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Treasury’s Eternal Question: What is the Right Level of Liquidity?

Wells Fargo’s risk-adjusted liquidity ratio offers insights on how corporates view liquidity during recessions.

Setting a target for a company’s ideal liquidity level is never easy. Corporates use a variety of metrics and liquidity ratios to get it right. But what happens when events like the global financial crisis or the pandemic push the economy into recession and force corporates to go into crisis mode?

  • In theory, given that most companies revenues and expenses drop somewhat during a recession, they should be carrying less liquidity.
  • But in the 2008 financial crisis, every business sector increased liquidity despite reductions in all aspects of their businesses, including revenues, expenses, investments and working capital.
    • That’s according to an analysis from Wells Fargo, sponsor of the spring meeting of NeuGroup for Capital Markets (NGCM).

Wells Fargo’s risk-adjusted liquidity ratio offers insights on how corporates view liquidity during recessions.

Setting a target for a company’s ideal liquidity level is never easy. Corporates use a variety of metrics and liquidity ratios to get it right. But what happens when events like the global financial crisis or the pandemic push the economy into recession and force corporates to go into crisis mode?

  • In theory, given that most companies revenues and expenses drop somewhat during a recession, they should be carrying less liquidity.
  • But in the 2008 financial crisis, every business sector increased liquidity despite reductions in all aspects of their businesses, including revenues, expenses, investments and working capital.
    • That’s according to an analysis from Wells Fargo, sponsor of the spring meeting of NeuGroup for Capital Markets (NGCM).

The old playbook doesn’t work. “That tells me those liquidity ratios are really only useful during quiet, normal times, and it’s not the right amount of liquidity when times get tough, in a recession,” said Hans Tallis, head of quantitative corporate finance at Wells Fargo and an adjunct professor of finance at Columbia Business School.

  • The bank’s presentation concluded that “managers don’t size liquidity to static income or balance sheet values. Instead, a robust measure of liquidity should include risk.”
  • Mr. Tallis described a tool his team developed to provide the best explanation for how companies think about liquidity and when it can be adjusted.

A simple solution. After exploring numerous options, the team arrived at what Mr. Tallis described as the “very simple” risk-adjusted liquidity (RAL) ratio. It is the median liquidity—cash plus undrawn revolving credit—divided by “EBIT risk,” which is the difference between a company’s high and low earnings before interest and taxes (EBIT) over a short look-back period.

  • “We looked back two years at a given company’s top and bottom levels of EBIT, and tracked its EBIT range over that period,” Mr. Tallis explained.
  • Applying RAL to different industry sectors during the Great Recession more than a decade ago produced a more stable liquidity target for sectors, excluding healthcare and information technology, which held significant cash offshore that skewed the findings.
  • “I can’t say this is how every management team thinks about the right amount of liquidity, but it certainly seems a lot closer,” Mr. Tallis said. 

The Covid recession. Splitting NGCM members’ companies by sector, Wells Fargo found the companies adjusted their liquidity throughout 2020’s pandemic-prompted recession in different ways.

  • Most companies built up cash, tapping revolving lines of credit and issuing debt, while EBIT risk was increasing. That resulted in a fairly stable RAL ratio, Mr. Tallis said. See the chart below for details.

Member takeaway. The RAL ratio did a “reasonably good job” of characterizing the liquidity profiles of NGCM members throughout both recessions, Mr. Tallis said, and so it may be a useful guidepost to think about a company’s appropriate amount of liquidity.

  • “Once your earnings trajectory stabilizes and you’re confident that EBIT is stable or perhaps will inflect upwards, that may be the right time to think about reducing the amount of liquidity that the company is carrying on the balance sheet,” he said.
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Adding Complexity to Hedging: An Adventure in Entity Restructuring

An FX risk manager faces hedging and forecasting challenges amid changes made in response to BEPS regulations.

It’s no surprise that the 15-point action plan announced by the OECD in 2015 to address base erosion and profit shifting (BEPS) would create various headaches for finance teams at multinational corporations.

  • But a member presentation at a recent meeting of NeuGroup FX risk managers provided a fuller picture of some specific challenges facing companies as they comply with the new regulations.
  • At issue for the member: Transfer pricing and the ripple effects on hedging and forecasting following a necessary entity restructuring.

An FX risk manager faces hedging and forecasting challenges amid changes made in response to BEPS regulations.
 
It’s no surprise that the 15-point action plan announced by the OECD in 2015 to address base erosion and profit shifting (BEPS) would create various headaches for finance teams at multinational corporations.

  • But a member presentation at a recent meeting of NeuGroup FX risk managers provided a fuller picture of some specific challenges facing companies as they comply with the new regulations.
  • At issue for the member: Transfer pricing and the ripple effects on hedging and forecasting following a necessary entity restructuring.

Transfer pricing dynamics.  At one end of the spectrum is the relatively straightforward setting of interest rates on intercompany loans: They must be priced as if the two entities are independent, operating at arm’s length.

  • At the other end, the member described a much larger undertaking: Changing from a so-called commissionaire business entity structure to a buy-sell or limited risk distributorships (LRD) structure.
  • The member gave an overview of the change so far and what it has meant to the management of FX risk.
  • The short version: It went from relatively simple and convenient to more complex and cumbersome.

Before: simplicity. In a commissionaire structure, a foreign subsidiary faces the third party (customer) for billing purposes, but really acts as a pass-through for the transfer of foreign billings to the principal, which is an entity in a low-tax jurisdiction.

  • The subsidiary gets a commission on the billings but the structure is designed to minimize gains and consequently taxes in countries in which its products are sold.
  • The principal records the full amount of the billings as deferred revenue, which enables the company to hedge the revenue and lock in one FX rate for the entire period of the deferred revenue.
    • For example, an annual contract will have the revenue recognized monthly over the whole period.
  • This makes it simple to hedge the exposure at one time at the principal entity level; one FX rate applies to the entire contract period, and it’s smooth and easy to forecast USD revenues (a key performance metric) for the principal entity.

After: forecasting complexity. In the LRD structure, a taxable local-currency functional subsidiary is now the seller to the third-party customer. The billed amount is booked as deferred revenue at the subsidiary level instead, and local currency-denominated royalties are intercompany cost of goods sold (COGS) for the sub (see graphic).

  • For the principal, the forecasted intercompany royalty revenues in foreign currency—also recognized monthly—is now the recognizable exposure that can be hedged, using third-party transactions as proxy for hedge designation.
  • To hedge, treasury uses monthly layered cash-flow hedging with forwards, resulting in a smoothing effect from the different effective FX rates; but the monthly revenue recognition still means a new FX rate for each of the periods in the contract period, making for a nightmare to forecast the key performance measures for management.
  • That’s a problem because some of the most important management KPIs for the member’s company are revenues and free cash flows on a USD basis, making the ability to forecast them crucial. “Fun times,” the member joked.
  • Overall objectives for the conversion project include minimizing FX risk from foreign billings and revenues, protecting foreign cash flows and maintain hedge accounting.

Starting small. The company started in Asia Pacific, which represents a relatively smaller part of overall revenues, before moving on to EMEA, which represents the vast majority of global turnover. “It will become much more material as we convert more entities,” the member said.

Is there a deadline? The deadline for conversion may vary based on requirements by the different tax authorities and jurisdictions. Having a plan and being seen as making the required changes matter, so there are opportunities for deadline extensions on a case-by-case basis.

  • If you don’t have agreement with local tax authorities on your conversion timeline, you risk owing the taxes, so you want to convert or get out of higher-tax jurisdictions sooner than later.
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‘Heat Maps Must Die’: Out With the Old ERM Tools, in With the New

Critics say traditional tools are inadequate for illustrating risk; one ERM member has found success modernizing them.

Pity the poor risk heat map. This well-worn tool, traditionally used by ERM teams to provide a visual representation of the range of risks a corporate faces, is now an object of scorn for some risk managers, including NeuGroup members.

  • “Heat maps must die,” one member said at a recent NeuGroup meeting for ERM heads, a sentiment echoed by a number of his peers.
  • Also on the hit list of ERM tools that critics say are outdated, ineffective or insufficient: risk registers.

Critics say traditional tools are inadequate for illustrating risk; one ERM member has found success modernizing them.

Pity the poor risk heat map. This well-worn tool, traditionally used by ERM teams to provide a visual representation of the range of risks a corporate faces, is now an object of scorn for some risk managers, including NeuGroup members.

  • “Heat maps must die,” one member said at a recent NeuGroup meeting for ERM heads, a sentiment echoed by a number of his peers.
  • Also on the hit list of ERM tools that critics say are outdated, ineffective or insufficient: risk registers.

A substitute for thinking? “I have a campaign against heat maps,” the member quoted above added. “In our organization, they can tend to be used as a substitute for thinking and give an illusion of precision.”

