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Justin Jones In FX, Sponsored Content, Technology

The Science of FX Exposure Management

FX volatility and economic uncertainty are putting pressure on treasury to optimize risk management programs and provide management and the business with insight and foresight on how currency moves can impact revenue and the P&L.

FX risk managers are under the microscope. “For the last six months, there’s been more intense attention on what my team is doing than for the past five years,” said a member of NeuGroup for Foreign Exchange.

He is not alone. The US dollar’s ascent, surging inflation and a global economic slowdown have made management of currency risk a top priority for CFOs. For US-based multinationals, a stronger dollar and weaker overseas sales are a double whammy: Lower foreign-sourced income is now translated at a less advantageous exchange rate, adversely affecting earnings and potentially introducing unwelcome volatility into financial results.

Meanwhile, members of our two FX risk management peer groups say they continue to struggle on two primary fronts:

Accessing accurate and comprehensive information about balance sheet and cash flow exposures.
Leveraging the data to develop effective risk management strategies, e.g., by analyzing the cost of hedging vs. benefits and selecting hedge tenors, coverage ratios and instruments.

Automation at the core. Treasuries have long struggled to collect reliable data about FX-denominated cash flows and monetary assets and liabilities. At the root of this issue is the lack of data availability and accessibility, a product of incongruous systems and antiquated and manual approaches to collecting exposure information.

To get a better read on risk, “we would have to look at our multiple entities and multiple instances of SAP,” said a weary FX risk manager. “In a perfect world, we would have one instance of one ERP.”
Even with balance sheet exposures, “hedging often feels like a game of whack-a-mole,” said another member. “We are looking to improve both forecast accuracy and how the book is recorded,” she said.
The situation is worse with cash flow exposures: It’s not uncommon to have dozens of business units manually gathering data and emailing Excel spreadsheets with varying degrees of accuracy. Consolidating the forecasts is time-consuming and creates a bottleneck for treasury as it tries to put on the right hedges at the right time.

Advanced capabilities. That is why more NeuGroup members are looking for a dedicated FX solution that goes beyond the capabilities of many of today’s TMSs and ERPs. “With a dedicated tool, business unit finance staff can log in directly to input the data and see the data both locally and at the enterprise level,” explained Chatham Financial’s Jason Peterson. At an October FX risk managers meeting, one member said, “We are analyzing our business requirements and thinking about how a solution could work with our overall systems landscape. For us, that’s priority No. 1.”

The good news is that best-in-breed FX risk management tools—for example, ChathamDirect—can integrate easily with multiple source systems including ERPs and cash management systems. “With ChathamDirect’s end-to-end SaaS solution, you can easily gather and consolidate cash flow forecasts and balance sheet exposures from your global business units to streamline your processes. You can also view and analyze your total exposure anywhere, at any time.” Mr. Peterson said.

A single source of the truth. Collecting the data automatically is a critical first step. However, storing it so it is accessible to different constituents as well as available for running analytics is essential to supporting smart decisions about hedging. Currently, most companies have separate processes for curating the data for their balance sheet and cash flow exposure information. This “split-screen” view hampers the development of holistic, cost-effective hedging programs.

“Data-wise, we would like to have all of our info in one place, including balance sheet exposures and cash flows,” one NeuGroup member said. The convergence of the information flows “provides huge opportunities to streamline hedging across the global organization,” he said.
“Because ChathamDirect siphons data on both types of exposures and stores them in a single location, it enables treasury to look across the global exposures at a granular level,” Mr. Peterson said.

Extracting more insights. Data is only important when it leads to insight and action. According to treasury leaders, more advanced FX risk analytics features are increasingly important. “We’re looking at a system to do exposure management. We want a tool that will pick up historic rates and run them through different analyses to determine what could impact us,” said one member.

The combination of a big-picture view of risk across exposure types with transaction-level data fuels ChathamDirect’s analytics engine, which enables treasury to:

Quickly spot changes in historical trends and drill down to identify root causes.
Assess individual subsidiaries’ levels of forecast accuracy to help them improve their processes and drive true accountability at the business unit level.
Gauge which subsidiary has updated its forecast (or not) to ensure all exposure information is up to date.
Identify and remedy situations where exposure limits specified in company policy have been breached.
Review counterparty risk across all derivative trades.
Allocate accounting at the appropriate level of the organization.

Finding the efficient frontier. Rising interest rates have also reignited the old debate about whether hedging is worth the cost.

“We are looking to understand the efficient frontier,” one risk manager explained. “I’d like to develop something to take to the CFO to demonstrate that we are on that line, by running a comprehensive risk assessment against risk appetite.”
ChathamDirect can help here. “With the availability of data, treasury has the capability to balance the desired level of risk reduction with the lowest cost of hedging by reducing the number of trades and selecting the right derivatives,” said Mr. Peterson. This applies to forecasted cash flows as well as balance sheet hedging.
“Hedging has become more expensive. We’ve experienced higher forward points, which lead to more questions from the top about whether it pays to hedge,” reported another member. According to Mr. Peterson, “By producing insight into the cost of hedging compared to the overall risk exposure, treasury can have a more productive conversation with the CFO about the effects of hedging.”

Continuing business insight. The benefits of a dedicated and comprehensive risk management tool go beyond hedging efficiency and effectiveness. Visibility into global, subsidiary-level information also offers treasury a unique lens through which to view the performance of each business.

Changes in exposure patterns can act as an early warning system—a leading indicator of shifts in market conditions. “ChathamDirect’s analytics functionalities allow treasury to get to the root cause of changes in sales forecasts and leverage the insight to inform more productive conversation with business partners and leadership,” Mr. Peterson said. “The ability to quickly access data across both programs is essential to making impactful decisions.”

Sponsored by:

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Justin Jones In Banking, Cash & Working Capital, Regional

Sending More Cash Out of China Using Pools in Free Trade Zones

Unpacking a member’s cash pool in China in a free trade zone where window guidance put no limit on cash outflows.

Many NeuGroup member companies face a challenge getting cash out of China—in part because of rules limiting outflows from cash pools set up under a so-called nationwide scheme to 50% of the net equity held by a company’s entities in the country. But not all multinationals have this problem.

At a recent session of NeuGroup for Global Cash and Banking, one member intrigued peers by describing how his company is taking advantage of free trade zones (FTZs) established in China that do not have specified limits on outflows, where corporates rely on unpublished “window” guidance provided by regulators.
That prompted the member’s company to set up a special cross-border, physical RMB pool, based in Shanghai, which sends cash via intercompany loans to a multicurrency notional pool based in Singapore, which is pooled under a dollar header account and sent to the US.

Unpacking a member’s cash pool in China in a free trade zone where window guidance put no limit on cash outflows.

At a recent session of NeuGroup for Global Cash and Banking, one member intrigued peers by describing how his company is taking advantage of free trade zones (FTZs) established in China that do not have specified limits on outflows, where corporates rely on unpublished “window” guidance provided by regulators.
That prompted the member’s company to set up a special cross-border, physical RMB pool, based in Shanghai, which sends cash via intercompany loans to a multicurrency notional pool based in Singapore, which is pooled under a dollar header account and sent to the US.
“China is a big entity for us, with trapped cash,” the member said. “We’d been studying this for the past year.”
One of the members who was unaware that companies could send more than 50% of equity out of China said he would immediately contact his team to look into following suit.

How it works. To benefit from the relaxed outflow rules governing free trade zones (FTZ), the member company set up a cross-border cash pool made up of three accounts (see graphic below):

A pool header operating account, onshore in China, which consolidates cash from all the corporate’s RMB subaccounts in the country.
A special cross-border account in the Shanghai FTZ that sweeps domestic cash and retrieves overseas cash. This requires an application and approval from the People’s Bank of China (PBOC), which the member said can take one to two months.
An offshore header account in Singapore that receives the cash, sent in CNY and received in CNH.

Another corporate’s liquidity director told NeuGroup Insights his company has a similar, special pooling account, also based in Shanghai. “Under the terms of this pooling structure, we can move unlimited amounts of cash, the only major requirement being that at least one time per year we have to have a zero balance for the sweep—meaning we have to repay all of the funds sent out of country for one day,” he explained.

A true team effort. The US-based member who described the structure at the meeting said setting it up was relatively complex as it required government approval and a very hands-on team in Asia, starting with a regional treasurer in Singapore.

