prompt more conservative lending terms post-Covid.

FASB’s new accounting for loan-loss reserves, current expected credit losses (CECL), directly impacts banks and other lenders and ultimately the loans they provide.

  • Tim McPeak, principal industry consultant in the risk research and quantitative solutions division of SAS, the data analytics provider, said that the current pandemic and economic downturn have blurred the impact of CECL, effective for larger banks and most public companies since the start of 2020.
  • Nevertheless, CECL will be a key factor in lenders’ credit decisions, and borrowers should query them about its impact on their loans.
  • Bankers may not point to specific changes in terms, but CECL could impact banks’ risk appetites, Mr. McPeak said, adding that in regulatory filings such as 10Ks management discloses the effects of accounting policy.

What to watch for. CECL requires lenders to reserve upfront for potential losses they estimate over loans’ lifetimes, so the longer the loan, the greater the risk for potential loss, and the higher the associated reserve.

  • The average lifespan of corporate loans is less than, say, residential mortgages, so CECL’s relative impact will likely be less. However, Mr. McPeak said, it is a factor lenders must now consider when negotiating terms such as maturity and credit spread. “Since lenders will have to take all that reserve upfront, that may result in slightly higher spreads or shorter maturities,” he said.
  • Covenants and underwriting standards may also be affected,” Mr. McPeak said, adding that the lower a company’s debt rating, the greater CECL’s impact.
  • Masha Muzyka, risk and account solutions team lead at Moody’s Analytics, said that because CECL does not consider extending loans, banks may be incented to offer short-term instruments with extension options cancellable by the lender rather than the traditional longer-term instruments with prepayment options.
    • She emphasized, however, that CECL will be just one of several factors influencing their credit decisions. 
  • Corporate borrowers anticipating credit renewals would be wise to seek clarity about CECL’s impact from their lenders, Mr. McPeak said.

CECL’s long-term impact. In late spring meetings, NeuGroup members discussed lenders’ pandemic-induced unwillingness to provide longer-term loans. The pandemic started shortly after CECL went live, so its impact on loan terms is blurry, Mr. McPeak said

  • “With the interest-rates so low, lenders’ search for yield, and the resulting competition, it may not move the needle all that much, but it’s likely a contributing factor,” Mr. McPeak said.
  • He described CECL as an “accelerant” likely to fuel more conservative terms after the pandemic is gone.

Less work for captives. Corporate captives providing financing options to customers are also subject to CECL, impacting their reserves, Mr. McPeak said, but complying with it should be simpler operationally.

  • “Captives’ loan types tend to be more uniform, with typically the same type of underlying collateral and loan structures,” Mr. McPeak explained.
  • Still, some captives, such as those financing heavy equipment, may provide longer-term loans with more creative structures, resulting in either putting up more reserves or more conservative lending. “Depending on the type of financing they’re providing and its duration, the impact could be meaningful,” Mr. McPeak said.
  • Those companies may securitize those assets, removing them from their balance sheets and lowering reserves, but institutions purchasing the loans would carry the reserve mantle.

Corporate portfolio impact. Most corporate treasuries place cash in money markets and other short-term investments unaffected by CECL. However, companies with longer horizons and/or oodles of cash may invest in longer-term securities classified for accounting purposes as “held-to-maturity,” and they may be subject to CECL.

  • “It gives treasurers more to think about in terms of the accounting treatment of the bonds their companies are holding,” Mr. McPeak said, adding that “it could impact the types bonds these companies hold.”
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Post-Labor Day Rethink: Reinventing Finance Teams and Redefining the Office

How should corporate finance and treasury roles adjust to extended remote work and further delay of in-person team interaction?

By Joseph Neu

NeuGroup exchanges with members about team (aka labor) performance during the Covid-19-induced work from home (WFH) period have been generally positive. Productivity has been good, even up, as team members take back time lost to commuting as they give up spontaneous communication and collaborative teaching moments. Sustainability is a concern, though, as WFH requires balancing work and home priorities including childcare and homeschooling, for women especially.

WFH works because teams used to be together. There is also a consensus that teams accustomed to working together in the office have made it easier to transition to remote work. This begs the question, then, what happens to teams that are put together with people who have not worked together in real life before?

How should corporate finance and treasury roles adjust to extended remote work and further delay of in-person team interaction?

By Joseph Neu

NeuGroup exchanges with members about team (aka labor) performance during the Covid-19-induced work from home (WFH) period have been generally positive.

  • Productivity has been good, even up, as team members take back time lost to commuting as they give up spontaneous communication and collaborative teaching moments.
  • Sustainability is a concern, though, as WFH requires balancing work and home priorities including childcare and homeschooling, for women especially.

WFH works because teams used to be together. There is also a consensus that teams accustomed to working together in the office have made it easier to transition to remote work. This begs the question, then, what happens to teams that are put together with people who have not worked together in real life before?

  • The long-term viability of remote work, in finance roles and others, will depend on the success of building high-performing teams outside of an office.
  • Everyone is scrambling to come up with viable hacks to maintain, renew and rebuild teams remotely.
  • Meanwhile, the bias is toward keeping teams as they are. But as we close in on a year of WFH, this bias will eventually have to be overcome.

Offices should return as team-building centers. Offices should become places to identify and develop high-performing teams and be designed accordingly. One member cited the Steve Jobs Building at Pixar, having recently rewatched “The Pixar Story” documentary on Netflix.

  • Steve Jobs designed the main building at Pixar HQ to promote encounters and unplanned collaborations among colleagues.
  • Another Steve Jobs Pixar design tenet was to put all functional areas under one roof, with creative functions on the right and technical offices on the left, while allowing them to come together in a large central space, the Atrium.
  • The design philosophy should carry over into team building, starting with virtual hacks and moving into return-to-office plans.
    • Build encounters and unplanned collaborations that cut across functional silos (e.g., finance and business team collaboration) and promote diversity and inclusion (bring together people from different backgrounds and parts of the world).

Space and time. In the meantime, the idea of the office also needs to adapt to the digital, virtual opportunity. This is an ideal time to connect and rebuild teams virtually across the globe to transcend space and time.

  • Maximize the hours of overlap in respective time zones to revitalize, if not reinvent the company culture, cross-fertilize best practices, strengthen governance and controls, and build resilience. 
  • Build global teams that follow the sun, oriented around global processes (e.g., cash forecasting), leveraging people at treasury, shared services and other centers of excellence worldwide.
  • Rotate high-potential talent virtually, across silos, and later offer to send them to meet team members face-to- face for work abroad stints if that is what is needed for high-performing teams.

Continue to invest in technology.  It is impossible to ignore that productivity in this pandemic has been made possible by technology enabling connectivity, starting with broadband internet. For this reason, business continuity planning scenarios where the internet goes down for sustained periods are getting a lot of attention now.

  • Connectivity needs to be made resilient; however, it is not the only sustaining technology.
  • Investing in technology to speed up work with data management, visualization, analytics, AI, machine learning, algos and smart bots is also critical.
  • Pivot more processes and transactions to digital, limit human work to an exception basis and provide human factor analysis and judgment overlays.
    • Then there is more time to invest in high-performing teams with virtual collaboration and foment unplanned encounters, as core work tasks get done in seconds vs. hours or days.

Reorient your labor. Along with using technology to shorten processing time and automating finance tasks comes the need to reorient labor, especially finance roles, toward things that humans do best.

  • For starters, take the lessons of the last six months about your ability to access financing, success in generating cash flow, shifting to contactless points of sale, changes in investment portfolio diversification thinking and policy shifts of central banks.
    • Then, apply them to the next six to 12 months so your business better serves humans—your customers, investors, team members and other stakeholders—for the remainder of this crisis and beyond.
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The Road Beyond Recovery: Corporates’ Upbeat View of Working Capital Management

A majority of companies in a recent Deloitte poll say that they are already in stabilization or growth mode.

Working capital is an issue never far from a treasurer’s thoughts, and the uncertainty the pandemic has brought to corporate cash flows has made it only more relevant. A recent survey by Deloitte of 1,500 C-Suite and other executives revealed what Anthony Jackson, a Deloitte Risk & Financial Advisory principal, called unexpected results.

  • A majority of respondents said their companies are in stabilization or growth mode, meaning 42.9% have stabilized liquidity, reduced leaking cash, and identified cost reductions and inventory strategies, while 13.2% in growth mode have unlocked capital for investment, can predict cash flow and reduce costs, and have improved financial forecasting.
  • Another 22.3% are still in recovery mode—starting to unlock liquidity, control of cash outflows, and other working-capital necessities—and 11.1% are in crisis mode. “I would have guessed a smaller number in stabilization and growth mode, and at a minimum more saying they were still in recovery mode,” Mr. Jackson said.

