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How Treasury Steps into the Strategic Limelight

Rising rates and a looming recession provide treasury with an opportunity to elevate its profile and and become a leader in board-level conversations.

Tough economic conditions have historically highlighted the critical role treasury plays as the champion of corporate liquidity. This happened during 2008-09 and will likely happen again if credit and cash flows begin to contract.

Rising rates and a looming recession provide treasury with an opportunity to elevate its profile and and become a leader in board-level conversations.

Tough economic conditions have historically highlighted the critical role treasury plays as the champion of corporate liquidity. This happened during 2008-09 and will likely happen again if credit and cash flows begin to contract.

This is not new territory for treasurers, many of whom have already evolved to serve new and broader constituents, becoming more strategic, consultative and less transactional in nature.

Treasurers are getting more involved in M&A transactions. They orchestrate the capital structure, and are working more closely with business partners on issues such as liquidity structures, legal entity setup and taxes. Yet, at many organizations, treasury is still pigeonholed as a back-office function.

Now is the time for all treasuries to become active members in senior-level discussions, so it’s imperative that they rev up efforts to develop strategic capabilities to better assist the C-suite. “Sometimes you have to step out and take on more responsibilities, talk to the CFO, find out how you can help and let them know you’re there,” said one treasurer at the in-person spring meeting of NeuGroup for Retail Treasury.

Five Steps to Creating a Strategic Capability

In conversations with dozens of NeuGroup members, most recently at the retail meeting in Minneapolis, treasurers shared important action items that can help the function develop into a true business partner and produce greater insight to support strategic decisions.

1. Grab a seat at the table. At some organizations, treasury is already involved in supporting board-level decisions. At many, however, that is not the case. Treasury should not wait to be invited. Instead, it should ask to participate in board discussions, which is different from providing data and analysis for the CFO’s presentation. Instead, it means being present and engaged in the conversations, explaining the business implications and sharing scenario analysis of the effects of higher rates, reduced inflow of cash, and the potential deterioration in AR quality.

2. Dismantle silos. There’s typically a natural tension between treasury and FP&A because both build a cash flow forecast but in different ways. FP&A usually takes a more high-level approach by pulling information from existing data sources like the ERP, whereas treasury takes a more granular approach with the objective of ensuring liquidity. To increase its sphere of influence, treasury should collaborate with FP&A to sync the forecasts, or at least spot and understand any discrepancies, to inform decision-making.

  • In an effort spearheaded by treasury to improve forecast accuracy at one member’s company, the treasury team has a quarterly meeting with the CFO and the FP&A team to align treasury’s cash- forecasts with FP&As longer-term forecasts, which the member said are more P&L-focused.

3. Determine the service-delivery model. Treasuries need to define a clear operating model vision: One approach is to adopt a generalist mindset, using rotations through other finance functions to build broader expertise. Another is to opt for a specialist model and develop deep subject matter expertise to support other parts of the finance function and the business. Both can work, but to work well it’s important treasurers make a conscious decision and drive their culture by recruiting the right talent, providing necessary training and establishing clear roles and responsibilities as well as a career path.

4. Speak the language of the business. Treasurers should put a stronger emphasis on developing soft skills such as storytelling and influencing. It’s one thing to understand a complex transaction and another to translate it to someone else in terms senior and business leaders can understand. To develop this fluency, treasury should engage with business unit leaders and understand their main pain points, e.g., tightening margins, and then provide context and narrative around data and analyses.

  • “As you shift to pushing more soft skills, it gets into, how do we avoid just telling people what we know? How do we influence and shape the next generation of treasury? It isn’t always easy, especially in a hybrid environment,” one member said.

5. Widen the path into treasury. Because few colleges offer treasury-specific tracks, treasury has traditionally hired junior staff from banks, recent finance majors and promoted internally. As the scope of the role expands, communication, critical thinking and intellectual curiosity are becoming core job requirements. Like other parts of finance, treasury should look beyond finance and business majors or practitioners and hire staff with nontraditional backgrounds, e.g., liberal arts, data analytics and technology. It should also expand its talent pool by offering remote or hybrid positions.

  • Finally, hiring managers should add some marketing “zing” to job posts, job fairs presentations and interviews, to highlight the exciting aspects of the role, e.g., working with business partners, predicting cash flows and getting engaged in designing the company’s capital structure.

A recession and spiking rates, combined with extreme market volatility, are tall challenges for finance organizations. However, they are also an opportunity to demonstrate the value finance and treasury can add to steer the company forward.

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The Great Reconsideration: Improving Culture To Improve Retention

While the flexibility provided by remote work is an important factor, the organization’s culture can be the biggest draw.

The pandemic triggered a significant shift in employees’ expectations, making finding and retaining talent a top priority for finance executives. Higher employee turnover rates are prompting companies to kick-start new efforts to craft corporate cultures that make people feel welcome and ensure they stay on long-term. It’s not easy.

  • “The labor market is still a challenge, and recruitment is a challenge,” one treasurer said at a recent meeting. “Especially if you’re not based in a large city, you have to do more to get people in; it’s hard.”

While the flexibility provided by remote work is an important factor, the organization’s culture can be the biggest draw.

The pandemic triggered a significant shift in employees’ expectations, making finding and retaining talent a top priority for finance executives. Higher employee turnover rates are prompting companies to kick-start new efforts to craft corporate cultures that make people feel welcome and ensure they stay on long-term. It’s not easy.

  • “The labor market is still a challenge, and recruitment is a challenge,” one treasurer said at a recent meeting. “Especially if you’re not based in a large city, you have to do more to get people in; it’s hard.”

A Confusing Reality

Offering remote and hybrid work arrangements presents opportunities and challenges for finance departments. For example, while flexible hybrid work policies that mandate a certain number of days in the office per week attempt to capture the best of both worlds, the need for in-person staff to join virtual meetings can leave them feeling disconnected. One member said, “How could we ask people to come to the office and spend their whole day on Zoom?”

On the flip side, forcing everyone to come into the office can backfire. Several Silicon Valley companies that adopted strict return-to-office policies have experienced attrition, and some have since gone back on these mandates. One member reported having difficulties hiring at his Virginia-based office, which mandates an in-person only environment.

Employees are increasingly demanding greater flexibility, and employers must be responsive to remain competitive, while ensuring employees’ focus, productivity and team spirit. As remote work becomes the norm, “spontaneous collaboration is becoming rarer, and it’s not always easy to foster,” according to the CFO of a member company.

  • Another issue that arises from little to no in-person interaction is the difficulty for leaders of gauging the attitudes of their staff. Because they may not be able to be responsive to the needs of an unhappy employee, that person may end up quitting. To better assess employee engagement and satisfaction, one company has launched randomized anonymous surveys as a “little pulse-check” on how everyone at the company is doing—but is still seeking ideas on how to measure individuals’ moods.

The upside of remote work has completely reshaped workforce demographics because it expanded the available talent pool. One member noted that Denver, Charlotte and Atlanta are now significant talent hubs. Another said she opened applications to remote workers across the continent, which led to a new hire based in Ottawa, who has had an instant impact on her team.

Three Steps to Improve Hiring & Retention
Building a welcoming culture is critical to the success of hiring and retention programs. To entice new talent and encourage people to stay, members have taken a number of novel approaches designed to bring people into the office and enjoy it or bond from a distance. It’s therefore incumbent upon executives to get creative.

1. Enhance benefits. A finance executive at a business whose workforce quadrupled during the pandemic said his company resorted to offering more diverse benefits to attract the best people, including the option to work fully remotely or in its Boston offices with free lunch and a stipend for the commute. Another reported that his company saw an uptick in applicants when it implemented full remote positions with unlimited paid time off.

2. Bring back the fun. Often, the “missing ingredient” in the remote office is fun. Without celebrations for birthdays, weddings and personal events, or even water cooler conversations, the workplace can lose much of its focus on people. “Especially when you’re remote, you can’t just be work-driven, you have to be people-driven,” said one member.
 
3. Offer new incentives. One corporate with a flexible hybrid policy held a free professional photo day, so all employees dressed in their Sunday best and got new headshots, which “brought a ton of people into the office.”

  • Other ideas included virtual beer and wine tastings, location-based meetups for remote employees, and lunch & learn calls to get to know one another’s interests.
  • The most common and most effective approach members mentioned was food. “Free lunch just gets employees in the office,” one member said. Another noted that after her company, which provided restaurant-quality meals to employees, went remote-only, it had to offer a lunch stipend for all employees.
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The Inevitability of Crypto for Corporates

While the cryptocurrency market has imploded recently, treasury’s need to become crypto-fluent remains strong.