He said the Singapore team obtained approval from the PBOC and worked with a local bank to set up the accounts. “We’re stepping in now to coordinate from the US side to make sure that we provide liquidity, interest rates, deposits, and make sure we’re fully covered,” he said.
The regional treasurer said that because China is “very paper-based,” she depended on a China-based treasury manager to propose banks for corporate approval, set up the facility’s infrastructure and get approval from regulators. The treasury manager followed guidance from the PBOC and the State Administration of Foreign Exchange.
“He is the one who is running around, talking to banks, talking to peers—this takes time and expertise,” the regional treasurer said. “If you do not have suitable people in country, it’s not easy; you wouldn’t be able to do it if you’re sitting in Singapore.”

Why not do it? Some multinationals that use the nationwide pooling scheme and have not opted to take advantage of the increased flexibility offered in China’s FTZs simply don’t have operations in the special regions necessary to set up a pool header account.

“The free trade zones are not everywhere,” one member said. “So if your company is in Shenzhou, you cannot do the free trade zone version. The FTZ is intended to attract people to concentrate imports into certain areas.”
They said in addition to having a FTZ designation, an eligible corporate considering the special pooling structure should have multiple entities in China. A corporate with only one account in the country may use repatriation via a dividend to move cash out of the country.
A NeuGroup member at a company using the nationwide structure told NeuGroup Insights: “We are aware of the other schemes, and continue to evaluate. We have had a positive partnership with regulators in developing and operating our existing structure and it has largely met our needs. We also believe this nationwide scheme offers the greatest stability and predictability, which is important to us both locally and globally as we manage liquidity.”

Words to the wise. Indeed, the regional treasurer warned corporates weighing the benefits of pools in an FTZ to be wary of ever-changing window guidance from the PBOC.

“I want to put a disclaimer that this was a chance for us to take advantage of China opening up because of how the economics have evolved,” she said. “But there is a chance that, even tomorrow, they could change the regulation—and they don’t have to give advance notice.”
And don’t expect to get parameters documented in writing. For guidance on FTZ RMB pool outflows, “even the bank won’t write an email to you, they’ll only tell you over the phone,” the team member in Shanghai said.

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Justin Jones In Banking, Technology

Sizing Up APIs: the Right Piece to Solve a Treasury Data Puzzle?

APIs offer flexible connectivity between systems, but widespread adoption by treasury faces several obstacles.

Treasury organizations are hungry for data, but visibility into it is hampered by a fractured system environment and lack of standardization, both within finance and with external partners. Short of implementing a single ERP with built-in modules, finding a way to access enterprise information on a real-time basis has been difficult for often resource-starved treasury organizations.

APIs offer flexible connectivity between systems, but widespread adoption by treasury faces several obstacles.

A new bridge for data. While complete system consolidation is not realistic, there are ways to mimic integration by implementing new technologies—by using APIs, for example. APIs can deliver flexible connectivity with other internal systems and external providers, like banks. They are a modern take on middleware, without all the technical debt and hard-coded flows. Banks have been using APIs in the retail market successfully, e.g., to offer 24/7 access to account information. However, each bank has its own set of APIs, designed to enhance customer “stickiness.”

On the commercial side, banks have pursued a similar strategy with a similar objective. However, the lack of standardization has slowed down corporate adoption significantly. Only 16% of respondents to NeuGroup’s recent Cash Forecasting Survey report using bank APIs.

Treasury does not typically have the technology resources to build user interfaces with multiple APIs.
Another obstacle is the debate about the value of real-time bank information. “If you are not going to make a decision based on it, why do you need it?” said a member at a NeuGroup for Retail Treasury meeting, hosted by Starbucks and sponsored by FinLync.
Plus, companies already using a treasury management system (TMS) wonder about the upside. A TMS can be programed to pull account information directly from bank portals, saving treasuries hours of data collection. “Why fix something if it’s not broken?” asked another member.

Owning the cadence. The benefit of APIs is that the company controls the frequency of data uploads. “It’s no longer the banks pushing your files, pushing payments or taxes,” said Tim Kane, head of sales at FinLync. With APIs, corporates can get real-time information on demand and then make decisions based on it.

“With legacy file formats, you’re essentially always playing catch-up, trying to get timely information based on the schedule that a predecessor agreed upon years ago,” Mr. Kane said.

Getting IT bandwidth. Even companies eager to implement bank APIs are facing major obstacles. Treasury is not first in line for IT investment. Plus, IT organizations are often focused on modernizing the broader finance and enterprise tech architecture. A panel discussion at the meeting offered pointers on how to get the CFO’s buy-in for allocating IT investment.

“If we can remove legacy technology debt by using APIs by getting rid of some of this old middleware, then treasury can get more help from IT to install new technologies to make it more efficient,” said the former treasurer of a major technology company who is now a managing director at JPMorgan Chase.
A senior director of treasury who participated in the panel recommended that treasury overcome limited IT resource challenges by attaching API implementations to larger technology upgrades, e.g., the roll-out of a new ERP.

Considering the cost. Convincing management to allocate funds also depends on whether the APIs can reduce treasury cost. The answer, according to this treasury director, is “it depends.”

Her bank does not charge for so-called front-end data calls because corporate clients are already paying for back-end services, such as accounts management and various treasury solutions.
Pricing can vary from bank to bank, similar to API formats, as institutions compete to gain market share in this new area.
In addition, replacing antiquated middleware with APIs can be an enormous cost-saver. For example, APIs’ connectivity takes away the need for lengthy calls with banks about missed payments or data.

Even API proponents agree that banks are unlikely to standardize their APIs any time soon. But that does not mean treasurers give up. Instead, they should put pressure on their banks to collaborate with each other and develop common APIs that would promote widespread adoption, reducing costs and facilitating the flow of information.

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Justin Jones In Banking, Talking Shop

Talking Shop: Verifying Payment Instructions for Vendors

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: “What does your company do to verify payment instructions for new vendors and changes in instructions for an existing vendor?”

Peer answer 1: “Our organization spends a significant amount of time validating changing or new banking information via phone calls. We are in the process of rolling out a service offered through a banking partner that will allow us to do this through an application they offer, but the database they use will not include every vendor.

“The bank we are using is U.S. Bank. They provide us an interface through their SinglePoint system to perform validations of banking information. My understanding is they use a system that all banks can have access to called Early Warning.
“This is a database that was created by a number of banks pooling banking information together to allow for validation and other inquiries. Another group we looked at was GIACT.
“We decided to use U.S. Bank because we already had a relationship with them and had access to their SinglePoint system. It was also more cost effective for us.”

Peer answer 2: “Accounts payable performs a vendor callback prior to setting up the vendor’s banking information in the ERP. Payment requests to treasury that flow outside of the ERP must be accompanied by proof of a vendor callback from the requestor. There are some exclusions to this policy.”

Peer answer 3: “We do verification calls to talk to a different person than the one that sent the wiring instructions. Exceptionally, if this is not possible due to time zone differences, language barriers, etc., we send a penny test and ask them to confirm the amount and send a screenshot from the vendor bank account statement.”

Peer answer 4: “We also do verification calls to a known contact at the vendor before setting electronic funds transfer instructions as well as before changing payment instructions. In addition, we utilize GIACT’s account validation services.”

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Justin Jones In Capital Markets

Overexposed to Fixed-Rate Debt, Not Ready to Swap to Floating

Inflation and uncertainty about interest rates leave many corporates waiting to add more floating-rate exposure.

Discussions and polling about fixed- to floating-rate debt ratios among corporate issuers at a recent meeting of NeuGroup for Capital Markets sponsored by Deutsche Bank made clear two key points:

The overwhelming majority of companies are overly exposed to fixed-rate debt relative to what they consider ideal and what historical data suggests will reduce interest rate expense over the long-term.
Volatile financial markets and uncertainty about inflation and interest rates have kept many of those companies from entering into interest-rate swaps to increase their exposure to floating rates. A few, though, are taking steps to reduce their exposure to fixed rates.

Inflation and uncertainty about interest rates leave many corporates waiting to add more floating-rate exposure.

Discussions and polling about fixed- to floating-rate debt ratios among corporate issuers at a recent meeting of NeuGroup for Capital Markets sponsored by Deutsche Bank made clear two key points:

The overwhelming majority of companies are overly exposed to fixed-rate debt relative to what they consider ideal and what historical data suggests will reduce interest rate expense over the long-term.
Volatile financial markets and uncertainty about inflation and interest rates have kept many of those companies from entering into interest-rate swaps to increase their exposure to floating rates. A few, though, are taking steps to reduce their exposure to fixed rates.

Fixed-rate debt dominates. A striking 89% of the companies polled at the meeting said that more than 75% of their debt is fixed rate. Several members said 100% of their debt is fixed. USD floating-rate swaps are how 42% of the corporates prefer to get exposure to floating rates, while 33% would rather issue commercial paper (see graphics).