A majority of companies in a recent Deloitte poll say that they are already in stabilization or growth mode.

Working capital is an issue never far from a treasurer’s thoughts, and the uncertainty the pandemic has brought to corporate cash flows has made it only more relevant. A recent survey by Deloitte of 1,500 C-Suite and other executives revealed what Anthony Jackson, a Deloitte Risk & Financial Advisory principal, called unexpected results.

  • A majority of respondents said their companies are in stabilization or growth mode, meaning 42.9% have stabilized liquidity, reduced leaking cash, and identified cost reductions and inventory strategies, while 13.2% in growth mode have unlocked capital for investment, can predict cash flow and reduce costs, and have improved financial forecasting. 
  • Another 22.3% are still in recovery mode—starting to unlock liquidity, control of cash outflows, and other working-capital necessities—and 11.1% are in crisis mode. “I would have guessed a smaller number in stabilization and growth mode, and at a minimum more saying they were still in recovery mode,” Mr. Jackson said. 

Ever hopeful. Also surprising, Mr. Jackson said, was the optimism of respondents about their organizations’ state a year from now.

  • Only 3.1% saw their companies in crisis mode, still working to improve liquidity strains, accounts receivable delays, inventory stockpiles, etc., while 11.7% foresee being in recovery mode.
  • Most saw their organizations in either stabilization (26.9%) or growth (45.1%) mode.


Greatest strain. Pandemic-driven disruptions have hindered working-capital management with difficult forecasting ranked as most problematic (31.8%), followed by delays in accounts receivable (19.2%), reduction in liquidity (18.3%), and delays from shifting to a remote workforce (9.2%).

More frequent updates. Unsurprisingly, the pandemic has prompted nearly half of respondents, 48.5%, to update their working capital management efforts more frequently. Another 32.3% said they’ve seen no change, while 3.2% said the frequency has decreased. 

  • Mr. Jackson said companies are taking steps they wouldn’t have pre-pandemic, including increasing their use of data and analytics to identify opportunities within their working capital processes.
  • For example, he said, companies often have payments leaving accounts payable earlier than the due dates, even when they have policies in place to prevent that. “The question becomes, where are the breakdowns in the process that allow that to happen and how can that be changed,” he said. 

Avoid risky steps. Mr. Jackson said pushing back payments to vendors has been a popular way to conserve cash, but companies must carefully assess whether that’s truly beneficial in the long term.

  • If pushing out the term results in a key vendor leaving, it could have a big operational impact. “So you want to be very strategic and thoughtful about how you do that,” he said. 

Discount discipline. Mr. Jackson recounted one CFO’s belief that his company was taking all possible accounts payable discounts, but closer analysis found that was true only 85% of the time. Correcting the remaining 15% would improve the firm’s liquidity position by $8 million.

Long-term vision lacking? Deloitte concludes that many CFOs are still not focusing on long-term efforts to improve capital management, relying instead on short-term fixes.

  • Many companies have a false sense of security, perhaps counting on further government support to weather the pandemic.
  • And the significant percentage of companies that anticipate being in growth mode within 12 months may be another reason for avoiding more sustainable changes.
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Wild Ride: Pension Fund Managers Describe a Rebalancing Roller Coaster Amid Pandemic

NeuGroup members discuss successes, disappointments and potential changes to strategy.

Huge market swings, limited liquidity and high trading costs have tested the ability of corporate pension fund managers to rebalance portfolios during the pandemic. These challenging conditions have demonstrated the importance of speed and agility to make investment changes in times of crisis, and have forced some managers to take a hard look at asset classes and external managers.

  • These and other insights emerged during a recent NeuGroup Virtual Interactive Session sponsored by Insight Investment featuring presentations by two members, one who assumed responsibility for his company’s pension just as the pandemic took hold.
  • “The last six months have revealed which asset classes are most impacted by constrained liquidity and high transaction costs during periods of extreme volatility,” Roger Heine, senior executive advisor at NeuGroup, said after the VIS. “Contingency plans need to consider these constraints.”

NeuGroup members discuss successes, disappointments and potential changes to strategy.

Huge market swings, limited liquidity and high trading costs have tested the ability of corporate pension fund managers to rebalance portfolios during the pandemic. These challenging conditions have demonstrated the importance of speed and agility to make investment changes in times of crisis, and have forced some managers to take a hard look at asset classes and external managers.

  • These and other insights emerged during a recent NeuGroup Virtual Interactive Session sponsored by Insight Investment featuring presentations by two members, one who assumed responsibility for his company’s pension just as the pandemic took hold.
  • “The last six months have revealed which asset classes are most impacted by constrained liquidity and high transaction costs during periods of extreme volatility,” Roger Heine, senior executive advisor at NeuGroup, said after the VIS. “Contingency plans need to consider these constraints.”

Keep calm and carry on. That phrase from a 1939 British poster is how one of the members described his approach amid the major disruption in the markets and his company’s business.

  • “There’s not a lot the pension team did except to understand exactly what was going on,” he said. “We had a strategy for this situation and worked to have the right asset allocation to allow managers to take advantage of opportunities, and they did,” he said.
  • In the same vein, the other member said, “The middle of a crisis is not the time to reevaluate asset allocation,” saying that it’s essential to “play through” and “stick to your guns.”
  • He said his team’s commitment to rebalancing paid off when, at the peak of the crisis, it sold more than $1 billion in Treasury STRIPS—whose value had soared—and invested in beaten-down equities, which recovered far faster than expected.
  • Mr. Heine later observed that “having pre-established targets and defined investment flexibility is very important and helps avoid panicking” during crises.

Winners and losers. Actively managed domestic equity portfolios and hedge funds stand out as major disappointments during the last six months for one member, who said of hedge fund managers, “The long and the short of it is that those guys have gotten crushed.”

  • As a result, this member expects to move assets away from active managers and hedge funds in the next 18 months and rely on a more concentrated group of managers that his relatively small team can monitor closely.
  • Among the factors weighing against active equity managers has been the need to own just a handful of tech stocks (including Apple and Amazon) that have soared.
    • That helps explain why the best equity growth manager used by one member reported an 85% gain while the worst suffered a 17% loss. “These are diversified funds with more than 50 stocks,” the member said.
  • Shorting stocks has been a losing game as the Fed and the government pumped money into the financial system and economy. “The short guys have thrown in the towel on shorts,” one member said.
  • Both members noted the underperformance of value stocks, with one saying this period is raising the question, “What is value?”
  • Looking ahead, Mr. Heine suspects that “after the disruptions and failures of the last six months, companies will rethink how they select, direct and periodically review asset managers in order to tighten their control of precisely where pension assets are being invested.”
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Blockchain’s Increasing Popularity Raises Internal Control Issues

Applying the COSO framework addresses risks but raises some new ones.

Despite its mysterious origins, distributed ledger technology (DLT) is increasingly viewed by companies as vital to remain competitive. From an internal control (IC) standpoint, the technology has significant potential to reduce risk and improve efficiency but also introduces new risks, prompting a recently published report on how to apply the leading IC framework when adopting DLT, also referred to as blockchain.

  • “We wanted to put this guidance out there so concerns about controls are not an inhibitor to adopting DLT,” said Paul Sobel, chairman of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), retired chief risk officer of Georgia-Pacific and a former NeuGroup member.
  • “The paper is intended to move blockchain to the next level by discussing the key risks and controls that we think organizations should be thinking about as it relates to distributed ledgers,” said Jennifer Burns, partner at Deloitte & Touche. Deloite and COSO teamed up on the report, “Blockchain and Internal Control: The COSO Perspective.”

Applying the COSO framework addresses risks but raises some new ones.

Despite its mysterious origins, distributed ledger technology (DLT) is increasingly viewed by companies as vital to remain competitive. From an internal control (IC) standpoint, the technology has significant potential to reduce risk and improve efficiency but also introduces new risks, prompting a recently published report on how to apply the leading IC framework when adopting DLT, also referred to as blockchain.

  • “We wanted to put this guidance out there so concerns about controls are not an inhibitor to adopting DLT,” said Paul Sobel, chairman of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), retired chief risk officer of Georgia-Pacific and a former NeuGroup member.
  • “The paper is intended to move blockchain to the next level by discussing the key risks and controls that we think organizations should be thinking about as it relates to distributed ledgers,” said Jennifer Burns, partner at Deloitte & Touche. Deloite and COSO teamed up on the report “Blockchain and Internal Control: The COSO Perspective.”

Growing ubiquity. The report recounts the 2008 paper by Satoshi Nakamoto—identity still unknown—that set the stage for bitcoin and the blockchain technology behind it. DLT’s accessibility, transparency, and security has dramatically broadened its applications.