Sharp drops in cryptocurrency value have grabbed headlines and rattled investors. However, the reality for most corporates is that they must continue, and even accelerate, their efforts to understand the market’s mechanisms and dynamics. Companies’ strategic initiatives, such as issuing nonfungible tokens (NFTs), and rising demand for payment in crypto from a younger customer base, are forcing treasuries to come up the crypto learning curve.

  • According to one assistant treasurer (AT), it is important that peer companies spend time learning every day. One reason: “When your CEO or CFO comes to you and says the company wants to start accepting bitcoin, you don’t want to be caught off guard.”

While the cryptocurrency market has imploded recently, treasury’s need to become crypto-fluent remains strong.

Sharp drops in cryptocurrency value have grabbed headlines and rattled investors. However, the reality for most corporates is that they must continue, and even accelerate, their efforts to understand the market’s mechanisms and dynamics. Companies’ strategic initiatives, such as issuing nonfungible tokens (NFTs), and rising demand for payment in crypto from a younger customer base, are forcing treasuries to come up the crypto learning curve.

  • According to one assistant treasurer (AT), it is important that peer companies spend time learning every day. One reason: “When your CEO or CFO comes to you and says the company wants to start accepting bitcoin, you don’t want to be caught off guard.”

Pressing questions. A recent poll of members of NeuGroup for Large-Cap Assistant Treasurers revealed that none have direct crypto capabilities; however, almost all had important questions, ranging from whether there are restrictions on corporates holding crypto to how long it would take to process crypto payments. Those questions will only become more pressing, as companies move further into the digital asset space.

  • One participant at a recent meeting said his company has pursued one-off sales of NFTs using a third party to manage the transaction and risk; “but just within the last week, questions came up about whether there could be regular, ongoing [NFT] sales.”
  • An AT whose technology company has purchased significant cryptocurrency to test the waters, shared some of the issues treasury must address when entering the crypto sphere, ranging from implementing the basic crypto-transaction infrastructure, to understanding the appropriate risk level for the company and the tax and accounting implications.

Inevitable. Recent volatility in the crypto market may have given some treasurers pause, and no one at the meeting reported that their bosses are pushing for immediate crypto capabilities. However, the market has always had steep peaks and valleys yet continued to expand, while increasingly attracting Main Street players. Financial institutions including Bank of New York Mellon and Fidelity are planning to offer crypto custody services this summer, and 74 governments worldwide are testing digital currencies.

Testing the waters. NeuGroup’s Matt Thomas, leader of a thriving digital assets working group, suggested treasury should get a head start. For example, one of the group’s members established a crypto wallet after the company’s first NFT to get ahead in case he is tasked with building the infrastructure to support those transactions. More members are considering doing the same. At one utility company, 72 customers are already paying in bitcoin.

By taking initial steps, treasury can find out firsthand how the market works. In the case of one member company, investing a tiny fraction of its assets in bitcoin has already provided insight into crypto assets’ distinct characteristics, for example:

Digital assets are accounted for as intangibles with indefinite lives, with different impairment tests. And the tax department has been routinely involved, since it remains murky what constitutes dispositions of the assets that would trigger a gain or loss.

  • Corporate governance is also key, to understand disclosures and even internal communications, since cryptocurrencies can be a “bit polarizing,” she said, “and employees want to understand what you’re doing and why.”
  • While the outlook for cryptocurrency price recovery is unclear, crypto evangelists predict a continued overall rise in value. This aligns with corporate treasuries’ longer-term perspective. The objective is not to jump in in significantly anytime soon; it’s to be prepared for this eventuality. Indeed, many of our members have already established cross-functional crypto taskforces mandated to research risks and opportunities.

NFTs: Gateway drug to crypto? The table above is a distillation of the crypto storyline for some NeuGroup member companies. It starts with a desire to have an informed answer if asked about the topic. How far beyond the middle stage member companies progress, as we emerge from the current downcycle, will depend on the business case for crypto, which often starts with NFTs. At the end state, crypto expertise (including DeFi and Web3) will integrate into treasury’s complete range of specialized knowledge, or a crypto treasury center of excellence may emerge as a standalone. This crypto COE, not unlike a captive finance company, would collaborate with the traditional finance treasury yet maintain a distinct team and, perhaps, entity structure.

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Former Intel CFO: Don’t Wait for an Invite to Impact Strategy

George Davis (left), here with NeuGroup founder Joseph Neu, urged treasurers gathered at a tech summit in California to dream big and weigh in on strategy.

In a keynote address referencing iconic daydreamer Walter Mitty, George Davis—the former CFO of Intel and Qualcomm and the former CFO and treasurer of Applied Materials—urged dozens of treasurers attending NeuGroup’s Tech Strategic Finance Summit Treasurer Day to dream big, take risks and not wait for invitations to apply treasury’s valuable perspective and skill set to a company’s strategic decisions.

  • Mr. Davis addressed members of NeuGroup for Tech Treasurers (known as Tech20 back when Mr. Davis was a member) and NeuGroup for Growth-Tech Treasury who gathered in person last week at The Ritz-Carlton in Half Moon Bay, California. RBC Capital Markets and Fitch Ratings sponsored the event.
  • You can watch portions of a video interview NeuGroup Insights did with Mr. Davis by hitting the play button below.

George Davis (left), here with NeuGroup founder Joseph Neu, urged treasurers gathered at a tech summit in California to dream big and weigh in on strategy.

In a keynote address referencing iconic daydreamer Walter Mitty, George Davis—the former CFO of Intel and Qualcomm and the former CFO and treasurer of Applied Materials—urged dozens of treasurers attending NeuGroup’s Tech Strategic Finance Summit Treasurer Day to dream big, take risks and not wait for invitations to apply treasury’s valuable perspective and skill set to a company’s strategic decisions.

  • Mr. Davis addressed members of NeuGroup for Tech Treasurers (known as Tech20 back when Mr. Davis was a member) and NeuGroup for Growth-Tech Treasury who gathered in person last week at The Ritz-Carlton in Half Moon Bay, California. RBC Capital Markets and Fitch Ratings sponsored the event.
  • You can watch portions of a video interview NeuGroup Insights did with Mr. Davis by hitting the play button below.

Swim with the sharks. The fictional character Walter Mitty, Mr. Davis said, is blessed with capabilities well beyond the needs of his day-to-day work, so he daydreams. In a similar vein, he told members, “You’re blessed with capabilities as a treasurer that are essential to your company. And my guess is that you’re still underutilized.”

  • To address that, Mr. Davis described his perfect treasury job as one where “treasury stuff” like cash management or liabilities and duration take up considerably less time than what the treasurer spends on activities that influence key strategic opportunities for the company—activities that “are the stuff of daydreams.”
    • Those may include the company’s M&A agenda, investment prioritization (including R&D), dealing with activist shareholders and global risk management, including cyber risk.
  • He warned that branching out into areas that present important challenges and pain points to CEOs, CFOs and boards may mean treasurers end up “in rough waters” with potential dangers as people within the company defend what they see as their turf. “It’s going to be out of your comfort zone,” he said.
    • To illustrate the point humorously, he showed a clip of “The Secret Life of Walter Mitty” (2013) starring Ben Stiller in which Mitty jumps into ice-cold, shark-infested waters.

Don’t wait for an invite to swim strategically. Treasurers need to take risks and venture into strategic waters, even when they’re not invited. “Getting invited is tricky. If you wait for an invitation you’ll be mostly in your box,” Mr. Davis said. “Most people I’ve seen who do this aren’t invited. So how do you get yourself invited? Well, you have to be willing to engage without being invited.”

  • He recommends telling the CFO you’re interested in weighing in on specific issues that fall outside your comfort zone. Another tactic: offer up a stand-out analyst on the treasury team to help on deals that will benefit from treasury’s ability to apply valuation methods and tools.
  • Treasurers who take the initiative to offer valuable insights—without seeking credit—will find fewer hurdles in getting a seat at the table in future strategic endeavors.
  • View the long hours that you and your team will put in when engaging in activism campaigns and deals as investments in satisfying, often fun work that will increase treasury’s value to the company.

Why inflation, recession and crypto make this a great time to be a treasurer. Several reasons Mr. Davis presented about why now is a great time to be a treasurer underscore his vision of the strategic value treasury is capable of providing to companies.

  • Inflation: “Very few of us are old enough to have inflation in our resume. It’s a time when there’s no muscle memory for how do you respond to this. So it’s very fair for the CEO and the CFO to look to the treasurer and say, ‘hey, how should we be thinking about it, what are the strategies that people have employed historically and successfully in the face of inflation?’
    • That’s a great opportunity. When there’s a problem, you want to be the solution and I think the treasurer can play a big role.”
  • Recession: “It introduces a lot of challenges for the company and the treasury portfolio and the skill sets that treasurers have are uniquely suited to thinking through strategies for getting through it. In a recession, the treasurer is definitely part of the solution.”
  • Crypto: “It’s a legitimate question as to where does crypto fit for a lot of companies—you have to have a view. People understand now that there’s a much broader dynamic in crypto and there’s no better individual in the company than the treasurer and the treasury organization to look at all the issues that come with where it fits.”  
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Go Short: The Case for Short Duration Credit

One portfolio manager’s investment in ultra-short securities helps shed light on an underrated way to pick up yield.