  • He said that heat maps—or risk radars—aim to show exposure to risk as a simple way of visualizing the data found in a risk register; but he believes they are only marginally more useful than a spreadsheet full of numbers.
  • Another member echoed the displeasure with the simple tool and said, “The only utility I see in heat maps is a way to appease auditors.”
  • The member who has a campaign against heat maps works at a private company, minimizing the need for him to deal with auditors and leaving his team with “basically no reason to ever use [heat maps].”
  • When one treasurer became responsible for his company’s ERM program, he inherited a risk register that tracks the company’s exposures to risks but does not process or analyze the data in any way.
    •  He said it felt like a tool from a previous generation, a tracker that may be “filled with risks, but no one ever does anything with it.”

A smarter risk register. One member suggested that heat maps and risk registers are not useless. His company developed a sophisticated risk register that can generate heat maps. The automated solution tracks the company’s risks and sends notifications for required follow-up actions.

  • The member said this tool was borne out of a company-wide desire to create a culture of risk-awareness, like many others who have recently kickstarted programs to eliminate what has become a check-the-box ERM routine.
  • The solution employs a user-friendly interface designed with a data visualization software. It’s connected to the raw data for the company’s risks and analyzes those using algorithms.

Tell a story. The member said that other corporates may not necessarily need the full-scale automation used by his company, but recommends they adopt a similar mindset and are thoughtful when employing heat maps.

  • Presenting risk exposure to leadership, he said, is about storytelling first. “If all management has seen is one heat map after another, it will be hard for them to engage with the material,” he said. “The key to getting heat maps right is to present them alongside clear conclusions—in other words, explain why the heat maps matter.
    • “With any heat map, you should be able to study for 30 seconds and know the story. If it takes any longer, it’s bad.”
  • The member said there can be a tendency for functional teams to look at data and try to come up with as many ways as possible to present it. “That’s an incorrect process. The right process is finding the significance of data before presenting and developing meaningful, actionable metrics. When it comes to metrics, more is not always better—in fact, it can be worse.”
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Fond of Fitch: Ratings Agency Gains Fans and Respect in Treasury

Members of NeuGroup for Capital Markets praise Fitch analysts and a ‘ratings-through-the-cycle’ approach.

For decades, Fitch Ratings has been the third ratings agency—behind Moody’s and Standard & Poor’s—used by Fortune 500 corporates that want to ensure they maintain the two investment-grade ratings necessary to remain in the Bloomberg Barclays Bond Index. That may be changing.

  • At a recent meeting of NeuGroup for Capital Markets, members said they have been impressed with Fitch’s analysis over the past few years, and especially during the pandemic.
  • Members also discussed how to approach credit analysts whose views about the company may be at odds with treasury’s.

Members of NeuGroup for Capital Markets praise Fitch analysts and a ‘ratings-through-the-cycle’ approach.

For decades, Fitch Ratings has been the third ratings agency—behind Moody’s and Standard & Poor’s—used by Fortune 500 corporates that want to ensure they maintain the two investment-grade ratings necessary to remain in the Bloomberg Barclays Bond Index. That may be changing.  

  • At a recent meeting of NeuGroup for Capital Markets, members said they have been impressed with Fitch’s analysis over the past few years, and especially during the pandemic.
  • Members also discussed how to approach credit analysts whose views about the company may be at odds with treasury’s.

More thoughtful. “They’ve really come a long way,” said one member whose company holds a Moody’s rating two notches above S&P’s, with Fitch in the middle, adding that S&P seems to be very numbers-focused post-financial crisis and during the pandemic.

  • “We felt that Fitch and Moody’s, from an issuer’s perspective, are taking more of a ratings-through-the-cycle approach,” the member said. “We think Fitch has been very thoughtful and we’ve been impressed by the analyst who has covered the company for a long time and the level of thought he’s put into our dialogue.”

Unsolicited but welcome. Another member said Fitch has rated his company on an unsolicited basis for more than a decade, but treasury treats the analyst no differently than those from other agencies.

  • “Same quarterly check-ins, annual business review and access to management,” the executive said.
  • One reason: The company wants to influence the narrative about itself to make sure it’s accurate and that “Fitch is not putting out stuff we don’t agree with.”
  • He added that Fitch has winnowed the list of companies it rates on an unsolicited basis over the years as its credibility has risen and more companies decide to pay.
  • “They have a good shop from what we’ve seen,” he said. “Our analyst there has been great—a very thoughtful, former sell-side analyst.”

Mixing industries. One member, whose company had acquired a business in a different industry, said the company’s longtime analyst at Fitch made a negative adjustment to EBITDA without fully understanding the new business.

  • The member, armed with advice from fellow NeuGroup members and his bankers as well as equity and debt research, was able to persuade the analyst—and the analyst’s boss—to check with a credit analyst covering the add-on industry about how best to gauge the EBITDA impact.
  • “Fortunately, we won that, because of the workaround—getting help from our friends here and our banks,” he said.
  • Another member suggested making sure that annual meetings with the rating agencies include an analyst covering an acquired company’s industry. “Just to make sure you’re not telling your story multiple times and nothing is lost in translation,” she said.
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Flying Higher: Moving ERM Beyond Safety Net to Strategic Partner

ERM is reaching new heights as risk exposures multiply and rising insurance premiums drive a search for options.

Enterprise risk management is having a moment amid a seeming explosion of risk exposures facing corporates since the pandemic began. And as the function grows in importance, at least a few ERM teams are heading toward inclusion in corporate strategy groups—a trend definitely worth watching.

  • One member at a late March meeting of NeuGroup’s Corporate ERM group said his goal since recently taking over the position “is to make ERM more strategic, to move it from ‘safety net’ to adding value.”
  • This means contextualizing ERM and company risks from a strategy perspective and making ERM “action-oriented,” or more proactive. “We want to change the mindset” around ERM, he said.

ERM is reaching new heights as risk exposures multiply and rising insurance premiums drive a search for options.

Enterprise risk management is having a moment amid a seeming explosion of risk exposures facing corporates since the pandemic began. And as the function grows in importance, at least a few ERM teams are heading toward inclusion in corporate strategy groups—a trend definitely worth watching.

  • One member at a late March meeting of NeuGroup’s Corporate ERM group said his goal since recently taking over the position “is to make ERM more strategic, to move it from ‘safety net’ to adding value.”
  • This means contextualizing ERM and company risks from a strategy perspective and making ERM “action-oriented,” or more proactive. “We want to change the mindset” around ERM, he said.

Strategic decisions. At some companies, a strategic approach to ERM is refining the decision-making process.

  • In a session on decision quality, the presenting member said that since business leaders and managers solve complex business problems every day, they need help making more informed decisions.
  • They can achieve this with a better understanding of the implications of strategic decisions and instill an “acute awareness” of resulting outcomes, intentional and unintentional.
  • One member joked that this was a good way of fixing mistakes before they’re made.

Where does ERM belong? Historically, one of the issues around ERM’s role within a corporate has been where it is housed and who runs the function.

  • Initially, when COSO (the Committee of Sponsoring Organizations of the Treadway Commission), elevated enterprise risk back in the early 2000s, it was seen as a way to reassure investors and credit ratings agencies. But it gave no indication as to where it should be housed.
  • As a result, ERM landed in a variety of places, including treasury, internal audit, compliance and sometimes legal. ERM’s placement within these functions meant the practitioner was usually doing it as a part of their regular job.
    •  For example, in treasury, the role often fell to an assistant treasurer.

Elevating ERM in treasury. Today, at some companies, ERM is being elevated to the top of corporate treasury’s to-dos. At a recent NeuGroup meeting of mega-cap companies, one treasurer said he now has responsibility for ERM in addition to everything else he’s doing.

  • The additional headcount and responsibilities are one reason his world has been turned “upside down,” forcing him to redefine his role and figure out how to split time between groups.

Another treasurer in charge of ERM said the function is now taking up significantly more time relative than debt capital markets, which has quieted down after a busy 2020. Today, business continuity management, weather and insurance risk are among his major priorities.

Eliminating check-the-box thinking. Several members of the ERM group said that when they took over the role, ERM had become a little too rote. “Aspects of ERM do lend themselves to a check-the-box setup,” said one participant. “Sure, you do your risk registers and scorecards,” but it needs to go deeper than that to achieve strategic value.

  • This is what many members and guests at the ERM meeting were attempting to do by infusing risk awareness into company culture. It’s no small task; one member said he’d tried to kickstart a company-wide risk awareness culture, but it didn’t take.
  • The first time around, his audience—risk owners and business unit heads—were enthusiastic about the concept of making risk awareness part of the culture. But in practice, they weren’t that active. “They were happy to see me doing the actual work,” he said.