  • In Deloitte’s 2020 blockchain survey of 1,488 senior executives globally, 83% of respondents said that without adopting DLT their organizations or projects will lose competitive advantage.
  • An even higher percentage said their suppliers, customers and/or competitors are discussing or working on blockchain solutions.
  • Higher percentages of respondents also see compelling business cases for blockchain technology and anticipate it achieving mainstream adoption.

Risk reduction and creation. Viewing DLT through the five components of the COSO Internal Control – Integrated Framework 2013, most organizations already apply the framework by complying with Section 404 of the Sarbanes-Oxley Act, Mr. Sobel said. Still, there remain plenty of risk-reduction opportunities and also some concerns. These include:

Control environment. DLT may help facilitate an effective control environment because it minimizes human intervention.

  • However, the component primarily addresses principles involving human behavior, such as promoting integrity and ethics, that blockchain cannot assess.
  • Plus, blockchains with multiple entities participating and intertwining face greater complications managing the control the environment.

Risk Assessment. Through this COSO-framework component, DLT reduces risk by promoting accountability, maintaining record integrity, and providing a record that is distributed to all participants simultaneously, so it cannot be denied or refuted.

  • But companies must consider risks more broadly, such as other parties in the blockchain network with different risk appetites and risk monitoring standards.
  • DLT also introduces the potential for new fraud schemes or new ways to carry out traditional ones.

Control activities. Blockchain and related smart contracts, which automatically execute, control, or document contractual events and actions, can significantly improve business efficiency by reducing human effort and fraud.

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Ripple Effects: Will Institutional MMFs Start Waiving Fees to Stay Above Water?

Rock-bottom rates have pushed retail money funds to waive fees, and institutional funds may be next.

The Wall Street Journal this week gave prominent play to a story headlined “Money Funds Waive Charges to Keep Yields From Falling Below Zero.” That piqued our interest.

  • Money market funds (MMFs) are a staple of many treasury investment managers and an important product for many of the banks that help corporates manage short-term cash.
  • MMF yields have plummeted. Seven-day net yields for the average money fund slid to 0.05% in July from 1.31% at the end of 2019, according to research firm Crane Data, the Journal reported.

Rock-bottom rates have pushed retail money funds to waive fees, and institutional funds may be next.

The Wall Street Journal this week gave prominent play to a story headlined “Money Funds Waive Charges to Keep Yields From Falling Below Zero.” That piqued our interest.

  • Money market funds (MMFs) are a staple of many treasury investment managers and an important product for many of the banks that help corporates manage short-term cash.
  • MMF yields have plummeted. Seven-day net yields for the average money fund slid to 0.05% in July from 1.31% at the end of 2019, according to research firm Crane Data, the Journal reported.

Retail, not institutional. What theJournal story doesn’tsay is that the fee waiving is centered on funds aimed at retail investors, not institutions. Here’s what Pete Crane, President of Crane Data, explained at a recent webinar:

  • “Fee waivers are a big deal on the retail side, where money funds are basically having to cut their expenses by a percentage, or even in half in some cases, to keep yields staying above zero.
  • “Right now, two thirds of the funds out there are yielding 0% to 0.​01%, and one third of the assets. This is a simple average of asset weight; the big dollars are, of course, in lower expense funds. 
  • “The institutional assets have lower expenses so, they’​re not in that waiver boat nearly as much or if at all, as the retail funds.”

Portal pressure? We followed up with Mr. Crane to ask whether MMF platforms or portals used by some NeuGroup members have started to feel the effects of lower fees being borne by banks and brokerages.

  • “Portals should begin to feel some fee pressure as funds try and cut costs across the board to live with the new lower revenue environment,” he wrote. “A lot depends on how rates move going forward.”
  • Tory Hazard, CEO of the MMF portal ICD, said in an email, “The vast majority of institutional MMFs have yet to experience fee waivers this time around. However, it is expected fee waivers will become necessary in September to avoid negative net asset values. 
  • “When this occurs, fund companies and institutional distributors will share the cost to shield corporate investors from negative yields.
  • “At ICD, we are actively working with our fund partners to ensure minimal impact to our clients.”
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Leaving Libor in the Dust: Look for SOFR Loans in Early 2021

Banks could price corporate loans using SOFR sooner than ARRC best practices suggest.

The Alternative Reference Rate Committee (ARRC) guiding the US transition for cash products is pushing for Libor pricing to cease for certain types of debt by the end of this year, and other types of debt may soon follow.

  • Floating-rate notes, for example, should be priced by year-end using an alternative benchmark, according to best practices published in late May by the ARRC, which comprises mostly large banks and federal regulatory agencies.
  • Revolving credit, term loans and securitizations have until June 30, 2021, but may be priced much sooner over a replacement benchmark—presumably the secured overnight financing rate (SOFR) whose development the ARRC has guided.

Banks could price corporate loans using SOFR sooner than ARRC best practices suggest.

The Alternative Reference Rates Committee (ARRC) guiding the US transition for cash products is pushing for Libor pricing to cease for certain types of debt by the end of this year, and other types of debt may soon follow.

  • Floating-rate notes, for example, should be priced by year-end using an alternative benchmark, according to best practices published in late May by the ARRC, which comprises mostly large banks and federal regulatory agencies. 
  • Revolving credit, term loans and securitizations have until June 30, 2021, but may be priced much sooner over a replacement benchmark—presumably the secured overnight financing rate (SOFR) whose development the ARRC has guided.

Catalysts for change. Libor is a forward-looking term rate enabling corporates to forecast cash flows accurately, and so far there’s no such version of SOFR. In late June, the ARRC published a method to calculate the “in arrears” SOFR rate for syndicated loans, and on July 22 it published conventions for how and when to do it. 

  • The in arrears approach averages the rate over the past 30 and 90 days to provide a “good” estimate of what averaging SOFR over the next 30 or 90 days will be, according to Ian Walker, head of US middle-market research at Covenant Review, a Fitch Solutions service that analyzes debt contracts determining creditor rights. 
  • Mr. Walker said these moves make it easier to adopt SOFR. He added that the ARRC’s “early opt-in” option enabling conversion to SOFR before Libor ceases is likely to prompt lenders to push for transitioning revolvers and term loans to the new rate sooner rather than later, to reduce Libor-exposure risk.
  • Mr. Walker called the conventions and vendor systems’ ability to handle SOFR—the ARRC recommends by Sept. 30 on the latter—the “last two dependencies” before we see the syndicated loan market doing loans over SOFR instead of Libor. “I would not be surprised if we start seeing that phenomenon before the end of 2020,” he said.

Fallbacks sooner. Floating-rate notes and securitizations priced over Libor before year-end 2020 should have incorporated “hardwired” contractual fallbacks to an alternative rate as of June 30, the ARRC says, and corporate loans by Sept. 30. 

  • “Any company refinancing today should spend significant time considering the Libor fallback language in their debt, and ensure that they can operationalize it should it become triggered,” said Amol Dhargalkar, managing partner and global head of corporates at Chatham Financial.
  • While there’s more time to transition revolving and term credits to an alternative benchmark or adopt another benchmark for new borrowings, don’t procrastinate. 
    • The operational challenges are significant, especially for companies still using Excel instead of a treasury management system (TMS). “Can their systems even support different indices and how are calculations done using these indices?” Mr. Dhargalkar asked.

Corporates too passive? Despite the significance of the Libor transition, Mr. Dhargalkar said, corporates’ common response tends to be that “things are going to take care of themselves. It’ll be fine.” Many appear to be waiting for banks to make the first move, he said.

  • Corporates “tend to view themselves as price takers rather than price makers on this Libor transition, so they’re waiting for banks to come to them with a proposal, rather than them approaching banks and saying, ‘I want to borrow off something other than Libor,’” Mr. Dhargalkar said.
  • While financial institutions and governmental organizations have issued SOFR-priced debt, Toyota Motor Credit appears to be the only large, public corporate to have done so to date, said Yon Valtchev, a treasury credit specialist at Bloomberg who has followed the issue closely.  
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Saving Time in Brazil: Automating Tax Payments Speeds Product Delivery

A fintech helps a corporate cut hours on tax payments, allowing faster delivery and freeing up staff. 

The first thing a treasury professional learns about business realities in Brazil is that there are a lot of taxes and they take many hours to process. The space is ripe for disruption, and a fintech called Dootax is doing just that.

  • At a recent meeting of NeuGroup’s LatAm Treasury Peer Group, a member from a megacap multinational shared the progress of a project to automate certain tax payments related to the sale of equipment in Brazil. The local value-added tax (VAT) is a major priority.
  • The COVID pandemic has raised the pressure to deliver machinery on time, and the multistep tax process was manual and time-consuming, delaying deliveries unnecessarily.

A fintech helps a corporate cut hours on tax payments, allowing faster delivery and freeing up staff. 

