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Chatham Financial Bolsters Euro Expertise with JCRA Acquisition

Chatham Financial recently announced that it has acquired a similar advisory firm headquartered in London, deepening its expertise in European derivatives and capital markets and related risk.

Chatham Financial recently announced that it has acquired a similar advisory firm headquartered in London, deepening its expertise in European derivatives and capital markets and related risk at a time when multinationals are mulling euro-centric issues like Brexit and negative rates.

Chatham has mainly grown organically and now has more than 650 employees worldwide, including 90 in its London and Krakow offices. The acquisition of independent risk advisor JCRA Group will increase its European staff by more than 50%, bringing on experts who, similar to Chatham’s staff, specialize in hedging and debt capital markets advice.

Chatham Financial recently announced that it has acquired a similar advisory firm headquartered in London, deepening its expertise in European derivatives and capital markets and related risk.

Chatham Financial recently announced that it has acquired a similar advisory firm headquartered in London, deepening its expertise in European derivatives and capital markets and related risk at a time when multinationals are mulling euro-centric issues like Brexit and negative rates.

Chatham has mainly grown organically and now has more than 650 employees worldwide, including 90 in its London and Krakow offices. The acquisition of independent risk advisor JCRA Group will increase its European staff by more than 50%, bringing on experts who, similar to Chatham’s staff, specialize in hedging and debt capital markets advice.

“One of Chatham’s purposes is to help make markets transparent, accessible and fair for all market participants. We’re excited about how, together with JCRA, we can have an even greater impact,” said Clark Maxwell, chief executive officer of Chatham.

Chatham pursued the acquisition primarily to increase its presence and breadth of expertise in Europe. At times it has competed with JCRA for business, but the firms tend to service a different corporate client base, according to Amol Dhargalkar, managing director at Chatham.

“The UK will remain one of the largest economies in the world and home to some of the most iconic and significant companies,” Mr. Dhargalkar said.

Sharing wisdom. Chatham has sought to apply the collective wisdom gained by serving thousands of clients in each engagement, enabling better, faster decisions. JCRA holds a similar philosophy with its mostly European client base, a benefit to Chatham’s existing customers dealing with issues impacting UK and eurozone derivative and capital markets.

“The merger will allow us to serve global clients facing challenges related to Europe even better, whether pricing on cross-currency swaps, nuances related to Brexit, negative rates, or accounting standard changes and the differences in applying US and international standards,” Mr. Dhargalkar said.

And technology. JCRA customers will, of course, have access to the collective wisdom of Chatham’s clients. In addition, the company has been one of the few firms providing advisory and operational support, as well as a technology platform supporting the accounting treatment, risk-analysis calculations and valuations for multiple asset classes. “We started our technology journey a long time ago and continually invested in it,” Mr. Dhargalkar said, adding, “Our combined team is excited to be offering the ChathamDirect platform and its capabilities to the European market.”

 

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Virtual Accounts—Not Ready for Prime Time?

 Notes from a discussion on a product that treasurers would like to use—when it’s truly ready.

A presenter from Societe Generale at a recent NeuGroup Global Cash & Banking Group meeting said this about virtual accounts (VAs): “Imagine a world where you can open and close accounts at a moment’s notice, set up zero balance account (ZBA) structures, and not deal with KYC. That’s where banks imagine virtual accounts to end up.” This is the ideal world. That is:

  • They’re like ZBAs in the US with all the reporting behind them, but they’re not real accounts; they exist on a book- basis only and can send money to all your entities.
  • One member has been told VAs will allow them to close approximately 2,000 bank accounts and cut account costs by 40%.
  • Could VAs work better than an in-house bank? Several members are looking at VAs as an alternative to IHBs.

Notes from a discussion on a product that treasurers would like to use—when it’s truly ready.

A presenter from Societe Generale at a recent NeuGroup Global Cash & Banking Group meeting said this about virtual accounts (VAs): “Imagine a world where you can open and close accounts at a moment’s notice, set up zero balance account (ZBA) structures, and not deal with KYC. That’s where banks imagine virtual accounts to end up.” This is the ideal world. That is:

  • They’re like ZBAs in the US with all the reporting behind them, but they’re not real accounts; they exist on a book- basis only and can send money to all your entities.
  • One member has been told VAs will allow them to close approximately 2,000 bank accounts and cut account costs by 40%.
  • Could VAs work better than an in-house bank? Several members are looking at VAs as an alternative to IHBs.