Insurance. Rising insurance premiums are key to understanding some of the spotlight shining on ERM. Companies are looking at ways to spend less, and through this lens, ERM is seen as an exercise in knowing better which risks require an insurance policy and which can be mitigated through thoughtful application of good risk management protocols.

  • For instance, instead of shelling out cash for extensive coverage of a cyber-risk policy, why not analyze where the weaknesses are and mitigate them through increased vigilance?
  • “We’re a facing hard insurance market,” said one member of NeuGroup’s Treasurers’ Group of Thirty. “If there’s opportunity to revisit risk retentions, ERM can help put it into context,” a discussion this member’s company is having around ERM.

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Tapping the Power of In-house Banks to Turn Cash Puddles into Pools

Mega-cap treasurers and PwC discuss multiple benefits of IHBs and some complexities of structuring them. 

Treasurers not sold on the value of in-house banks (IHBs) often tell Damien McMahon, a partner at PwC, “We have cash pooling already, and therefore we have a kind of in-house bank,” he recently told a group of NeuGroup members from mega-cap companies.

  • In reality, though, many of the treasurers may have what Mr. McMahon called “cash puddles,” not cash pools.
  • PwC and treasurers from two member companies described turning dozens of small puddles into large cash pools by implementing truly global in-house banks at each company.
  • Among the takeaways from one of the treasurers: The cost savings made possible by the IHB are an added benefit to the bigger goal of achieving the increased efficiency and control IHBs bring to liquidity management.

Mega-cap treasurers and PwC discuss multiple benefits of IHBs and some complexities of structuring them. 

Treasurers not sold on the value of in-house banks (IHBs) often tell Damien McMahon, a partner at PwC, “We have cash pooling already, and therefore we have a kind of in-house bank,” he recently told a group of NeuGroup members from mega-cap companies.

  • In reality, though, many of the treasurers may have what Mr. McMahon called “cash puddles,” not cash pools.
  • PwC and treasurers from two member companies described turning dozens of small puddles into large cash pools by implementing truly global in-house banks at each company.
  • Among the takeaways from one of the treasurers: The cost savings made possible by the IHB are an added benefit to the bigger goal of achieving the increased efficiency and control IHBs bring to liquidity management.

IHB objectives. Mr. McMahon said one of the treasurers was adamant that the IHB maximize the centralization of the company’s liquidity “back to the US,” a key, but often elusive, goal for most treasurers. The company’s other objectives included:

  • Simplifying cash pooling structures to address cash fragmented throughout the company.
    • The other treasurer that worked with PwC said the biggest driver for establishing the IHB was turning more than 50 “puddles” into two large, centralized cash pools, allowing the investment team to achieve higher yields. “That dwarfed from a value point of view all the other benefits.”
  • Minimizing the number of banks and bank accounts by insourcing services, reducing the fees paid to banks.
    • “A lot of this is to pull away the reliance on third-party banks and bring most of that back in-house,” the first member said. Doing that will produce an 80% reduction in the number of banks the company uses and a 30% drop in physical banks accounts (see graphic below).
  • Centralizing global FX exposures. “There were some trades happening in opposite directions on different sides of the Atlantic and that wasn’t efficient,” Mr. McMahon said about the first client.
    • The other client’s treasurer said, “We ended up with a lower set of exposures we needed to hedge, so it reduced the notional on our balance sheet hedging program,” reducing fees and raising efficiency.
    • “And we reduced the number and volume of spot FX trades we did because of all the intercompany settlement,” another source of savings.
  • Building a scalable and future-proof infrastructure to automate and streamline processes, critical for large, high-growth companies.

Icing on the cake. “When I went into this project it wasn’t really about a cost savings overall; it was mostly looking for efficiencies and control,” the treasurer who reduced bank accounts by 30% said. “But what we did get was a big dollar savings and I think that came holistically, which was a great way to look at it.”

Other IHB benefits. Other members shared additional benefits their companies have reaped from IHBs:

  • Reduced credit exposure. One member called the reduction of credit exposure to banks made possible by his company’s IHB structure one of the biggest benefits. The company, he explained, has higher ratings than a majority of its banking partners.
    • “We’ve eliminated significant counterparty credit exposure” by being able to invest excess cash in US treasuries or prime funds, for example, He said. The company’s alternatives in countries including Argentina and Indonesia aren’t as “robust,” he added.
  • Tax. “There can be some huge tax synergies from this, depending on how it’s structured, where it’s located, etc.,” this treasurer said. “We have found this to be a real value-add both on a pre-tax as well as a tax basis.”
  • Cash ownership. Another treasurer noted that cash is a corporate asset managed by treasury, not business units. “By centralizing and aggregating everything up into an in-house bank or pooling structure, it kind of removes that business unit sense of ownership of that cash,” he said.

One big pool? One of the treasurers listening to the presentation asked what Mr. McMahon called the million-dollar question: “We have two cash concentration structures, one in the US and one offshore. And my big question is how do I get to one pool? How do I move that liquidity daily from our international pool? But if tax law changes I want to be able to unwind it quickly.”

Complexity. The answer is not simple, given that multiple tax, accounting, banking and legal considerations must be evaluated and the exact answer will depend on each companies’ unique facts and circumstances, Mr. McMahon said.

  • However, the two PwC clients found that the complexity could be reduced by establishing an international IHB entity and an overarching US IHB entity, he explained. Each consolidates the positions and settlements for their participants.
    • Liquidity flows can then be settled across these two entities, and participants can also settle global intercompany flows between each other in a controlled way via the IHB entities.
  • Both entities and their positions are managed using one single system and a standard set of processes and automations to take care of the detailed position keeping, accounting and reporting required to manage one combined global liquidity structure.
  • “It should be noted that a careful modelling and tax compliance study should be carried out to understand how much liquidity can be shared and what guardrails are needed to avoid adverse tax and accounting consequences,” Mr. McMahon said.
  • The added advantage of the two IHBs is that treasury can also have a ‘follow the sun” model of treasury support for the business as well as for global liquidity management.

Flexibility. As one treasurer remarked, this structure can also give the flexibility to efficiently manage tax compliance under both the existing tax rules enacted in 2017 and also any reversal or amendment of those rules passed during the Biden administration.

Good, not perfect. And the PwC client said while his company did not opt for the most efficient structure possible from a treasury perspective, “This is what makes legal happy, treasury happy and tax happy.”

  • Treasury and PwC evaluated three structures, each with sub-options. “We came to a realization that option 1 is the best. But within option 1, we have option 1a and option 1b that can still both work and that’s what we’re [working on] today.
  • “And we’re very close. We’re just about there to having the full structure in place.”

 

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Making the Devil’s Advocate an Angel on Your Shoulder

NeuGroup risk managers make space for contrarians to question decisions and combat overconfidence.

Rather than shunning contrarians for challenging conventional thinking, corporates need to make sure their decision-making processes always include a constructive devil’s advocate—someone who forces teams to consider all the ramifications of whatever action—or inaction—a company is contemplating.

  • This was among the key pieces of advice given by Michael Zuraw, head of enterprise risk management at ON Semiconductor, during a presentation on decision-making at a recent ERM-focused NeuGroup meeting. He said this best practice applies to all collaborative teams.
  • “Cognitive biases can occur at any link in the [decision-making] chain,” Mr. Zuraw said. “When you’re making a big decision, you need a contrarian thinker who says, ‘Why do we believe that? What if we’re wrong?’”

NeuGroup risk managers make space for contrarians to question decisions and combat overconfidence.

Rather than shunning contrarians for challenging conventional thinking, corporates need to make sure their decision-making processes always include a constructive devil’s advocate—someone who forces teams to consider all the ramifications of whatever action—or inaction—a company is contemplating.

  • This was among the key pieces of advice given by Michael Zuraw, head of enterprise risk management at ON Semiconductor, during a presentation on decision-making at a recent ERM-focused NeuGroup meeting. He said this best practice applies to all collaborative teams.
  • “Cognitive biases can occur at any link in the [decision-making] chain,” Mr. Zuraw said. “When you’re making a big decision, you need a contrarian thinker who says, ‘Why do we believe that? What if we’re wrong?’”

Designate the devil’s advocate. Mr. Zuraw recommends team leaders designate a team member to play devil’s advocate in meetings. “You need to be able to identify, and provide space for, the realist in the room,” he said.

  • “This is the one who’s going to do a check and keep you honest with yourself and is going to help you identify and recognize biases that can creep into your decision.”
  • One member had worked at a company whose culture discouraged contrarian positions, going so far as to not invite staff members who always added a wrinkle to the latest plan with an objection or contrary opinion.
  • To combat this, the company implemented an idea endorsed by Mr. Zuraw: A devil’s advocate rotation that allows everyone on staff to play the role. “So everyone learns the skill of asking those questions, and everyone recognizes that it’s not frowned upon, it’s a value-add to the process.”

