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Spotlight Features

Reverse Repo: A Safe Haven for Cash Amid Financial Turbulence

What the FASB’s Supply Chain Finance Disclosure Rules Mean for Corporates

The Science of FX Exposure Management

Justin Jones
In Capital Markets, COVID-19, Treasury Management

Busting Talent Silos and Reading the Signs on Hong Kong

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

By Joseph Neu

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

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

By Joseph Neu

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

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

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

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

Payments Ownership by Treasury and Other Founder KTAs from GCBG 2020 H2 Meeting

By Joseph Neu

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

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

By Joseph Neu

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

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

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

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

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

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

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

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

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

Transforming Data Reporting and Analytics With a BI Tool

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Looking Beyond Libor: Engage Vendors, Expect Some Frustrations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Talking Shop: Methods for Pulling Cross Rates From Central Bank Published Rates

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

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

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

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

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

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

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

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Justin Jones
In Banking, COVID-19

Reality Check: Banks Dial Back PPP Loan Forgiveness Expectations

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

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

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

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

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

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

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

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

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

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

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

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Joseph Neu
In FX, Technology

Risk Managers Face an Inflection Point Without a Clear Direction

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

By Joseph Neu 

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

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

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

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

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

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

By Joseph Neu 

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

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

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

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

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

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

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

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

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

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

  • So, CFOs and treasurers would do well to determine a balance between power users that become builders and investing in sufficient, dedicated builder professionals to serve the needs of their important specialty functions.
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Justin Jones
In Cash & Working Capital, Investment Management, Risk Management

Weighing Reward vs. Risk, Cash Investors Make Moves or Hunker Down

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

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

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

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

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

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

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

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

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

Source: ICD

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

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

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

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

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

  • Another member, in the process of moving cash out of government MMFs and into demand deposit accounts, said he “hadn’t thought of going outside the credit facility.”
  • But, reflecting the range of risk appetite among companies, another member said he was staying away from bank deposits to avoid counterparty risk.
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Justin Jones
In Banking, Cash & Working Capital

Talking Shop: The Philosophy of Fees on Revolving Credit Facilities

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

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

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

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

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

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

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

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

Friedman, Profits and Treasury’s Role in Stakeholder Capitalism

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

By Joseph Neu

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

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

By Joseph Neu

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

Milton Friedman

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

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

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

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

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

  • This would be less true if politicians took seriously their fiduciary obligation to act in their stakeholders’ best interests in the same way that treasury professionals do.
  • That is, if they sought to do good via BAU and to measure success with real KPIs, if not profits.
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Justin Jones
In Banking, Libor SOFR

Excitement Borne of Frustration Greets Ameribor 30-day Term Rate

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

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

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

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

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

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

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

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

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

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

Talking Shop: Disclosing Option Premium Expenses in Revenues

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

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

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

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

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

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

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

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

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

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

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

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

ESG Transparency Goals Create Hard Resource Allocation Decisions

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

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

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

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

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

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

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

  • For example, certain frameworks recommend disclosing a company’s number of cyberbreaches, something the ESG officer said raised several questions.
  • “Number one, whether or not you ought to be disclosing that,” the executive said. “How an investor would look at that? What’s a breach? We all know that we’re all vulnerable every day and so some of those numbers aren’t remotely useful to an investor.”
  • One recommendation for navigating all the various disclosure frameworks: Determine what the quality of the data ought to be and allocate resources only to the most useful programs.
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Justin Jones
In COVID-19, Tax, Treasury Management

Auditors Eye Risks of Not Knowing Where Remote Workers Call Home

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

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

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

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

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

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

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

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

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

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

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

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

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Justin Jones
In Accounting & Disclosure, Banking

Pandemic Clouds CECL’s Impact on Corporate Loans and Lending

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

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

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

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

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

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

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

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

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

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

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

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

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

  • “It gives treasurers more to think about in terms of the accounting treatment of the bonds their companies are holding,” Mr. McPeak said, adding that “it could impact the types bonds these companies hold.”
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Justin Jones
In COVID-19, Technology, Treasury Management