Investment managers prospecting for opportunities to pick up yield as rates rise may find gold in the hills of short duration credit. At a recent meeting of NeuGroup for Cash Investment sponsored by investment management company Lord Abbett, the portfolio manager of a private university with a large endowment shared how he capitalized on rising yields for short-term investments by working with Lord Abbett at the start of the pandemic—and went back for more.

  • “You want to understand the volatility, and make sure the institution can tolerate that,” the portfolio manager said. “But looking forward, there is a yield pickup there,” he said of his investment in credit and other ultra-short duration assets.
  • Lord Abbett investment strategist Joseph Graham, who worked with the university on this investment, said, “Now, yields are up and spreads are wider, and as inflation ravages the purchasing power of cash portfolios, the case for short duration credit is even more compelling,” adding that the firm’s clients “are continuing to find value in our broad-based approach.”

One portfolio manager’s investment in ultra-short securities helps shed light on an underrated way to pick up yield.

Investment managers prospecting for opportunities to pick up yield as rates rise may find gold in the hills of short duration credit. At a recent meeting of NeuGroup for Cash Investment sponsored by investment management company Lord Abbett, the portfolio manager of a private university with a large endowment shared how he capitalized on rising yields for short-term investments by working with Lord Abbett at the start of the pandemic—and went back for more.

  • “You want to understand the volatility, and make sure the institution can tolerate that,” the portfolio manager said. “But looking forward, there is a yield pickup there,” he said of his investment in credit and other ultra-short duration assets.
  • Lord Abbett investment strategist Joseph Graham, who worked with the university on this investment, said, “Now, yields are up and spreads are wider, and as inflation ravages the purchasing power of cash portfolios, the case for short duration credit is even more compelling,” adding that the firm’s clients “are continuing to find value in our broad-based approach.”

The client’s journey. The portfolio manager said the university had good deal of cash on its balance sheet in early 2020, when pandemic era policy rates combined with tight spreads meant traditional cash management options offered nearly no yield, leading him to be “more proactive with the management of this cash,” which was sitting in money market funds (MMFs) at the time.

  • After speaking with Mr. Graham and Samantha Scher, who leads Lord Abbett’s institutional sales team, the manager made an initial investment topping $100 million through a separately managed account with Lord Abbett that included credit and other short duration assets like treasuries, picking up 60 basis points of additional yield compared to the MMFs.
    • Later in 2020, the university created a second, more conservative customized allocation of a similar size with Lord Abbett, picking up 20 basis points of yield over money market options.
  • Because of the university’s liquidity needs and the uncertainty of the pandemic, the manager was limited to a shorter term. “As we evaluated different strategies, we had good visibility for 12 months, but not beyond that,” he said. “So we had to focus on ultra-short.”
  • “The yield and spread environment [in 2020] was a driver of a more broad-based approach that included credit-sensitive assets for this cash management client,” Mr. Graham said. As yields rise at the short end of the market and spread volatility returns, an active, short duration, credit-focused strategy can compete with core and intermediate fixed income options.

The case for short-term investments. Though Mr. Graham conceded that turning to short-term investments for yield pickup is somewhat counterintuitive, he said “that is indeed the case if you look at the data.”

  • Lord Abbett presented the chart above comparing the performance of actively-traded US Treasuries from 2020 and now. Because the yield curve is steep through the first three years, then flattens out, short-term (one to three-year) securities make sense right now, particularly in light of uncertainty around the persistence of inflation, noted Mr. Graham.
  • “You can kind of think of this as an efficient frontier, with term as the biggest risk in fixed income and yield as the biggest component of return,” he said. “It’s tough to justify being anywhere but the one- to three-year area, as long as you have visibility into your liabilities and you’re matched appropriately.”

The case for credit. To help explain the viability of short-term credit investing, Mr. Graham compared it to the concept of matching liabilities and assets in liability-driven investing, instead using credit to offset liabilities. “The question becomes, how much can you really use credit to do this?,” he said. “Aren’t you exposing yourself to principal losses in addition to price volatility?”

  • The answer, he said, is that historically there aren’t many principal losses in short and high-quality credit investments. “The price volatility and liquidity risk is what you’re solving for,” he said. “By matching assets to liabilities, you can afford some of that price volatility and basically are monetizing the liquidity risk by having the ability to hold through it.
    • “In times of volatility, because it’s short-duration and matures relatively soon, as long as a manager is doing good work underwriting credits and there are limited principal losses you do get that pullback to par as things start to reach maturity.”
  • Mr. Graham acknowledged the real risk of principal losses, but noted “one way to look at it is to compare the term structures of losses vs spreads: the spreads more than make up for the losses.”
    • In the chart below, average annual credit loss rates, especially in the first three years, are relatively low for high grade investments, and are offset by spreads over the same period.

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Talking Shop: Managing Credit Risk for Crypto Custodians

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].


Member question: “How should corporates manage credit risk for cryptocurrency custodians?”

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].


Member question: “How should corporates manage credit risk for cryptocurrency custodians?”

Peer answer 1: “We’ve thought a lot about this. One point to make: Anchorage Digital Bank is federally chartered by the OCC; most others are state chartered. We look at things like that. Most of these licenses have pretty high standards for capitalization, so it might be as simple as learning more about that.

  • “In addition, we looked at the probability of default on their loan portfolios (percentage of liquid collateral vs. loans outstanding), their ability to repay their obligations and what level of insurance they offer.
  • “Ultimately, we did purchase dedicated insurance on top of the insurance that the custodian holds. I’d also look at assets under management and if they can disclose any of their top customers. In my experience, they’re all willing to share their latest financials.
  • “We thought Fidelity had a less impressive solution from a technical standpoint, but it might be the easiest sell if you’re looking for a counterparty that fits within the traditional credit risk framework. We found that Anchorage had the best platform in terms of security and a really great leadership team.”

Member response: “All great thoughts, in line with what we are thinking. We think about credit risk from two angles: balance sheet and cash flow. Do the custodians function like a bank or a corporate? Are there any risk assets (loans or investments)? What is the debt/EBITDA ratio (your point on ability to replay the obligations)? By answering those questions, we think getting the latest financial statement is a start, then we can run credit analysis and categorize them as an IG or non-IG company.”

Peer answer 2: “Great question. Since it is really hard to ‘KYC’ someone in this space, our thought process was to ask our banking partners, who have strict KYC reviews, who in this space met their standards.

  • “Since the majority are not publicly traded companies, it is near impossible to get completely comfortable. To avoid credit issues as best we can, we currently have rules in place that immediately trade any crypto received to USD and then wire to our preferred banking partner.”

Peer answer 3: “I echo several of the same sentiments of Peer 1. Here are some other points to consider:

  • “Regulation of custodians: How is the custodian regulated and by whom?
  • “Regulation of your firm: We had to work with our regulators to have our custodians approved. Our regulators spoke to the regulators of those custodians to feel comfortable. This would apply to broker-dealers and financial firms but unlikely to corporations.
  • “Strength of balance sheet: Typically this information is shared and is part of the counterparty due diligence process.
  • “Insurance policies.
  • “Business continuity policies/processes.
  • SLAs on transactions.
  • “Executive team.
  • “Overall technical abilities of the custodian.
  • “Any adverse media.”
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Internal Auditors Shine a Brighter Light on Climate Data Sources

Pending regulations prompt IA to validate companies’ climate-related claims and incorporate first and second lines of defense.

Several members of NeuGroup for Internal Audit Executives have recently or will soon conduct the first audits of their companies’ climate impact reports, and in a recent meeting they generally concluded that ESG group leaders may not understand much of the data behind their reports.

  • The vice president of internal audit at a corporate with supply chains stretching worldwide discussed his company’s annual climate impact report and several others related to specific supply chains.
    • “We had never audited them,” he said. “So I told my team that we really need to take a look at the information in those reports: where the data comes from, can we validate it and are there controls in place?”

Pending regulations prompt IA to validate companies’ climate-related claims and incorporate first and second lines of defense.

Several members of NeuGroup for Internal Audit Executives have recently or will soon conduct the first audits of their companies’ climate impact reports, and in a recent meeting they generally concluded that ESG group leaders may not understand much of the data behind their reports.