The heavy weighting to fixed rates reflects both an extended period of historically low interest rates that encouraged corporates to lock in rates as well as a surge in fixed-rate issuance as they increased liquidity at the beginning of the Covid pandemic.
The reluctance of many companies to swap to floating reflects a belief that rates will continue to rise and that by waiting they will receive a higher swap rate on the fixed-rate leg of the swap, said Scott Flieger, who leads the NeuGroup capital markets peer group. “Companies have already benefited from waiting as rates have risen, following the age-old advice to ‘let the trend be your friend,’” he said.
“The argument for doing something now is that maybe, just maybe, interest rates are near their high point and you don’t want to miss the market. Or maybe you just want to be prudent and do some hedging now and average your way into it,” he added.

Obstacles to swapping to floating rates. One member’s company has traditionally taken a programmatic approach to interest rate hedging but paused its program earlier this year as the Fed began hiking rates. Prolonged inflation and rate hikes have complicated the decision about when to restart gaining exposure to floating, he said.

Typically, an economy facing recession, like the US appears to be, would provide a lower-rate environment where floating-rate debt is cheaper than fixed-rate debt and thus help lower interest expense during a business slowdown, the member said. However, today’s sticky inflation has thrown off that logic and forced the Fed to raise rates and increase the cost of floating-rate debt in the midst of a potential business slowdown.
Another member, whose company began issuing fixed-rate debt at the beginning of the pandemic, is starting a programmatic interest rate hedging program. But launching it will in effect be a form of market timing, difficult in the current environment. “How do we get started?” he asked.

Challenges with timing the market. This member said pitching to senior leadership a negative carry (i.e., adding interest cost) on a swap-to-float trade in the current market is a “difficult conversation” given that corporate earnings face headwinds from supply chains, inflation, FX and other factors—“even if the long-term view remains the swap will have a positive outcome over the life of the trade.” He added:

“While rates are rising, there is upside from collecting higher yields on invested cash.
“Volatility is high with big, daily swings: a few months ago, some banks were telling us clients were waiting to swap when the 10-year Treasury hit 3%. Now we are at 4%! There is an aversion to putting on a trade only to find a large negative [mark to market] a few months later.
“Of course, the peak of the Fed cycle is the ideal time to transact and at some point you’ll have to trust the thesis behind having floating-rate exposure and begin averaging into a position.”

Easing back in, Europe first. Here’s how one company is slowly getting back in the floating-rate exposure game after unwinding all of its swaps and being 100% in fixed, according to the member attending the NeuGroup meeting:

The board approved a strategy to target floating-rate exposure between 20% and 30% going forward, which is lower than the historical approach of 40% or more.
Treasury first plans to layer in euro-denominated floating-rate swaps to align with the company’s debt in euros, about 30% of its total debt. The relatively lower risk of prolonged rising rates in in the eurozone relative to the US and a positive initial interest expense benefit underlies this timing.
The company will begin layering in US dollar swaps over four to five quarters as the Fed rate hiking cycle winds down, perhaps beginning in Q1 2023.

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Justin Jones In Cash & Working Capital

Crunch Time: A Rising Emphasis on Cash Forecasting Accuracy

Management is putting greater focus on cash forecasting accuracy. Some in treasury wonder whether the extra work is worth it.

After a decade of cheap money, liquidity is once again at a premium. Because it costs more to borrow, and pays more to invest, treasuries are under pressure to improve cash forecasting accuracy. In this environment, “treasury has three important mandates: don’t run out of cash, don’t run out of cash and don’t run out of cash,” one member said.

“From a treasury perspective, this is the time when the rubber hits the road,” another treasurer said. “The organization looks to treasury for guidance. Whereas FP&A’s cash flow forecast becomes completely irrelevant.”

Management is putting greater focus on cash forecasting accuracy. Some in treasury wonder whether the extra work is worth it.

“From a treasury perspective, this is the time when the rubber hits the road,” another treasurer said. “The organization looks to treasury for guidance. Whereas FP&A’s cash flow forecast becomes completely irrelevant.”

Treasuries are feeling the pressure. At a recent NeuGroup meeting, 86% of participants said they are experiencing significant or moderate pressure to get it right (see chart).

Especially in this environment, the forecast must provide meaningful insight that can lead to action, e.g., tightening working capital management to reduce external borrowing and minimize idle cash and take advantage of higher yields.
One treasurer, recalling the 2008 liquidity squeeze and the early days of the pandemic said, “Some treasury staff have not lived through a real liquidity crisis.”

Getting over short-term volatility. The problem treasuries face is that producing the cash forecast remains a tall challenge. NeuGroup’s May 2022 Cash Forecasting Survey found that the primary hurdles to producing the forecast are lack of visibility into cash (88%) and access to data about cash (50%). Absent accurate and up-to-date information, treasury is hamstrung in fine-tuning forecast accuracy.

As the chart below shows, the forecast-to-actual variance gets smaller as the horizon gets longer. That reflects greater volatility in shorter-term forecasts because of uncertainty about the timing of incoming and outgoing cash. While treasury may expect $500 million in receivables in Q1, some of the revenue may come at the end of the quarter (which is why for quarterly forecasts, some teams forecast monthly for months one and two and weekly for the last month of the quarter).

Does accuracy matter? Given these obstacles, some treasurers wonder whether trying to shrink the variance is worth the effort. “The ROI just does not make sense,” one member said.

“This is a case where the 80/20 rule applies: As long as we are directionally correct, I am OK with that.” His company reported a variance between forecast and actuals exceeding 10%.
Another company sets a minimum liquidity threshold for its subsidiaries, so forecast precision does not really matter.

Driving action. But several treasurers argued that accuracy is essential to driving funding and investment decisions, especially in this environment.

“If you can’t make a decision based on the forecast, then why are you even forecasting?” one member asked.
At another company, cash forecasting accuracy and discipline are a big focus. Because cash has been plentiful, some organizations have loosened their grip, according to this member. “But cash forecasting is like a muscle: You have to exercise it to stay fit.”

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Justin Jones In FX, Technology

FX Dashboards: Essential Tool to Manage the Volatility Narrative

Real-time dashboards help treasury risk managers tell the FX story, but collecting front-end data remains a challenge.

Extreme volatility in foreign exchange markets has underscored the importance of technology tools, systems and solutions that enable companies to better monitor and manage their FX exposures. And for multinationals with far-flung operations, nothing beats a real-time dashboard to keep on top of the FX narrative, experts at Chatham Financial said at a recent NeuGroup for Mega-Cap Assistant Treasurers meeting.

The key for companies with global operations and treasury teams managing numerous currency pairs—one NeuGroup member has more than 50—is to take charge of the FX narrative by illustrating key metrics, program drivers and insights using dashboards that aggregate and display FX information in real time, said Jason Kirwan, director with Chatham’s risk-management platform, ChathamDirect.

Real-time dashboards help treasury risk managers tell the FX story, but collecting front-end data remains a challenge.

The key for companies with global operations and treasury teams managing numerous currency pairs—one NeuGroup member has more than 50—is to take charge of the FX narrative by illustrating key metrics, program drivers and insights using dashboards that aggregate and display FX information in real time, said Jason Kirwan, director with Chatham’s risk-management platform, ChathamDirect.
APIs and other tools have greatly facilitated straight-through processing (STP) and the flow of FX data from the front-end to the back-end and the implementation of a dashboard. But challenges remain, members noted.

Storytelling. Dashboards that dynamically illustrate cash flow, balance sheet and other important areas affected by FX volatility, in as close to real-time as possible, allow treasury to take control of the dialogue about the company’s current exposures and the hedging programs in place to mitigate swings.

“If treasury doesn’t tell the story, then C-Suite executives will find a narrative from someone else, and all of a sudden treasury is no longer in control of the financial situation,” Mr. Kirwan said.
Overlaying its FX program with real-time data, rather than flipping between the program and Bloomberg, empowers treasury to identify the company’s exposures quickly, explain them in the context of the company’s FX program and make recommendations to management, he added.

Easier STP. Transmitting the necessary FX-related data to and from enterprise resource planning (ERP) systems, especially when acquisitions have resulted in multiple ERPs, has traditionally been a challenge.

A renewed focus on those integrations, Mr. Kirwan said, has been fueled by the advent of APIs and other tools that have significantly reduced the time and resources to pursue STP.

Ongoing challenges. The biggest challenge for many firms today, Mr. Kirwan said, is making sure the data digested on the front-end is comprehensive and accurate; taking extra steps to ensure its quality and coverage provides abundant rewards downstream.