Learn from mistakes. One member said his company had once passed on making an acquisition, a decision the team is still “haunted” by. The problem: a failure to consider the risk of not doing the deal left the corporate too hesitant to pull the trigger.

  • When opportunity arose again, a willingness to question themselves—as a devil’s advocate would—prepared the team to make a better decision, resulting in the company’s largest acquisition ever.
  • “It was an enormous risk,” the member said, but by considering all sides, he believes the company made the right decision. “We would not be able to be as effective and efficient for our customers without the acquisition,” he said.

An object in motion. Many teams with established processes have what one member called a “bias toward inertia,” where teams are set in their ways and have a resistance to making any changes—another reason to include contrarians unafraid to voice doubts and bring up any potential risk.

  • To further combat inertia and paralysis, Mr. Zuraw also recommends what he calls a “pre-mortem” meeting right in the midst of a process to take stock, challenge key assumptions and prevent overconfidence.
    • “Making no decision is as big of a risk as any decision you could make,” he said.
  • “I think the concept of a gray rhino is a good one, and that speaks to the need for a pre-mortem,” one member said. “There are natural disasters, but a lot of things that do happen people thought about [and] knew was on the horizon, but nobody spoke up.”
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Talking Shop: Who Is Allowed to Open Bank Accounts at Your Company?

Editor’s note: The NeuGroup Process brings members together to solve problems and answer each other’s questions in a variety of forums, including online communities for specific groups—one of many benefits of membership. Talking Shop shares valuable insights from these members-only exchanges (anonymously) with all members and NeuGroup Insights readers. We welcome your responses—and any questions you want answered: insights@neugroup.com.


Member question: “We are trying to do some benchmarking: Do your board resolutions allow the treasurer (and others?) to open bank accounts or is it just limited to the CEO and CFO?”

Editor’s note: The NeuGroup Process brings members together to solve problems and answer each other’s questions in a variety of forums, including online communities for specific groups—one of many benefits of membership. Talking Shop shares valuable insights from these members-only exchanges (anonymously) with all members and NeuGroup Insights readers. We welcome your responses—and any questions you want answered: insights@neugroup.com.


Member question: “We are trying to do some benchmarking: Do your board resolutions allow the treasurer (and others?) to open bank accounts or is it just limited to the CEO and CFO?”

Peer answer 1: “Our resolutions, and in some cases powers of attorney (depending on the locale/type of entity), all point to the treasurer as having this authority.

  • “I suppose technically our CFO could also, but in practice it just isn’t realistic for [the CFO] to be involved in those activities.
  • “We also took it a step further and implemented a specific policy statement as well stating that, in effect, only the treasurer can do (or delegate) treasury related things with the typical list of what those are.
  • “We did this to cover ourselves in those challenging geographies where local entity board members claim they cannot legally abdicate their authority to others to do things like open bank accounts.
  • “So our policy [basically provides air cover to prevent local management executives from doing anything that we have decided to limit to the treasurer].”

Peer answer 2: “We have a treasury committee comprised of our CFO, controller and me. For bank accounts, we need approval from two members of the committee.”

Peer answer 3: “Resolutions empower me and my cash management directors in addition to key executive officers. Two signatures, like others. Almost never CFO or CEO involvement.”

Peer answer 4: “Ours specifies the treasurer can open bank accounts, and we no longer even put the CEO or CFO as signatories to our bank accounts.”

Peer answer 5: “Our company only allows the CFO to open bank accounts.”

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Pricing Loans Using SOFR: Wait for Banks or Take the Initiative?

Members discuss the Libor-SOFR transition, including contracts and other non-treasury Libor exposures.

Regulators want corporates and their banks to price new loans and other financial exposures using a USD Libor-replacement rate such as SOFR by the year-end deadline—just nine months away. But who should take the lead in this transition—the banks or the corporates?

  • That question and other issues that companies confront relating to the move away from Libor arose at a recent meeting of NeuGroup for Capital Markets sponsored by Wells Fargo.
  • The bottom line: Members and banks still have a lot to do and must face some big unknowns.

Members discuss the Libor-SOFR transition, including contracts and other non-treasury Libor exposures.

Regulators want corporates and their banks to price new loans and other financial exposures using a USD Libor-replacement rate such as SOFR by the year-end deadline—just nine months away. But who should take the lead in this transition—the banks or the corporates?

  • That question and other issues that companies confront relating to the move away from Libor arose at a recent meeting of NeuGroup for Capital Markets sponsored by Wells Fargo.
  • The bottom line: Members and banks still have a lot to do and must face some big unknowns.

First movers. In terms of pricing loans over SOFR, members said banks were in the best position to move first, given the size of their balance sheets and the large number of loans they hold.

  • But while it may seem perfectly logical that banks should take the lead because lending is what they do, discussions among bankers at NeuGroup meetings make clear that it’s not that simple.
  • The banks say they aren’t ready, one member said. He added that banks in the UK voiced similar sentiments about pricing his firm’s debt over SONIA, the UK equivalent of SOFR.
  • “We just said, ‘We’re doing it, here are the terms,’ and they all signed up for it.”

Follow the leaders. Proactively searching for and resolving Libor-related issues can devour treasury resources, and members agreed that other market participants with broader and deeper exposures have greater incentive to lead the charge.

  • Among the players and participants seen as appropriate leaders are other corporates, banks, custodians and trustees.
  • “So we can be fast followers,” said one member, adding, “But as the date gets closer my anxiety is starting to build.”
  • Another member is actively pushing for a solution in the securitization market where his company is a major player. “The leaders in specific segments have to be thoughtful and help solve issues,” he said.

Non-treasury exposures. One member raised the issue of who beside treasury has been involved with determining companies’ total exposure to Libor.

  • One member said his treasury is coordinating the effort but, “We’re relying on support from other functionaries to go through the contracts.”
  • Another member said his team had anticipated finding USD Libor exposure in leases and procurement contracts across the company but was pleasantly surprised to find it limited mostly to treasury.
  • A corporate restructuring by one company prompted it to search for Libor among tens of thousands of contracts. Only a few involved Libor issues, including late fee rates on one-off supply contracts. The issue for peers, the member said, “is whether to find them or deal with the small tail risk when it comes up.”
  • Two companies found employee stock ownership plans (ESOP) with Libor-priced loans spanning decades that will likely have to be negotiated bilaterally, and another found exposure in its captive financing unit.

Term SOFR? One member brought up banks that recommend a daily average of SOFR with observation shift, adding wistfully, “It would be really nice if there was a [forward-looking] term SOFR.” Other members agreed but expressed some doubts.

  • One member mentioned insufficient liquidity supporting a term SOFR raising concerns about renewing a revolving credit over a daily-average SOFR, since “flip” clauses in credit agreements could change the rate to the term version before enough liquidity emerges. “An opaque market is what got Libor into trouble in the first place,” he said.
  • Another member recalled a Fed official saying at a recent ARRC meeting that a term SOFR could increase banks’ hedging costs, prompting them to avoid such transactions or pass on costs to corporate clients.
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Cut the Static: An FX Risk Manager Transitions to Dynamic Hedging

Standard Chartered guides a client to hedging that requires more analytics but aligns more with risk management goals.

The increased frequency of so-called black swan (or gray rhino) events roiling currency markets recently has more corporates establishing or revamping FX hedging programs designed to minimize earnings volatility. They face a host of decisions involving which exposures to hedge, timing, instruments and overall approach—static, dynamic or somewhere in the middle.

  • At a recent meeting of FX risk managers, sponsor Standard Chartered, along with a NeuGroup member that is a client of the bank, explained how and why the corporate shifted from a static hedging program to one that is dynamic—as well as the pros and cons of the company’s move and those of other approaches.

Standard Chartered guides a client to hedging that requires more analytics but aligns more with risk management goals.

The increased frequency of so-called black swan (or gray rhino) events roiling currency markets recently has more corporates establishing or revamping FX hedging programs designed to minimize earnings volatility. They face a host of decisions involving which exposures to hedge, timing, instruments and overall approach—static, dynamic or somewhere in the middle.

  • At a recent meeting of FX risk managers, sponsor Standard Chartered, along with a NeuGroup member that is a client of the bank, explained how and why the corporate shifted from a static hedging program to one that is dynamic—as well as the pros and cons of the company’s move and those of other approaches.

Static scorecard. Standard Chartered’s presentation described a static hedge execution style as one where a corporate hedges all its exposures at the beginning of the year, a simple approach with minimal execution costs.

  • The major downside of static strategies, though, is the year-over-year volatility they create, the bank said.
  • The NeuGroup member said the rigidity of the static approach also left the company “fully at the mercy” of markets and bank counterparties because hedging needed to be completed by a certain time each year.

Defining dynamism. To reduce volatility, better manage FX risk and allow treasury to take advantage of favorable markets, in the last year Standard Chartered has helped guide the corporate to a more dynamic approach.