  • The vice president of internal audit at a corporate with supply chains stretching worldwide discussed his company’s annual climate impact report and several others related to specific supply chains.
    • “We had never audited them,” he said. “So I told my team that we really need to take a look at the information in those reports: where the data comes from, can we validate it and are there controls in place?”
  • The audit led to the development of a climate framework that will enable the ESG team to comply with anticipated European Union requirements as well the company’s businesses to better understand and control their climate impact.

Data skills lacking. The executive said his company’s sustainability team members may be passionate, but they didn’t have any background in setting up a so-called second line of defense structure, which ensures the proper handling of risk controls and compliance by first-line risk managers. In some cases, they weren’t well-versed in establishing policies and expectations. 

  • After recently finishing an audit of her company’s climate impact report, another member noted there was no validated data for 40% of the numbers reported.
  • A third member said her team was beginning a climate impact audit shortly, along with its external auditor.

Out of the ashes. The session leader said his ESG colleagues were upset about the audit’s conclusions, but the group’s leader saw the value of putting in more rigor behind the data.

  • Now IA reviews every report before it is published and validates the data with limited testing, and has started to work with the ESG group to analyze its source data.
    • A peer questioned whether that was excessive, and the session leader pointed to the potential for reputation risk and losing customers, adding that IA will review the reports until the ESG team sets up a functioning second line.
  • Also stemming from the climate audit is a climate risk assessment template that IA created to apply to each of the company’s businesses.
    • “Our ESG team has adopted this and will use it going forward as their official guide,” he said. “We don’t intend to do risk assessments in this area unless they ask for our assistance.”
    • He added that such risk assessments are expected to be a part of the European Union’s proposed legislation regarding climate impact.

Framework aspects. Responding to a peer’s request for key aspects of the risk assessment framework, the session leader recommended analyzing the data inputs in a specific process and where it is sourced from—often the supply chain—then building a risk register. Like any risk assessment, common criteria in terms of impact and likelihood were developed, to help prioritize all the data.

  • Climate change risk stands out because current frameworks typically divide it into physical and transitory risks; so, is it a factory at risk, or a change such as temperatures increasing that must be dealt with over time?
    • Using a tool that predicts how climate change will impact businesses, “We can tell them here will be the impact on your business’s profitability.”
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The Fed Won’t Derail the Economy, UMB Tells Assistant Treasurers

The bank’s positive forecast addresses concerns about rates, inflation, growth and unknowns ahead.

UMB, the regional commercial bank, presented a surprisingly upbeat economic forecast for this year to assistant treasurers in a recent meeting, suggesting less likelihood they will face difficult choices to help guide their companies through a recession or skyrocketing inflation.

  • “On our side,” said an assistant treasurer attending the meeting of NeuGroup for Large-Cap Assistant Treasurers, “it’s fear of the unknown,” given the Fed failed to foresee the inflation spikes “and no one seems to understand what’s going on.”

The bank’s positive forecast addresses concerns about rates, inflation, growth and unknowns ahead.

UMB, the regional commercial bank, presented a surprisingly upbeat economic forecast for this year to assistant treasurers in a recent meeting, suggesting less likelihood they will face difficult choices to help guide their companies through a recession or skyrocketing inflation. 

  • “On our side,” said an assistant treasurer attending the meeting of NeuGroup for Large-Cap Assistant Treasurers, “it’s fear of the unknown,” given the Fed failed to foresee the inflation spikes “and no one seems to understand what’s going on.”
  • Addressing those unknowns, the bank’s director of research and fixed income, Eric Kelley, told the group that UMB forecasts GDP growing by 3.4% in 2022 (see chart), lower than last year but still high historically, and inflation will drop significantly over the next few months based on technical reasons alone.

Rate hike fears overblown. The Federal Reserve’s “dot plot,” illustrating board members’ votes on a time chart, indicates the central bank will raise the Fed Funds rate to 2.75% and perhaps 3% this year, and another quarter-point or two in 2023, then pause.

  • “Not enough to derail the economy; not even close,” Mr. Kelley said, and “The Fed believes that’s their new neutral rate, and it will be good enough to slow down economy.”
  • The market sees a slightly higher increase this year, at 3.25%, still historically low, Mr. Kelley said, adding that recent volatility in the bond and stock markets has stemmed more from the unexpectedly rapid nature of the rate hikes than longer-term concerns.

Deceptive headlines. US GDP decreased by an annualized negative 1.4% in Q1, but behind the headlines and excluding exports and inventory builds—both volatile components—the economy actually grew at 2.8%, Mr. Kelley said.

  • “I was surprised how that print did not cause much market turmoil,” noted a meeting participant, adding that Fed Chairman Jerome Powell effectively conveyed that context in his press conference.

Factors powering growth. A housing glut and bust prompted the Great Recession, but today’s housing market and the economic activity it generates show no sign of weakening, despite mortgage rates jumping more than 200 basis points this year, to around 5.25%.

  • A member asked where UMB sees mortgage rates topping out, and Mr. Kelley noted they tend to follow the 10-year Treasury which the bank forecasts increasing to 3.5% or possibly 3.75%.
    • “That should put mortgage rates in the high 5s, maybe 6%,” Mr. Kelley said, adding that could impact first-time homebuyers but not overall housing demand, given historically low housing inventory that is unlikely to meet demand anytime soon.
  • Another factor powering growth is resilient households, bolstered by today’s strong job market and the accompanying higher wages.
    • “We’re in a bit of a housing bubble in San Francisco,” commented a meeting participant, “But people are still buying up houses and spending.”
  • Assuming no more major surprises this year, UMB expects the S&P to end the year net positive, up 3% to 7%.

Inflation falling. Dramatic inflation numbers have prompted the Fed’s rapid rate increases this year and much of the volatility in the securities markets, but those numbers won’t last.

  • On the technical front, year over year price comparisons between the first months of 2022 and 2021, when much of the economy was in lockdown, resulted in annualized inflation reaching 8.5%. But prices began rising significantly last summer as the economy opened, reducing that month-to-month spread.
    • “By year end, inflation should drop by at least 100 basis points, maybe 200, just because of the math,” Mr. Kelley said.
  • In addition, factors that have fueled inflation, including supply chain challenges and wage increases, are moderating, he said, adding that the Fed closely monitors the US 5-year/5-forward TIPS breakeven inflation rate, and it shows inflation resting in the agency’s comfort zone of 2.3% to 2.5%.
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Talking Shop: FBAR Annual Reporting Requirements

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].


Member question: “Do you know if companies need to report all ‘signers’ of foreign bank accounts or all ‘payment approvers’ to the IRS each year for FBAR (Report of Foreign Bank and Financial Accounts) purposes?”

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].


Member question: “Do you know if companies need to report all ‘signers’ of foreign bank accounts or all ‘payment approvers’ to the IRS each year for FBAR (Report of Foreign Bank and Financial Accounts) purposes?”

Peer answer 1: “We interpret the FBAR authorized individual to be any employee known to the bank that can direct the bank to take action (including payments). As such, we report signers as well as the payment approvers in our bank portals.”

Peer answer 2: “We have the same interpretation as Peer 1. We report any individual with the ability to directly remit funds from a foreign bank account at his or her discretion where the individual is recognized by the bank as the remitter of the funds.

  • “We interpret being recognized by the bank as your individual name or username (including password or signature) being attached to the payment. This includes those listed in banking resolutions, bank signature cards, and having approve/release capability in the banking portal.”

Peer answer 3: “We report all signers (US persons) and not electronic payment approvers to the IRS. I won’t comment on its correctness, but that is what we do.”

Peer answer 4: “We report both signers and approvers (viewed as a more conservative approach/interpretation of the guidance).”

Peer answer 5: “I’ve seen both. I think the guidance is to add those who have ‘authority’ on the account, so it’s open to interpretation. I suggest aligning with your tax team. We include payment approvers and signers.”

Peer answer 6: “We only report all US passport holders or people living in the US that are signers on any bank account.”

Peer answer 7: “We only report signers on foreign bank accounts.”

An IRS tax law specialist told NeuGroup Insights that anyone listed on an account, including all signers, must be reported on the company’s FBAR. She advised consulting the IRS FBAR Reference Guide, which states, “A US person must file an FBAR if they have a financial interest in or signature or other authority over any financial account(s) outside the US and the aggregate amount(s) in the account(s) exceeds $10,000 at any time during the calendar year.”

Peter Larson, a principal at Deloitte told NeuGroup Insights:

  • “Whether a person has ‘signature authority’ for FBAR purposes is fact specific, especially since each company will have different controls, systems and protocols for how their employees interact with the company bank accounts, and different banks will use different protocols as well.
  • “Basically, the rule is that a person must be able to communicate directly with a bank or other financial institution to dispose of funds for that person to be seen as having signature authority (even if it requires multiple people to communicate with the bank).”
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Musical Chairs: Where Should ERM Sit To Create the Most Value?

Some corporates are positioning ERM teams to sit under internal audit or corporate strategy.

