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Justin Jones In Regional, Talking Shop

Talking Shop: Reducing Impact of Negative Interest Rates in Europe

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 solutions are available to reduce the impact of negative interest rates in the eurozone?

“Our bank there charges 1% on euro deposits. We have cash pooling, but converting to USD daily seems like a pain.”

Member Question: “What solutions are available to reduce the impact of negative interest rates in the eurozone?

“Our bank there charges 1% on euro deposits. We have cash pooling, but converting to USD daily seems like a pain.”

Peer answer 1: “Our global bank charges us 0.5% at the moment, but our local controllers mentioned there are EMEA regional banks that will waive the interest charge with a minimum deposit. We haven’t had time to explore that yet.”

Peer answer 2: “We are currently being charged 0.4%. We do weekly EUR to USD conversion to minimize the costs as well as investing USD in offshore money market funds.”

Peer answer 3: “Have you spoken with your bank about notional pooling? If not, that may be an option to discuss and see if they have solutions.”

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Justin Jones In ESG, Regional

Oil and Gas Treasurers Weigh Finance Roles in Transition Strategies

How much time do companies have? Takeaways from the first meeting of a NeuGroup focused on oil and gas treasury support of energy transition conducted in partnership with Societe Generale.

By Joseph Neu

Last week shook the oil and gas sector. Exxon Mobil saw two board seats go to directors backed by the energy transition activist hedge fund Engine No. 1 (yesterday, the company said a third seat will likely go to the fund), which convinced big asset managers to back its proxy statement. Shell, meanwhile, had a Dutch court rule that it must advance its decarbonization targets.

These landmark events cast some doubt about how much time US firms in the sector have to rethink their energy transition, ESG and decarbonization strategies in light of rapidly shifting public policy, regulation and market perceptions of risk.

Big picture. There is still hope that the US, which is generally thought to lag Europe by a few years on ESG mandates, will not follow the European path of energy transition favoring renewable energy investment to the detriment of (by taxing) anything else. However, while the US response will almost certainly be more nuanced, there is no guarantee it will be reasonable, based on analytical rigor or science-based, as most everyone in the sector hopes.

Meanwhile, the pace of change is most certainly accelerating. So it is time for US oil and gas companies to accelerate rethinking of their business strategy on decarbonization, perhaps with more than one nuanced and unnuanced scenario, to tell stakeholders a responsive, responsible and credible story (one that keeps the lights on and meets science-based target initiatives to mitigate climate risk).
This will allow treasury and finance teams to devise a strategy to secure funding for transition at a reasonable cost. And fortunately, most companies don’t have an urgent need for capital, having prefinanced ahead of the pandemic and pent-up demand bringing pricing up and free cash flow levels closer to normal.

Key takeaways from the meeting:

The degree to which natural gas and carbon capture/sequestration are accepted as part of the US energy transition will drive strategy. There are many midstream companies that will find it very difficult to pivot in the near- to medium-term from natural gas, which has been responsible for substantial US emissions reduction since 2007. So the finance strategy for energy transition will be dramatically different if these businesses are forced to pivot immediately from natural gas. Almost as significant is the extent to which carbon capture/sequestration will be accepted as part of a decarbonized energy transition strategy—as opposed to a renewables-only one:
1. This will vastly impact the finance strategies of those upstream.
2. Capital providers’ expectations and who will provide capital to energy transition projects of widely varying risk/return profiles will depend on how this question gets answered in the US over the next months and years.
Finance strategy cannot be the tail that wags the dog. Treasury and the rest of the finance function supports the business and its strategy. So the business strategy must be set first before a finance strategy to fund it can be made.
1. Treasurers cannot advocate to banks looking to pull back from fossil fuel credit commitments that they need to support them through the transition until they have a clear picture of what the transition will look like.
2. The same can be said for marketing bonds to fixed-income investors increasingly subject to ESG mandates and rating agencies incorporating carbon assessments and ESG impacts into their credit rating. You need a business strategy and KPIs tied to it before you can start thinking about investor relations (IR) talking points, green bonds or sustainability-linked financing, much less structuring new project financing.
Be part of the dialogue. While the finance team cannot wag the dog, it should be working with sustainability and ESG teams to understand the thinking going into the revamped strategies, the targets and the why behind them, so that they can better tell the supporting finance story to capital providers and their influencers as soon as it is set.
1. The more they can understand what peers are doing and why helps, too. As does collecting market intelligence on what capital providers and their influencers (e.g., policymakers, regulators, raters, market participants) are advocating that will impact access to and cost of capital.
2. The external dialogue also goes both ways. As one treasurer noted: “Without education on environmental activities, we allow others to put a target on our backs.”

Joseph’s next post will focus on takeaways from this pilot meeting that zero in on determining what providers of capital really want from players in the energy industry amid this seismic transition where risk is being redefined.

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Justin Jones In Insurance, Pension and Benefits

Bridge the Gap or Vive la Différence: Insurers vs. Pension Plans

Can corporate pension managers learn from how insurance companies invest their pension-related assets?

So-called pension risk transfers (PRTs) allow corporates to negotiate with insurance companies to take on a pension plan’s liabilities and remove interest rate and longevity risk from the company’s balance sheet.

In the US, PRT transactions totaled about $25 billion in 2020, with $14 billion of that coming in Q4, the highest quarterly volume since 2012.
That context formed the backdrop for a recent meeting of NeuGroup for Pensions and Benefits sponsored by Insight Investment that probed how and why the asset portfolios of life insurers differ from those of typical corporates that fund pension liabilities.
Following are takeaways from NeuGroup’s Roger Heine, who helped moderate the meeting.

In the US, PRT transactions totaled about $25 billion in 2020, with $14 billion of that coming in Q4, the highest quarterly volume since 2012.
That context formed the backdrop for a recent meeting of NeuGroup for Pensions and Benefits sponsored by Insight Investment that probed how and why the asset portfolios of life insurers differ from those of typical corporates that fund pension liabilities.
Following are takeaways from NeuGroup’s Roger Heine, who helped moderate the meeting.

Compare and contrast. Jeremy King at Insight Investment set the table by asking if it makes sense for corporate plan sponsors to invest more like insurance companies. This can facilitate on-balance sheet derisking or an eventual PRT transaction. What’s clear now is that most plans don’t invest like insurers.

Investment in private credit instruments by insurance companies can represent 35% of the overall portfolio—much more than typical corporate pensions. Securitized debt, a very capital efficient asset class for insurers, can represent a similar amount.
On the other hand, Tod Nasser, SVP, Investment Management at Pacific Life Insurance Co., pointed out that insurance companies typically hold far fewer equities—perhaps a 5% to 10% “sliver,” mainly to fund the longest-term liabilities.

Lay the groundwork. If PRT is the corporate pension’s end goal, then working with a small number of insurance companies well in advance of the transfer to adjust the plan’s asset mix to insurance company preferences could narrow the gap between balance sheet valuation and the price insurance companies would demand to take on the pension liabilities.

Drawing an analogy, Alex Veroude of Insight said while you (the pension plan) might like to paint your house green, potential homebuyers (insurance companies) will likely pay more for a neutral color.

Why the big differences between insurers and pensions when the underlying annuity liabilities are essentially the same?