The first thing a treasury professional learns about business realities in Brazil is that there are a lot of taxes and they take many hours to process. The space is ripe for disruption, and a fintech called Dootax is doing just that.  

  • At a recent meeting of NeuGroup’s LatAm Treasury Peer Group, a member from a megacap multinational shared the progress of a project to automate certain tax payments related to the sale of equipment in Brazil. The local value-added tax (VAT) is a major priority.
  • The COVID pandemic has raised the pressure to deliver machinery on time, and the multistep tax process was manual and time-consuming, delaying deliveries unnecessarily.

Automation transformation. The member’s multiyear effort to reduce, streamline and automate payments in the entire LatAm region was spearheaded out of a regional shared service center in Mexico. Brazilian fintech Dootax was selected to help automate the process involving the payment of several different local taxes. The new processes:

  • Increase accuracy.
  • Eliminate a vast number of banking platforms (ensuring better controls and fewer bank accounts and signers). 
  • Provide a platform for real-time metrics. 
  • Enable faster payments (and consequently faster product delivery). 

Big savings. Time savings have been enormous: In the Brazilian VAT (ICMS) example the member shared, the old process, from order to shipping, took four hours and was subject to regular office hours. The new one is an automated Dootax process taking at most 30 minutes and is “open” 24/7:

When a product delivery is requested and an invoice created, the generation of the slip for the ICMS is initiated. This step was incorporated into the automated process that has eliminated touch points, or human intervention, for:

  1. Recording the ICMS in the ERP. 
  2. Funding requests requiring review and approval. 
  3. Creating the payment in the system.
  4. Initiating the payment in a bank platform, which also requires review and approval. 
  5. Sending ICMS payment proof to the warehouse so it can ship the product. Digital signatures add more speed in a country where signatures are often delivered by couriers on motorbikes. 

The human factor. The company is currently using automated tax payments for two different ICMS taxes and one federal income tax, freeing up a total of six full-time employees from the treasury or business side. 

  • Automation can be a tough sell if people feel they will lose their jobs. The member was able to reassign treasury resources to higher-value tasks that are seen as more interesting and career-promoting, helping get the team to embrace changes and automation. These opportunities should be communicated well to those potentially impacted by the new processes.
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Waiting Game: Fed’s Update on Dividend Regs Reflects Increased Back-and-Forth With Banks

Earnings hold the key to whether a bank qualifies for “expedited consultation” with regulators.

Recent clarification by the Federal Reserve about the timing of regulatory reviews of dividends paid by banks has raised a few questions and concerns for members of NeuGroup’s Bank Treasurers’ Peer Group.

  • Even before the guidance, banks have delayed or considered delaying their dividend declaration dates to provide more time for back-and-forth with regulators over the payout.
  • Experience suggests that approaching the Fed with a concrete plan and detailed analysis can help smooth and expedite the process.

Earnings hold the key to whether a bank qualifies for “expedited consultation” with regulators.

Recent clarification by the Federal Reserve about the timing of regulatory reviews of dividends paid by banks has raised a few questions and concerns for members of NeuGroup’s Bank Treasurers’ Peer Group. 

  • Even before the guidance, banks have delayed or considered delaying their dividend declaration dates to provide more time for back-and-forth with regulators over the payout. 
  • Experience suggests that approaching the Fed with a concrete plan and detailed analysis can help smooth and expedite the process.

Tricky times. As a result of the pandemic, more banks are facing a situation where earnings may not fully cover dividends. In those cases, what’s known as “SR 09-4” calls for banks to consult with regulators before a dividend is declared.

  • For banks that declare dividends in connection with earnings, this has created “a compressed timeline to finalize earnings, determine the dividend and, if necessary, consult with the Fed,” Ben Weiner, a partner at Sullivan & Cromwell, said to members on a recent NeuGroup call.
  • Given evolving views of bank dividends in the current macroeconomic environment and a shorter period to make decisions, it makes sense for banks to be proactive and talk to the Fed early, should SR 09-4 direct it to do so, Mr. Weiner said.

It’s all about timing. The amendment—called Attachment C—to SR 09-4 establishes criteria to determine whether a holding company can expect “expedited consultation” with its Federal Reserve Bank about its dividend plans. 

  • Generally, this applies when a holding company is “considering paying a dividend that exceeds earnings for the period for which the dividend is being paid,” Attachment C states.
  • The criteria for an expedited response include having net income available to common shareholders over the past year sufficient to fully fund the dividend (and previous dividends over the past four quarters). 
  • The expedited response time for qualifying banks is two business days; other banks will receive a response in five business days.

Change of plans.  One member said increased communication about the dividend with regulators following COVID-related loan losses caused his bank to delay its dividend declaration date. 

  • “We changed the dividend declaration date to be later, to the second month of the quarter, to be able to make the dividend request to the Fed. We have lived through this and changed the calendar to accommodate the Fed,” he said.
  • In past years, another member’s bank had to wait more than a month for a response from the Fed on a different issue. He expressed worries about regulators’ response time on dividends for those in the non-expedited tier.

Be prepared. Another member advised peers to initiate conversations with regulators early, to present a plan and to focus on the particular quarter.

  • “We’ve had quarterly losses, and we’ve had to go to the Fed with our plan,” the member said. “It is a quarter-by-quarter play. We went a week before and had a plan and presented it; by Friday they got back to us,” he added.

Looking ahead. Mr. Weiner, the attorney, said the full implications of Attachment C on banks likely won’t be known until the fourth quarter of 2020 or the first quarter of 2021, after it has been applied for one or two quarters. 

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Balancing Act: The Realities of Working Capital Management

NeuGroup members and C2FO discuss the Fed, credit risk and negative cash conversion cycles.

Working capital management has taken on increased significance during the pandemic, and two members of NeuGroup’s Tech20 Treasurers’ Peer Group discussed the subject with an executive from C2FO at a NeuGroup Virtual Interactive Session this week. Here are some takeaways from the session by NeuGroup founder and CEO Joseph Neu.

NeuGroup members and C2FO discuss the Fed, credit risk and negative cash conversion cycles.

Working capital management has taken on increased significance during the pandemic, and two members of NeuGroup’s Tech20 Treasurers’ Peer Group discussed the subject with an executive from C2FO at a NeuGroup Virtual Interactive Session this week. Here are some takeaways from the session by NeuGroup founder and CEO Joseph Neu.

  • The growing importance of data. C2FO’s platform is a great way to use working capital efficiently and provide liquidity to suppliers, but the company also supplies data that can signal credit risk. If a supplier is ready to pay a high rate for a discount, that is a signal for the credit team to look into why. 
    • Bankruptcies are expected due to COVID-19, so internal credit teams are hypervigilant and conducting thorough credit investigations along with bucketing the credit winners from the credit losers. 
  • The Fed effect. The Fed flooding the market with liquidity allows working-capital conscious companies (and anyone who cannot compete with the Fed for liquidity provision) to pull back. This means that platforms like C2FO need to play up their other advantages and find ways to channel central bank liquidity into their platforms. 
  • China reality. There is more talk about supply chain moves outside of China than action, even as the shift in mindset is on to manufacture/supply the domestic market from China vs. produce for export. 
    • For a lot of the inputs to manufacturing of electronics and tech, it is not really that easy shift from China to another country, even though the contract manufacturers can readily shift the manufacturing capabilities to other parts of the world.
  • Cash conversion cycles. This measure of the time in days it takes for a company to convert its investments in inventory and other resources into cash flows from sales is one key metric of working capital management efficiency. Negative figures mean you’re paying suppliers or distributors after you receive payment from customers.
    • If the goal is to get to double-digit negatives, -30 days for example, companies have to carefully balance the impact on the manufacturer that is accepting later payment and the distributor being asked to pay sooner. Can their balance sheets and credit situation carry your working capital efficiency metric? The path to negative cash conversion cycles cannot be simply paying suppliers later and asking distributors to pay earlier.
  • Proliferation of no inventory retail and distributor models. One accelerating trend is no-inventory models, where even retail stores will not own the inventory but rather leave it on the books of the manufacturer or the brand until the scan at the time of purchase, at which time the transfer is made directly to the purchaser.
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Smart Move: Deploying Artificial Intelligence to Manage Cash as Inventory

A member’s quest to improve cash visibility begins to bear fruit just as the crisis hits.

“When there is a crisis, treasury becomes very important,” a member of the European Treasury Peer Group said at a recent meeting where he and a colleague shared their progress on a project to improve cash forecasting, in part by viewing cash as inventory to be optimized.

  • Cash forecasting, a critical concern for treasury teams at all times, is especially important amid the extreme uncertainty created by the pandemic.
  • “We get taken out of the shadows and up to the front,” the member said of crises. “Can we quickly ascertain where the cash is? Can we see it in real time?”