Many enterprise risk management teams are at an inflection point as they aim to become strategic partners to the business. Some corporates are finding that ERM can add more value to the business by sitting within functions like corporate strategy or internal audit.

  • At a recent meeting of NeuGroup for Enterprise Risk Management, two members who recently experienced a shift in reporting—one to internal audit and the other to corporate strategy—compared their approaches and the impact on their ability to add value.

Some corporates are positioning ERM teams to sit under internal audit or corporate strategy.

Many enterprise risk management teams are at an inflection point as they aim to become strategic partners to the business. Some corporates are finding that ERM can add more value to the business by sitting within functions like corporate strategy or internal audit.

  • At a recent meeting of NeuGroup for Enterprise Risk Management, two members who recently experienced a shift in reporting—one to internal audit and the other to corporate strategy—compared their approaches and the impact on their ability to add value.

The case for strategy. Last year, the head of corporate strategy at one member company assumed responsibility for the company’s ERM team due to a push from the CFO to make the function more strategic.

  • The strategy leader had no previous experience in risk management but was tasked to bring his broader view to a function that had up to this point been entirely tactical.
  • He now sorts all risks into three buckets: enterprise-level risks, audits and compliance, with audit as an independent function and compliance sitting within the legal department. This frees up time for the ERM team to “take on a few select enterprise strategic issues that cannot be adequately managed by other functions.”
    • Though the new structure is still in its first stages, the ERM team has kick-started comprehensive sustainability risk tracking, including short-term reputational risks and long-term economic impacts.
  • There were two big reasons for the move, he said: “Number one: relevance. Is the function helping with managing risks that are relevant to today’s environment in today’s world?
    • “The second, I call outcome orientation,” he said. “You had functions for a long time focused more on process without thinking holistically about the outcomes and the value derived from the process.”

The case for audit. One member who recently conducted a study of peers found that 40% of audit teams own their companies’ ERM programs, and most members at the meeting shared that they report to internal audit.

  • NeuGroup’s managing director of research and insight Nilly Essaides said that while moving ERM to reside within internal audit could potentially lead to an overly compliance-related focus, it all depends on whether IA has expanded to a broader risk perspective. “However, there is the risk that in some circumstances, IA is not a truly strategic partner and will therefore change the approach of ERM,” she said.
  • One member who heads her company’s audit team took on enterprise risk management when the chief accounting officer, who also headed the ERM team, left the company. It was more of a tactical decision at the start but led to a value-adding supervisory role.
  • “They thought IA was a perfect fit, since we have a large view of the company’s risk: strategic, financial, operational, etc.,” the member said.
    • “What I’ve now done with the process is we facilitate it, but our executive leadership team owns the risks. So they have to present those risks and mitigation plans to our audit committee.
    • “I’ve moved the activity to be owned more by the business, so they’re accountable for those risks.”

Other options, dotted lines. Others at the meeting also recently moved the position of the company’s risk management team, some with a more complex structure.

  • One ERM head now reports to the chief risk officer at the company, who has helped her think more strategically about how risk management ties into the company’s global operations. She now has quarterly calls with risk leaders for each team within the company, and said the “open dialogue allows us to challenge each other.”
  • Another company’s ERM function is housed within finance, but has a “dotted line” to the head of compliance.
    • “I thought [ERM] should be directly under me, but this setup is actually better,” the company’s compliance head said. “From a personnel perspective, it’s hard to ask 20-25 non-lawyer finance types to be in legal, and we’ve also now been able to straddle the major functions of what an ERM team is ‘supposed’ to do.
    • “On compliance matters, [ERM] works at my direction, but they also have a lot of involvement in dealing with financial risks and operational risks, which would be more under the CFO; so they have a foot in both worlds. Though a dotted line is always a little bit of extra work, I’ve been really happy with the coverage.”
  • One member agreed that having a dotted line connecting ERM to multiple functions can be very beneficial. At his company, ERM sits in internal audit, but has a dotted line to financial strategy and the CFO.
    • “It’s been a fantastic complement,” he said. “We also work closely with our compliance office under the legal team, and it’s a great relationship. We do a lot of partner audits and reporting, and fundamentally, I’ve found to be a very good pairing.”
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Talking Shop: What Is Your Hedge Horizon?

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].


Member question: “For Neugroup members with an FX cash flow hedging program, what is your hedge horizon?

  • For context, we hedge up to two years and we’re looking to revise that horizon (potentially up to three years) in our FX policy.
  • Last, what determines your hedge horizon (e.g., budget cycle, product development cycle, contracts, other)?

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].


Member question: “For Neugroup members with an FX cash flow hedging program, what is your hedge horizon?

  • “For context, we hedge up to two years and we’re looking to revise that horizon (potentially up to three years) in our FX policy.
  • “Last, what determines your hedge horizon (e.g., budget cycle, product development cycle, contracts, other)?”

Peer answer 1: “We manageour cash flow hedging program on a rolling 12-month basis until we set initial business plan rates for the next calendar year; we can extend to 15 months to cover the next full calendar year at that time.

  • “Outside of this normal duration, we can request CFO approval to hedge up to five years out for a portion of our long-term hedge exposure when there is a strong business case.”

Peer answer 2: “We hedge out to two years only, governed by the hedging policy. The policy allows us to hedge longer if the CFO approves. Our forecast goes out to three years, but we feel more comfortable with the accuracy of the forecast for nearer terms.”

Peer answer 3: “We hedge up to 13 months. Our focus is to build certainty in our operating plan for next year. So, in our operating plan, FX rates are mostly fixed.

  • “I would be very interested in hearing your rationale for revising the hedge horizon.”

Peer answer 4: “We employ a rolling cash flow hedge program with hedges not extending beyond rolling 13 months. For the majority of the cash flow hedge program participating currencies, we use average achieved FX rates to establish budget FX rates.

  • “I would be interested to learn what analysis method used by others in building recommendation to hedge specific currencies.”

Peer answer 5: “We hedge operating expense (opex) cash flows to lock our plan FX rates for the coming year. We hedge 12 months of opex and, since the plan rates are established two months before the end of the year, we trade forwards with tenors up to 14 months.”

  • Peer response: ”Just curious, do you hedge up to 100% and do you use the hedge rate as the budget rate?”
  • Peer answer: “We hedge 70% of the opex under our cash flow hedge program. This is to keep a margin of safety to avoid being over-hedged. We do not use the hedge rate as the budget FX rates, although we proposed this methodology to establish the plan rates, to have no slippage.
    • “For most currencies, including all the cash flow hedge currencies, our budget rates are equal to the accounting month-end rates established at the end of the previous fiscal month (usually we open our hedges less than a week after those rates are established to minimize the slippage).”
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NeuGroup’s Strategic Finance Lab Podcast, Episode 4: ESG Investing: An Interview with Marina Severinovsky of Schroders

Step into a lab where innovation and digital transformation empower senior finance executives to become true strategic partners.

Investors who don’t acknowledge that countries and companies are decarbonizing as they commit to net-zero emission goals will find themselves on the “wrong end of a massive flow of capital.” That pragmatic approach to sustainable investing is among the insights you’ll hear in this podcast featuring Marina Severinovsky, Head of Sustainability for North America at Schroders.

Step into a lab where innovation and digital transformation empower senior finance executives to become true strategic partners.

Investors who don’t acknowledge that countries and companies are decarbonizing as they commit to net-zero emission goals will find themselves on the “wrong end of a massive flow of capital.” That pragmatic approach to sustainable investing is among the insights you’ll hear in this podcast featuring Marina Severinovsky, Head of Sustainability for North America at Schroders.

  • In an interview with Nilly Essaides, NeuGroup’s Managing Director for Research and Insight, Ms. Severinovsky
    says that a commitment to maximizing returns and minimizing risks is the driving force behind how Schroders integrates ESG principles into investment decisions for its clients. Whatever your personal beliefs, this trend is creating both opportunities and risks that must inform investment strategy.
  • Ms. Severinovsky—who has spent more than a decade at Schroders in various roles—also talks about her journey as a woman in finance, the importance of creating more inclusive pathways for other diverse candidates and why she ended up in finance instead of law.

Please listen to the podcast by hitting the play button above or by heading to Apple or Spotify.

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Stories and Foresight Built on Data: What a CFO Wants From Treasury

A seasoned CFO shares thoughts on automation and how treasury can elevate itself to become a strategic partner.

The path of treasurers who are determined to walk the walk of becoming strategic business partners by devoting more time to value-adding activities and less to tactical tasks runs through automation that frees up bandwidth for intense data analysis.