Members acknowledged the difficulty in refreshing their companies’ FX exposures frequently enough to trade on a daily basis, much less intraday, especially in jurisdictions where staff may lack expertise. One noted having the luxury of having implemented one instance of SAP systems across the company, enabling treasury to view exposures in real-time.
Another said his team improved a Brazilian subsidiary’s daily hedging by shifting members of the accounts receivable team stationed at an offshore location, to reduce costs, back to sit with the local treasury. They now post invoices within 24 hours, bolstering the accuracy of reports the FX team pulls.

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Justin Jones In Accounting & Disclosure, Crypto

Valuing Crypto with Fair Value Accounting: Game Changer?

How will FASB’s decision to require companies to report gains and losses in value influence corporate crypto plans?

The FASB’s decision in mid-October to require companies to use fair-value accounting for certain crypto assets (i.e., not NFTs) produced a generally favorable response from corporates that follow developments affecting crypto accounting and regulation. Whether it changes how other corporates consider crypto use cases is another question.

Until the FASB’s tentative board decision, companies treated crypto held on balance sheets as indefinite-lived intangible assets that must be written down if they decline but whose value can’t be raised until the asset is sold.

How will FASB’s decision to require companies to report gains and losses in value influence corporate crypto plans?

Until the FASB’s tentative board decision, companies treated crypto held on balance sheets as indefinite-lived intangible assets that must be written down if they decline but whose value can’t be raised until the asset is sold.
Under the FASB’s decision, corporates will be required to recognize gains and losses of crypto assets in comprehensive income during each reporting period; and to recognize certain costs incurred to acquire crypto assets, such as commissions, as an expense (except in certain cases).

Fundamental rethink. “This is a constructive change insofar as corporates willing or desiring to hold crypto would no longer be exclusively exposed to downside P&L risk,” one member whose company holds crypto assets said.

“Marking it to market, rather than treating it like an intangible asset, seems intuitive but also represents a fundamental rethink of the accounting treatment,” they added.
Michael Saylor, the founder and former CEO of MicroStrategy—which has purchased about 130,000 bitcoins worth about $2.5 billion—tweeted that the FASB’s move is “a major milestone on the road to institutional bitcoin adoption.”
Another member, whose company is active in the NFT space, said, “I don’t think it would be the primary driver to change the corporate mindset when thinking about NFT and metaverse initiatives; however, it will help to provide better guidance from a risk management perspective.”

Volatility as deterrent. One member said a corporate’s view of the FASB decision likely depends on the business case: “If their plan was to invest in crypto, then this ruling may definitely deter them from investing because of the volatility and the complexity of creating a robust accounting/controls environment to capture the changes in fair value, which may take a while to implement.”

They added, “Not to mention potential complexities around taxes for gains/losses, etc. External auditors would also put a lot of scrutiny around the corporate’s controls/processes to account for crypto.”
However, “if the corporate’s plan was to transact in crypto (including cross border payments) and not hold any on the balance sheet, then this ruling may not change their mind. The timing of crypto being held over month-end is something corporates would have to consider.”

Looking ahead. The FASB will next consider what will have to be included in disclosures about crypto assets and how companies should inform investors. The two topics will likely be discussed by the end of the year, according to a FASB spokesperson, and the board would then vote on whether to issue a proposal. They declined to comment on when that might take place.

And although this decision meets what some corporates had hoped for, it won’t necessarily change the opinion of crypto skeptics. One member said that while the accounting change “would solve one unattractive aspect of holding crypto, I don’t think this changes certain corporates’—and their shareholders’—inherent aversion to highly-speculative assets.”
The topic will be discussed at future meetings of NeuGroup’s working group on digital assets and Web3 strategies. You can find information on the group here. And to download a copy of A Treasurer’s Guide To Becoming Crypto-Ready, click here.

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Justin Jones In Regional, Risk Management, The NeuGroup Insights Interview

The Importance of Timing When Buying Political Risk Insurance

Laura Burns of WTW explains the benefits of policies that insure losses caused by geopolitical crises in episode 10 of NeuGroup’s Strategic Finance Lab podcast.

Russia’s escalating war with Ukraine and rising tensions between the US and China are two big reasons why multinational corporations might want to consider buying political risk insurance—in other regions of the world, where it’s not too late to find coverage.

To learn what corporates need to know about political risk insurance, hit the play button below or head to Apple or Spotify and hear insights from Laura Burns, who heads the political risk practice for WTW, formerly known as Willis Towers Watson. She joins NeuGroup Insights writer Justin Jones on the latest Strategic Finance Lab podcast, recorded in August.

Laura Burns of WTW explains the benefits of policies that insure losses caused by geopolitical crises in episode nine of NeuGroup’s Strategic Finance Lab podcast.

To learn what corporates need to know about political risk insurance, hit the play button below or head to Apple or Spotify and hear insights from Laura Burns, who heads the political risk practice for WTW, formerly known as Willis Towers Watson. She joins NeuGroup Insights writer Justin Jones on the latest Strategic Finance Lab podcast, recorded in August.
Political risk insurance policies fill gaps in traditional property insurance policies, picking up where other coverages drop off, Ms. Burns explains in the podcast.

Ms. Burns also discusses how growing up in Bermuda with family in the insurance business provided an up-close view of innovations in insurance policies and, along with a lifelong enthusiasm for international affairs, made political risk insurance the perfect job for her.

“I discovered this little niche called political risk insurance, and I thought, ‘well that’s interesting, marrying the family business with my particular interest in geopolitics,” she says. “I would say this is the best-kept secret in the business.”

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Antony Michels In NeuGroup Viewpoint, Technology

Connecting the Dots

Why the level of connectivity among people, processes and systems is the key to unlocking finance’s true value.

By Nilly Essaides

Finance used to sit in an ivory tower.

Over time, brick by brick, we have been dismantling the walls that kept the finance organization separate from other functions and business operations. However, there remain barriers to connecting finance professionals, processes and systems within the function and throughout the enterprise. These structural impediments create unnecessary friction and information gaps that reduce process efficiency and effectiveness and prevent the finance organization from unlocking its full strategic value.

Why the level of connectivity among people, processes and systems is the key to unlocking finance’s true value.

By Nilly Essaides

Finance used to sit in an ivory tower.

Clearing roadblocks through peer-to-peer knowledge exchange is critical to NeuGroup’s mission of connecting every finance professional who wants to share and learn. Now more than ever, it’s vital these exchanges take place between and among finance functions but also with business partners across the corporation.

Confronting Pain and Frustration

We hear about the pain created by siloed approaches from NeuGroup members in multiple contexts. During a recent FX peer group session, one member shared his frustration with the difficulty of extracting exposure data from business units and segment-level finance teams. His problem was compounded by an Excel-based data collection and analysis process that involves multiple sources of information and sits outside of the rest of the finance organization’s tech stack.

In one case, this member recalled, the wrong value was pasted in a spreadsheet, leading to significant over-hedging and resulting in a significant P&L hit. “I had to explain that, and it wasn’t fun,” he said wearily.
He also emphasized the importance of soft skills in creating trusted relationships with the various constituents who, for P&L reasons, may be reluctant to divulge a complete exposure picture.

Members of our mega- and large-cap FP&A peer groups have expressed similar frustration in accessing operational and financial data to build forecasts and annual plans. With a mandate to forecast cash flow and the P&L, these members face data coming from divergent systems and through different pipelines that not only slows them down but also introduces more friction into the process. That, in turn, hampers their ability to monitor and manage enterprise performance and support strategic decision-making

In another context, respondents to our May 2022 Cash Forecasting Survey ranked lack of visibility into data as the No. 1 reason that cash forecasting remains a huge pain point for treasury.

A Connective Tech Tissue

Let’s start with the prevalent technology landscape: Most finance teams currently operate within a fractured system environment with different ERPs and different instances of the same ERP. In addition, many have legacy applications that are hard coded into the source system. In a recent NeuGroup survey of 25 companies’ FP&A groups, we found most are also still relying on Excel for data collection, analysis and visualization.

Finance executives have long yearned for a one-stop solution, and corporates spent billions trying to achieve this nirvana. While cloud-based ERPs are gaining a growing share of the market and helping to streamline core system’ integration, their level of functionality often falls short of the finance organization’s requirements.

The dream of a single solution is being supplanted using maturing technologies like APIs and RPA. They can link up cloud systems quickly and cheaply to construct a finance ecosystem that includes the automated flow of data among systems and into an enterprise data warehouse.