Insurance companies are subject to capital charges based on risk measures: this discourages investment in equity securities, non-rated debt instruments and certain applications of derivatives. In contrast, risk taken in corporate pensions has no impact on equity capitalization and minimal impact on credit ratings.
But several factors lead to more illiquid private investments in insurance companies than corporate pensions:
- Insurance companies have the benefit of large scale and can diversify investments across their entire general account while corporate pensions must diversify within a typically smaller pension plan.
- Because annuity liabilities are fully funded in insurance companies with minimal possibility of early withdrawals, insurance companies don’t need to worry about liquidity; corporate pensions face more volatile funded status and glidepaths that can require rebalancing trades. One member also expressed a concern about valuing illiquid private investments and the resultant challenge in managing risk.
- If the corporate wants flexibility to someday do a PRT, then liquid assets can result in a lower, better price because the insurance company will incur lower cost to replace transferred assets.
One other significant factor is that life insurance companies tend to invest in high-quality, investment-grade (IG) private credit instruments such as illiquid corporate credit, as well more traditional private placements.
- These assets are yielding an illiquidity premium of 0.5% to 1% over comparable liquid IG corporate bond risk. Taking on this illiquidity premium makes a lot of sense to insurance companies with long-holding periods.
- By contrast, pensions that have exposure to private credit tend to be in middle-market direct lending strategies which are below investment grade or non-rated instruments structured in fund format. These are often held in a growth allocation rather than a fixed income allocation, and the hedging characteristics are often disregarded.

Yield pickup for pensions. So there are real reasons why the assets of insurance companies and corporate pensions are so different. But the meeting did highlight two areas where corporate pensions could move to more illiquid private investments to pick up yield:

Insight presented a case study of a client company that had substantially increased its investments in private credit instruments over several years with the benefit of meaningfully increasing credit spread; but this company has no intention of ever doing a PRT. It wanted to derisk their plan on their own balance sheet, but do so by “borrowing” from the life insurance playbook.
An investment manager at another insurer emphasized the benefit of investing in private credit instruments that the insurance companies themselves are buying, as the insurers would ultimately be happy keeping them in a PRT.

Looking ahead. Finally, it was noted that as active defined benefit plans are being superseded by defined contribution (DC) plans, such as 401 (k)s, insurance companies have stepped up efforts to offer annuity products to DC plans, facilitated by recent Federal legislation.

Another innovation is LDI or personal bond strategies for individual investors.
This topic will be one of several covered at the three-hour session sponsored by Investment Insight scheduled for June 22^nd focused on DC plan issues.

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Justin Jones In Banking, Libor SOFR, Risk Management

Deep Liquidity: Officials Backing SOFR Point to the Repo Market

ARRC Chair Tom Wipf and Nate Wuerffel of the New York Fed on the benefits of SOFR vs. other rates.

Know your Libor replacement term rate inside and out. That was the message delivered to regional bank treasurers by top officials leading the effort to replace USD Libor that has led to the development of the secured overnight financing

More than $200 trillion in transactions are priced over Libor, but the interbank lending market on which the floating-rate benchmark is based has shrunk to few if any transactions daily, a fate regulators do not want to see repeated.
A choice of floating-rate benchmarks may emerge, but bankers must scrutinize them. “It begins with thinking about your own organization and what these different rates do, their construction and the data behind them, and how they perform over time,” Tom Wipf, chairman of the Alternative Reference Rates Committee (ARRC) and vice chairman of Morgan Stanley, told members of NeuGroup for Regional Bank Treasurers.

More than $200 trillion in transactions are priced over Libor, but the interbank lending market on which the floating-rate benchmark is based has shrunk to few if any transactions daily, a fate regulators do not want to see repeated.
A choice of floating-rate benchmarks may emerge, but bankers must scrutinize them. “It begins with thinking about your own organization and what these different rates do, their construction and the data behind them, and how they perform over time,” Tom Wipf, chairman of the Alternative Reference Rates Committee (ARRC) and vice chairman of Morgan Stanley, told members of NeuGroup for Regional Bank Treasurers.

Arriving at SOFR. The ARRC, comprising public-market representatives and sponsored by the Federal Reserve and the Federal Reserve Bank of New York, reviewed a wide range of potential Libor replacement reference rates, including unsecured credit-based rates and other secured rates, according to Nate Wuerffel, deputy head of the New York Fed’s open market trading desk for domestic markets.

It chose SOFR because it is generated from the highly liquid, overnight treasury repurchase agreement market, with upwards of $1 trillion transactions daily.
“That’s a market that’s not going anywhere,” Mr. Wuerffel said. “It’s super durable and deep, and a reference rate you can rely on.”

Drawback. SOFR is a secured rate that can tighten dramatically during periods of market stress. Regional and community banks worry that their returns from SOFR-priced assets could plummet while their cost of funds increases.

In response, several reference rates incorporating credit risk have emerged, including the American Financial Exchange’s (AFX) Ameribor and the Bloomberg Short-Term Bank Yield Index (BSBY).

Due diligence required. The credit-risk alternatives aggregate rates from several sources of bank funding, but their daily transaction volumes are significantly lower than SOFR’s—typically less than $10 billion daily.

Mr. Wipf noted that some are heavily weighted in commercial paper (CP), “markets that are small and some might argue getting smaller.”
Their liquidity becomes ever sparser as their term structure tenors lengthen.
Mr. Wipf acknowledged that alternatives such as Ameribor may reflect banks’ marginal cost of funds more closely. However, so far few transactions have been priced over them, and ‘as we move out to more industrial-size transaction volumes, we don’t want to end up right back where we started.”

SOFR’s biggest hurdle. Peer group participants pointed out that indeed all the Libor replacement rates now in the works have some issues. The very biggest concern about SOFR was its lack of a forward-looking term rate, which at the start of the billing cycle provides borrowers with their interest payment due at the end; overnight rates, instead, must be averaged daily, and borrowers learn their final rate only a few days before the payment is due. In April, CME Group announced the availability of a term SOFR in several popular tenors.

“I want a credit sensitive and forward-looking rate—that’s my perfect world,” said one bank treasurer. “But if I have to choose one, I’ll pick the term rate.”

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Justin Jones In Banking, FX

Looking at How Banks Look at You: Revolvers, Fees and Wallet Share

Treasurers seeking clarity on bank fees and product profitability get insights from Chatham Financial and NeuGroup.

At a recent meeting of NeuGroup for Large-Cap Treasurers, members compared notes on revolving credit facilities, bank groups and share of wallet issues, including which products produce the greatest return for banks.

A survey taken before the meeting revealed that despite market volatility last year that could have convinced corporates to replace some banks, most members did not see the size or composition of their bank group change much.
However, some companies, at the margin, are shrinking the number of banks to minimize the amount of time needed for all the coverage and to rightsize the group relative to their wallet.

A survey taken before the meeting revealed that despite market volatility last year that could have convinced corporates to replace some banks, most members did not see the size or composition of their bank group change much.
However, some companies, at the margin, are shrinking the number of banks to minimize the amount of time needed for all the coverage and to rightsize the group relative to their wallet.

Wallets and returns. The survey sparked a discussion of share of wallet where some members expressed interest in how others keep track of the fees they pay banks. All treasurers said they keep close track of their wallet, but several noted that some products are difficult to measure as they do not have a stated fee.

For example, one treasurer said he knows exactly what he paid on a bond transaction but is less certain on what a bank makes on an interest rate swap.
Amol Dhargalkar, a managing partner from meeting sponsor Chatham Financial, expanded on this point and shared the chart below. It illustrates how the profits banks earn on different types of interest rate swaps such as pre-issuance rate locks, fixed/floating swaps and cross currency swaps grow along with the risk for the bank.

Mapping products. NeuGroup’s Scott Flieger shared a matrix of products and how they are viewed by many banks, noting that the most coveted products use little to no balance sheet, have good profit margins and are predictable and recurring (see chart below; RWA stands for risk-weighted assets, used to determine minimum capital requirements).

So being in the top right quadrant (i.e., an IG bond issue) is where banks want to be, as opposed to the bottom left (i.e., a 5-year revolving credit facility).
“A dollar in one product is worth a lot more than a dollar in another,” Mr. Flieger said.

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Justin Jones In Banking, D&I

Working Together: Meaningful Relationships With Community Banks

NeuGroup’s Diversity & Inclusion Working Group meets with leading MDIs/CDFIs to identify ideal collaborations.

Just over a year ago, the death of George Floyd led to a widespread cultural reckoning, with many companies pledging millions toward social justice initiatives. Some corporate treasurers are now viewing so-called impact investing as a part of regular, day-to-day activity.