  • The policy for forecasted cash flows prescribes hedge coverage levels for up to one year out. Now, though, the company is transitioning to a quarterly, layered hedging strategy, which also extends to forecasts beyond the one-year horizon.
  • In its presentation, Standard Chartered illustrated how a layered approach reduces quarter-over-quarter gains and losses from FX volatility.
  • The disadvantage of a dynamic approach is that it is more time consuming to track exposure changes and execute the resulting more frequent hedges. And the more flexibility you build into the program, the more time-consuming it becomes—which is why a decision framework is important.

Exception, not the rule. Today, the member is able to take several factors into account when deciding what to hedge, how much and when to meet established risk tolerance levels. That puts him among the one-third of members who said in an in-meeting poll that they can dynamically hedge their exposures; two-thirds of respondents have either no flexibility on timing hedge execution or some flexibility, but only within a month or quarter (see chart).

Exposure and confidence. The most important factor is confidence in the exposure forecast. For risk managers, higher confidence in exposure data allows a higher hedge ratio without risking over-hedging (important to avoid for hedge accounting reasons).

  • The company’s hedge ratios take into account the degree of certainty of forecasted exposures, while contractual exposures by their nature are more certain but may instead have some timing variances.
  • Balance sheet exposures should be “majority hedged,” according to the company’s presentation.
  • Its instrument tool kit includes outright forwards, swaps and NDFs, as well as options (calls, puts and collars).

A decision framework. Under the member’s new program, a decision framework helps determine which instrument or combination of instruments will be chosen to hedge at any given time.

  • Treasury has built a spreadsheet “monitor” that looks at market spot and forward rates, forward points (carry), at-the-money options premium and the 25-delta skew (call-vs.-put volatility differential), which can be compared to their three-year historical levels.
  • Backtesting shows how instruments have performed under different circumstances and can be used to support the instrument decision.
  • The team is allowed to take in-house views on currencies, supported by purchasing-power-parity (the long-term fair value of currencies) and other factors, tempered by bank forecasts. A caveat on research is to pay extra attention to very divergent views to see if the publishing date of the bank’s forecast might explain it.
  • Depending on the strength of the in-house view, collar strikes may be set to incur some premium cost (vs. a zero-cost collar) to capture potential for upside participation.
  • The performance or success of instrument choices is benchmarked against a strategy using only forwards.
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Fight and Flight: Bank Fee on SEPA Payments From UK Sparks Pushback

Corporates respond by moving accounts to other countries, pushing banks to drop the fee and lobbying regulators.

The number of banks charging corporates a fee for payments going from the UK to countries in the single euro payments area (SEPA) is growing, and some NeuGroup members are taking action to minimize the impact.

  • Echoing what treasurers in Europe reported at a recent meeting, the head of cash product at a UK-based bank said that “a lot more banks in Europe are now charging” the fee, including some large institutions.
  • One member is working with a bank (that does not charge the fee) to lobby regulatory bodies to limit these types of fees and deductions. “We view this as a fee grab in a post-Brexit world of financial services,” he said.

Corporates respond by moving accounts to other countries, pushing banks to drop the fee and lobbying regulators.

The number of banks charging corporates a fee for payments going from the UK to countries in the single euro payments area (SEPA) is growing, and some NeuGroup members are taking action to minimize the impact.

  • Echoing what treasurers in Europe reported at a recent meeting, the head of cash product at a UK-based bank said that “a lot more banks in Europe are now charging” the fee, including some large institutions.
  • One member is working with a bank (that does not charge the fee) to lobby regulatory bodies to limit these types of fees and deductions. “We view this as a fee grab in a post-Brexit world of financial services,” he said.

Quick background. Corporates began seeing these so-called fees for receipt in January, following the last-second Brexit deal finalizing the UK’s exit from the EU and the European Economic Area (EEA). Withdrawal from the EEA meant banks could start charging for receipt of SEPA payments from non-EEA accounts. 

  • This put the UK in the same category as Switzerland, which is also a member of SEPA but not in the EU.

Unacceptable or fair? In some cases, the receipt fee is deducted from the principal payment by the beneficiary bank. As SEPA payments are mostly used for payroll and suppliers, members said they find this “unacceptable.” When the UK was still in the EU, payments were protected from deduction by a regulation called the Payment Services Directive 2.

  • The receiving banks for payroll and supplier payments are chosen by beneficiaries, making it very difficult to change banks. That gives the existing banks pricing power, at least in the short-term, to charge new fees.
  • “What does SEPA membership mean, if it doesn’t mean the absence of fees?” said NeuGroup senior executive advisor and former banker Paul Dalle Molle. “Why should Switzerland and the UK be a member of SEPA if this is the result? It doesn’t make sense.”
  • One bank with a large European presence told NeuGroup Insights that these “new fees are likely being applied to compensate for the increased costs caused by Brexit for the banking system.” The bank did not say whether it charges the fee.

Fighting back. In some cases, members report success contesting the SEPA payment fee. “I advise [you] to challenge the fee with the bank, or find another bank,” one member said. He acknowledged that is an unsustainable solution for corporates that may use a UK-based account for payroll across the continent.

  • To get around the fees, multiple members who once used UK-based accounts for payroll have opened accounts in other locations across Europe, with Dublin and Luxembourg emerging as hot spots. However, migration could prove costly for a company with a limited number of accounts.
  • Another member has resorted to issuing wire transfers, which incur higher fees than SEPA payments but are more predictable and guarantee protection of the principal payment.
  • “Lobbying, using wires, switching to EEA-based remitting accounts and switching banks are all smart things to do,” said Mr. Dalle Molle. “When the European regulators hear complaints and see a drop in SEPA volume, they’ll go back to the banks and say, ‘What are you doing?’” 
  • US and UK-based banks are also developing solutions to resolve the issue. For example, one member is working with a bank to develop a technical solution—a monthly subscription in which the bank guarantees protection of the principal and eats the cost of SEPA fees.

Varying fee sizes. As the fees are applied in a case-by-case basis, the amount charged can also vary. Depending on the bank, this could be applied as a fixed fee or a percentage.

  • One NeuGroup member said the fee charged was around three euros. But another member said he was told a large payment would incur a fee of 600 euros, which he called “bordering on the completely ludicrous.”
  • Another member said that his company is also seeing a charge based on volume, which he called “outrageous,” though he is only seeing it from “a select few [banks], it’s not yet across the board.”
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Talking Shop: Payment Platforms; Supply Chain Finance; Bank Capital

Member question 1 (payment platforms): “We are having discovery calls with FIS, TIS and Fides to understand their value propositions.

  • “Our main pain points are having all sorts of e-banking portals, and arise when we onboard new entities (recently acquired) and penetrate new countries.
  • “Anybody having any experiences with the vendors listed? And suggestions how to best select (did you RFP this business?).”

Member question 1 (payment platforms): “We are having discovery calls with FIS, TIS and Fides to understand their value propositions.

  • “Our main pain points are having all sorts of e-banking portals, and arise when we onboard new entities (recently acquired) and penetrate new countries.
  • “Anybody having any experiences with the vendors listed? And suggestions how to best select (did you RFP this business?).”

Peer answer 1: “We have used TIS for some years now and are quite happy. They have a large number of banks in the system and it’s pretty easy to connect to these.”

Case study: NeuGroup Insights published an article on how TIS helped The Adecco Group. And watch this space for details about a NeuGroup virtual interactive session in May featuring TIS.

  • “However, we did make an amendment to the buyer joinder agreement to narrow the terms under which the direct debit may occur.
  • “It specifies that the debit is limited to amount in the payment instruction, or any obligation to pay an amount equal to any payment obligation, and so on.
  • “The SSC-A/P function then uses a clearing account process in SAP to ensure 1:1 matching to expectations.”

Member question 2 (supply chain finance): “[Our bank] is telling us that companies permit them to direct debit their accounts for supply chain finance (SCF) in EMEA due to ECB rules, and that that it is common practice.

  • “Is anyone else allowing direct debt in EMEA for SCF?”

Peer answer 1: “Yes, we are rolling out SCF in Europe and are allowing direct debit under [that same bank’s] process.

  • “However, we did make an amendment to the buyer joinder agreement to narrow the terms under which the direct debit may occur.
  • “It specifies that the debit is limited to amount in the payment instruction, or any obligation to pay an amount equal to any payment obligation, and so on.
  • “The SSC-A/P function then uses a clearing account process in SAP to ensure 1:1 matching to expectations.”

Member question 3 (bank capital): “I’m interested in getting some peer feedback regarding the internal monitoring of capital ratios beyond just the standard regulatory minimums.

  • “What types of reporting/tracking are people using? Are they utilizing multiple points of escalation based on various internal targets? Are the internal levels based on actuals, forecasts, both?
  • “If forecasts, what time frames are being used? How proscriptive is everyone when it comes to taking action based on dropping below an internal threshold?”