Breaking Organizational and Process Barriers

A key benefit of a cohesive technology ecosystem is that it enables finance to connect processes within finance and across finance and operational processes and construct a more agile operating model. At the core is a single source of data, overlayed by fit-for-purpose solutions, e.g., for planning or FX risk management. At the heart of this structure is a common set of data definitions and a single source of the truth, increasingly a data lake or warehouse.

By breaking barriers between different areas within finance and finance and operations, e.g., treasury and AR or FP&A and business finance, executives can gain an end-to-end view of core processes such as customer-to-cash, account-to-report and procure-to-pay. The E2E view supports better insight into enterprise cash and performance, thus delivering greater insight to aid in decision-making.
By standardizing data definitions, information can be shared and understood, across the organization, driving greater insight and foresight.
The emerging tech stack also allows FP&A, treasury, accounting and other areas to share new functionalities, e.g., analytics. Everyone can access the data and take advantage of advanced analytics to make smart decisions. Leading finance organizations are also establishing analytics centers of excellence, which can build algorithm libraries and deliver analytics support to different parts of the organization.

Building a Connected Community

Enabling partnerships is essential to leveraging a coherent tech stack and standardized E2E processes. While data must be exchanged, so do best practices and expertise. The importance of personal relationships between people in different parts of the finance organization and outside of it cannot be underestimated.

We see this trend most noticeably in the connection between FP&A and the business. In a quick poll at our July FP&A summit meeting, 100% of participants said they have dedicated business partners who are embedded in the operations. By working side by side:

Finance and business managers can develop mutual trust and establish credibility.
Finance professionals can build up their business acumen and identify key drivers, to better assess performance and provide advice on possible courses of action.
Business managers can evolve their financial understanding to foresee the financial repercussions of business decisions.

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Justin Jones In Capital Markets, Risk Management

Debt Issuers, Don’t Doubt the Fed’s Resolve to Fight Inflation

Insights from Chatham Financial about pre-issuance hedging and tail risk.

Companies that anticipate issuing debt should not underestimate the Federal Reserve’s resolve to fight inflation, Chatham Financial executives told members of NeuGroup for Mega-Cap Assistant Treasurers at a recent meeting sponsored by the risk management advisory and technology firm.

In light of the Fed’s determination to get inflation back to 2%, Amol Dhargalkar, Chatham’s managing partner and chairman, raised several issues for treasuries to consider as they lay the groundwork for debt offerings.

Insights from Chatham Financial about pre-issuance hedging and tail risk.

In light of the Fed’s determination to get inflation back to 2%, Amol Dhargalkar, Chatham’s managing partner and chairman, raised several issues for treasuries to consider as they lay the groundwork for debt offerings.

Factor in tail risk. Interest rate increases in the US have already exceeded a move of two standard deviations compared to what was anticipated a year ago, Mr. Dhargalkar said, and several factors make more unexpected moves possible.

Given the risk that rates could move significantly higher, Chatham recommends placing extra emphasis on considering the potential for tail risk and hedging it.
“We’re not trying to say that rates are going to 7% or 8%,” he said. “But in your scenario analysis and planning, we highly recommend you spend a bit more time on the tail risk scenario.”
One factor not yet priced into the market, he added, is China at some point eliminating its “zero-Covid” policy. That may reduce supply chain bottlenecks but also “reinvigorate the local economy, stimulating demand across the country, thereby increasing demand for a variety of raw and finished goods.”
- That includes “increased energy consumption that can drive oil and gas prices higher in the short term, further stoking inflationary concerns across the global economy.”

Pre-issuance considerations. More sophisticated approaches to gauging the impact of rate increases, including Monte Carlo simulations or statistical shocks to forward curves, may be warranted, rather than a static analysis of rates rising by a certain amount, Mr. Dhargalkar said.

Pre-issuance hedging remains popular because companies can de-link the underlying rates at the time of issuance from the rates locked in through hedging, he added, noting that in a volatile market dollar cost averaging the hedge can help lower future issuance costs.

Debt offering anyone? Responding to a query about how members plan for future debt issuance in light of today’s rate risk, a few members mentioned management’s tight controls.

One said her company pursues relatively short-term pre-issuance hedges, and only if senior management judges the offering eligible for hedge accounting.
- “I would add that if you’re doing [pre-issuance hedging] for the first time it’s really good to be right, since it puts everyone at ease that going ahead this will be an asset and not a liability,” she said.
- Mr. Dhargalkar added that in order to manage expectations internally, it is important to help stakeholders understand the intent of hedging to create predictability in outcomes.

More to read on pre-issuance hedging. To read a 2020 NeuGroup Insights article on pre-issuance hedging based on analysis from Chatham, click here. And to see an article on the topic by Chatham published earlier this year, click here.

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Justin Jones In Banking, Investment Management

Insist and You May Receive: Higher Rates on Bank Deposits

A low overnight deposit rate prompted one company’s treasury to push back and ask for a higher rate. The bank doubled it.

Corporates that want to keep some cash in bank deposits as the Fed hikes interest rates but don’t like the rates they’re being offered should consider an inspirational example described by one assistant treasurer who said her treasury team told some of its banks, in essence, “Your rates aren’t good enough.”

The AT discussed the approach during a recent NeuGroup session on positioning cash portfolios for a changing rate environment sponsored by Capital Advisors Group.
She said bank deposits are an important part of the company’s relationships with banks in its revolving credit facility, especially those where deposits are the only share of wallet they receive.

A low overnight deposit rate prompted one company’s treasury to push back and ask for a higher rate. The bank doubled it.

The AT discussed the approach during a recent NeuGroup session on positioning cash portfolios for a changing rate environment sponsored by Capital Advisors Group.
She said bank deposits are an important part of the company’s relationships with banks in its revolving credit facility, especially those where deposits are the only share of wallet they receive.

A great rate. After one bank initially offered an overnight rate of 1.6%, the AT said treasury let them know they were not in alignment with rates being offered by other banks. And the bank understood the corporate would pull its deposits if the rate didn’t rise. “We would have moved it to another bank—you have to be willing to make a change,” she said. In response, the bank offered to double the rate to 3.25%, which peers agreed was a great result.

How great? Lance Pan, director of research and investment strategy at Capital Advisors, said that today, “under normal circumstances, banks can borrow at 3.05% and earn at 3.15% at no risk. It makes sense for banks to offer deposit rates at any point up to 3.05%, but not 3.25%.”
He added, “unless they lend out all the money they borrow, 3.25% would represent a negative spread for the banks (earns at 3.15%, pays at 3.25%). If a customer can get a rate at the top of the range, the bank must be making a concession to retain their business.”
The AT said that in her experience, while some banks will take the initiative and raise rates in response to Fed hikes, others will not. With those, “unless you ask, you’re not going to get.”
And of course, asking does not guarantee a satisfactory increase. One of the other banks in the corporate’s revolver did not raise its overnight rate to an acceptable level and treasury is withdrawing deposits from that bank, the AT said.

Context. The Fed in September raised the target range for the federal funds rate to 3% to 3.25%, hiking rates by 75 basis points for the third consecutive time. But banks—many flush with deposits—have not passed along most of those increases to depositors.

In fact, for every 100 basis points the Fed increases rates, Capital Advisors estimates, the average bank only passes along 15 to 20 basis points in higher deposit rates.
Capital Advisors notes that FDIC data shows the national average money rate was still stuck at just 0.18% as of Sept. 19. “This is astounding,” Mr. Pan said.

Alternatives to bank deposits. Relatively low rates on bank deposits have some corporates considering moving money to higher-yielding alternatives. One Capital Advisors executive said that rising rates on commercial paper (CP) and other short-term fixed-income investments including treasuries mean the “opportunity cost” of staying in bank deposits is rising.

Indeed, one cash investment manager at the session said, “It’s getting harder and harder to justify significant balances at the bank.” His company is considering prime money market funds (MMFs).
Other members are sticking with government MMFs, including the AT who asked banks for higher rates on deposits. Her company, which has reduced its total cash holdings, including deposits, may consider CP and short-term treasuries, among other investments.
“We’re facing dramatically higher borrowing rates,” she said. Partially offsetting greater interest expense with better rates on deposits is “only one leg of the stool.”

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Justin Jones In FX, Technology

Macros on Steroids: How FX Teams Use Everyday Automations

Many FX risk managers are working to get out of Excel and automate more processes.

“When it comes to treasury and finance upscaling, aside from the big TMS systems, who is using what?” That question from an FX risk manager sparked discussion at the second-half meeting of NeuGroup for Foreign Exchange 2, sponsored by Societe Generale, as members shared a variety of approaches ranging from tapping a team of dedicated treasury engineers to using less sophisticated, more user-friendly tools. And the trend was clear—everyone wants to be less reliant on Excel.