At a Q&A session with executives from five leading minority depository institutions (MDIs) and community development financial institution (CDFIs), NeuGroup’s Diversity and Inclusion Working Group shared and learned on the process of working with MDIs and CDFIs.

At a Q&A session with executives from five leading minority depository institutions (MDIs) and community development financial institution (CDFIs), NeuGroup’s Diversity and Inclusion Working Group shared and learned on the process of working with MDIs and CDFIs.

Here are some takeaways from the meeting compiled by NeuGroup’s Andy Podolsky, who moderated the meeting:

Long-term relationships. The key, the bankers said, is to not prioritize transactions, but to create long-term relationships and partnerships that help with a key need. Reliable funds from corporations can go beyond depositary relationships and provide much needed capital in the form of equity.

“The first thing any bank needs for success is equity capital. Liquidity helps, but equity is number one,” one banker said. Though he understands that an equity investment could possibly be more difficult for corporate treasury, “it’s critical that we establish relationships with companies that are not episodic.”
Another responded that “corporations’ motivation for working with us shouldn’t be just because it’s in vogue at the moment.” Corporations need to be willing to take a small amount of manageable risk for the opportunity for exponential positive impact.
“If you make a simple financial commitment with our bank and then take it out in 24 months, it can be devastating to us if we built up the infrastructure to support you,” he said. “It’s more about a partnership for the long-term, the deposit is just a starting place.”

Lean in. “There has been an awakening in the past year,” one bank representative said. “It is becoming [clear] to me more and more that on some of the stuff in the D&I world, you’re going to have to lean in a little bit. There’s going to have to be some muscle, a little extra effort.”

One treasurer at the meeting responded, “Some corporates want to ask, ‘How can I take all risk off the table?’ but the point about leaning in is a really great point, and that really resonates with me.”

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Justin Jones In Cash & Working Capital, Senior Executive

No Walk in the Park: Overcoming Resistance To Embrace a Cash Culture

One treasurer’s rocky quest to shift his company’s focus from P&L to cash.

When one NeuGroup member saw an opportunity to elevate treasury’s role within the company while focusing its overall view of cash, he took it—but the journey was no walk in the park.

He encountered some resistance from leadership and the FP&A team, but was able to work with them to reconcile two methods for cash flow forecasting and take a more active approach to cash management.
The member, the treasurer at a high-growth tech firm, addressed how to overcome these internal obstacles, which he said are common to treasurers working to build a cash culture and move away from a P&L focus.

One treasurer’s rocky quest to shift his company’s focus from P&L to cash.

When one NeuGroup member saw an opportunity to elevate treasury’s role within the company while focusing its overall view of cash, he took it—but the journey was no walk in the park.

He encountered some resistance from leadership and the FP&A team, but was able to work with them to reconcile two methods for cash flow forecasting and take a more active approach to cash management.
The member, the treasurer at a high-growth tech firm, addressed how to overcome these internal obstacles, which he said are common to treasurers working to build a cash culture and move away from a P&L focus.

Destroying the ivory tower. The member said treasury tends to land in a unique kind of corporate silo that he called an “ivory tower;” not only separate from the rest of the company, but seemingly elevated above it.

For him, this led to tension with other divisions even before he embarked on his cash mission. “It is a big issue when treasury is not connected to the company’s [operations], management and the board,” he said.
“When treasury is only focusing on operational matters, like cash positioning, it is not ideal,” the treasurer said. He felt treasury was performing very well on the day-to-day operations side but was restricted by not being involved in the long-term cash or capital structure planning.
“In our case, we also had a high debt leverage, so we needed to have full control of the company’s cash model,” he said. “FP&A was in charge of that but wasn’t really doing it. So we had to transform the company’s culture.”

Hard work pays off. When the treasurer was first brought in to help manage strategic cash planning (also known as the indirect model for long-term cash forecasting), he said FP&A was hesitant to let go. Being able to strategically manage these relationships was key to the project’s success, he said.

To soothe relationships, treasury now shares the responsibility, working alongside the FP&A team. “We work with external functions on a weekly basis, we have weekly reviews with teams and corrective action items, but we do not manage these functions,” he said.
Now, treasury is part of the company’s process for strategic cash planning three years out, as well as the short-term forecast, which he said allows for better alignment between the two types of forecasting and a more holistic cash framework.

Internal discord. When another member said her CFO had expressed concern about a disconnect between the long-term cash flow forecasting and treasury’s short-term forecast, she similarly suggested allowing treasury to assist with both forecasts to bring them into harmony. It didn’t go over well, so she looked to her peers on how to overcome this resistance.

The member who successfully completed this transformation suggested his approach to these situations: using a “treasury road map” to illustrate his vision to leadership. It breaks down, area-by-area, the approach the company took two years ago, how it is performing now and a vision for the next two years.
“Just being able to have these conversations is good,” though they’re not always easy, he said. “I think, and this is key for me, if you’re transparent and have a regular review of projects, then that works.”

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Justin Jones In Banking, D&I

Putting Money Where Your Mouth Is: Diversity Scores for Bank Groups

One treasury team factors the diversity of its bank coverage teams into share-of-wallet decisions.

As corporations articulate diversity and inclusion (D&I) goals more publicly, treasurers are setting out to live up to D&I values on their own teams and apply them to their banking relationships as well.

At a recent meeting of NeuGroup for Tech Treasurers, one member said his team surveys its banks on the diversity of its coverage teams, resulting in a score that treasury takes into account for discussions around share-of-wallet allocation.

At a recent meeting of NeuGroup for Tech Treasurers, one member said his team surveys its banks on the diversity of its coverage teams, resulting in a score that treasury takes into account for discussions around share-of-wallet allocation.
Another treasurer called this a “really innovative” approach. “I’ve not heard of other people doing this in terms of allocating wallet share based on the diversity of coverage side. That’s a good way to put your money where your mouth is.”

Taking a hard line. To do the scoring, treasury asks its banks for an EEOC report detailing the diversity of their employee base as well as the specific information about the company’s coverage team.

“Some banks were unwilling to provide the data in a couple cases,” the member said. “I took a pretty hard line on it and said ‘If you don’t provide the data, you get a zero, and that is how we are going to score you.’ There are a couple of banks in that category, and it impacts them.”
The diversity score is one element in the company’s share-of-wallet model and could also be a factor in seeking rotations on coverage teams.

Gray areas. Another member said that he sees this as an interesting idea, but worries about situations where a bank may only have one or two employees covering the company.

“How are you expecting banks to then react?” he asked. “How do you deal with the fact that low numbers of coverage may impact the scoring, given the size of coverage teams?”
The member replied, “There’s not a perfectly easy way to answer the question, and it does create some of those gray areas.”

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Justin Jones In Banking, Cash & Working Capital, COVID-19

Too Much Money: Banks Struggle With Surging Deposits

Banks awash in deposits need to prioritize active accounts making use of services that generate fees and revenue.

Originating loans as the pandemic recedes and the economy revives is a major challenge for banks today—but so is the surge in deposits since spring 2020 and just what to do with them given the lack of precedent.

Consumer and commercial deposits increased by more than $3 trillion, or roughly 20%, since the onset of pandemic through the end of December, according to Novantas, a data and solutions firm specializing in financial services. Roughly two thirds of the increase was and remains commercial deposits (see chart).

Consumer and commercial deposits increased by more than $3 trillion, or roughly 20%, since the onset of pandemic through the end of December, according to Novantas, a data and solutions firm specializing in financial services. Roughly two thirds of the increase was and remains commercial deposits (see chart).
With deposits coming in from all angles, banks have focused on the “primacy” of their customers to emphasize deposits associated with so-called operating deposits used for day-to-day needs and discourage non-operating deposits—excess cash.
The unprecedented nature of Covid-19 and consequently the lack of applicable historical data has left banks uncertain about how to model those deposits’ behaviors, leading them to rely more on non-modeled and qualitative estimates.