Post-Labor Day Rethink: Reinventing Finance Teams and Redefining the Office

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

By Joseph Neu

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

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

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

By Joseph Neu

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

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

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

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

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

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

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

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

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

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

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

  • For starters, take the lessons of the last six months about your ability to access financing, success in generating cash flow, shifting to contactless points of sale, changes in investment portfolio diversification thinking and policy shifts of central banks.
    • Then, apply them to the next six to 12 months so your business better serves humans—your customers, investors, team members and other stakeholders—for the remainder of this crisis and beyond.
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Justin Jones
In Cash & Working Capital, COVID-19

The Road Beyond Recovery: Corporates’ Upbeat View of Working Capital Management

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • Many companies have a false sense of security, perhaps counting on further government support to weather the pandemic.
  • And the significant percentage of companies that anticipate being in growth mode within 12 months may be another reason for avoiding more sustainable changes.
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Justin Jones
In Capital Markets, COVID-19, Pension and Benefits

Wild Ride: Pension Fund Managers Describe a Rebalancing Roller Coaster Amid Pandemic

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

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

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

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

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

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

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

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

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

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

Blockchain’s Increasing Popularity Raises Internal Control Issues

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

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

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

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

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

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

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

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

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

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

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

Risk Assessment. Through this COSO-framework component, DLT reduces risk by promoting accountability, maintaining record integrity, and providing a record that is distributed to all participants simultaneously, so it cannot be denied or refuted.

  • But companies must consider risks more broadly, such as other parties in the blockchain network with different risk appetites and risk monitoring standards.
  • DLT also introduces the potential for new fraud schemes or new ways to carry out traditional ones.

Control activities. Blockchain and related smart contracts, which automatically execute, control, or document contractual events and actions, can significantly improve business efficiency by reducing human effort and fraud.

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Justin Jones
In Banking, Capital Markets, Investment Management

Ripple Effects: Will Institutional MMFs Start Waiving Fees to Stay Above Water?

Rock-bottom rates have pushed retail money funds to waive fees, and institutional funds may be next.

The Wall Street Journal this week gave prominent play to a story headlined “Money Funds Waive Charges to Keep Yields From Falling Below Zero.” That piqued our interest.

  • Money market funds (MMFs) are a staple of many treasury investment managers and an important product for many of the banks that help corporates manage short-term cash.
  • MMF yields have plummeted. Seven-day net yields for the average money fund slid to 0.05% in July from 1.31% at the end of 2019, according to research firm Crane Data, the Journal reported.

Rock-bottom rates have pushed retail money funds to waive fees, and institutional funds may be next.

The Wall Street Journal this week gave prominent play to a story headlined “Money Funds Waive Charges to Keep Yields From Falling Below Zero.” That piqued our interest.

  • Money market funds (MMFs) are a staple of many treasury investment managers and an important product for many of the banks that help corporates manage short-term cash.
  • MMF yields have plummeted. Seven-day net yields for the average money fund slid to 0.05% in July from 1.31% at the end of 2019, according to research firm Crane Data, the Journal reported.

Retail, not institutional. What theJournal story doesn’tsay is that the fee waiving is centered on funds aimed at retail investors, not institutions. Here’s what Pete Crane, President of Crane Data, explained at a recent webinar:

  • “Fee waivers are a big deal on the retail side, where money funds are basically having to cut their expenses by a percentage, or even in half in some cases, to keep yields staying above zero.
  • “Right now, two thirds of the funds out there are yielding 0% to 0.​01%, and one third of the assets. This is a simple average of asset weight; the big dollars are, of course, in lower expense funds. 
  • “The institutional assets have lower expenses so, they’​re not in that waiver boat nearly as much or if at all, as the retail funds.”

Portal pressure? We followed up with Mr. Crane to ask whether MMF platforms or portals used by some NeuGroup members have started to feel the effects of lower fees being borne by banks and brokerages.

  • “Portals should begin to feel some fee pressure as funds try and cut costs across the board to live with the new lower revenue environment,” he wrote. “A lot depends on how rates move going forward.”
  • Tory Hazard, CEO of the MMF portal ICD, said in an email, “The vast majority of institutional MMFs have yet to experience fee waivers this time around. However, it is expected fee waivers will become necessary in September to avoid negative net asset values. 
  • “When this occurs, fund companies and institutional distributors will share the cost to shield corporate investors from negative yields.
  • “At ICD, we are actively working with our fund partners to ensure minimal impact to our clients.”
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