“You can have IT focus on the big stuff, but what about everything that starts in Excel?” the risk manager said. “Excel macros are powerful, but they’ve been there for 20 years and almost no one’s using them because they’re pretty technical. So, we’re trying to experiment with other platforms that are essentially macros on steroids to see if something else will click with people.”

Many FX risk managers are working to get out of Excel and automate more processes.

“You can have IT focus on the big stuff, but what about everything that starts in Excel?” the risk manager said. “Excel macros are powerful, but they’ve been there for 20 years and almost no one’s using them because they’re pretty technical. So we’re trying to experiment with other platforms that are essentially macros on steroids to see if something else will click with people.”
An in-meeting poll (below) showed that Tableau and Power BI lead the field. “We’re able to automate things like exposure uploads and forecast uploads, which save up to 10 hours a month of upload time,” said one member who uses both tools.

Future state. The global currency director at one multinational who presented at the meeting said his goal for treasury automation is to eliminate manual data input processes and move exposure data directly into the TMS from the ERP. He aims to consolidate to a single source of truth and move away from the current process of collecting various Excel files from different regions.

“We’ve been asking, ‘Is this the European Excel file or the Mexican Excel file?’,” he said. “Depending on which one you get, it might cause some challenges.”
The presenter said he believes Excel can be great but can also be a crutch, which is why he’s aiming to automate everything out of the system.
- “I think Excel is a step, it’s treasury version 2.0; version 3.0 will have no place where a person has to go and click a mouse just to make sure something got copied over correctly,” he said. “I’d like to have one place, one source of truth based on actuals.”

Making it on your own. Some corporates have already begun the journey, but IT time constraints and a high skill level needed to use some tools means it’s not a short path to a single source of truth.

“As far as a dedicated IT resource goes, I can raise tickets with the service desk, but who knows how long that will take,” the presenter said. “Fully integrating new systems takes a lot of money and a long time, but I think smaller tools, including even fintechs, can come in, go out and change quickly.”
One member said his treasury team is “mostly an Excel and PowerPoint shop.” He is experimenting with different tools that require little or no coding experience, including Power BI, Alteryx, Dataiku and Microsoft’s Power Query.
There is a moderate learning curve for each of those tools, but he said they’ve all been fairly easy for treasury team members to learn the basics, opening the door to develop more expertise and create more automations.

The tech company benefit. Members from two technology companies have already begun large-scale implementations of automations, benefitting from more resources within the companies.

The FX risk manager at a software company said treasury has access to a dedicated engineering team that aids in building what he calls small robots, used mostly for pulling, gathering, verifying, uploading and distributing FX rates.
“It saves my team a lot of time,” he said. “And we’re on monthly rates; I can’t imagine [using] daily rates—that would be a huge resource to look into automating.”
The treasury team at another large tech company recently started an internal finance training program to teach the basics of programming simple automations.
- The member said his treasury team has since designed, coded and implemented robots designed in SQL that take care of internal processes like reporting, inputting or updating data in certain systems, which saved thousands of hours for the whole treasury organization.
“We are not mandating, it’s an optional training, but people see the value in it,” he said. “Instead of spending the whole day doing repetitive processes, have a robot do it in a few minutes.”

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Justin Jones In Risk Management

A Treasury Twist on Commodity Hedging: Overseeing Price Locks

Having a physical price lock team report to treasury instead of procurement made perfect sense for one company.

Breaking down boundaries and extending the reach and influence of treasury teams can help businesses succeed and may enhance the strategic value of finance in the eyes of a corporation’s senior executives.

That takeaway and others emerged during a presentation by the director of risk management at a mega-cap company who now oversees a team dedicated to setting physical price locks for commodities in contracts with suppliers—a team that previously reported to the corporate’s purchasing group.
The member described the reasoning behind the move and the company’s approach to commodity hedging, including its use of derivatives, at a meeting of NeuGroup for Foreign Exchange sponsored by Wells Fargo.
The discussion comes amid high volatility in commodity prices that’s prompting more NeuGroup member companies to consider hedging energy and other costs where liquid derivative markets exist.

Having a physical price lock team report to treasury instead of procurement made perfect sense for one company.

That takeaway and others emerged during a presentation by the director of risk management at a mega-cap company who now oversees a team dedicated to setting physical price locks for commodities in contracts with suppliers—a team that previously reported to the corporate’s purchasing group.
The member described the reasoning behind the move and the company’s approach to commodity hedging, including its use of derivatives, at a meeting of NeuGroup for Foreign Exchange sponsored by Wells Fargo.
The discussion comes amid high volatility in commodity prices that’s prompting more NeuGroup member companies to consider hedging energy and other costs where liquid derivative markets exist.

Propose a win-win change, get buy-in. When the member became head of risk management, the physical price lock team interacted with treasury but reported to procurement. He took initiative and asked the treasurer, “Why aren’t they in our treasury team?” He believed there could be additional value for both groups if “we were all reporting through treasury.” His reasoning:

Combining the teams in treasury would allow increased collaboration, improved alignment on market views and team strategies, cross-training opportunities, increased connectivity with other treasury teams and growth in finance team talent for current and future positions.
The company’s procurement leaders liked the idea because they would still get the support of the price lock team to help buyers reduce costs by deciding when to lock in prices with suppliers and when to keep commodity surcharges in contracts. It was seen as a “win-win,” the member said.
There have been other benefits to the change. The company has made multiple process improvements within the physical price lock team to simplify the internal approval processes and reporting “that are clear advantages from having the team located within our treasury group,” the member said.

Price locks or surcharges? Treasury first tries to hedge commodity exposures through its supplier contracts using price locks—if that makes sense for both the corporate and the supplier. Physical price locks are legal contracts that lock in a forward price for a set quantity of a certain commodity for an estimated time period. Locks are used with suppliers with whom the company has good relationships that are financially sound and provide a high volume of a target commodity.

Suppliers, who are used to assessing a surcharge that fluctuates with the price of a given commodity, may not agree to lock a price, the member explained. Therefore, onboarding suppliers requires close collaboration with the buyers and the treasury price lock team.
“We’re considered the internal foreign exchange and commodity market experts,” he said. So part of the value of treasury’s knowledge of markets is deciding when the company will benefit from a price lock versus taking a surcharge.

Where derivatives enter the picture. The company hedges commodity exposures that exceed what can be offset through price locks with derivatives in those areas where there are active and liquid markets.

The same traders at the company are responsible for FX and commodity derivative hedging. The company’s policies, systems, processes, controls and reporting are generally consistent across both types of exposures.
Treasury has the authority to hedge on a rolling 12-month period into the future but can extend that up to five years with CFO approval. However, multiyear hedges are normally limited to only a portion of the company’s exposure.
“We evaluate the multiyear hedging opportunities when currencies or commodities are significantly overvalued or undervalued,” the member said. “We believe we have a strong chance of succeeding when markets are extended because they normally revert to their long-term trend over time.”

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Justin Jones In FP&A, Senior Executive, The NeuGroup Insights Interview

FP&A’s Role in Making Finance an Indispensable Business Partner

General Mills CFO Kofi Bruce’s vision of FP&A and finance: NeuGroup’s Strategic Finance Lab podcast, episode 8.

In a world with growing volatility, uncertainty, complexity and ambiguity, also known as VUCA, so grows the importance of finance organizations that can accurately see what’s coming down the pipeline, understand how that will impact the company and how to adjust. And the skills FP&A brings to the table are critical to succeeding in that mission.

In the latest Strategic Finance Lab podcast episode, General Mills CFO Kofi Bruce joins Nilly Essaides, NeuGroup’s managing director of research and insight, to discuss the role FP&A teams must play at organizations navigating an increasingly VUCA world. You can hear their conversation by heading to Apple or Spotify.

General Mills CFO Kofi Bruce’s vision of FP&A and finance: NeuGroup’s Strategic Finance Lab podcast, episode 8.

In the latest Strategic Finance Lab podcast episode, General Mills CFO Kofi Bruce joins Nilly Essaides, NeuGroup’s managing director of research and insight, to discuss the role FP&A teams must play at organizations navigating an increasingly VUCA world. You can hear their conversation by hitting the play button below or heading to Apple or Spotify.

Mr. Bruce’s vision of finance evolution features an FP&A team that connects information from across the enterprise, using its vantage point in the flow of information to develop foresight that produces insight that leads to action that supports business growth.

As Mr. Bruce says in the podcast, FP&A’s role isn’t to only understand what will happen, but also to share “what I think we need to get on right now, and some ways and some places we can start the conversation. That’s what makes a differential FP&A organization.