Stimulus overdrive. The surge in commercial deposits was sustained throughout 2020 and gained steam at the start of 2021 as additional stimulus coincided with year-end seasonality.

Pete Gilchrist, co-head of global advisory at Novantas, said in a presentation to regional bank treasurers that banks now have “more liabilities than attractive assets to invest them in,” and they must be wary about taking on additional deposits that would result in cost rather than income.
Contrary to the norm, Mr. Gilchrist said, “Banks are actively discouraging certain deposits coming on to their balance sheets.”

Questions and more questions. The deposit surge poses critical balance sheet management questions spanning measurement, management and governance, starting with what is the aggregate surge-balance impact, the drivers and duration of the surge by customer type, and what factors could affect surge stability.

Also important to consider are the actions management should take based on surge-deposit measurement outcomes, Mr. Gilchrist said, including deposit pricing and the allocation of cash and investment securities, and the overarching framework to guide these decisions in the new environment.
Governance questions include whether to adjust surge-deposit valuations and which analytics to prepare for the asset liability committee.

Model concerns. Alas, the unprecedented nature of the pandemic and the trillions of dollars in federal stimulus to fuel recovery make output from the models constructed in the wake of the 2008 financial crisis highly questionable.

“If the world after the pandemic looks different than before, then models relying exclusively on data from before the pandemic will be suspect,” Mr. Gilchrist said.
A bank treasurer echoing peers’ sentiments said his institution is “just getting overrun with unabated inflows of deposits.” He added that third-party models built over the last several years “didn’t pass muster, and we had to go back to a simplistic kind of trailing average decay model, which shortened our deposit lives a lot.”

Emphasis on primacy. To stem the flood of excess deposits, banks should focus on measuring and ranking accounts by “primacy”—highly active accounts whose deposits can lead to loans and banks fee services down the road, typically checking accounts for consumers and especially businesses.

“When an account is opened, is that someone who wants to establish a primary relationship and borrow money and use services from the bank, or are they just parking deposits so the bank loses money?” Mr. Gilchrist said.
He added that that deposits of the biggest six commercial banks have grown less quickly because they’ve succeeded in identifying those primary customers.
“There’s a lot of conversation today between treasury and the commercial business around making sure the institution knows what a higher quality commercial deposit is,” Mr. Gilchrist said.

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Justin Jones In FX, Talking Shop

Talking Shop: The Calendar, the Clock and FX Accounting Rates

Member question: “When do you set your monthly accounting FX rates? Our fiscal month always ends on Friday, end of day. We set our month-end rates on Thursday at 5 p.m. EST. Alternatives include:

“Setting FX rates on Friday morning, but intraday historical data is limited in time, which limits auditability.
“Setting FX rates on Friday at 5 p.m. EST, which means that we would trade very close to the weekend, which is a risk.”

Peer answer 1: “We set rates monthly, 8 a.m. [three days before month-end]. We like to trade soon after setting rates. We used to set at 7:30 a.m., but that pushed us to trade during a less liquid market.

“I think the only downfall to 8 a.m. is that we sometimes get some odd results in Latin American markets that are just opening. So I would probably go for 8:30 a.m. if I could.
We take a snapshot in Excel at that time and save it; plus, there is a documented check by the controller’s team that provides the audit evidence.
- They compare rates in the system to their own snapshot for reasonableness.”

Peer answer 2: “What rate source are you using? Have you considered using 4 p.m. London? It is the EOD rate for WM/Reuters fix.”

Member response: “Thank you for the suggestion. You reminded me that I could use the last price at another time—for example, by picking London fix.”

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Justin Jones In D&I, ESG

On the Horizon: ‘Much Better Data and Analytics To Do ESG Scoring’

BlackRock CEO Larry Fink shared insights on ESG, D&I and American capitalism with NeuGroup members and guests.

BlackRock CEO Larry Fink recently addressed treasurers attending a special session moderated by NeuGroup CEO Joseph Neu that touched on topics including ESG, diversity and inclusion, corporate purpose and American-style capitalism. Among many highlights, Mr. Fink said he is actively urging world leaders to agree on a common set of metrics to judge progress on climate change.

BlackRock CEO Larry Fink shared insights on ESG, D&I and American capitalism with NeuGroup members and guests.

“We need every country to come together on one taxonomy,” Mr. Fink told members of NeuGroup for Mega-Cap Treasurers and NeuGroup for Tech Treasurers. “If you really are earnest in moving the world to net zero [carbon emissions], we need to have proper measurements that are measurements we can all do together,” he said. “That’s the only way public companies are going to be properly judged.”
Mr. Fink said he’s making the case to politicians attending the next UN climate change conference, COP26, in November. “I’m constructive on this, but we’re not going to get there unless there are long-term policies by governments. We’re not going get there if we don’t have a global taxonomy.”

Better environmental scoring, analytics. The lack of standards underlying ESG scores frustrates many corporate risk managers. Mr. Neu described a cash investment manager at a recent NeuGroup meeting who said, in essence, “I see these ESG scores but I don’t really know what to make of them.”

Mr. Neu asked Mr. Fink for his thoughts on “how we can bring these metrics on par with the more traditional metrics including credit ratings, so we get over this hurdle of thinking differently about fiduciary responsibility and stakeholder ESG responsibility?”
In his 2021 letter to CEOs, Mr. Fink reiterated BlackRock’s desire that all companies report in alignment with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB), which covers a broader set of material sustainability factors.
“As more and more companies report under TCFD and SASB, we have better analytics at the corporate level, Mr. Fink said. “And through better reporting and more transparency we are, in a short period of time, going to have much better data and analytics to do environmental scoring.”
Also: “The Biden administration is making this a priority and everybody should expect that we as public companies are all going to be asked to report our ESG data, if you’re not doing it already. So you might as well just get it done. Which is going to be good. We’re going to be able to analyze every company and how they’re moving forward.”

The Aladdin advantage. Mr. Fink gave participants a preview of a new tool BlackRock will use to analyze the climate risk posed by companies and, by extension, the credit risk of their securities and assets. It’s called Aladdin Climate and is in the beta stages, due to be unveiled in the fall.

“This is probably the biggest ESG-related project that we have going on in BlackRock right now to develop the technologies and algorithms to really understand and to quantify why we believe climate risk is investment risk,” he said. “We’re trying to ‘Aladdinize’ the physical impact of climate change and transition risk associated with the energy transition, so that we can analyze them like we would analyze duration risk, convexity risk, credit risk. We believe that is going to be very important component of investing in the future.”
“We have onboarded satellite imaging technology onto our risk management platform with algorithms on climate change movements,” he explained. This will allow investors and risk managers to evaluate the transition risks of a portfolio. “We believe this is going to be one of the biggest opportunities in the investment world, for treasurers, for CFOs.”

Proud of American capitalism. Coming out of the pandemic in the US,“I’m more bullish on American-style capitalism than ever before,” Mr. Fink told members. “You have to be really proud of American capitalism.”

“American capitalism was so successful, despite the pandemic in 2020. When you think about our capitalism and the ability to create a vaccine in 10 months…it’s an amazing story. But that’s the beauty of America, the beauty of the country’s ingenuity.”
Beyond ingenuity, today’s companies need to have leaders who pursue a corporate purpose that benefits all stakeholders. Mr. Fink said, “I do believe that some of the best companies in America today are companies who have a strong, well-articulated purpose— and some of those companies are on this call right now.”
He added, “Society is asking more and more of public companies. Public companies are now becoming the big drivers that move society forward.”

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Justin Jones In Capital Allocation, Capital Markets

Back in Fashion, Buybacks Have Corporates Scoping Capital Structure

Many corporates are deciding whether to restart share repurchase plans suspended in 2020.

After the pandemic hit, the volume of share repurchases plummeted and what continued was mainly executed by companies managing the top-20 programs in terms of volume, Societe Generale bankers told assistant treasurers at a recent NeuGroup meeting sponsored by the bank.