  • In making that point at a recent meeting of NeuGroup for Mid-Cap Treasurers sponsored by HighRadius, Jeff Martini, interim CFO of Bishop Lifting Products, said it’s critical that treasury teams become “data guardians” who leverage data to tell stories that lead to action, helping senior leaders achieve their goals. “Treasury’s role is to allow me to make an informed decision,” he said.

A seasoned CFO shares thoughts on automation and how treasury can elevate itself to become a strategic partner.

The path of treasurers who are determined to walk the walk of becoming strategic business partners by devoting more time to value-adding activities and less to tactical tasks runs through automation that frees up bandwidth for intense data analysis.

  • In making that point at a recent meeting of NeuGroup for Mid-Cap Treasurers sponsored by HighRadius, Jeff Martini, interim CFO of Bishop Lifting Products, said it’s critical that treasury teams become “data guardians” who leverage data to tell stories that lead to action, helping senior leaders achieve their goals. “Treasury’s role is to allow me to make an informed decision,” he said.
  • “It’s about treasury being able to internalize a data model,” he added. “Being able to hold that model in their heads, understand where the data is moving, how to access it, and how to report, taking away the right stories. You have to understand where the pinch points are, and what you can do differently.”
  • Mr. Martini, who has 20 years of experience as a CFO, began his career in accounting, which he said is similar to treasury, in that a crucial skill is being able to tell a bigger story through transactions. Top treasurers, he said, are able to “back away from the business and see the full landscape.”

Tech fluency. Getting to a place where treasury can focus on seeing the stories in the company’s transactions, Mr. Martini said, requires freeing up time for technology-fluent team members and giving them the right tools.

  • As he pushed automation at his company, he turned to HighRadius for a tool that streamlines processes and makes data more visible, aiding treasury’s ability to extract insights.
  • “I helped to eliminate the spreadsheet-only system and set up a data pipeline up front using HighRadius,” he explained. “The work flow was exclusively Excel, and the analytical stuff is still stuck in Excel, but we’ve gone about 60% away from that.”
  • “You have to have an awareness of your team’s skillset,” before giving them tools and access to data, Mr. Martini advised. It can be beneficial to limit which team members have access to large data sets, which may slow them down.
    • “People aren’t getting value just by touching data,” he said, stressing that only employees who have the skill to dig into data should be touching it.

Sharing is caring. Although it may seem counterintuitive to let go of some of treasury’s responsibilities to elevate its role as a strategic partner, Mr. Martini said that freeing up time to dig into data is the priority, making collaborating with other functions essential.

  • “If I notice treasury is collaborating with other functions within the company, and even sharing some responsibilities, that’ll get my attention very quickly,” he said, including allowing FP&A or a shared service center or center of excellence to take some responsibilities off treasury’s hands.
    • “To earn treasury’s seat at the table, it’s about having a mindset of what is going on with the business and acting in the best interest of the entire organization,” he said.
    • “It shows treasury has a strategic understanding of the business and internalizes its complexity. Knowing that can take a huge load off the office of the CFO.”
  • One treasurer at the session said Mr. Martini’s advice rings true. “When we bring accounting or FP&A together with treasury and can collaborate and explain something we’re doing together to the CFO, it works like magic,” the treasurer said. “The mindset of needing to share is important.”  

Areas of expertise. Mr. Martini identified three primary areas in which treasury can provide value to a CFO:

  1. “The number one through number five jobs of a CFO are to never run out of money,” he said. “So anything that can be done to help de-risk and look ahead, from managing capital structure to being able to tell the story of the transactions” is crucial. “As a CFO, uncertainty is the name of the game. So as uncertainty goes up, so does value of trust” in treasury.
  2. Second “is the certain skill of being able to answer a question. It’s not just answering the question but finding the question behind the question. If a CFO asks a question, knowledge is more than just the direct answer, it’s being able to interpret the question” and connect the dots to the context behind it.
  3. The third aspect flips the script: asking the CFO useful questions. “I want to be asked questions that can be helpful,” Mr. Martini said. “Tell me what it is that I can be [for treasury], what are the organization’s broader needs that I’m not seeing? What does the treasurer see that I don’t?”
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A Tale of Two Bank Revolvers 

One company has fewer than 10 banks in its revolving credit facility while the other has more than two dozen.

How many banks does a corporation need or want in its revolving credit facility? The answer, no surprise, is that it depends on the company, a point driven home at a recent meeting of NeuGroup for Mega-Cap Assistant Treasurers.

  • During the session, two members discussed how they arrived at very different answers based on the particulars of their companies.

One company has fewer than 10 banks in its revolving credit facility while the other has more than two dozen.

How many banks does a corporation need or want in its revolving credit facility? The answer, no surprise, is that it depends on the company, a point driven home at a recent meeting of NeuGroup for Mega-Cap Assistant Treasurers.

  • During the session, two members discussed how they arrived at very different answers based on the particulars of their companies.

Less is more. For one company, the answer is fewer than 10 banks, with each committing the same amount of capital. It’s a five-year revolver that is in excess of $3 billon.

  • This structure came about after extensive analysis and discussion at the company following a strategic acquisition that left it with about two dozen banks combined, which it reduced by about 30% initially.
  • Later, the question arose in treasury, “how few [banks] could we have and support the business we operate,” the member said. It also needed to know the approximate revenue each bank would need to earn on an annual basis to achieve its return targets, and whether the company’s recurring business would generate sufficient fee revenue for its banking partners over time.
  • The company first and foremost wanted to ensure it had a bank group that could provide investment and commercial banking services on a global basis. The results have been good, with the company being more able to award additional business and shift ongoing business based on value-added ideas and execution expertise.

Benefits from bigger. The second company has roughly three times the number of banks in its revolver as the first (but fewer than 30), with four tiers of commitment amounts. The revolver is less than $10 billion in total across one-year, four-year and five-year tranches.

  • This long-established structure provides ample liquidity to support the credit rating and commercial paper program related to its captive finance company which has $50 billion in assets. Some of the banks in this facility have relationships with the company spanning multiple decades.
  • For this member, whose company has a strong risk management culture, the banks provide a wide range of services including medium-term notes, commercial paper, asset-backed securities, foreign exchange, interest rate derivatives and cash management.
  • Like the other member, this company keeps close track of fees paid to its banks.

Big Picture. A poll during the session (see chart) revealed the member with fewer than 10 banks is in the minority of the corporates at the meeting. As the chart below shows, 20% have 10 or fewer banks in their revolvers, 30% have between 11 and 20 banks, and half have between 21 and 30.

  • In terms of dollar amount, the poll showed that half the group have revolvers between $3 billon and $5 billion; another 30% have revolvers between $1 billion and $3 billion.
  • Both members and other ATs who joined the discussion noted that the number of banks in a revolver means committing time and attention to coverage efforts by the bank group. Also, most members said the trend was to have fewer as opposed to more banks in their revolvers relative to where they are now.
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Talking Shop: Payments to Support Relocation for Russian Nationals

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].


Member Question: “As a result of the ongoing crisis in Ukraine, we have Russian national employees based in Russia who are looking to relocate and effectively become employees of our Dutch entity. Because of the restrictions on getting cash out of the country from employees’ personal bank accounts, we’re looking to support them with a one-time relocation allowance.

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].


Member Question: “As a result of the ongoing crisis in Ukraine, we have Russian national employees based in Russia who are looking to relocate and effectively become employees of our Dutch entity. Because of the restrictions on getting cash out of the country from employees’ personal bank accounts, we’re looking to support them with a one-time relocation allowance.

  • “Does anyone have experience with this type of effort and, if so, could you share how you supported this? We’re exploring prepaid debit cards, corporate cards, etc.; but no luck so far on a solution that helps support employees upon landing in the Netherlands.”

Peer answer: “Look into Payoneer. They offer digital wallets and standalone cards; we haven’t used them, but we did look into them for the same purposes.”

Western Union? In March, at one of NeuGroup’s frequent meetings for members to discuss how they’re handling the challenges presented by the crisis, one member shared with peers a Western Union B2C solution called Quick Cash to wire to money to fleeing employees once they reach other countries. 

  • NeuGroup Insights reached out to that member this week for an update. “Fortunately, we did not need to use [Quick Cash],” he wrote. “Our primary plan was for refugees to get to a designated bank branch/bank contact where an account was quickly opened for several employees.
  • “The Western Union solution was to be used if there was situation where we couldn’t get an express account opened in each of the respective countries bordering Ukraine. But we did, thanks to Citi’s immense help with ensuring key local bank contact points.”
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A Treasury Mind Shift: Focusing On Operational Cash

Many treasuries have grown complacent about cash levels, but concerns about a recession are triggering a renewed focus on optimizing the management of working capital.

The debate about whether the US economy is headed into a recession because of higher interest rates and the Fed reducing its balance sheet is heating up. While some economists are bullish, many corporate treasuries are not: In a poll last week, 71% of members of NeuGroup for Global Cash and Banking said a recession is likely or highly likely in the second half of this year (see chart.)