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Justin Jones In Risk Management, Senior Executive

Internal Audit Debate: Keep Reporting to CFO or Switch to CEO?

An IA expert says reporting to the CFO may divert IA resources disproportionally to finance vs other areas.

More than three-quarters of US publicly traded companies’ internal audit (IA) functions report administratively to the CFO, although a similar percentage of IA professionals see reporting to the CEO as ideal.

Presenting to a meeting of NeuGroup for Internal Audit Executives, Richard Chambers, a former head of the Institute of Internal Auditors (IIA) and a longtime IA practitioner, noted that seeming disconnect as one of several alarm bells IA professionals should consider.
IA reporting to the CFO does not violate audit standards, but it may hinder it from carrying out its function fully, or at least foster that perception.
“When IA reports to the CFO, there tends to be a much higher incidence of it doing work in financial reporting and finance-related risks,” Mr. Chambers said.

An IA expert says reporting to the CFO may divert IA resources disproportionally to finance vs other areas.

Presenting to a meeting of NeuGroup for Internal Audit Executives, Richard Chambers, a former head of the Institute of Internal Auditors (IIA) and a longtime IA practitioner, noted that seeming disconnect as one of several alarm bells IA professionals should consider.
IA reporting to the CFO does not violate audit standards, but it may hinder it from carrying out its function fully, or at least foster that perception.
“When IA reports to the CFO, there tends to be a much higher incidence of it doing work in financial reporting and finance-related risks,” Mr. Chambers said.

The numbers. According to the IIA’s 2022 North American Pulse of Internal Audit report , 76% of chief audit executives (CAEs) say they work administratively for their CFOs. In response, Mr. Chambers launched a poll on LinkedIn that drew 1,700 responses.

“My question was, ‘Ideally, where should IA report administratively within the organization?’ It wasn’t even a contest,” Mr. Chambers said, with 74% citing the CEO, 11% the CRO and the CFO at 9%.

Supporting the CFO line. One member said IA would be way down the list of priorities of his company’s CEO, who is effectively the head of sales and dealing with a host of macro business issues.

As is often the case, the company’s CFO once worked in IA and so understands it better than the CEO, he said. So while Mr. Chambers’ poll may reflect what’s best theoretically, in practical terms reporting to the CFO is a more practical model.
“The skill set of the CFO is better aligned with what IA is trying to do, and having an informed sponsor or stakeholder is much more effective than having someone at the CEO level,” the executive said.

Other perspectives. Each company is different. IA reporting to the CFO may be most appropriate in many cases, Mr. Chambers said, and IA’s tendency to retain responsibility for Sarbanes-Oxley (SOX) reporting can channel it toward the CFO. However, there are issues to consider.

Mr. Chamber’s biggest concern is that CFOs, who typically view themselves as the function’s caretaker, may unintentionally interfere with IA or be perceived as interfering within the organization.
And reporting to the CFO may also disproportionally steer IA resources to financial issues, when risks and the need for controls abound in areas ranging from supply chains to climate and cyber.

Enlightening the CEO. Mr. Chambers recalled working for a four-star command in the Army and similar criticism arising about generals, like CEOs, not having time to listen to audit.

“We had no choice, we had to do it, and lo and behold these generals found it was very enlightening to have audit working directly for them,” he said.

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Justin Jones In FX

To Hedge or Not to Hedge FX Exposures When Volatility Spikes

Pausing a hedging program risks undermining the perceived value of hedging by senior executives and the board.

“Should we stop hedging?” The surge in the US dollar this year against other major currencies has prompted some FX risk management teams to ask that question as well as others about hedging strategy amid disruptive volatility, bankers at Wells Fargo said at a fall meeting for NeuGroup for Foreign Exchange sponsored by the bank.

The questions come amid a big jump in talk about FX by CEOs and CFOs on second quarter earnings calls. Use of the phrases “currency headwinds,” “FX headwinds” and “FX losses” soared during Q2, according to data from Bloomberg that Wells Fargo presented.
To be sure, few if any companies will pull the plug on existing FX hedging programs. But talk about the topic provided an opportunity to review why companies might consider the move and the reasons corporates with established hedging programs should stay the course.

Pausing a hedging program risks undermining the perceived value of hedging by senior executives and the board.

The questions come amid a big jump in talk about FX by CEOs and CFOs on second quarter earnings calls. Use of the phrases “currency headwinds,” “FX headwinds” and “FX losses” soared during Q2, according to data from Bloomberg that Wells Fargo presented.
To be sure, few if any companies will pull the plug on existing FX hedging programs. But talk about the topic provided an opportunity to review why companies might consider the move and the reasons corporates with established hedging programs should stay the course.

Why companies might stop hedging. Wells Fargo said regret aversion—the fear of making the wrong decision—often leads companies to under-hedge or not hedge at all. When FX markets are volatile and moving against the company’s exposure, corporates may fear locking in rates below “arbitrary benchmark rates” such as FX budget rates, the bank’s presentation said. The fear of being second-guessed weighs on risk managers.

“The dominance of regret aversion on corporate hedging behavior is directly related to a company’s inability to employ different strategic alternatives for managing its risks, as well as weaknesses in the company’s risk management policy,” the presentation states.

The case against not hedging. Deciding to end or pause an existing hedging program during periods of volatility ignores the potential risk to a company’s financial performance, the Wells Fargo presentation said. Other reasons not to abandon the hedging ship include:

Stopping a hedge program undermines the reasons for implementing the program in the first place and risks changing the perception of hedging within the company, one of the bankers said. Treasury teams have often worked hard over long periods to convince senior executives and finance committees of the value of hedging.
Decisions to quit hedging are “most often made with no future plans” on what to do if the market continues to move against the underlying exposures, the presentation said. Nor do most companies plan what market scenarios would “define the appropriate time to re-engage and begin hedging again,” it added.
Pausing a program often relies on the belief that currency values will revert to the mean within short cycles or the view that current market conditions are only temporary, Wells Fargo said. But mean reversion may take a lot longer than expected. And, based on historical data, there is still a 33% chance that EUR weakens over the next 12 months, according to Wells Fargo’s Quantitative Risks Solutions group.

Stick to a systematic approach. In response to a member’s question, one of the Wells Fargo bankers said sticking to a systematic approach to hedging appears to be the right approach. His colleague recommended sticking with a “base program” but adding the flexibility in the hedging policy to “make it more dynamic,” giving risk managers the option to make adjustments—including the use of options.

Another member asked peers, “Anyone in the room considering pulling back from hedging in any way? We are about the exact opposite of that.”
A third member said his company has a lot of short positions and is considering extending the tenor of its hedges. “Where we are long,” he said, “we have to form a view and be patient.” He is considering the use of options instead of forwards, he added.

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Justin Jones In Cash & Working Capital, ESG

A Finance Treat to Tame the Scope 3 Elephant in the Climate Room

HSBC and one member established a supply chain finance program that rewards ESG-friendly suppliers.

Corporates striving to reduce their carbon footprints amid investor pressure and growing disclosure regulations face a daunting challenge when it comes to reducing emissions by suppliers and customers. These so-called scope 3 emissions do not originate from the business itself but are an indirect consequence of the corporate’s value chain.

Enter ESG-linked supply chain financing programs like HSBC’s sustainable supply chain financing program, which incentivizes suppliers to have fewer emissions and stronger ESG performance at no cost to the corporate buyer.
At a recent meeting of NeuGroup for European Treasury sponsored by HSBC, Sibel Sirmagul, the European product and proposition head on the bank’s global trade and receivables finance team co-presented with a NeuGroup member company that recently implemented the program. A number of the member’s suppliers are already benefiting from discounts thanks to favorable ESG outcomes.

HSBC and one member established a supply chain finance program that rewards ESG-friendly suppliers.

Enter ESG-linked supply chain financing programs like HSBC’s sustainable supply chain financing program, which incentivizes suppliers to have fewer emissions and stronger ESG performance at no cost to the corporate buyer.
At a recent meeting of NeuGroup for European Treasury sponsored by HSBC, Sibel Sirmagul, the European product and proposition head on the bank’s global trade and receivables finance team co-presented with a NeuGroup member company that recently implemented the program. A number of the member’s suppliers are already benefiting from discounts thanks to favorable ESG outcomes.
“Scope 3 emissions are the elephant in the climate room,” Ms. Sirmagul said. “These value chain emissions often contribute the largest part of corporate-related emissions. Greater scrutiny of corporate scope 3 emissions can offer insight into overall climate risk and potential greenwashing.”

How it works. Similar to other forms of sustainability-linked financing, HSBC’s sustainable supply chain program relies on KPIs established by the corporate, in partnership with the bank.