The real world: The first hurdle is payables. Certain banks can open a series of accounts down to four tiers and only take receipts. Banks are still trying to build out the payables side. And from the banks’ point of view, the greatest interest is in using the accounts for notional pooling.

  • One member said there is a reconciliation issue—intercompany loans are not trackable in an automated fashion and only reported on the physical account, a big limitation. Once that’s resolved, they could potentially have an automated loan process. Another member said the biggest implementation hurdle of the VA model is intercompany loans.
  • You can only open VAs in certain countries where the bank allows it, so they may or may not be compatible with your treasury structure.
  • One member has been attempting to get rid of bank accounts and implement POBO and ROBO by leveraging VAs in SAP. However, VAs have proven more painful than the company hoped.
  • SAP is the system of record. Unfortunately, banks in this process like to have their system be the record of who owes whom, “which doesn’t work for our business,” the member said.
  • Another member tried to do virtual accounts in India; the company’s first attempt didn’t go well.

VAs in China

  • One member talked to three banks and sees the potential beauty of using VAs for payments in China: When you pay into China, you must pay a beneficiary and not someone else, so the VA structure would work.
  • The problem: VAs are not allowed in China and are not accepted by the PBOC for payments. Cross-border payments for China are always physical.
  • Banks said they can do cross-currency, but the member would need a pre-agreed FX spread with them (usually not a good one).
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Concerns About the Transition from Libor to SOFR

Treasurers aren’t too happy about the fallback language for the Libor-to-SOFR switch.

Members at a recent NeuGroup meeting used some colorful language in discussing the challenging issue of changing fallback language in contracts that currently use Libor, the benchmark rate that’s scheduled to disappear after 2021.

The wording needs to specify what rate will replace Libor when it’s gone, what triggers the switch, and the pricing spread adjustment between Libor and the successor rate to account for differences between the two benchmarks.
Prepare for battle? One treasurer bemoaned the fact that regulators seem to “hope that people can agree” on the terms of fallback language and warned, “At worst, every contract could be hand-to-hand combat.”

(Editor’s Note–published November 29, 2019)

Treasurers aren’t too happy about the fallback language for the Libor-to-SOFR switch.

Members at a recent NeuGroup meeting used some colorful language in discussing the challenging issue of changing fallback language in contracts that currently use Libor, the benchmark rate that’s scheduled to disappear after 2021.

  • The wording needs to specify what rate will replace Libor when it’s gone, what triggers the switch, and the pricing spread adjustment between Libor and the successor rate to account for differences between the two benchmarks.

Prepare for battle? One treasurer bemoaned the fact that regulators seem to “hope that people can agree” on the terms of fallback language and warned, “At worst, every contract could be hand-to-hand combat.”

  • Behind that potential battle, of course, is the proposed transition in the US from Libor to the secured overnight financing rate (SOFR), a so-called alternative reference rate recommended by the Alternative Reference Rates Committee (ARRC). SOFR is a broad measure of the cost of borrowing cash overnight collateralized by US Treasury securities—the repo market.
  • A report from consultant EY describes issues that could fuel the combat: “The transition to [SOFR] may require renegotiating the spread due to the differences between LIBOR and [SOFR], such as credit and term premiums. If a bank comes up with its own approach for redefining the spread for its variable-rate instruments, the counterparties may find themselves on the losing end of the transition—which could lead to legal challenges and reputation damage.”

No term rates—yet. As an overnight rate, SOFR is not a direct replacement for Libor, which is typically quoted for one-, two-, three-, six- and 12-month terms. And one treasurer at the meeting said the biggest issue in his mind is the lack of SOFR term rates. He said when that issue is resolved, corporates will get serious.

  • But another treasurer noted that the ARRC has warned market participants not to wait for forward-looking term rates to develop before transitioning from Libor to SOFR.

Give your feedback. In early November, ARRC welcomed the release of a proposed publication of SOFR averages and a SOFR index. The New York Fed is requesting public comment on this so-called consultation by Dec. 4.