A member’s quest to improve cash visibility begins to bear fruit just as the crisis hits.

“When there is a crisis, treasury becomes very important,” a member of the European Treasury Peer Group said at a recent meeting where he and a colleague shared their progress on a project to improve cash forecasting, in part by viewing cash as inventory to be optimized.

  • Cash forecasting, a critical concern for treasury teams at all times, is especially important amid the extreme uncertainty created by the pandemic.
  • “We get taken out of the shadows and up to the front,” the member said of crises. “Can we quickly ascertain where the cash is? Can we see it in real time?”

Then and now. When this company’s multiyear journey to digitize treasury began, the team manually prepared custom spreadsheets for once-daily consumption. 

  • Pain points included balances in nonfunctional currencies and how cash stacked up against target balances. 
  • Today’s automated daily process generates mobile-friendly descriptive cash dashboards with current and historical data that users can drill into. 
  • This allows the cash team to be guided by hotspots that require action and to make better decisions on what cash to move where and how to use it. 
  • “The tool has to be able to tell us where we are today and tell us where we are going to be in three to six months” and whether there will be money for buybacks, dividends and M&A, the member said.

Cash as inventory. The team’s ultimate aim is to automate cash flow forecasting using analytics (AI models) to optimize cash levels, similar to how product inventory can be optimized. 

  • Next comes the optimization into the automated forecast, plus building in predictive analytics based on external economic indicators. 
  • By using data sets from the ERP and other sources of financial data, plus AI technology combined with a combination of traditional forecast algorithms, the company is building a hybrid model to forecast short- and long-term cash flows. 
  • It learns over time the way cash flows work and has demonstrated a high accuracy rate so far.
  • Of course, a forecast cannot do everything, i.e., tax hits and unexpected events, but it can help with the amounts that are able to be predicted with pretty good accuracy, freeing up treasury staff to take action on the information rather than producing it, the member said. 

Don’t expect overnight success. Not only was it trial and error to see which forecasting algorithms—and in what combination—produced the highest accuracy, it also took time for the machine learning aspect of the tool to work. 

  • “It was definitely a journey,” the presenter said, adding that it required “lots of exchanges with the data scientists.” 
  • Treasury went through multiple models, saw that different model mixes yielded different results, and tried “different combinations until we got to the right combo” for the different liquidity items that needed to be forecast.
  • It took many iterations until the model produced accurate results and it took time. “But as we progressed the machine learning started to kick in,” the member said.

ERP advantage. In addition to having data scientists, a single-instance ERP certainly helps the company, the member said. “We’re on one instance of SAP so it makes it easy.” 

  • Companies with multiple ERPs, several instances and a TMS will soon notice that “it can get clunky.” 
  • Clear ownership and KPIs for the project are also key to success.  

Optimizing cash as inventory = savings. By treating cash as an inventory to be optimized in each region and currency, the company will free up balances, earn yield on invested (vs. idle) cash, and optimize or reduce credit lines. In fact, one of the pilot regions managed to reduce idle operational balances by 46%!

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Finance Teams Kept More Hands on Deck in Q2 to Navigate Rough Waters

The pandemic is taking a toll on working capital, leading to more rationing of cash, an FEI survey says.

Far fewer finance teams planned on cutting headcount in the second quarter of 2020 than in the first, according to a survey released this week by Financial Executives International in collaboration with Deloitte. Meanwhile, the percentage of companies reporting a drop in working capital balances in Q2 rose by a third as the pandemic took hold.

  • The survey of 170 of FEI’s members—CFOs and other senior finance executives—found that in Q2, 55.7% of respondents expected to maintain their headcount, while 24.5% indicated planned workforce reductions. In Q1, 46% of respondents expected to reduce headcount.
  • Among myriad reasons for retaining staff, said Dillon Papenfuss, manager of research and analysis at FEI, the most commonly cited one was uncertainty. “These are complex, volatile times and companies need ample supplies of human capital to not only survive but also find new avenues of long-term growth,” he said.
  • The survey found half of staff across all organizations will work remotely for the remainder of 2020, with 51.5% in the Northeast saying that, and 64.7% on the West Coast.

The pandemic is taking a toll on working capital, leading to more rationing of cash, an FEI survey says.

Far fewer finance teams planned on cutting headcount in the second quarter of 2020 than in the first, according to a survey released this week by Financial Executives International in collaboration with Deloitte. Meanwhile, the percentage of companies reporting a drop in working capital balances in Q2 rose by a third as the pandemic took hold.

  • The survey of 170 of FEI’s members—CFOs and other senior finance executives—found that in Q2, 55.7% of respondents expected to maintain their headcount, while 24.5% indicated planned workforce reductions. In Q1, 46% of respondents expected to reduce headcount.
  • Among myriad reasons for retaining staff, said Dillon Papenfuss, manager of research and analysis at FEI, the most commonly cited one was uncertainty. “These are complex, volatile times and companies need ample supplies of human capital to not only survive but also find new avenues of long-term growth,” he said.
  • The survey found half of staff across all organizations will work remotely for the remainder of 2020, with 51.5% in the Northeast saying that, and 64.7% on the West Coast.

Working capital blues. Nearly half of respondents, 43%, said their companies’ working capital balances decreased in Q2, compared to 33% in Q1.

  • The increase “illustrates a profound erosion of corporate cash flow,” FEI’s survey report says.
  • One Chief Financial Officer remarked that his organization is focused on conserving cash and that cash-related financial metrics have become the KPIs his team scrutinizes the most.
  • FEI said that if not for CARES Act funding the proportion of respondents reporting decreasing working capital would likely have been higher.
  • Financial executives expressed a preference for pausing various business actions instead of canceling or cutting them.

Forecasting challenges. Complicating decision-making, however, is difficulty forecasting in the current environment, cited by 66% of respondents. That difficulty is heightened by the uncertainty of COVID-19’s impact and the timing of a vaccine, the report says, noting that one senior-level executive said his team is planning for 2021 based on whether a vaccine is ready by the end of Q4.

  • Companies are often using different scenarios as part of their forecasting process, and in the current environment the inputs and outputs of the various scenarios have a high degree of variability,” Andy Elcik, national managing partner of accounting, reporting and advisory services, Deloitte & Touche, said in a statement. “To manage through this some companies are using rolling 12-month forecasts to help assess the evolving economic landscape.
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Paying Employees On Demand Brings Both Benefits and Risks to Corporates

The gig economy and the pandemic are boosting interest in pay solutions that may present legal and regulatory issues.

The pandemic and the gig economy are prompting traditional employers to explore their options for so-called on-demand pay services that put money in the hands of workers when they need it most. US Bank laid out the benefits and potential complications for corporates of some of these solutions at a recent meeting of the NeuGroup for Retail Treasury. Some basic background:

  • Today’s technology-driven early pay solutions and apps offer less costly alternatives to high-interest payday loans, credit cards or pawnshops for employees struggling financially during the pandemic.
  • Before COVID-19, large and small companies discussed with US Bank their need to offer on-demand wage services to employees to compete for talent in the gig economy.

The gig economy and the pandemic are boosting interest in pay solutions that may present legal and regulatory issues.

The pandemic and the gig economy are prompting traditional employers to explore their options for so-called on-demand pay services that put money in the hands of workers when they need it most. US Bank laid out the benefits and potential complications for corporates of some of these solutions at a recent meeting of the NeuGroup for Retail Treasury. Some basic background:

  • Today’s technology-driven early pay solutions and apps offer less costly alternatives to high-interest payday loans, credit cards or pawnshops for employees struggling financially during the pandemic.
  • Before COVID-19, large and small companies discussed with US Bank their need to offer on-demand wage services to employees to compete for talent in the gig economy.

Beyond gig workers. The use of on-demand pay solutions, common among new economy companies like Lyft and Uber, has spread to more conventional employers.

  • In a story this month, PYMNTS reported, “McDonalds and Outback Steakhouse began offering day-of payouts to employees two years ago…and Walmart…introduced a service that allows employees receive early payments through a specialized app.”
  • One member at a large US retailer said his company partners with a fintech called Even to offer employees on-demand pay and “we’ve had good success so far.” During COVID, employees at his company have paid nothing for the service, which offers budgeting tools and educational programs for users.

The employer-driven model. Even is an example of an employer-driven model for early pay. US Bank explained that under this approach:

  • The employer supplies information on hours actually worked by the employee.
  • Advances may be repaid through a payroll deduction or through other means before net pay is delivered to the employee.
  • The employer works with the service provider to set standards on how much of the fees they will cover, and the amount of each paycheck available.
  • Either the employer or the service provider fund the advances.
  • Other companies in this category include SAP FlexPay, PayActiv, Instant Financial, FlexWage and DailyPay.