Dividend payouts, meanwhile, stayed relatively steady and were only cut or canceled as a last resort, Societe Generale said (see chart).

Many corporates are deciding whether to restart share repurchase plans suspended in 2020.

After the pandemic hit, the volume of share repurchases plummeted and what continued was mainly executed by companies managing the top-20 programs in terms of volume, Societe Generale bankers told assistant treasurers at a recent NeuGroup meeting sponsored by the bank.

Dividend payouts, meanwhile, stayed relatively steady and were only cut or canceled as a last resort, Societe Generale said (see chart).

An increasing number of companies have restarted their buyback programs and more are expected to follow suit through the rest of 2021. As of mid-May, S&P 500 companies had repurchased $156 billion in the first quarter, with 90% of the data reported, according to S&P.
But not everyone is rushing in headfirst. One AT said companies can grow overly accustomed to buybacks’ accretion to EPS, and that perhaps a silver lining of the pandemic has been the necessity to go “cold turkey” on repurchasing shares. “We’ve got to reset and be more strategic about it.”

Bigger picture. NeuGroup’s Scott Flieger said many companies have higher-than-normal cash positions as the result of 2020 debt transactions. Now, these companies are looking at their capital structures and deciding whether capital should be allocated to share repurchases and/or debt reduction.

One member said it’s difficult to announce buybacks when projects requiring capital remain on hold. “So now it’s just trying to weigh the whole framework and make sure everybody’s in line and being more balanced,” the member said.
“That’s where we are as well,” said a peer. “It’s a pure capital allocation discussion right now. Share buybacks, dividends, investing in the business—where is the greater return?”

Timing a restart. One member’s company, usually a year-round cash cow, saw customer access to its products and services limited by the Covid outbreak, prompting it to halt its otherwise reliable share repurchase program out of an abundance of caution. It is considering resuming buybacks, within the narrow windows between its significant blackout periods around quarterly earnings.

By contrast, a peer’s company is highly cyclical and historically has only used residual cash for share repurchases. But because its industry was deemed essential and cash was rapidly building, it resumed its repurchase program last fall.

More grids. A Societe Generale banker said grids have always been used with structured plans under Rule 10b5-1, and now the bank is seeing increased use of grids by companies purchasing shares in the open market, under rule 10b-18.

A member said her company maintained its repurchase program throughout the pandemic, given its subscription model predictably generates cash and the need to offset any incremental dilution to shareholders.
“We stayed in the market but adjusted our grids so they would be very opportunistic and wouldn’t trigger unless we were trading below what we believed to be fair value,” the AT said. “We managed to take advantage of some big dips, especially in March and April.”
“To your point,” said the banker, “there’s a lot more use of grids to manage [repurchases] more opportunistically and a bit more aggressively—an interesting development.”

Listening to the lawyers. Some corporate legal departments may frown on opportunistic repurchases, and one member said theirs requires lengthy six-month plans and that shares be purchased almost evenly, despite price movements.

A peer noted that a nudge from external counsel helped change the perspective of their company’s legal department and increase its flexibility regarding blackout periods for share repurchases and debt issuance. “They just needed that affirmation from legal counsel that was less conservative,” the member said.
Mr. Flieger recalled a member of the large-cap treasurer peer group whose company’s blackout period was significantly longer than peers’. “We connected their internal legal department to outside counsel that issues opinions, and they ended up shortening their blackout period,” Mr. Flieger said.

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Justin Jones In Banking, Capital Markets, COVID-19

Bounce Back: Bank Loan Market Quickly Sees ‘Amazing Recovery’

U.S. Bank describes the speedy recovery of revolving credit facility issuance.

Talk about a rebound: In the depths of the Covid-19 pandemic, the value of bank loan facilities put in place by corporates tanked by more than 50% to about $200 billion. In the first quarter, it topped $500 billion, above the level reached a year prior (see chart), due in part to plummeting pricing.

This was among the key insights from a loan market update by Jeff Stuart, EVP and head of capital markets at U.S. Bank at a recent NeuGroup for Mid-Cap Treasurers meeting.
The loan market’s U-shaped recovery shows no signs of slowing. “I think we’re seeing a pretty amazing recovery in this market, and I think we’re going to see opportunities you won’t see for a while,” Mr. Stuart said.

U.S. Bank describes the speedy recovery of revolving credit facility issuance.

Talk about a rebound: In the depths of the Covid-19 pandemic, the value of bank loan facilities put in place by corporates tanked by more than 50% to about $200 billion. In the first quarter, it topped $500 billion, above the level reached a year prior (see chart), due in part to plummeting pricing.

This was among the key insights from a loan market update by Jeff Stuart, EVP and head of capital markets at U.S. Bank at a recent NeuGroup for Mid-Cap Treasurers meeting.
The loan market’s U-shaped recovery shows no signs of slowing. “I think we’re seeing a pretty amazing recovery in this market, and I think we’re going to see opportunities you won’t see for a while,” Mr. Stuart said.

Positive pricing. Mr. Stuart said the return of issuance levels is “nothing short of extraordinary. It is an amazing recovery over a very short period of time.”

“The part that’s really amazing about the past 12 months is the strength of the market through the crisis in terms of new money for M&A and expansion,” he said. That’s shown by the yellow and green bars in the chart above.
Pricing, after spiking during the pandemic, has returned to pre-Covid levels (see charts below).
“It’s almost like it never even happened, and in some cases pricing is even more aggressive,” he said. “Borrowers are testing new lows in pricing all the time. I think we might be there, but this is a far cry from where we were six months ago.”
In addition, he said, though three- and five-year revolvers were essentially abandoned during the depths of the pandemic in favor of temporary one-year facilities, he has seen one-year revolvers “fall off” and three- and five-year volume return close to normal.

Relief and reaction. In response to the market’s recovery, one member said, “I don’t think any of us sitting here this time last year would’ve really thought that, but I think that’s really good information for all of us.”

The member said companies are now ready to explore going back into the market, and her colleagues are “talking to our bankers about utilizing the various options out there.”
Mr. Stuart said, “Whether you’re thinking about a new facility or you’re thinking about renewing, this is an opportune time. Banks are really looking to recover asset growth.
- “Whether you’re a leveraged borrower or an investment-grade borrower, now is a great time to be thinking about taking advantage of this strong bank market and raise some dry powder.”

Accordion or start over? One member whose company did not see a need to take any risk management actions during the pandemic is now looking to take advantage of the favorable pricing. But she wonders if the right move is through an accordion, adjusting the company’s current long-term facilities.

“We’re looking at more offensive plays, we have a pretty substantial accordion,” she said. “I’m curious if companies are going out and exercising those accordion options to increase committed dry powder.”
Mr. Stuart responded that, if corporates have the time, a full refinancing may be the better option. “What we’re seeing is not necessarily the use of accordions, but full refinancings at better terms,” he said.
- “Borrowers are actually looking to reduce pricing, and in many cases redoing their deal as an amend-and-extend or as an upsize.”
Another member noted that, though this is an attractive option, it may not work if companies have an impending need for liquidity. “If you need to tap an accordion, you could probably do it in 30 days or less,” he said. “But for a refi, it’s going to take a lot longer. A lot of times you don’t have the luxury of redoing it.”

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Justin Jones In Cash & Working Capital, Risk Management

A Look at the Inflation Crystal Ball: Morgan Stanley’s View

Morgan Stanley economist Ellen Zentner says people are becoming “more convinced that inflation is a real thing.”

The outlook for inflation and interest rates is a hot topic as the US recovery picks up steam. Here’s the view Morgan Stanley recently outlined for bank treasurers at a recent NeuGroup meeting:

Inflationary pressure will almost certainly continue, but even with upwards of $2 trillion in additional capital from the Biden administration’s Build Back Better initiative likely to arrive early next year, the Federal Reserve will probably not increase rates until third quarter of 2023.