Many treasuries have grown complacent about cash levels, but concerns about a recession are triggering a renewed focus on optimizing the management of working capital.

The debate about whether the US economy is headed into a recession because of higher interest rates and the Fed reducing its balance sheet is heating up. While some economists are bullish, many corporate treasuries are not: In a poll last week, 71% of members of NeuGroup for Global Cash and Banking said a recession is likely or highly likely in the second half of this year (see chart.)

This sentiment was echoed in a NeuGroup Peer Research survey, Going Out the Curve: Benchmarking Investment Strategies. In follow-up conversations with respondents, NeuGroup found that not only are companies rolling off longer duration assets, but some are reallocating strategic cash into their operational and reserve cash “buckets.”

  • “Because this cash is so short-term, we are pulling money out of externally managed portfolios,” one NeuGroup for Cash Investment member explained. “We feel we have the expertise to manage this cash internally.”
  • In addition, NeuGroup has observed a growing interest among cash investment managers in investing in money market funds (MMFs) and setting up connectivity with MMF portals to facilitate the process.

Return to discipline. Significant corporate expectations of higher rates and a recession later this year is—or should be—a red flag for treasuries, especially at companies that issued or refinanced debt in the past few years. That’s because lower earnings can deplete liquidity buffers, and higher rates would make additional borrowing more expensive. That’s why 78% of participants in the global cash and banking group poll said they expect greater emphasis on working capital (see chart).

In NeuGroup’s 2022 Member Agenda Survey earlier this year, working capital ranked fourth in the list of priorities, after business partnering, capital structure and digital transformation. If we asked members now, would the survey results be different? To find out, we asked this very question during a research-debrief session at the H1 semi-annual meeting of the NeuGroup for Mid-Cap Treasurers.

  • “Working capital would rank higher,” one of the members said. At his company, optimization of working capital is now a big focus area for treasury.

Getting closer to the sources of cash. At the same mid-cap treasurers meeting, members reported that their role, and treasury’s scope, are expanding rapidly, e.g., to include credit cards, AP and parts or all of FP&A. On one side, the broader role is stretching some members’ capacity; however, on the other, it is elevating treasury’s profile and increasing engagement with the business.

  • Managing working capital requires getting into the weeds of incoming and outgoing cash by looking at customer-to-cash metrics such as days sales outstanding (DSO) and days payable outstanding (DPO) and the health of the AR portfolio. These metrics are important in two ways:
    • They allow treasury to get involved in managing customer credit and payment terms, e.g., come up with strategies to hasten collections and delay payments, calculate the cash impact of offering early-payment discounts, etc.
    • Also, the closer treasury is to cash, the more accurate its cash forecast, which takes on greater urgency during times of tight liquidity. For example, a deeper dive provides visibility to DSOs and thus a slowdown in incoming cash, which can be built into hedging ratios and duration.
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Why Morgan Stanley Sees US Economy Avoiding Recession

Economist Robert Rosener tells bank treasurers that rising wages supporting consumption and continued capex by corporates should keep GDP growth above trend.

Not everyone thinks the Fed will push the US economy into recession as it raises rates to fight inflation. Robert Rosener, senior US economist at Morgan Stanley, recently told members of NeuGroup for Regional Bank Treasurers that the firm sees just a 25% chance of recession over the next year.

  • “Avoiding recession is our base case, but markets will have to confront the rising probability of one regardless,” he said in a follow-up email with NeuGroup Insights.

Economist Robert Rosener tells bank treasurers that rising wages supporting consumption and continued capex by corporates should keep GDP growth above trend.

Not everyone thinks the Fed will push the US economy into recession as it raises rates to fight inflation. Robert Rosener, senior US economist at Morgan Stanley, recently told members of NeuGroup for Regional Bank Treasurers that the firm sees just a 25% chance of recession over the next year.

  • “Avoiding recession is our base case, but markets will have to confront the rising probability of one regardless,” he said in a follow-up email with NeuGroup Insights.

Reasons for guarded optimism. Morgan Stanley expects the US economy to grow 2% this year and 2.1% in 2023, Mr. Rosener said. One factor supporting this view is the longest stretch of such strong job growth on record—including another 428,000 new jobs in April—that has increased aggregate real wage and salary growth, despite inflation weighing on households’ real wages.

  • It helps that consumer balance sheets remain strong, if uneven, and around 90% of the household debt is fixed-rate and unaffected by higher rates.
  • Other factors, Mr. Rosener said, include continued capital expenditures by corporates and their efforts to rebuild pandemic-depleted inventories.
  • Annualized real GDP growth unexpectedly contracted by 1.4% in the first quarter. However, stripping out “noisier” components such as weak exports and the pullback in government spending reveals a more solid 3.7% growth rate, he said.
  • While slowing over the course of this year, Morgan Stanley expects that real GDP growth will remain above trend, with continued strong wage and job growth supporting consumption together with some lift from fiscal policy as infrastructure spending kicks into higher gear from the fourth quarter of 2022 onward.

What to watch. Responding to a member asking what would indicate persistent inflation as the year progresses, Mr. Rosener said Morgan Stanley sees Q1’s very high inflation run rate ebbing to between 4% and 5% for the year, still near double the Fed’s target (see chart). If the Fed’s front-loading rate hikes don’t tap down demand fueling inflation—the hoped for soft landing scenario—more aggressive tightening may be necessary.

  • The biggest risk right now, Mr. Rosener said, stems from supply chains, for which improvement has paused due to China’s Covid-related shutdowns.
    • Inflation forecasts now depend heavily on whether goods prices return to pre-Covid levels and remain persistently elevated, he said, noting that after rising 50% over 2020 and 2021, used car prices fell more than 3% in March but have since flattened and even increased.
  • Rising energy prices prompted by Russia’s invasion of Ukraine could result in yet another wave of inflation, hardening expectations of persistent inflation and prompting rate hikes sufficient to create “slack” in the economy by increasing unemployment.
  • But, Mr. Rosener said, unemployment has never risen more than 50 basis points without a recession following.
  • The most recent data on inflation for the month of April showed little sign of cooling inflationary pressures, Mr. Rosener said this week. “While inflation has likely moved past its peak on a year-over-year basis, the latest data shows that sequential trends remain firm and a plateau may be forming, at least in the near-term, with inflation not far off of its peak and still above 6%,” he said.
    • A slower rate of inflation in pandemic-sensitive categories like airfares, as well as further easing in goods price inflation are two key components that will be needed to get core inflation below that trend over coming months, he added.

Then there’s QT. The Fed is also seeking to shrink its balance sheet by letting Treasury and agency securities it purchased mature—so-called quantitative tightening (QT). How that impacts the slope of the Treasury curve will depend less on QT itself and more how the Treasury Department increases bond issuance to replace that lost funding.

  • That will be the biggest factor in whether the Treasury curve flattens or steepens, Mr. Rosener said, adding Treasury’s current bias toward bills and short-end coupons suggest those may be the biggest issuance segments to offset QT.
    • “That increases our conviction the curve will be flat to slightly inverted by year-end,” he said. Morgan Stanley’s strategists’ latest forecasts see 10-year yields trading around 3.0% through 2H22 and moving sustainably above 3.0% in 1H23 with the 2s10s yield curve inverting again as the Fed hikes rates further.
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Russia Reality: Paying Taxes to Shield Staff From Criminal Liability

Fear of criminal liability motivates corporates to pay taxes in Russia—but banks are rejecting some tax payments.

The threat of criminal prosecution of their employees in Russia is one reason some US-based companies continue to make tax payments in Russia. Meanwhile, several US companies report that Russian tax payments made by entities outside the US have been rejected by a US-based bank.

  • These takeaways emerged at the most recent NeuGroup session where members discuss the challenges facing finance teams at companies that continue to do business in Russia, have frozen operations there or are exiting the country.
    • None of the companies present said they have stopped making tax payments.

Fear of criminal liability motivates corporates to pay taxes in Russia—but banks are rejecting some tax payments.

The threat of criminal prosecution of their employees in Russia is one reason some US-based companies continue to make tax payments in Russia. Meanwhile, several US companies report that Russian tax payments made by entities outside the US have been rejected by a US-based bank.

  • These takeaways emerged at the most recent NeuGroup session where members discuss the challenges facing finance teams at companies that continue to do business in Russia, have frozen operations there or are exiting the country.
    • None of the companies present said they have stopped making tax payments.

No tax holidays. “We discussed how to negotiate with the authorities there in terms of a tax holiday,” one member said this week. “And the result of the negotiation was that if you don’t pay those excise taxes promptly and on time and in full, our representatives in Russia, executives, will be under criminal liability. So we made the choice to pay those taxes,” he said.