  • The consultation proposes the daily publication of three backward-looking, compounded averages of SOFR with tenors of 30, 90 and 180 calendar days. It also proposes a daily SOFR index to help calculate term rates over custom time periods. It plans to initiate publication of the averages in the first half of 2020.

SEC disclosure. In a final point about Libor’s demise, one treasurer noted that the Securities and Exchange Commission this summer gave guidance on responding to risks associated with Libor’s end. The statement says, “The risks associated with this discontinuation and transition will be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate is not completed in a timely manner. The Commission staff is actively monitoring the extent to which market participants are identifying and addressing these risks.”

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Cloud Accounting May Require New Controls, Impact Covenants

Treasury executives whose companies are relying more and more on cloud services should confer with their accountants.

Companies are increasingly choosing treasury management systems (TMSs) and other applications via the cloud rather than installing the software in their own data centers. The Financial Accounting Standards Board’s (FASB) new accounting standard aims make the accounting between the two approaches more similar by requiring companies to defer and amortize cloud-related costs rather than expensing them right away, as they do under current accounting.

“For companies that have these [cloud] arrangements, they will have to defer certain of those implementation costs to future periods, and that could impact some covenants, whether free cash flow, EBITDA, and other metrics,” said Sean Torr, managing director of Deloitte Risk and Financial Advisory.

Treasury executives whose companies are relying more and more on cloud services should confer with their accountants about new requirements that potentially could impact loan covenants as well as operational elements tangentially affecting treasury.

Companies are increasingly choosing treasury management systems (TMSs) and other applications via the cloud rather than installing the software in their own data centers. The Financial Accounting Standards Board’s (FASB) new accounting standard aims make the accounting between the two approaches more similar by requiring companies to defer and amortize cloud-related costs rather than expensing them right away, as they do under current accounting.

“For companies that have these [cloud] arrangements, they will have to defer certain of those implementation costs to future periods, and that could impact some covenants, whether free cash flow, EBITDA, and other metrics,” said Sean Torr, managing director of Deloitte Risk and Financial Advisory.

On the plus side, said Chris Chiriatti, audit managing director at Deloitte & Touche, some companies may have avoided software as a service (SaaS) solutions if there was a sizable initial investment because under current accounting they have to expense those costs immediately. “Now they can defer those costs, and it may open up opportunities to use the cloud,” he added.

Challenges. One of the more challenging aspects of addressing the new accounting, according to Mr. Torr, is that management must exercise judgment over the costs to be capitalized. In addition, internal controls will be required to ensure that the capitalized costs are amortized to the P&L over the appropriate term.

“Additional processes and controls may have to be put in place to correctly identify the costs that need to be capitalized under the new standard,” Mr. Chiriatti said. He added that since under existing accounting a lot of those costs were expensed as incurred, companies didn’t need processes to identify and scrutinize their activities.

New controls. Under the new standard, companies entering into cloud contracts frequently and those with decentralized organizational structures should consider whether internal controls are sufficient to handle all cloud arrangements. Additionally, organizations should consider internal controls to ensure management’s judgment is consistently applied and costs are being capitalized appropriately. If those judgments are being made in a decentralized fashion, “then the rigor of the control needs to be greater,” Mr. Torr said, adding that companies will also have to have controls around what information they disclose in financial statement footnotes.

Companies may already have frameworks in place to determine what gets capitalized or expensed if they’ve built solutions on premise. However, for companies that have aggressively pursued cloud solutions, the framework may have gathered dust and become outmoded. “So for those companies there might be additional work because they may not have the processes currently in place that they can leverage,” Mr. Chiriatti said.

Effective date. The accounting goes into effect Jan. 1, 2020, for any company currently deploying software to the cloud, buying cloud services or presently incurring cloud implementation costs. Companies can adopt the standard early for any quarters they have yet to issue financial statements for.

Lining up accounting practices. Mr. Chiriatti noted that from a functional standpoint today there’s little difference between a company using software in the cloud or in its own data center, and that was a major factor prompting the accounting standard-setters to conclude that the deferral model should be the same for both situations.