Inflationary pressure will almost certainly continue, but even with upwards of $2 trillion in additional capital from the Biden administration’s Build Back Better initiative likely to arrive early next year, the Federal Reserve will probably not increase rates until third quarter of 2023.
Ellen Zentner, Morgan Stanley’s chief US economist, told members that her forecast is consistent with the Fed’s new framework that recognizes short-term rates close to zero require waiting longer to raise rates, and then only gradually.
Morgan Stanley sees the core personal consumption expenditures (PCE) index peaking around 2.6% and longer-term falling to 2.3%, higher than the Fed and Wall Street consensus expectation of 2.0%.

Inflation surge. The bank anticipates a pop in inflation this year, stemming partly from comparing this year’s growth numbers to last year’s deflationary numbers.

Replenishing inventories and resuming services after the Covid-19 hiatus will also fuel price increases, as well shortages of goods and other distortions stemming from the economy unwinding from the pandemic.
However, core PCE, which anchors Fed policy, should recede in 2022 but remain elevated, Ms. Zentner said.
Seeking an average core rate of 2%, the Fed won’t rush to tamp down inflation, which has been stubbornly below that target for some time.

Rising 10-year rates. The 10-year Treasury bond rate fell from 1.9% pre-pandemic to as low as 0.50% during, and this year ramped up to 1.6% from below 1.0% at the start of the year. NeuGroup’s Scott Flieger asked whether that increase represented returning to a pre-pandemic environment or inflation.

“It’s mostly due to inflation compensation,” Ms. Zentner said, adding that while normalization has played a role, “The difference now is that people are becoming more and more convinced that inflation is a real thing.”

Higher inflation. Longer term core PCE should remain above 2%, Ms. Zentner said, partly because globalization has slowed long-time disinflationary pressure from lower import prices and labor costs.

Plus, the pandemic is likely to lead to sticky increases in labor costs, and households flush with cash, combined with low mortgage rates, have pushed up housing prices and rents.
Consumers are also likely to draw upon $2.1 trillion in excess savings.

Fed’s view. The Fed is assuming unemployment can return to as low as pre-Covid, around 3.5%, without becoming inflationary, Ms. Zentner said, although structural changes stemming from the pandemic may change that.

The Fed has recognized, however, that its old concept of full employment is not an inclusive goal, so it now seeks to achieve ‘maximum employment’ by running a tight labor market, focusing on objectives such as closing employment gaps among demographic groups.
Combining its inflation framework target with the concept of maximum employment, Ms. Zentner said, is why the Fed will keep rates on hold for so long while “running a high-pressure economy.”

Infrastructure raises productivity. The Biden administration’s infrastructure plan provides the biggest bang for the government buck.

Morgan Stanley anticipates infrastructure will be passed via reconciliation in October and start to trickle into the economy at the start of 2022.
Although a massive chunk of change, Ms. Zentner said, the Fed is likely to see it revving up currently depressed productivity levels in the long term. “You can get inflationary pressures at first because you might run into shortages with these big projects,” she said. “But higher productivity ultimately will put a lid on runaway inflation.”

Tax question. A bank treasurer asked whether failure to fund President Biden’s initiatives fully via taxes would prompt the Fed to purchase Treasury bonds to increase the money supply and liquidity in the financial sector.

If the Fed has to step up purchases, it will be because it has seen pockets of financial conditions tightening that must be offset to support its outlook, Ms. Zentner said. “Keep in mind the Fed may consider higher interest rates from more debt issuance perfectly acceptable given that infrastructure would also be boosting the economy’s prospects for stronger growth.”

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Joseph Neu In Banking, Cash & Working Capital, Fintech, Technology

FinLync Brings API Bank Connectivity to an ERP-Native App That Spans Editions and Instances

Having conducted three focus groups of NeuGroup members over the last 6 weeks—targeting senior treasury managers, treasury and financial technology support specialists and AR/AP/Cash applications and general financial operations managers respectively—we can now share the key member-validated findings regarding FinLync and solutions like it. While the focus groups were comprised of members from companies with SAP as their principal ERP, many apply to companies with other ERPs. Plus, while FinLync is certified for SAP (from ECC 6.0 to S/4 HANA), it plans to release native apps for Oracle and MS Dynamics soon.

Consider the value of connecting your treasury and financial operations teams via the ERP they all access to banks in real-time.

One of the takeaways that cannot be ignored is that SAP, despite decades of working on it, has not managed to create its own solution to deliver on the promise of marrying transaction data from banks with that within the ERP, in a straight-through manner, without loss of data detail and in a timely way.

There are myriad reasons for this. The one that most resonates is that SAP itself tends to introduce functionality that works with the latest version, which very few SAP companies have implemented across all functions and instances, and even fewer see finance functions at the early phases of their upgrade timelines. Finance and treasury practitioners are thus used to waiting and usually end up implementing another solution that connects with banks while delivering needed functionality and that pulls data out of SAP instead.

FinLync’s key value proposition is that it has developed API links to banks, which is where connectivity to banking and financial services is moving, with direct access to ERP data tables across instances and versions of the ERP. With SAP, FinLync works with ECC 6.0 to the latest S/4HANA and delivers the modern Fiori user experience regardless.
For banks that are not API-ready, it also has a connectivity aggregator to connect via SWIFT, host-to-host or via a gateway bank or other provider.
There is the potential that banks in developing markets may choose to leapfrog to APIs’ connectivity, even before joining SWIFT.

While not all members are fully sold on the value of real-time treasury for everything, there is wide recognition that the quality, detail and security of data exchanged via API connections is a huge value add. For example:

API connections give real-time visibility not only to when the payment arrives at the beneficiary’s bank but the number of “hops” the payment made to get there and what fees were charged along the way.
API connections along with native integration with the ERP mean that machine learning and AI algorithms get better, faster at learning your patterns and analyzing all the data in the ERP to auto-reconcile and forecast cash flows. The typical 60% out-of-the-box accuracy can be higher and the path to 95% or better accuracy can be much shorter.
API connections are encrypted two-way communications between your ERP’s data tables and those of the bank’s system, so there is no writing to a data file that can be altered as it makes its way from your systems to the bank’s. This is an inherently more secure way to connect financial systems.

Further, treasury and financial operations cutting across commercial and treasury payments come together in new centers of excellence or global solutions centers. Thus, it is increasingly important to provide common applications that process all incoming and outgoing payments, along with all the data relevant to them, to drive better reconciliation, forecasting and, most importantly, insight about your business.

Embedding connectivity and applications in the ERP opens access to bank data beyond users with access to treasury systems and electronic banking portals—plus with better timeliness and data quality. No longer do you have to get licenses and implement the TMS at shared-service centers, for example.
Leveraging user familiarity, systems support and controls that come with ERP applications also empowers financial operations scalability and flexibility. Finance can rethink processes and who does what work end-to-end, plus shift more resources as automation, smart bots and AI take on more transaction processing and reconciliation activity.

And finally, as an application that installs easily into SAP, and soon other ERPs, and that helps transcend versions and instances with the delivery of desired functionality, many treasurers and their finance colleagues may be able to:

Fully justify the cost alongside a traditional TMS or other treasury systems that deliver functionality that FinLync does not, as well as duplicative functionality that FinLync delivers much better.

To learn more about FinLync, join us on Friday, May 21 from 12:00 to 1:30 pm ET as we discuss the above and other findings and give those who have not seen FinLync before a quick demo.

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Justin Jones In Investment Management, Technology

Square’s Bitcoin Investment: The Early Steps of a Crypto Pioneer

Digital payment processor Square describes the details and nuances of its $220 million bitcoin investment.

Square, the digital payments company, has generated headlines by investing significant sums in bitcoin—along with crypto heavyweights like MicroStrategy and Tesla (which on Wednesday said it will stop accepting bitcoin for purchases but isn’t selling its stockpile). Allison Rossi, Square’s global treasury lead, recently described details of the company’s $220 million investment—about 5% of its cash— to members of NeuGroup Cash Investment 1.