Peer answer 1: “We do monthly forecasts and ALCO where we report out actuals and provide an outlook for a few quarters (depending on the time during the year). 

  • “Our focus tends to be common equity tier 1 and tangible common equity ratios, although we also show ALCO leverage, tier 1 and total risk-based. Our TCE ratio limit is self-imposed at [a certain percentage].
  • “For all other ratios we set the limits at the defined ‘well capitalized levels’ plus 1.0% to serve as an early warning limit. 
  • “We also share our typical operating range of the ratio, which is higher. If we were to break a ratio, there is a process in place to discuss with the enterprise risk committee of the board and settle on a course of action to bring it back under compliance. This hasn’t happened since I’ve been here.”
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Beyond Deposits: An FDIC Fund Aims to Boost Equity Capital at MDIs, CDFIs

Mission-Driven Bank Fund will offer corporates a way to infuse equity capital in banks serving minority communities.

Corporations looking to make impactful investments in minority communities, but not through bank deposits, may want to consider a new partner: the Federal Deposit Insurance Corporation (FDIC)—the federal agency that insures deposits.

  • Representatives from the FDIC and a large asset manager that is acting in an advisory role described what’s being called the Mission-Driven Bank Fund (MDBF) at a recent meeting of NeuGroup’s diversity and inclusion (D&I) working group.
  • The fund, slated to launch later this year, will offer corporates a path to provide equity capital to minority depository institutions (MDIs) and community development financial institutions (CDFIs) that serve low- and moderate-income communities at higher rates than mainstream banks, the FDIC said.

Mission-Driven Bank Fund will offer corporates a way to infuse equity capital in banks serving minority communities.

Corporations looking to make impactful investments in minority communities, but not through bank deposits, may want to consider a new partner: the Federal Deposit Insurance Corporation (FDIC)—the federal agency that insures deposits.

  • Representatives from the FDIC and a large asset manager that is acting in an advisory role described what’s being called the Mission-Driven Bank Fund (MDBF) at a recent meeting of NeuGroup’s diversity and inclusion (D&I) working group.
  • The fund, slated to launch later this year, will offer corporates a path to provide equity capital to minority depository institutions (MDIs) and community development financial institutions (CDFIs) that serve low- and moderate-income communities at higher rates than mainstream banks, the FDIC said.

Equity capital’s multiplier effect. One advantage of infusing equity capital into MDIs and CDFIs is that an equity investment “helps mission-driven banks far more than deposits,” according to an FDIC slide (see chart, below).

  • Every dollar of equity capital invested, the FDIC says, can increase lending by a multiple of the original investment, while every dollar of deposits can only increase lending up to the amount of the deposit.  
  • The treasurer of a large technology company that is an anchor investor in the fund said, “We’ve looked at a lot of different ways [to invest], we looked at deposits, but we wanted impact. We feel like we’ve moved up.”
  • Because of regulatory requirements governing capital ratios, many MDIs and CDFIs need equity far more than deposits so they can increase the amount of loans they make to borrowers.

Facts and figures. Once the MDBF launches, the FDIC says, it will be run by an independent fund manager selected by the fund’s founding investors. The FDIC will not be an investor and will play no role in fund management.

  • The FDIC’s goals for the MDBF are initial capital commitments in the range of $100 million to $250 million and a target of $500 million to $1 billion when fully established.
  • Once selected, the fund manager will work with an investment committee to hear quarterly proposals from MDIs and CDFIs for potential investments. Those could include:
    • Direct equity
    • Structured transactions
    • Funding commitments
    • Loss-share arrangements
  • The FDIC says it is targeting “a minimal rate of return to investors, who can reinvest any returns in the fund or in aligned non-profit enterprises that support mission-driven banks.”

Investment policy changes? One NeuGroup member from a corporate that worked with the FDIC said the fund meets the company’s priorities. “Our primary focuses are risk, then impact, and then return, in that order,” he said. “The beauty is you get to do it all in one product. They do all the work for you instead of needing to hire a team.”

  • The company did have to change its investment policy to accommodate investment of equity capital. “Lots of corporations are unable to do equity, but it’s an important part of [our] portfolio,” the member said.
  • Another member said that as long as the investment aligns with the company’s stated values and mission, this kind of change isn’t too difficult.
  • But in a survey at the meeting, half the members responding said it would be either somewhat or very difficult to change investment guidelines to allow or create exceptions to make investments in MDIs or CDFIs in the form of equity capital.
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A Push in the Right Direction to Simplify Bank Fee Analysis

As bank fee statements slowly standardize, corporates and banks can work together to make the analysis process simpler.

Analyzing bank fees to uncover outliers remains a thorn in the side of treasury teams—in no small part because the banks code their fees and transmit the files to corporates in many different ways. And while standardization is improving, companies should keep the pressure on banks to bring more clarity to the opaque world of bank fees.

As bank fee statements slowly standardize, corporates and banks can work together to make the analysis process simpler.

Analyzing bank fees to uncover outliers remains a thorn in the side of treasury teams—in no small part because the banks code their fees and transmit the files to corporates in many different ways. And while standardization is improving, companies should keep the pressure on banks to bring more clarity to the opaque world of bank fees.

  • That was among the takeaways at a recent NeuGroup meeting of assistant treasurers who were joined by Larry Williamson, head of healthcare, corporate and investment banking at Societe Generale and Tonette Palencia, a cash management sales manager at the bank.

Forcing the issue. “It’s perfectly appropriate to guide banks in the right direction,” Mr. Williamson said. “In the context of selecting service providers, I would be highlighting that a key criteria and consideration is for banks to provide their billing information in the forms that work for you and in line with more of a universal standard.”

  • He added, “If I’m a corporate client, I’d be saying ‘We want our billing to look like this, are you able to do that?’”
  • Ms. Palencia cited the example of a client that requested the corresponding service codes to the products on their billing statement as part of their analysis to evaluate and compare their banking fees.

State of play. As it stands, many reports from banks in the US come in what’s called EDI 822 statements, an e-billing file standard that one member described as “pretty raw.” The member said companies “have to have special programs to ingest it, or some pretty sharp programmers to decode it.”

  • Ms. Palencia said that many banks base these statements on AFP service codes, but some might classify products differently from others, so it is “a lot to reconcile, and it takes a bit more on [a company’s] side to analyze it more in-depth.”

Hope in BSB reporting? Bank Service Billing (BSB), including the Twist and ISO 20022 standards (camt.086), offer more standardization globally, since EDI 822 is used only in the US.

  • “At some point, you want to get to a common utility, and Twist may be a part of that, with one single electronic database providing inputs from banks instantly,” Mr. Williamson said.
  • One member said some of the international banks he works with use the Twist format, which “is almost like an XML format, it’s a little more standard.” The member said Twist files still need to be run through a software tool “to make heads or tails,” though it can be as simple as analysis in Microsoft Excel.
  • Twist is based on AFP’s service codes but has closer to 800 options, which offers a measure of simplicity.
  • SocGen is working on a project to roll out BSB files more broadly. “Because we’re a European bank, that’s where most of our availability is,” Ms. Palencia said. “But a lot of the banks have also rolled it out.”

Third-party solutions. Members spoke highly of solutions from Redbridge and Fiserv, which can make the analysis process simpler but whose costs need to be evaluated in the context of how much savings they bring.

  • One member that uses Weiland BRMedge from Fiserv said the system is effective in tracking “pops” in fees. “We rely on it to find anomalies, and we go back to the banks to get those fees reduced,” he said. “It’s been helpful, but it takes a lot of time and effort to maintain and get up and running.”
  • Another member, after researching the market for a few months, has a contract to implement Redbridge’s HawkeyeBSB later this year. “We’re expecting to be able to see 60% to 70% of our bank fees globally,” he said. “It does almost all the work with all the statements, and we just take a look at the analysis.”
  • Mr. Williamson expressed surprise that corporates need these tools to navigate around bank billing systems. “In this world of digitization, we’ve still got banks thinking of requiring corporate clients to work around the inefficiencies of billing, which surprises me,” he said.  
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A Goldman Risk Management Tool Flying Under the Radar

FX risk managers talk up a Goldman Sachs solution called Capital Markets Atlas to measure value at risk.

To no one’s surprise, a recent meeting of NeuGroup FX risk managers included plenty of talk about well-known vendors of exposure identification solutions like FireApps and AtlasFX, FX trading platforms including FxAll and 360T, and a variety of ERPs and TMSs.

  • But not everyone in the large virtual room had heard of a self-service tool from Goldman Sachs that some members are using to measure value at risk (VaR). Making matters a bit confusing: the name of the solution includes the word “atlas.” As in Goldman Sachs Capital Markets Atlas, which is part of the firm’s broader Marquee platform.