The employee-driven model. Under this approach:

  • The employee provides work information through documentation and/or location tracking.
  • The service provider sets the standards for fees and what percentage of payment is available.
  • The employee authorizes repayment from a bank account.
  • Companies in this group include Earnin and Clover.

Legal issues and risks. Providing on-demand wages comes with risks and raises questions, some of them complicated, US Bank said. That’s one reason more employers have not adopted solutions yet. Here are some questions employers need to ask:

  • Does the payment trigger tax and withholding obligations?
  • Should wage statements be given?
  • Is this an advance or an assignment of wages?
    • US Bank’s presenter said employers need to ask on-demand wage providers how they manage state- to-state differences in how early pay is treated.
    • She said advances fall under a different body of law that has a long history. “Using technology is what’s making it new,” she said. At the state level, she added, there is a “wide variety of rules about advances.”
  • Is this lending?
    • This question is particularly relevant when the service provider funds the payments.
  • How are state and federal regulators and legislatures responding?
    • US Bank said 11 states are investigating advance payment to employees as unlicensed lending.
  • What happens when proceeds are paid to a payroll card?

Data integration. US Bank’s presenter said a lot of payroll services have relationships with earned-wage providers, so that the data integration to make the product work is already in place, meaning the technology lift is not so hard.  She recommended corporates selecting an on-demand provider find out which payroll processors have already done integration with the providers.

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Turning to Kyriba for Payments Helped One Treasury Centralize Operations

The benefits of using one TMS for treasury payments and retiring a homebuilt infrastructure.

One member of NeuGroup’s Global Cash and Banking Group recently shared the benefits of using Kyriba as a payment factory that handles about 85% of his company’s treasury payments. The advantages boil down to saving time while improving controls, oversight, visibility and efficiency, he said.

Ultimate goal. The treasury director said his company used Kyriba as a tool to achieve the primary goal of centralizing treasury operations across nearly a dozen large subsidiary companies, each with its own treasury department.

  • The company’s first major task when implementing Kyriba was to connect its largest cash management banks across the globe to Kyriba for both payments and reporting.  This allowed central oversight for corporate treasury to manage the day-to-day operations across each subsidiary, globally.

The benefits of using one TMS for treasury payments and retiring a homebuilt infrastructure.

One member of NeuGroup’s Global Cash and Banking Group recently shared the benefits of using Kyriba as a payment factory that handles about 85% of his company’s treasury payments. The advantages boil down to saving time while improving controls, oversight, visibility and efficiency, he said.

Ultimate goal. The treasury director said his company used Kyriba as a tool to achieve the primary goal of centralizing treasury operations across nearly a dozen large subsidiary companies, each with its own treasury department. 

  • The company’s first major task when implementing Kyriba was to connect its largest cash management banks across the globe to Kyriba for both payments and reporting.  This allowed central oversight for corporate treasury to manage the day-to-day operations across each subsidiary, globally.

No easy feat. The treasury director called the process of implementing Kyriba “a big undertaking” that usually takes 18 months but that the company did in nine months with the help of Deloitte.

  • Prior to the implementation, treasury used a different TMS vendor. The member said that most of its subsidiaries did not use TMSs, and just one used Kyriba.
  • He said Kyriba’s payments module and version of a payment factory solution is the “biggest advantage” offered by the TMS, adding that the company has put “a lot of eggs in that basket.”
  • A Kyriba fact sheet says its payments network features a pre-built format library with 800 bank format variations and 40,000 bank testing scenarios globally for 1,000 global banks, with the ability to reach up to 11,000 institutions via SWIFT.

Lessons learned. This member stressed the importance of getting buy-in early on across each subsidiary or division, including appropriate internal capabilities outside of treasury such as accounting and IT. 

  •  “These groups play a major part in the design and successful use of the TMS, so you want to give them a seat at the table early on during the planning and design phase,” he said.

Beyond treasury. The member’s company is now kicking off a six-month project to run nearly all the corporation’s AP payments through Kyriba. This will involve connecting four ERPs to Kyriba, he said. That means retiring “the homebuilt payment infrastructure” the company uses and has to maintain internally.

  • The old system meant sending files to an internally built and managed EDI infrastructure and then to various banks via host-to-host connectivity, each with its own protocol for payment formats —with prohibitive costs for adding banks.
  • Soon, an ERP connected to Kyriba will generate payment data coming from a supplier or customer invoice and send it to Kyriba. The TMS then puts the data file into the appropriate bank format and sends it to the bank through SWIFT. Payment files will pass through the TMS seamlessly to the bank without the need for human touch.
  • “Kyriba does all the work,” the member said. “We’re happy with it.”
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DIY: Improved Cash Forecasting and Visibility With In-house Tools

A cash awareness culture results in better forecasting of future flows to support growth.

Young tech companies thriving in the latter stages of a multi-year economic expansion when many investors had lots of cash to deploy can be forgiven for not always demonstrating disciplined cash preservation.

  • “We are cash rich and our culture is not sensitive to cash,” as one member put it during a discussion of cash positioning and forecasting at a recent meeting of the Tech20 High Growth Edition.
  • But as companies grow and confront crises like COVID-19, they need to take a hard look at liquidity.

A cash awareness culture results in better forecasting of future flows to support growth.

Young tech companies thriving in the latter stages of a multi-year economic expansion when many investors had lots of cash to deploy can be forgiven for not always demonstrating disciplined cash preservation.

  • “We are cash rich and our culture is not sensitive to cash,” as one member put it during a discussion of cash positioning and forecasting at a recent meeting of the Tech20 High Growth Edition.
  • But as companies grow and confront crises like COVID-19, they need to take a hard look at liquidity.

“You make it, we take it.” Awareness of cash generation, how cash moves through the company and who’s entitled to control it is an issue of corporate culture and education.

  • Just because treasury can lay down the law on owning the cash, clear communication on events that impact cash doesn’t spring up naturally. Treasury needs to develop the relationships to ensure that this communication is efficient.

Treasury technology: critical for scaling. Good technology goes a long way to bridge some of the communication gaps regarding cash-related events between business units and treasury.

  • Just over half of the companies participating in a short TMS survey reported having a TMS in place, while over a quarter have none and the rest use some variety of an in-house solution. One member said the decision to implement a TMS four years ago felt “early,” but that a TMS would be critical for scaling.

Cash positioning. For one member company, the culture is to “drink your own champagne” before seeking outside solutions. 

  • The company’s treasurer has worked with product development to bring more discipline and accuracy to cash positioning.
  • Some groundwork was already done, like direct bank integration for payroll, general ledger and accounts payable with its two main partner banks. This information goes to accounting but “we created a new security structure for the treasury team to use the same data but a ‘different lens’ without needing to go to bank portals and download,” the treasurer said.
  • This produces a daily global cash position dashboard showing 95% of ending domestic and international balances by legal entity, currency and financial institution.
  • It shows money market funds, fixed income balances from third parties, reflecting all transactions from the prior day, coded by type of accounts (ZBA, intercompany, etc.) and type of transactions.
  • If a new type of transaction occurs, it can be coded for automatic recognition going forward. “This is very handy in a pandemic when you get questions from the CFO about cash.”

Cash forecasting. With limited budgets and time for systems implementations, what do you do? One member, a data visualization company, looks at how its own product can be used.

  • The company has a large financial master data warehouse (using a big vendor in that space) with data around each legal entity, bank partners, bank accounts, categorization rules, account signers, etc.
  • It has several years of balances organized by categories and sub-categories like accounts payable, receivables, rent and tax, and allows the ability to drill down into cross-border FX and other types of transactions.
  • Treasury looks at forecasting on an individual account level and then a roll-up, and can do a 14-day daily view and an 11-week weekly view—and of course uses the historical data for a sanity check on the forecast.
  • FP&A forecasts on accrual basis and treasury on cash basis. “They rely on us for the cash forecast and we rely on them for revenues and expenses.” The company reports accuracy of more than 90%. 
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Life After Libor: Ameribor Holding Its Own as Regulators Back SOFR

Banks already price commercial loans over Ameribor and a term version is in the works.
 
Ameribor, the benchmark alternative interest rate to Libor devised by the American Financial Exchange (AFX), is managing to stay in the conversation despite the endorsement by the Federal Reserve of the secured overnight financing rate (SOFR). Ameribor reflects the unsecured borrowing costs of more than 1,100 American lenders.

  • This week, Citizens Financial Group, one of the nation’s 20 biggest banks, with assets of $177 billion, joined the exchange.
  • In late June, the AFX announced volume of $1 trillion transacted since its inception in 2015.
  • In late May, Fed Chair Jerome Powell—in response to a question by Senator Tom Cotton—wrote that Ameribor is “based on a cohesive and well-defined market” and is “fully appropriate rate for the banks that fund themselves through [AFX] or for other similar institutions for whom Ameribor may reflect their cost of funding.”