Square allows users of its Cash App to buy and sell bitcoin. Its bitcoin revenue—the total sale of bitcoin to customers— rose 11-fold to $3.5 billion in the first quarter.
Square’s platform does not currently allow merchants to accept bitcoin as payment, in contrast to PayPal—which, interestingly, has not yet invested in bitcoin.

Reasons for bitcoin: know the goal. Square’s decision to buy bitcoin came in the context of investigating a “broader universe” of alternative investments in the wake of Covid and economic stimulus— including equities, gold and TIPS, Ms. Rossi said.

Diversifying with bitcoin may offer a hedge against inflation, given most of the company’s balance sheet is denominated in US dollars, she added. Other reasons:
Bitcoin is aligned with the company’s mission of “economic empowerment,” holding the potential to democratize global access to financial tools in places that are underbanked.
Square CEO Jack Dorsey, who also runs Twitter, is “a Bitcoin evangelist,” Ms. Rossi noted.
The investment is a way for the company to learn more about the cryptocurrency, she said. Her education included Coinbase publications and videos from MicroStrategy.

A business decision. Square framed the purchase of bitcoin as a business decision in support of its payment platform and Cash App, rather than an investment or liquidity allocation issue. “We don’t consider it as part of our investment policy,” Ms. Rossi said.

Square does not have a specific target for its bitcoin investments. Its initial purchase of $50 million was followed by one of $170 million. “We want to remain flexible,” Ms. Rossi said.
The downside: these one-off purchases each require separate conversations with senior leadership and the board, one reason Square may ultimately set a target or develop a decision framework that requires fewer discussions, she said.
If the target amount is a percentage of cash, a company will likely want to carve that out in its investment policy and will need the necessary approvals, she added.

Buying the bitcoin. To make its bitcoin purchases and maintain some privacy, Square used OTC desks at several liquidity providers, including Genesis, Coinbase and Kraken.

Corporates also need to pick custodians. Ms. Rossi says Fidelity is a popular choice because of the firm’s name and reputation; BitGo is another. Liquidity providers also offer custodial services.
Counterparty risk analysis is a good idea, as is a review of the custodians’ so-called cold storage systems, which are not connected to the internet.
Consider insurance. Ms. Rossi said custodians typically cover about $250 million worth of bitcoin in total. Dedicated coverage is also available; there are separate policies for cold storage and so-called hot wallets that are connected to the internet and pose a greater risk.

Accounting: not ideal. In setting thresholds or target amounts to buy, corporates need to take accounting into consideration. They want to avoid the need to constantly buy and sell when they’re basing a target on book value and then the market value rises to, say, 10 times that amount, Ms. Rossi said.

Impairment is an issue, as Square explained in its first quarter 10-Q filing: “Bitcoin is accounted for as an indefinite lived intangible asset, and thus, is subject to impairment losses if the fair value of bitcoin decreases below the carrying value during the assessed period.”
Square, using manual calculations currently, marks down its investment to the lowest price since the time of its purchases. But corporates don’t see any investment gain unless they sell. “So you’re not marking it to market; you’re just marking it down,” she said.
To learn more, she recommended resources including publications by Deloitte.

Get buy-in early and communicate. Bring in outside auditors as soon as you can, Ms. Rossi advised. Early stakeholder decisions should also include tax, legal, compliance, SEC reporting and IT/CISO teams. “As early as you can loop in all the different teams is what I’d recommend,” she said.

Communication is key, both internal an external. Square chose to make external announcements for each of its purchases, in contrast to some other companies that only disclosed them in filings.
Internally, “employees are going to be really interested as to why you are doing this,” Ms. Rossi said. “It’s really important to get the messaging right. You’re going to get a lot of questions about it. Be ready for debate.”

Opportunities, risks. In the future, Square may consider making its bitcoin holdings available for lending, the equivalent of securities lending, to pick up additional income.

In response to a question about global regulators’ mixed views of private cryptocurrency, Ms. Rossi said regulatory risk is something the company discusses, including the implications of countries that may ban bitcoin.
Bitcoin’s future looks bright. But as Square notes in its 10-Q, “The regulation of cryptocurrency and crypto platforms is still an evolving area.”

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Justin Jones In Investment Management, Technology

Planning Ahead: What Role Will Cryptocurrency Play in Treasury?

As cryptocurrency takes flight, market maker B2C2 teams with NeuGroup to shine a light on this new world.

More than half (52%) of the members at a recent NeuGroup meeting said they expect cryptocurrency to become a regular part of day-to-day treasury activity. To help get members up to speed, NeuGroup teamed with sponsor B2C2, a leading crypto liquidity provider, and other industry leaders.

Rob Catalanello, CEO of B2C2 USA, said, “There is a pretty big groundswell of interest from the institutional world, and by that I mean the very well-known names, who are looking into it for a variety of reasons. Either as a form of payment, as a store of value or just trading in a new asset class.”
Members from several NeuGroups attended the meeting, and expressed curiosity regarding how corporations may use cryptocurrency—but very few said they actually have hands-on experience (see chart below).

As cryptocurrency takes flight, market maker B2C2 teams with NeuGroup to shine a light on this new world.

More than half (52%) of the members at a recent NeuGroup meeting said they expect cryptocurrency to become a regular part of day-to-day treasury activity. To help get members up to speed, NeuGroup teamed with sponsor B2C2, a leading crypto liquidity provider, and other industry leaders.

Rob Catalanello, CEO of B2C2 USA, said, “There is a pretty big groundswell of interest from the institutional world, and by that I mean the very well-known names, who are looking into it for a variety of reasons. Either as a form of payment, as a store of value or just trading in a new asset class.”
Members from several NeuGroups attended the meeting, and expressed curiosity regarding how corporations may use cryptocurrency—but very few said they actually have hands-on experience (see chart below).

OTC and KYC. B2C2 aims to make cryptocurrency trading more private by providing an over-the-counter option for corporates looking to make relatively large trades without moving the market as they might on an exchange (see our story on Square).

Addressing concerns about the security of cryptocurrency trades, Mr. Catalanello said B2C2’s extensive KYC process enables the company to “only send coins to, or receive coins from, wallets where we know the beneficial owner of the wallet. We don’t send co-mingled, third-party or exchange wallets.”
“It’s not the Wild West,” Mr. Catalanello said . “But at the same time, it’s important for people to understand the market structure before they jump into it. There are a lot of people out there pretending to be things that they’re not. We encourage people to do the proper due diligence before getting involved.”

Beyond bitcoin. In a brief overview of the crypto market, Brian Kelly, CEO of BKCM, a digital currency investment firm, said he views bitcoin as similar to an S&P 500 index fund—an entry point into the larger world of crypto. “Bitcoin gets you into the space and provides general beta exposure,” he said.

But bitcoin alone is just the first step. “Then you have the alt-coins…that would include Ethereum,” he said. “These give you exposure to everything else that is going on, like DeFi and Web3…all those crazy things [people] talk about.”
Ethereum is a blockchain developed to support scripting and applications, which includes a native token called ether. DeFi, short for “decentralized finance,” is a term for financial apps built on top of Ethereum that cut out financial intermediaries; and Web3 is a collection of libraries, also built upon Ethereum, designed to become a privacy-focused evolution of the internet.
Mr. Catalanello stressed that bitcoin and ether aren’t the only coins in the market. “Stablecoins probably have more potential for actual payments, whether it’s B2B or B2C,” he said. “I would say it would be much easier to adopt any one of the stablecoins that are currently in the market,” he said.
- A stablecoin is a type of cryptocurrency that aims to counter the high volatility of crypto assets like bitcoin by tying the token’s value to other assets, including sovereign currencies.

Bitcoin chicken and egg. One member at the meeting who has a growing direct-to-consumer business said he is most interested in accepting cryptocurrencies as a form of payment, which many members echoed. “It does feel like, in our initial research, the processing companies are in the process of accepting digital currencies as a form of payment and then settling with the end merchant—so, us—in US dollars,” he said.