  • “We’re actively keeping our taxes paid for the same reason—criminal exposure to our employees,” another member responded. “We’ve discussed it, but we’ll be paying our taxes.”
  • Those statements came in response to a member who asked if any companies had decided not to pay taxes. She said someone on the tax team had raised the issue and, after some back-and-forth, the company had come to the same conclusion as its peers about legal liability. The member “wanted to find out what everyone else is doing” and bring that information back to the tax team.

Rejected payments. After NeuGroup senior executive advisor Paul Dalle Molle said that it appears that “everybody is rigorously paying” Russian taxes, one member quickly added, “So long as the banks will allow us to pay”—an allusion to one bank that members say has rejected Russian tax payments from entities based outside the US.

  • Three members said one US-bank had rejected Russian tax payments made by entities based the UK, Ireland and Switzerland. One of the members said the explanation he heard is that the bank’s Office of Foreign Assets Control (OFAC) license allows it to process tax payments for US entities only.
  • Another member notes that value-added tax (VAT) payments go to the Russian central bank, which is a sanctioned institution. That could create a need for the bank to get approval from OFAC.
  • One member said a different US bank located in London had successfully paid Russian taxes from a ruble account for a Swiss entity owned by his US-based company. “So it may depend on the bank itself or what license it has. We may be purely lucky,” he said.
  • As a result of all this, members are building in long lead times for tax payments. Even if payments are approved, delays are common as bank compliance checks can be laborious.
    • Mr. Dalle Molle observed, “ When banks do sanctions checks on proposed tax payments, some appear to weigh more heavily the domicile of the remitting entity, while other banks weigh more heavily the ultimate country of ownership of the entity’s parent.”
    • He also noted that tax payments are being made successfully both from outside Russia into Russia, and with domestic Russian transfers. Many companies need to do both because of how their businesses are structured.

Other takeaways. Members discussed a range of other topics during the session, producing these takeaways:

  • Treasury teams are seeking clarity from compliance and legal teams on new OFAC sanctions that prohibit US persons from providing accounting, trust and corporate formation, and management consulting services to any person in Russia.
    • “Treasury services seem to be out of scope for this. But accounting support, so control or FP&A services, may be in scope. We’re waiting for our legal team to come back on this,” one member said.
  • Members report slow or no progress in opening accounts at Chinese banks in Russia as more US banks retreat or fall under counter-sanctions.
    • One member said the two Chinese banks his company approached early in the crisis were “very reticent to do anything.” But given current circumstances and a dearth of Russian banks that are unsanctioned, “we may try to do another attempt.”
  • Several companies have stopped all FX hedging in Russia, citing high costs. And while some corporates continue to engage in balance sheet hedging, none are hedging cash flows.
    • “For cash flow hedge purposes, it’s very expensive and there is uncertainty,” one member said.
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Seeing Risks Before They Do Damage Isn’t Impossible

Members of NeuGroup’s corporate enterprise risk management group hear how they can divine unseen, emerging risks.

The ancient stoics often practiced premeditatio malorum or the premeditation of evils, which was basically the art of expecting the worst. In a sense, this is how enterprise risk managers must go about their jobs today, particularly when the timeline of 100-year disruptive occurrences has been compressed to every four to five years.

  • Social, geopolitical and environmental risks combined with the everyday risks of competition and markets have prompted ERM practitioners to look farther and wider for risks seemingly popping up everywhere.

Members of NeuGroup’s corporate enterprise risk management group hear how they can divine unseen, emerging risks.

The ancient stoics often practiced premeditatio malorum or the premeditation of evils, which was basically the art of expecting the worst. In a sense, this is how enterprise risk managers must go about their jobs today, particularly when the timeline of 100-year disruptive occurrences has been compressed to every four to five years.

  • Social, geopolitical and environmental risks combined with the everyday risks of competition and markets have prompted ERM practitioners to look farther and wider for risks seemingly popping up everywhere.

Keys to success. Doing a good job discerning those risks (and opportunities) will mean success for the company, according to Paul Walker, the James J. Schiro/Zurich Chair in Enterprise Risk Management and Executive Director of St. John’s University’s Center for Excellence in ERM.

  • Dr. Walker, who presented at a NeuGroup for Enterprise Risk Management meeting in April, said a recent survey he conducted showed that 94% of respondents agreed that “how well an organization anticipates, interprets and reacts to emerging risks, market changes, trends and disruption is the key to future success,” according to a white paper by Dr. Walker.
  • The way companies can do that is to “spend time to understand” and to locate emerging risks and then “tie them back to business the model,” Dr. Walker said (see chart). And whatever the decision is to meet that risk, it must include a plan of action. “Gotta be actionable,” he said. When practitioners “are standing in front of the CFO” they need to have a plan.
  • One member responded that being able to know “what’s around all corners” is crucial, but described being able to see what’s coming as one of the biggest challenges in his career as an ERM professional.
    • “If something happens, the board always turns around and says, ‘Why didn’t you see this coming?’” he said. “The way I prepare for this is by sharing all the things that could ever happen that we have consolidated over the many years, from internal sources all the way to an alien invasion.”

Prioritize thorough plans. Plans need to be thorough, Dr. Walker said. He said one way to get that thoroughness is working with parts of the company already doing the analysis. “Some of you may have within your org … someone already doing” analysis of risk related to their specific function—say for financial planning or marketing—”get to know them,” Dr. Walker advised.

  • He cited one company he works with that “breaks down business impacts into social, tech, economic, environmental, political” categories and then gives them a score on dimensions of business impact.
  • An ERM member said his team looks at various trends and breaks them down into what impact those trends may have on the company. “What can they signal? And what would happen if you did nothing? How confident are you in the path?” Are actions required? And should they do a strategic deep dive?
  • “It comes back to, what do we change?” Dr. Walker said of the impact of trends. Is it the business model? The strategy? Or is it just making the company more resilient? “I think executives want to know [from risk managers], ‘what do we do?’”

The danger of irrelevance. Dr. Walker also said emerging risks aren’t all bad and some “are opportunities.” Quoting a senior strategy executive he’d worked with, he said “the greatest risk to any organization is irrelevance.” Therefore, organizations “must learn to see change and trends” and risk leaders cannot afford to miss “strategic pivot points” and end up losing the company massive value and risk going bankrupt.

  • Missing the boat has been a topic of other NeuGroup ERM meetings, with one member discussing how his company had the opportunity to acquire a budding rival and decided against it. Today, the company it didn’t acquire is larger than his company. His company has since acquired another company, paying top dollar for it in the process. This has prompted other worries, the member said, the main one being whether the previous missed opportunity caused them to overpay for the new acquisition.
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Benchmarking Investment Strategies in a Rising Rate Environment

Higher rates mean higher yields, but 70% of respondents to a recent NeuGroup survey conducted with Clearwater Analytics do not intend to extend duration.

Surging inflation, a hawkish Fed and talk of a recession are prompting corporate treasuries to reevaluate their cash investment strategies.

  • However, 70% of respondents to a NeuGroup survey conducted in partnership with Clearwater Analytics, Going Out the Yield Curve: Benchmarking Investment Strategies, report they do not intend to extend duration to take advantage of the uptick in yield, and some are rolling off longer maturities. The primary reason: concern about increased market risk.

Higher rates mean higher yields, but 70% of respondents to a recent NeuGroup survey conducted with Clearwater Analytics do not intend to extend duration.

Surging inflation, a hawkish Fed and talk of a recession are prompting corporate treasuries to reevaluate their cash investment strategies.

  • However, 70% of respondents to a NeuGroup survey conducted in partnership with Clearwater Analytics, Going Out the Yield Curve: Benchmarking Investment Strategies, report they do not intend to extend duration to take advantage of the uptick in yield, and some are rolling off longer maturities. The primary reason: concern about increased market risk.

A Red Flag. “The yield curve is definitely signaling an inversion, particularly between the two- and 10-year rates and therefore an upcoming recession,” said one survey respondent in a follow-up interview in April.

  • “We are running scenario analysis using advanced analytics to determine our cash position given different recession scenarios.” In addition, his company and others are stress testing their portfolios against the potential fallout from the crisis in Ukraine.

Key Findings. The accompanying white paper highlights our findings as well as practitioner input from three, follow-up focus groups. Here are the three main takeaways:

  1. Investible cash. Corporate investors expect their significant, strategic cash balances to remain steady or grow this year as they monitor current events and evolving market conditions.
  2. Extending duration. The most common response to recent shifts in the market has been to maintain—or slightly shorten—duration, reflecting concerns about market volatility and rising interest rates.
  3. External managers. The amount of investible cash on the balance sheet continues to play a factor in offering economy of scale to corporates, driving those with smaller portfolios to seek the expertise of external managers.

Click here to read or download the complete white paper.

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