Banks already price commercial loans over Ameribor and a term version is in the works.
 
Ameribor, the benchmark alternative interest rate to Libor devised by the American Financial Exchange (AFX), is managing to stay in the conversation despite the endorsement by the Federal Reserve of the secured overnight financing rate (SOFR). Ameribor reflects the unsecured borrowing costs of more than 1,100 American lenders.

  • This week, Citizens Financial Group, one of the nation’s 20 biggest banks, with assets of $177 billion, joined the exchange.
  • In late June, the AFX announced volume of $1 trillion transacted since its inception in 2015.
  • In late May, Fed Chair Jerome Powell—in response to a question by Senator Tom Cotton—wrote that Ameribor is “based on a cohesive and well-defined market” and is “a fully appropriate rate for the banks that fund themselves through [AFX] or for other similar institutions for whom Ameribor may reflect their cost of funding.” 

Pricing debt over Ameribor. With a few exceptions, corporates have yet to price floating-rate debt over SOFR, although that may start soon. Ameribor is already used for that purpose.

  • ServisFirst Bank, catering primarily to commercial clients, has priced all new and renewing corporate loans over Ameribor since the start of the year.
  • “Customers really haven’t resisted moving to Ameribor, after we show them the chart and why it’s better for them,” said Tom Broughton, chairman and CEO of the full-service, Birmingham-headquartered bank.
  • Richard Sandor, AFX CEO, said other banks—generally smaller regionals—are also pricing clients’ debt over Ameribor.
  • John Deere and American Electronic Power (AEP) have joined the AFX. How they are using AFX and Ameribor is unclear, but AEP said in May that the company wants to help “advance Ameribor as a benchmark rate.” 

Forward-looking terms. Both SOFR and Ameribor have listed futures contracts, and both are aiming to develop swap markets that will enable the generation of the type of forward-looking term rate corporates prize to forecast cash flows.

  • “We continue to do research on a forward-looking term Ameribor,” Dr. Sandor said, “In March and April we had record volume and the lowest volatility of any rate, including fed funds and Libor.”
  • Until a term Ameribor arrives, rates calculated in arrears are available for both SOFR and Ameribor that may differ from the current rate averaged over the specific time period, but not by much.
  • Amol Dhargalkar, managing partner and global head of corporates at Chatham Financial, said cutting off the period several days early or delaying payment so treasury can accommodate the difference are potential solutions. 

Have to hedge. Corporates and their lenders alike need to hedge floating-rate exposures. The Financial Accounting Standards Board (FASB) has already approved SOFR as a hedging benchmark rate, making it viable for hedge accounting.

  • AFX has asked FASB to add Ameribor to its list of approved benchmark interest-rate indices, so it qualifies for fair value hedge accounting treatment.
  • In the interim, Ameribor’s high correlation to the effective fed funds rate (EFFR) enables the latter to be used as a hedging index for Ameribor-linked assets and liabilities. That’s according to a recent note from Derivative Path, an electronic platform aimed at commercial and financial end users to manage interest-rate and FX over-the-counter derivatives.
  • Any difference between the contractually specified Ameribor borrowing rate and the EFFR would be recorded “through interest income/expense, but that basis would not be recorded as hedge ineffectiveness from an accounting perspective,” the note said.
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Automating FX Trades: How Heavy a Lift?

Key takeaways from 360T from a NeuGroup Virtual Interactive Session

Earlier this summer, technology provider 360T discussed some of the benefits of automating FX trades at a Virtual Interactive Session for NeuGroup members called “Demystifying Automated Trading Across the Trade Lifecycle.” Following are some takeaways as distilled by 360T about the technology lift involved in automating workflows and trade execution.

  • Although some of the treasurers expressed optimism that automated trading solutions could help improve their FX workflow and execution, there was clearly some trepidation about how onerous the lift on their end would be to actually implement any of these solutions.
  • Specifically, some of the participants said that the integration work with their existing technology stack—which included TMSs, ERPs, post-trade systems and in some cases 3rd part TCA systems—seemed intimidating.

Key takeaways from 360T from a NeuGroup Virtual Interactive Session

Earlier this summer, technology provider 360T discussed some of the benefits of automating FX trades at a Virtual Interactive Session for NeuGroup members called “Demystifying Automated Trading Across the Trade Lifecycle.” Following are some takeaways as distilled by 360T about the technology lift involved in automating workflows and trade execution.

  • Although some of the treasurers expressed optimism that automated trading solutions could help improve their FX workflow and execution, there was clearly some trepidation about how onerous the lift on their end would be to actually implement any of these solutions.
  • Specifically, some of the participants said that the integration work with their existing technology stack—which included TMSs, ERPs, post-trade systems and in some cases 3rd part TCA systems—seemed intimidating.

  • Although it was pointed out that there is a wide range of different automated tools available to treasurers today that require different degrees of implementation work, the consensus was that it is not an insignificant undertaking to introduce new technology to treasury operations.
  • However, it was highlighted that the process is not comparable to implementing a new TMS and that it takes a matter of weeks, not months or years to complete.
  • Moreover, with technology partners such as 360T willing to do all the integration work, and already being integrated with all the major TMSs, it was explained that treasurers only need to put resources towards testing and validation in order to gain the benefits of these automated trading tools.
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Virtual Accounts Help Treasury and Accounting Bridge Multiple ERPs 

The advantages of using virtual accounts for accounting and reconciliation across ERPs.

A member at a recent NeuGroup meeting described his company’s pilot initiatives with its primary transaction banks in Europe to roll out virtual accounts (VAs).

  • Treasury is doing the projects in partnership with accounting and are aimed at reducing the all-in cost of account reconciliation, cash application and account maintenance—which EY has estimated at about $4,000 per account—while also improving liquidity access and management.

The advantages of using virtual accounts for accounting and reconciliation across ERPs.

A member at a recent NeuGroup meeting described his company’s pilot initiatives with its primary transaction banks in Europe to roll out virtual accounts (VAs).

  • Treasury is doing the projects in partnership with accounting which are aimed at reducing the all-in cost of account reconciliation, cash application and account maintenance (estmated by the member at about $4,000 per account) while also improving liquidity access and management.

Tangible benefits. The VA advantages are even more tangible for the member’s company, because of recent large acquisitions that have resulted in the company operating multiple enterprise resource planning (ERP) systems.

  • VAs allow them to identify payments and separate account statements, helping to automate posting and reconciliation across various systems.
  • Physical accounts reside in one ERP, and VAs allow for more seamless reconciliation in the other.

Another member with as many as 70 ERP instances noted that his company was also looking into VAs to help with reconciliation and cash consolidation in conjunction with its cash pools.

  • The company may begin by using internal dummy, subledger accounts in the general ledger (GL) vs. VAs.

VAs vs. subledgers. This prompted a debate on the merits of VAs vs subledger accounts in the ERP or even the treasury management system (TMS).

  • “Replicating real bank accounts with virtual accounts was deemed the easier sell to accounting and other functions, since you can get the whole account infrastructure, MT940 reports from SWIFT included,” one member noted.
  • You can also establish clear account ownership with VAs to do the reconciliation.

Reporting benefits. Mark Smith, head of global liquidity at Goldman Sachs’ newly launched transaction banking unit offering Virtual Integrated Accounts, concurs that the benefits of the reporting capability of VAs have helped fuel their growth among corporates.

  • A key advantage to a VA is the unique identifier assigned to each incoming receipt and outgoing payment so that the bank’s VA solution can attribute it to the correct VA, and in turn the bank account with which it is associated.
  • These identifiers can be simple reference numbers, or they can be configured as a clearly-recognized account number, such as an International Bank Account Number or IBAN, so a payment instruction need only contain the VA identifier to be automatically posted and reconciled across associated physical and VAs.

Tax concerns. While accounting can be easily sold on VAs, tax departments are more leery.  

  • Several companies reported tax being concerned about assigning VAs to multiple entities, for example, which would help transform pay-on-behalf-of and receive-on-behalf-on structures and allow in-house banks to fully leverage them.
  • To work around this, treasury must get tax comfortable with affiliates using VAs with the parent or treasury center like they would an intercompany ledger.
  • To do that, they must properly organize their payment and receipt structure in the centralized entity.
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Cost-Cutting Corporates Need to Factor in ROI of Cybersecurity

Quantifying the value of cyber defenses as some companies look to cut costs amid COVID.
 
Cybersecurity is a major concern for NeuGroup member companies, and the pandemic has forced them to pay more attention to the risks of having so many people in finance roles working from home as the push for accelerated automation and digitalization grows.

  • At the same time, COVID-19 has also pushed companies to tighten their belts. But cutting spending on cyber defenses looks like a potentially costly mistake.