“In our experience, it’s mostly environmental and social KPIs,” she said. “The first thing you need is an ESG agenda incorporating sustainability KPIs for your suppliers. You need to have a policy in place, and a methodology to differentiate suppliers, usually with the help of third party rating agencies creating ESG scoring.”
Like traditional supply chain financing, the program allows suppliers to get paid ahead of time, as the corporate leverages its superior credit rating to obtain short-term credit that optimizes working capital for both the buyer and the seller, and the seller accepts a small discount for the early payment.
- ESG performance incentives can minimize that discount, allowing the supplier to get more of their payment in the end.
“The pricing is determined at the outset based on the credit profile of the corporate, then there’s an adjustment based on the supplier’s ESG rating and performance,” Ms. Sirmagul said. While the differential between tiers may not be substantial, tiered pricing provides incentives for suppliers on their ESG journey and supports their relationship with the corporate.
But it’s crucial for companies with supply chain financing programs to have a platform that facilitates trades and payables, said the global supply chain manager of the member company that worked with HSBC. “Otherwise, it’s very challenging to have a solution like this in place,” he said.
- In this case, the member used Infor Nexus, a cloud supply chain platform that “has all the business covered, from purchase order creation to logistics documentation process.”

Three keys to establishing an ESG supply chain financing program:

A cooperative approach between finance and sustainability teams.
1. “We always say that supply chain finance is an enabler to your sustainability program,” the member company’s director of sustainability said. In this case, it was mostly related to the business’ compliance program, which already monitored the many ESG requirements for suppliers.
2. The company already had 100 pages of ESG requirements that its suppliers must meet, including low environmental impact and minimal safety concerns.
3. “If you’re thinking that this is a program that’s going to stand alone, that’s going to be very challenging,” he said. “For us, a precondition was having compliance and our sustainability program already built.”
A defined program to monitor vendors’ KPI performance.
1. Even before the project with HSBC, the company had a defined set of rules related to emissions and workplace safety that scored suppliers from one to 10 on an annual basis, with four meaning very poor, four through six being average and above seven being good performance.
2. “The scores we generate are linked to risk, so if a vendor is at level four, it’s a high risk—and this impacts how we approach the supplier,” the director of sustainability said. “That can mean short-term mediation or a long-term impact, for example volumes changing or eliminating them from our supply chain.”
A long-term plan.
1. The last thing to keep in mind, the company’s director of sustainability said, is to have a plan for evolving requirements as times change and KPIs shift.
2. To incentivize strong performance, the company raised volumes and gave priority to suppliers that immediately scored highly or even went above and beyond compliance into more strategic programs like preventing climate change.
3. “This was really good news because a good performer is going to be a good performer in many different areas, including sustainability and labor,” he said. “But with a bad performer, usually what we find is that the program was not incentive enough to move into the next level.”

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Justin Jones In Compliance, Talking Shop

Talking Shop: Third Parties for SWIFT Attestation Compliance?

Member question: “Are any of you SWIFT corporate members? If yes, SWIFT requires an independent assessment of controls as part of their security attestation compliance that can be done by internal audit (IA) or a third party. Which third-party vendors do you use?”

Peer answer 1: “We are using PwC to perform the independent assessment. We have typically done this internally, but this year we were ‘lucky enough’ to be hand selected by SWIFT to complete the assessment, which requires using an external assessor.”

Peer answer 2: “We found third parties very expensive. Our internal IA group does the assessment and it hasn’t been too burdensome. We have AL2 in-house but would like to move to the SWIFT AL2 cloud version which moves much of the assessment requirements back to SWIFT and off your shoulders. Using a SWIFT service provider does the same thing.”

Peer answer 3: “We used Grant Thornton to do this assessment last year.”

Peer answer 4: “We are looking at Axeltrees for our assessment but have not yet signed the contract.”

Peer answer 5: “Deloitte completes our third-party assessment.”

Peer answer 6: “Our company is a SWIFT member. We are approaching the independent assessment as an internal independent assessment, i.e., compliance group review.”

Peer answer 7: “We also do an internal independent assessment coordinated by our data security/information protection teams.”

Peer answer 8: “We also used our internal audit team to do the assessment in-house.”

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Justin Jones In Crypto, Technology

How to Climb the Crypto Learning Curve

Just-released NeuGroup Peer Research reveals that despite the turmoil in the cryptocurrency market, treasury’s efforts to become crypto-ready remain on track.

The summer of 2022 wrought havoc on the cryptocurrency market; however, the extreme volatility did not undermine corporate treasuries’ resolve to become more crypto-fluent. While the headlines were disturbing, crypto payments have now become an inevitability for companies, and to ignore crypto can mean missing important strategic growth opportunities. In our most recent NeuGroup Peer Research report, A Treasurer’s Guide to Becoming Crypto-ready, produced in partnership with liquidity provider B2C2, we share insight and corporate treasury examples based on dozens of interviews with members in recent months.

Just-released NeuGroup Peer Research reveals that despite the turmoil in the cryptocurrency market, treasury’s efforts to become crypto-ready remain on track.

Emerging stronger. The late spring collapse of stablecoin Terra/Luna sent shockwaves throughout the crypto-verse. But according to Nicola White, USA CEO of B2C2, “The market turmoil has been largely the result of crypto-ecosystem participants prioritizing P&L growth over sound risk management and good governance. The lesson for participants is to choose counterparties carefully and prioritize those that are building for the long term.”

Fast-tracking the exploration process. Our research revealed that many corporate treasuries are accelerating their efforts to become crypto-savvy.

The majority focus on supporting their companies’ strategic objectives, speeding up cross-border payments, and eventually accessing crypto as a funding source and even leveraging investments in digital currencies to pick up yield.
“Many treasury groups are way behind in terms of the back-office operationalization of accepting and paying in cryptocurrencies,” said one treasurer. “Digital assets are the future. We just need to introduce them in a safe and controlled manner.”

Ready. Set. Go. To speed their climb up the learning curve, treasuries are forming “SWAT” teams with the mandate of speaking with vendors, fintechs and each other to prepare for transacting in crypto.

“Working through the governance, compliance and overall strategy for entering the crypto and the digital assets space is important to do before competitors and other market participants build out their own,” said Matt Thomas, who leads NeuGroup’s digital assets working group. “During the bear markets, companies are building, investing and acquiring where they see opportunities.”

Companies are taking one step at a time. Treasuries are inherently cautious, so they are taking a phased in approach to entering the crypto markets:

Phase 1: Mastering the crypto ecosystem. Most corporate treasury teams are currently at the knowledge-acquisition phase.

In our crypto-related sessions, including those of NeuGroup’s digital assets working group, members still have more questions than answers.
To speed up learning, treasury should benchmark against peers, voraciously consume research materials, and collaborate with internal partners such as accounting, tax and legal as well as players in the crypto ecosystem, e.g., OTC dealers, liquidity providers and custodians.

Phase 2: Piloting through a third party. Treasury typically starts by opening an account with a third party – e.g., a custodian or a broker-dealer OTC provider that is connected to others in the ecosystem and provides a one-stop solution for safekeeping, trading and transaction monitoring.

“Right now, our opinion is why build something we can rent? So, we use a third party for market access and pricing. However, the rich fees and cost will drive whether to bring in-house,” one member of the working group said.
“A third party can handle the volatility in prices, which still requires specialized skills,” explained another member.

Phase 3: Holding crypto on the balance sheet. Once treasury becomes more comfortable with accepting crypto payments, investing in crypto and trading cryptocurrencies via an exchange, liquidity provider or OTC broker, they begin to experiment with holding some crypto on their balance sheet as working capital.

In some cases, treasury has a two-way flow that is crypto, e.g., in the case of NFTs. But for now, for most corporates, the short-term holding of crypto is not material to their balance sheet.
Most treasuries immediately convert bitcoin or ether into USD or another fiat currency.

Phase 4: In-sourcing the technology infrastructure. Finally, treasury organizations that have significant crypto holdings and trading volume are beginning to assemble the necessary technology platforms required to transact on blockchain, and hedge exposures with derivatives.

At this point, it is important to address any system connectivity issues between crypto trading and other critical processes such as cash forecasting, trade confirmations, accounting/record keeping and risk management.

Don’t be left behind. The bottom line is that treasury teams must get ready to provide answers to inevitable questions from CFOs and treasurers about crypto opportunities. “Crypto is here to say and corporates have not been dissuaded from participating in the market, despite recent market events,” Ms. White from B2C2 said. “Whether for payments, storing value or unlocking opportunities, institutions are increasingly active in the digital asset class.”

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