FX risk managers talk up a Goldman Sachs solution called Capital Markets Atlas to measure value at risk.

To no one’s surprise, a recent meeting of NeuGroup FX risk managers included plenty of talk about well-known vendors of exposure identification solutions like FireApps and AtlasFX, FX trading platforms including FxAll and 360T, and a variety of ERPs and TMSs.

  • But not everyone in the large virtual room had heard of a self-service tool from Goldman Sachs that some members are using to measure value at risk (VaR). Making matters a bit confusing: the name of the solution includes the word “atlas.” As in Goldman Sachs Capital Markets Atlas, which is part of the firm’s broader Marquee platform.

Self-service VaR. Goldman marketing materials say Capital Markets Atlas provides clients with “independent access” to the bank’s risk and pricing models with tools that help them understand how “active markets impact exposures and solutions” using a web-based application that is free for the bank’s clients.

  • The first member to mention Goldman’s tool at the meeting emphasized the benefit for risk managers of being able to perform VaR analysis without waiting for a bank to do it for them.
  • “You can run it on a real time basis on your own,” he said. “You run analysis whenever you need.”
  • In an interview after the meeting, Ketan Vyas, managing director in Goldman’s corporate risk analytics business, said, “What’s new is that you can do it yourself.”

More member buzz. Another member said he was impressed by a demo of the tool late last year. “I perform a lot of risk analysis monthly and it seems like the [Goldman] tool may be more user-friendly/point and click,” he said. “I am not sure it is as robust as the tools I use, but seems like a solid starting place for analysis if nothing else.”

  • One risk manager asked peers to contact him if they are using the Goldman Atlas tool for VaR. “I’m super interested in your thoughts on it. We just started using it, and it has come very far from where it was two years ago,” he said.
    • Goldman added the VaR tool to Atlas in 2018; Atlas debuted in 2015.
  • “The GS Atlas system is about value at risk, which is modeling that helps to quantify the risk,” the member said.  So given risk profile A, what is the potential impact of B if nothing is done? This helps a corporate decide what risk to manage (helps us decide what to do),” he said after the meeting.

Risk decomposition. The tool includes what Goldman calls a “risk decomposition model” that uses “market forwards, volatility and historical correlation parameters to quantify VaR on an individual and portfolio level.” Goldman says this allows corporates to:

  • Identify optimal hedge portfolios to meet risk and hedging cost goals.
  • Track the key drivers of currency risk to target hedges more efficiently.
  • Compare multiple hedging strategies across an array of risk metrics.

Sample portfolio. Goldman’s marketing material shows how VaR provides valuable insights for risk managers about their portfolios.

  • As the table above shows, the Canadian dollar (CAD) and the Mexican peso (MXN) contribute the largest amount of risk on an individual basis to a sample portfolio. See the figures marked 1.
  • “But when considered in the context of the broader portfolio of FX exposures, CAD actually represents a much lesser risk (~24% of the sample company’s total risk instead of ~38% if calculated on an individual basis),” Goldman’s slide says. “And MXN represents a much larger risk (70% in the context of the portfolio vs ~39% on an individual basis).”
  • The large difference in the figures marked 2 is explained by the differing levels of volatility of the two currencies.
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Spring and Derisking in the Air for Defined Benefit Pension Plans

A strong stock market and higher interest rates plus regulatory relief bring smiles to some DB plan managers.

An upbeat mood befitting the beginning of spring prevailed at this week’s meeting of NeuGroup for Pensions and Benefits. With the yield on the 10-year US Treasury note rebounding to pre-Covid levels and equities trading in the vicinity of all-time highs, a summer of full funding is within sight for many plans.

A strong stock market and higher interest rates plus regulatory relief bring smiles to some DB plan managers.

An upbeat mood befitting the beginning of spring prevailed at this week’s meeting of NeuGroup for Pensions and Benefits. With the yield on the 10-year US Treasury note rebounding to pre-Covid levels and equities trading in the vicinity of all-time highs, a summer of full funding is within sight for many plans.

  • Below are takeaways distilled by NeuGroup executive advisor Roger Heine, who helped lead the meeting.

Derisking in fashion. Members at several companies did not stay on the sidelines—they jumped into the game by sticking to established policies to derisk as financial markets moved in their favor. More than one said their moves came after hitting glide path triggers.

  • These pension fund managers reduced equity exposure and increased fixed income, in some cases by using derivatives to move quickly with minimal transaction costs. 
  • Members are also well aware that some of the stocks within the big market indices such as the S&P 500 trade at bubble-level multiples, with investment managers steering clear of these potential reefs.

American Rescue Plan Act. More spring thawing arrived following the passage this month of the American Rescue Plan Act (ARPA).  Kevin McLaughlin, of meeting sponsor Insight Investment, described how alterations to complex funding calculations effectively mean no required pension funding for years to come.  

  • While this will particularly aid highly leveraged companies with big pension deficits, most of the NeuGroup participants with better funded plans really won’t be impacted.
  • These members indicated that their funding decisions are more driven by avoiding steep variable rate PBGC fees or potentially triggering tax deductions should corporate tax rates increase in the future.  
  • The ARPA also provides $86 billion to bail out qualifying multiemployer pension funds; but again, this has little impact on members except that these funds might compete for investment-grade fixed-income product down the road.

Covid mortality. In response to a member question, Mr. McLaughlin also addressed whether Covid mortality—approaching 550,000 in the US—will have any impact on mortality tables used to calculate pension liabilities.  

  • While there is a likely a onetime impact on liabilities, he said it is unlikely that there will be any material shift in life expectancy as negative factors such as deferred health screenings and weakened Covid survivors may be offset by better health practices and pharmaceutical breakthroughs following Covid vaccine innovations.
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Talking Shop: How Do You Use Counterparty Exposure Information?

Member question: “Does your organization review counterparty exposure? If so, how do you use this information?

  • “What exposure types do you include? Cash, bank products, derivative contracts, other?
  • “I understand that there are some organizations that set limits to how much exposure can be outstanding per counterparty. Does anyone have this practice in place?”

Member question: “Does your organization review counterparty exposure? If so, how do you use this information?

  • “What exposure types do you include? Cash, bank products, derivative contracts, other?
  • “I understand that there are some organizations that set limits to how much exposure can be outstanding per counterparty. Does anyone have this practice in place?”

Peer answer 1: “I monitor this frequently and have limits tied to my overall assets. Here are some items we look at for our liquidity providers:

  • Jurisdiction
  • Regulatory environment and views
  • Settlement process
  • Liquidity on their platform
  • Any policies and procedures that are shared; shared financials when applicable
  • Customer service, which is always a big one.”

Peer answer 2:  “We monitor our counterparty exposure closely, and formally review it at a leadership level at least once a quarter (part of our policy). We bucket our exposures into three different categories: operating cash, investments and derivatives.

  • “We have a pretty strict policy on investments/excess cash; so when monitoring/reporting, we’re making sure we’re within our global limits and call out any issues we have experienced or potentially could occur in the near future. We have many local markets that manage their cash directly, so we’re making sure we’re within limits from a global perspective.
  • “The derivative exposures are monitored from a collateral perspective and help when looking at new derivatives and deciding which banks we may choose to execute with. We don’t have a limit on the amount outstanding for derivatives; we just monitor to make sure CSAs are working as intended.
  • “The operating cash exposures are monitored differently as we’re required to have various bank accounts due to local market regulations. We don’t have a policy we’re adhering to for this section of cash but make sure we know where all our cash is—and where to focus first if something were to occur globally (Covid pandemic, financial crisis, etc).”
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A Risk Manager Leveraging Flexibility to Benefit from Volatility

FX meeting sponsor Standard Chartered: Hedge policy flexibility may decide if volatility is treasury’s friend or foe.

Volatility in foreign exchange, commodity and other markets sparked by the pandemic presented risk managers with challenges to their hedging programs. And while some corporates ended up with financial pain, others turned the volatility to their advantage.

FX meeting sponsor Standard Chartered: Hedge policy flexibility may decide if volatility is treasury’s friend or foe.

Volatility in foreign exchange, commodity and other markets sparked by the pandemic presented risk managers with challenges to their hedging programs. And while some corporates ended up with financial pain, others turned the volatility to their advantage.

  • At a recent meeting of NeuGroup for Foreign Exchange sponsored by Standard Chartered, a representative of the bank used the positive experience of one member to underscore the benefits of hedging policies that give risk managers flexibility in how and how much to hedge, and for how long.

What you need to take advantage. “The volatility we’ve seen has been advantageous,” said the member. “We’re coming at it from a different perspective.” Unlike many members who have long exposures, in most countries, the company “is short, selling dollars, buying local currencies,” she explained.