Quantifying the value of cyber defenses as some companies look to cut costs amid COVID.
 
Cybersecurity is a major concern for NeuGroup member companies, and the pandemic has forced them to pay more attention to the risks of having so many people in finance roles working from home as the push for accelerated automation and digitalization grows.

  • At the same time, COVID-19 has also pushed companies to tighten their belts. But cutting spending on cyber defenses looks like a potentially costly mistake. 

Return on investment. A recent survey of more than 1,000 companies globally by ESI ThoughtLab found that investing in cyber defenses provides double-digit returns on investment (ROI)—179% on average. The ROI analysis is based on how cybersecurity investments change a firm’s expected losses.

  • Training and improving staff skills, recruiting specialists and appropriately compensating cybersecurity staff provided the biggest bang for the buck, with an ROI of 271%.
  • “One of the things we found from the study is that the investment in people results in the highest decline in the probability of a breach,” said Davis Hake, co-founder of Arceo.ai, which specializes in cyber-risk analytics, who was on the survey’s advisory board.
  • The study found significant ROI from investments in cybersecurity-related processes and procedures (156%) and technology (129%). 

Costs and COVID. Cybersecurity—like treasury—is often considered a cost center, so cost cuts may be imminent.

  • The ESI study notes, “Our interviews during the pandemic show a divergence of views, with some companies, particularly those in hard-hit areas like retail and hospitality, expecting significant budget cuts, and others foreseeing increases to support more ambitious digital transformation plans.”
  • Research firm Gartner recently estimated that companies’ spending on protecting their information from cyberattacks will increase by 2.4% in 2020, down significantly from the 8.7% growth it forecasted in December 2019, as a result of the pandemic. 

The value of cyber insurance. Six in 10 respondents plan to spend more on cyber insurance over the next two years, the survey found. And of those firms most advanced in cybersecurity effectiveness and compliance—which ESI calls cybersecurity leaders—57% have coverage over $10 million, compared to 30% of non-leaders.

  • Mr. Hake, who is also an adjunct professor of cyber-risk management at the University of California, Berkeley, said, “I talk to my students about this—when you you look at the price per dollar, insurance is one of the best investments you can make from a financial perspective.” 

Cybersecurity leaders. ESI determined leaders by analyzing responding companies’ adherence to the NIST Cybersecurity Framework, success in thwarting actual cyberattacks, and the Verizon Business Cyber Risk Monitoring Tool, based on publicly available data from Bitsight and Verizon’s own data breach investigations.

  • Only 64 of 151 companies classified as leaders in NIST compliance are advanced in cybersecurity effectiveness, the survey found, while leaders adapt the framework to business goals, strategies and the company’s individual risk profile.
  • Leaders make cybersecurity hygiene a top priority and do more frequent backup restoration drills.
  • Leaders are more likely to make cybersecurity a shared responsibility, often between the CIO and CISO, and they report to the CEO, COO or the board.
  • Eight out of 10 leading companies conduct cyber-risk scenario analysis, assess the financial impact of risk events, and measure the impact of mechanisms to mitigate risk.
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Exploring Cashforce’s Forecasting Solution, Among Others

Bottoms-up, top-down, ERP or bank statments?

During a recent discussion about cash forecasting at NeuGroup’s Global Cash and Banking Group, one member asked if any of her peers had done demos of solutions from Cashforce.

  • Another member said his company had reached the point where Cashforce is “going demo something” once an NDA is in place. “We have found them to be very open-minded,” the member said.
  • That’s important because his company has decided it does not want a forecasting system that relies on bottom-up analysis of data sourced from ERPs, in part because the company has “so many” different ERP systems and is “looking for an  AI, robotics approach” using top-down analysis.
  • He said that Cashforce has “been incredibly engaged” and willing to design solutions based on a bank statement model rather than ERP data.

Bottoms-up, top-down, ERP or bank statements?

During a recent discussion about cash forecasting at NeuGroup’s Global Cash and Banking Group, one member asked if any of her peers had done demos of solutions from Cashforce.

  • Another member said his company had reached the point where Cashforce is “going demo something” once an NDA is in place. “We have found them to be very open-minded,” the member said.
  • That’s important because his company has decided it does not want a forecasting system that relies on bottom-up analysis of data sourced from ERPs, in part because the company has “so many” different ERP systems and is “looking for an  AI, robotics approach” using top-down analysis.
  • He said that Cashforce has “been incredibly engaged” and willing to design solutions based on a bank statement model rather than ERP data.

Multiple approaches. This member described the company’s journey, saying, “We are taking on multiple approaches, some internal, some external, trying to figure out what’s most cost effective.”

  • “We’ve talked to a number of different companies and vendors; what’s worked for one company may not work for us,” he said.
  • The company, the member said, is “engaging all the fintechs out there” and has found that some are focused on ERPs while others understand this company’s preference for a bank account approach.
  • But as the ecnomic effects of the pandemic mount, this member said his company is “growing wary” of fintech companies because of the impression that “cash is drying up in fintech land.”
  • He said he would love to use cash forecasting supplied by a TMS, but that the experience of using the module offered by his TMS vendor is “just ok.” Sound familiar?
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Treasury’s Key Role as Corporates Support Black Communities

Treasurers weigh investments, deposits and transactions that will benefit Black communities.

Treasury teams within the NeuGroup Network are playing a key role at companies that are stepping up efforts to support Black communities and Black-owned financial institutions.

  • NeuGroup members discussed their initiatives and options at a recent Virtual Interactive Session (VIS) that followed a webinar in which Netflix detailed its commitment to allocate 2% of cash holdings—initially up to $100 million—into financial institutions and organizations that directly support Black communities in the US.

Treasurers weigh investments, deposits and transactions that will benefit Black communities.

Treasury teams within the NeuGroup Network are playing a key role at companies that are stepping up efforts to support Black communities and Black-owned financial institutions.

  • NeuGroup members discussed their initiatives and options at a recent Virtual Interactive Session (VIS) that followed a webinar in which Netflix detailed its commitment to allocate 2% of cash holdings—initially up to $100 million—into financial institutions and organizations that directly support Black communities in the US.
  • Director of treasury Shannon Alwyn told VIS participants that Netflix approached this project—an idea from someone in HR which treasury executed—by asking, “How can we make a difference in the normal course of business—how to do something without really doing anything—to make this more than a moment?”
  • Part of the answer to that question involved moving a portion of non-operating cash from one set of banking partners to other financial institutions.

The Netflix plan. Netflix is taking a first step by putting $35 million into two vehicles:

  • $25 million will be managed by the Local Initiatives Support Corporation (LISC), which will invest in Black financial institutions serving low- and moderate-income communities and Black community development corporations.
  • $10 million will go to Hope Credit Union in the form of a so-called transformational deposit to fuel economic opportunity in the South. This is a two-year CD with a 30-day call option in case Netflix needs the liquidity.

Big Picture. In general terms, companies looking to make an impact have three pillars to consider:

  1. Depositing cash into banks that directly serve Black communities.
  2. Using Black-owned institutions for financial transactions such as bond issues or stock buybacks.
  3. Direct investment of debt, equity or contributions in kind (e.g., technology, training and building housing).

There are obstacles to making investments that benefit communities. Investment policy constraints are among the biggest.

  • Most firms need peer benchmarks to ok carve-outs for depositing significant amounts of excess cash with smaller institutions and to approve equity investments that are said to have much more of a multiplier effect than loans financed by bank deposits.

Inspired by Netflix. A treasurer who attended the Netflix webinar and the NeuGroup VIS said his company, inspired in part by Netflix, is now looking to support Black-owned community development financial institutions (CDFIs) via options that include:

  • Making deposits directly into minority depository institutions (MDIs) that serve Black communities. This requires due diligence, partly because of the relatively small asset size of many Black-owned banks.
  • Using an intermediary similar to LISC that can help spread the company’s investment across a bigger group of Black-owned MDIs. “That’s what everyone is grappling with—trying to get adequate scale and diversification and some level of diligence,” the treasurer said.

Other paths to progress. The treasurer is also looking into options discussed by other companies who spoke at the VIS. They include:

  • A structured fund similar to one described by a member from a large technology company.
    • That tech company also uses the Certificate of Deposit Account Registry Service (CDARS) with a CDFI in New Orleans.
    • And the company makes use of the Insured Cash Sweep (ICS) service that involves hundreds of institutions.
  • A separately managed account (SMA) used by another company. The account is managed by RBC’s Access Capital, which helps financial institutions comply with the Community Reinvestment Act.
    • The SMA’s fixed-income investments include highly-rated issues from GSEs that support single-family loans and small businesses. The treasurer exploring his options called this “an elegant solution.”

Investment policy changes.