“There is no direct demand from consumers at this point, but it’s one of these double-sided chicken-and-egg issues at this point,” said another member. “For it to be worthwhile for a business, you need the consumer to need there to be acceptance before you can really put it in place.”
One treasurer at a retail company said he isn’t quite ready to take any actions in the crypto space, but he thinks “inevitably it’ll be used in terms of payment acceptance from customers.”

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Justin Jones In COVID-19, Treasury Management

To Return or Not to Return? That Is the Question

With control of the pandemic in sight in the US, finance teams confront how to manage a return to the office.

As the Covid infection rate in the US falls and vaccinations increase, the issue of when and how companies will bring employees back to the office is heating up. Assistant treasurers at a recent NeuGroup meeting said some staff will return to corporate offices starting in July, raising a bevy of issues for managers.

Who will return and how, and just what the workweek looks like, will vary by company. For many, spending five days a week in the office will likely become an anachronism.
The negative impact of having no communication in person has been a fear expressed in NeuGroup meetings since early in the pandemic. After a year of remote work, members mulled whether finance teams face long-term damage.

With control of the pandemic in sight in the US, finance teams confront how to manage a return to the office.

As the Covid infection rate in the US falls and vaccinations increase, the issue of when and how companies will bring employees back to the office is heating up. Assistant treasurers at a recent NeuGroup meeting sponsored by Societe Generale said some staff will return to corporate offices starting in July, raising a bevy of issues for managers.

Who will return and how, and just what the workweek looks like, will vary by company. For many, spending five days a week in the office will likely become an anachronism.
The negative impact of having no communication in person has been a fear expressed in NeuGroup meetings since early in the pandemic. After a year of remote work, members mulled whether finance teams face long-term damage.

Culture concerns. Many companies seek to develop positive and productive cultures that the remote work environment may be putting in jeopardy.

One member said that new hires are having difficulty integrating and getting a “good pulse” of the corporate culture. One reason is that for many people, remote learning is less efficient.
- “When companies say they’re going fully remote, I don’t think they fully understand what that does to their culture over longer periods of time,” he said.
One assistant treasurer walked the floor of his company’s office and saw many cubicles without name tags because the company had reorganized and many employees had left. “With all these new people coming, I’m not sure how we can get them up to speed quickly,” he said.
Several members reported turnover and the need to hire staff. One had hired a treasury analyst remotely who initially wanted to telework. Now the person is looking forward to going to the office, interacting with colleagues and feeling more a part of the team.
Junior employees seem to want to come back to the office more than seasoned staff, one member said, “because they feel their careers are getting a bit short-changed without exposure to people.”

Hybrid hassles. Many employees prefer working remotely for at least part of the week, so coordinating when people come to the office to maximize interaction may be a challenge without mandates.

A member’s Singapore office has been open to all employees for several months and only requires wearing a mask. But “the office is still pretty empty,” she said. “Just as it was very difficult to start working from home, it’s going to be very difficult to bring people back to the office.”
And where the infection rate remains high and more restrictions are in place, one-on-one connections may still be difficult. “I’ll be damned if I’m going one-on-one with somebody if we each have to go into focus booths in the same building,” one AT said.

Liability issues. One member lamented that it would have been helpful if the US federal government had provided liability protection to companies in one of its rescue packages, because many difficult issues must still be resolved.

Can you only come back to the office if you’re vaccinated, and what proof is required? “If somebody gets sick, or worse very ill after they’ve mandated people to come back—that’s going to be a bigger issue,” the member said.

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Justin Jones In FX, Risk Management

A Fresh Look: Refining Financial Risk Management Programs

Streamlining a hedging portfolio can seem daunting, but there are advantages for corporates that take the plunge.

There’s a growing trend among corporates to take a new look at existing financial risk management programs. Some of the triggers for review are explicit events, such as financial reporting results or restatements, or changes in key personnel.

But many companies are finding that longstanding hedging programs may just no longer meet the original program objectives, or may have grown in silos and created pockets of cost inefficiencies throughout the supporting processes.
At a recent meeting of NeuGroup for Large-Cap Treasurers, one member, along with Amanda Breslin from meeting sponsor Chatham Financial, walked those at the meeting through the experience of streamlining the company’s hedging portfolio.

But many companies are finding that longstanding hedging programs may just no longer meet the original program objectives, or may have grown in silos and created pockets of cost inefficiencies throughout the supporting processes.
At a recent meeting of NeuGroup for Large-Cap Treasurers, one member, along with Amanda Breslin from meeting sponsor Chatham Financial, walked those at the meeting through the experience of streamlining the company’s hedging portfolio.
“Operational FX hedging can involve daily activities across the globe, triggering exposures, visible and hidden costs throughout the process, a wide range of stakeholder interests, complex accounting, and multiple technology tools,” Ms. Breslin said.
- “It’s not surprising at all that program mechanics can get dislocated from objectives over time as a company evolves.”

Streamlined. After a holistic program review, the company went into action, making its risk management process more efficient by:

Reducing its portfolio trade count to less than 20% of its prior size, while maintaining risk reduction levels.
Using strategic layering to dollar cost average more efficiently.
Simplifying products and currency pairs within the portfolio to eliminate premiums, simplify settlements and reduce trade volume.
Integrating all workflows from exposure gathering through trading, accounting designation, and reporting, through ChathamDirect, Chatham Financial’s financial risk management platform.

Tech benefits. Technology often plays a key role in a hedge program review for a number of reasons, Ms. Breslin said. They include:

Manual workflows increase errors and limit the effectiveness of program controls.
Manual interventions take time and resources.
Data aggregation allows for real-time reporting through business intelligence tools.

Next steps. The member who successfully overhauled the process said she is “really happy with it,” and is now able to look ahead. “The next steps are really then to keep getting more visibility into our exposures, to add value by reducing exposures, and partner with procurement and FP&A to reach a full FX view of our financial statements for a cohesive conversation.”

The treasurer said her primary takeaway from the project is learning that treasury at her company doesn’t really own anything specific—”capital, currency, anything really”—but it owns the story. “We own the end-to-end process and the conversation around it,” she said.
“The CFO loves the fact that we’re digging in and we’re making a difference,” she said. “But it takes a lot of work, it takes thinking differently.”

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Justin Jones In Risk Management, Talking Shop

Talking Shop: Cash Exposure in Counterparty Risk Assessment

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

Member question: “In counterparty risk assessment models, related to cash in bank accounts, do teams typically manage cash exposure using a percentage of the total or fixed dollar limits (or both)? If dollar-based, how are limits defined (and how much flexibility is employed)?”

Peer answer 1: “We set deposit limits with our banks at fixed dollar limits. It’s not a perfect science, but we use several factors to set the overall dollar exposure limit per bank.

“These factors include credit rating, CDS spread and country risk. Country risk includes macroeconomic factors and events that can affect the bank’s risk profile.
“Generally, it is as simple as higher limits are given to banks with higher credit ratings in lower risk countries.”

Peer answer 2: “We set deposit limits at our banks based on dollar limits. The exposure limit includes cash, derivative exposure and direct investments in the bank. The limits are set by our risk management team, primarily based on credit ratings.”

Peer answer 3: “We set our counterparty investment limits based on a combination of a bank’s credit ratings and CDS scores. We set predefined ranges for each metric to break each into four different tiers and then set a predefined dollar limit for each tier.

“We test the credit ratings and CDS scores on a weekly basis. If a bank moves up or down a tier based on this testing, we require them to remain at the new tier for four consecutive weeks before adjusting their limit. In certain limited cases, we will seek an exception from senior management to increase a bank’s limit beyond what our model suggests.
“When we set our limits each year, we used a fixed percentage multiplied by enterprise assets to set the top tier counterparty limit. This percentage was set many years ago and there wasn’t too much science to it— just based on what we were comfortable with from a risk appetite perspective.
“So, the amount of exposure we are willing to take with a counterparty changes year to year as our enterprise assets change.”

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