  • The member described her company’s hedging policy as “very flexible; we use forwards and options—zero cost collars.” Treasury also has flexibility in how much to hedge, all the way up to 100% of the company’s exposures.
  • There are “no stipulations,” and the company’s traders “develop their own strategies” for hedging, she said.
  • “Right now we’re experiencing positive OCI (other comprehensive income) and mark-to-market gains,” the member told peers. “This is a good story for us.”

Nimble and quick. Standard Chartered’s head of client analytics said that policy flexibility like what exists at the member company gives corporates the ability to be “nimble and quick,” adding that, “Volatility can be your enemy or your friend depending on your flexibility.”

  • In addition to a flexible policy, an efficient trade approval process for trades also allow risk managers to add “interesting hedges to capture the volatility and momentum” of markets roiled by news and events, she said.

Options in theory, not practice. It appears that most risk management teams have the policy approval to use options in their hedging strategies but do not use them. As the chart below shows, about two-thirds of the companies surveyed at the meeting said options are allowed at their companies but are not in use.

Why not options? In response to questions from Standard Chartered, members gave several reasons why they are not currently using options to hedge risk other than the cost of option premiums:

  • We have approval to use from an accounting, auditor and policy perspective. But there still seems to be a stigma against them internally. We are self-insured, and options often feel like insurance, so it’s a culture thing.  We just need a good business case to help us get to the finish line!”
  • “It’s a corporate governance issue; it takes time and effort to get approval, but we want to.”
  • “We’re trying to find the right time and haven’t found the right opportunity to dip our toes in.”
  • “Showing the value [to senior management] is the hurdle.”

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Racing to Change Horses: A Risk Manager’s Quick Switch to AtlasFX

An FX risk manager changed exposure ID systems and implemented the new solution in just three months.

Changing horses in midstream is never easy, but sometimes it’s the right move. One FX risk manager who did it explained to members of NeuGroup for Foreign Exchange the benefits of jumping off his existing exposure identification system and hopping onto AtlasFX—in an extremely compressed timeline of three months.

An FX risk manager changed exposure ID systems and implemented the new solution in just three months.

Changing horses in midstream is never easy, but sometimes it’s the right move. One FX risk manager who did it explained to members of NeuGroup for Foreign Exchange the benefits of jumping off his existing exposure identification system and hopping onto AtlasFX—in an extremely compressed timeline of three months.  

  • The time and effort spent making the switch under pressure paid off big-time. “We now have our dream state,” he said at a March meeting sponsored by Standard Chartered.  
  • The new solution has boosted the company’s exposure accuracy, leaving the FX team more time for “value-add” activities, he said. Changing vendors also resulted in significant cost savings.
  • The member started his presentation by thanking peers at two companies he called “early AtlasFX explorers.”

Quick pivot. One day last year, the member told AtlasFX that he needed to stick with his company’s existing exposure ID vendor for at least another year.

  • The next day, for various reasons, he reversed course, set up a meeting with AtlasFX and explained exactly what he wanted, after the company asked him to describe his ideal state.
  • About five days later, the member told AtlasFX that he was all in. Key to the decision was having confidence in the AtlasFX team’s ability to deliver the dream state and “confidence they could pull this off in three months,” the member said.
    • He had to make a go-no-go decision immediately or would have to renew the contract with the existing vendor.

Making the dream real. His dream included opening up AtlasFX to see foreign exchange exposure data from his ERP, SAP, and current hedges from his TMS, Reval. And he wanted the ability to click a button to approve and move trade actions to his trading platform, FXall.

  • Further, after trade execution, he wanted the info straight-through processed to both Reval (to book external trades) and AtlasFX, where intercompany trades would be automatically generated and sent to Reval.
  • “To pull it off, there needed to be connectivity between all systems,” he said. “SAP, AtlasFX, Reval and FXall—and a new, novel connection between AtlasFX and Reval to automate back-to-back hedging at FXall trade rates.”
  • AtlasFX made it all happen, giving the member the ability to execute the company’s balance sheet hedge program (see chart below) the way he envisioned.
    • “I honestly thought that dream would be impossible to achieve,” he said.
  • He said the extent of the exposure discovery and automation the FX team has with AtlasFX was not possible with the previous vendor.
  • The solution AtlasFX devised to solve the member’s connectivity and automation issues can now be used by other corporates that use the same ERP, trading platform and TMS, he added.

Domain expertise. The member’s presentation listed several other reasons his company decided on AtlasFX, including “domain expertise provided routinely throughout implementation.” He noted that the fintech’s founders have experience as treasury practitioners, and said its representatives “are risk managers like us, they speak the language.”

  • The reps, he added, “learn a company’s process when implementing the solution.” This paid off when the AtlasFX team suggested a simplification of the company’s settlement strategy for derivatives, helping the FX team better “distribute our workload,” he said.

Exposure determination technology. The member said AtlasFX has so-called query software that “adapts to changes immediately” in the company’s general ledger, saving hours of maintenance time each month compared to what was required before.

  • He said delays in making this type of change can mean treasury misses exposures, potentially resulting in insufficient or incorrect hedges.
  • While exposure determination is faster using AtlasFX, setting up the automation, interfaces and workflows making that speed possible “was definitely more complex,” the member said.
    • “That took some deep thinking and partnership between fintech vendors, and we had to involve our IT team for the connection to SAP data.”

Performance analysis. Using its previous vendor’s solution, the company was not able to successfully configure end-of-month hedging analysis to determine how well its hedges performed relative to actual accounting losses and expectations. “With our prior vendor, we were only able to get 25% of the process working,” the member said.

  • He said that with AtlasFX, 80% of the process was working within a month. His presentation read, “AtlasFX: In process of configuring and testing—we will get there!”
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Where Captives Fit in the Insurance Puzzle Corporates Want to Solve

Captives offer tax advantages and flexibility, but treasury teams must make sure trapping cash in them is worth the benefits.

Rising insurance costs are putting more focus on captives, a solution that offers tax advantages, flexibility and lower costs than traditional insurance.

  • For those reasons and others, several members at a recent meeting of NeuGroup for Retail Treasury said they plan to expand their captives to cover more risk.
  • Other members say captives are not a good use of capital for their companies.

Captives offer tax advantages and flexibility, but treasury teams must make sure trapping cash in them is worth the benefits.

Rising insurance costs are putting more focus on captives, a solution that offers tax advantages, flexibility and lower costs than traditional insurance.

  • For those reasons and others, several members at a recent meeting of NeuGroup for Retail Treasury said they plan to expand their captives to cover more risk.
  • Other members say captives are not a good use of capital for their companies.

The case for captives. “A captive brings a few benefits, and a few challenges,” one member said. “From a financial standpoint, managing the risk within the captive brings a lower general cost than translating those risks to a third party. There are some limits, but the day-to-day expenses for, say, worker’s compensation, can be lower.”

  • One retail treasurer whose company works on a franchise model said she had success with an offshore captive, which did a “bang-up job,” and proved a boon as insurance costs began to rise.
  • “Instead of paying premiums to the insurance company and the insurer keeping those profits, we are able to charge our stores individually for our expected losses; and when we didn’t reach those expected losses, we kept those profits,” the member said.
    • “Over a 10 year period, we were able to build up capital to increase our retentions, which minimizes the actual risk transfer insurance that we’re buying from an insurer, and we’re able to weather market swings much better.”
  • Members also discussed the non-financial benefits of captives, including a faster claims process and control over the standards used to handle claims.

Capital concerns. Saving on taxes and speeding up the claims process “may or may not be sufficient reasons to start up a captive,” one member warned. The big reason: captives trap capital.

  • “From a P&L perspective, [a captive] looks good, as it lowers tax expense,” another member said. “However, from a capital allocation perspective, we have trapped capital and it returns less than our WACC, and much less than the targeted ROIC we expect the business to return. So it’s not a good use of capital for us.
  • “It’s a capital allocation decision at the end-of-the-day,” she added. “You can allocate capital to the captive, to the business or back to shareholders. This would be a circumstance specific to each company.
  • “For instance, for us, many states do not allow us to self-insure workers’ comp without an insurance company backing the self-insurance. In this case, the captive acts in that capacity. We would need to analyze whether it’s worth the capital.”

Monitoring performance. To combat capital inefficiency, multiple members recommended incorporating routine strategic reviews, measuring a captive’s benefits against its cost.

  • During one of these reviews, one treasurer saw that a captive established before he had the job had more cash trapped than he found justifiable reduced the “static” balance in the captive by one-third without significantly impacting the captive’s tax benefit.
  • Another member learned during an internal review that the location of the company’s international captive was no longer viable due to recent regulation.
  • “The captive was set up because it could provide direct policies to some companies, saving us some fronting costs,” the member said. “Since recent policy has been implemented [in this country], we’ve found the capital requirements and solvency requirements overly burdensome.
    • “We undertook a study to see if there is a different domicile that we should be using for that risk and opened a new captive and shifted those policies over.”
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