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The Value of Treasury Finance to Growth Company

Founder’s Edition, by Joseph Neu

When venture capital isn’t enough, you need a treasurer.

Growth companies looking to disrupt industries outside software and pure internet plays (which are already mostly disrupted) can have significant capital needs. This is why traditional venture capital needs to be supplemented with new types of investors and innovative ways to access capital markets. Given the cost of equity, pre-IPO, non-investment grade, un-rated companies needing capital have to be creative about debt financing.

Founder’s Edition, by Joseph Neu

When venture capital isn’t enough, you need a treasurer.

Growth companies looking to disrupt industries outside software and pure internet plays (which are already mostly disrupted) can have significant capital needs. This is why traditional venture capital needs to be supplemented with new types of investors and innovative ways to access capital markets. Given the cost of equity, pre-IPO, non-investment grade, un-rated companies needing capital have to be creative about debt financing.

This puts a new spin on the need for a treasurer with solid capital markets experience to serve as head of corporate finance for a growth-company CFO wearing multiple strategic hats. Growth companies that can’t afford to bring one in-house should have access to one on an on-demand basis.

That capital markets experience should include:

  • Wide-spectrum asset-linked securitization. Disruptive companies often have unique assets and monetization strategies to spin off cash flows that require a visionary mind that can bundle them into financial securities. They need finance talent with experience working on such problems, identifying opportunities and packaging them properly. These asset-linked financings may start with AR factoring, but quickly move to contracted revenue securitization, for example, and even rights to cash-flow streams from future data monetizations.
  • Relationships with debt financing innovators. Treasury’s role as chief bank relationship officer can also be useful, to the extent it includes meaningful connections with incumbent banks and bankers who go against trend to be innovative. Yet it also must include relationships with creative finance minds who’ve left the incumbents to join fintechs, capital advisory firms and investor groups. These relationships often are critical to getting needed funding or funding with a sub-10% cost of capital versus a 40%+ dilutive equity round.
  •  A contingency/opportunistic financing mindset. While most treasury professionals understand that the best time to arrange for financing is when you don’t need it, growth companies need to take this thinking to the extreme. They continually need to look to expand the number of current and contingency funding sources for the capital plan to keep growing as well as funding and liquidity options to tap to survive in a stress scenario or crisis event. 

But the treasurer also needs to be capable of executing the basics:

  • Expand the funding toolkit. “From the earliest stages of a startup, the finance team needs to think about expanding their financing toolkit so that the number of funding sources keeps growing, from 2-3, to 5-6, 6-10, to 16 or more,” says Kurt Zumwalt, former treasurer of Amazon.com and NeuGroup member who’s more recently been advising growth companies.
  • Build a bank group. Start early to build what will become long-term relationships. “As soon as you can build a traditional bank group, so much the better, as bank credit opens avenues to more sources of funding,” notes Neil Schloss, former treasurer of The Ford Motor Company and CFO of Ford Mobility (and NeuGroup member). Plus, more banks are thinking creatively about lending opportunities; so why not target those banks for your facility?
  • Instill a cash culture. Finally, a professional with treasury experience, especially in a high-leverage environment will appreciate the importance of free cash flow and instilling a cash culture throughout the business and finance operations.

NeuGroup can help connect you with one if needed.

Perennial value of free cash flow. Any form of debt financing requires cash flow generation to service it—and it helps if it is cash available after capex and other critical outlays. Equally important, as mindsets shift from revenue and user growth to profitability as drivers of enterprise value, the ability to generate free cash flow does more than improve firm borrowing capacity, it creates a better overall valuation, too.

This renewed focus on cash flow for funding a firm to reach its private value potential with debt and realize its full initial public market value should put treasury finance expertise in demand earlier at growth companies.

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Pushing Responsibility for Risk Gets Results

Sometimes you have to assign risk to reluctant BU leaders to get their attention.

Complying with internal audit’s requests isn’t always front and center in terms of business leader priorities. But prompting them to accept responsibility for identified risks can change that.  

In a lengthy discussion at a recent meeting of NeuGroup’s Internal Auditors’ Peer Group, members discussed the inadequate funding internal audit (IA) often receives to perform its function as well as the sometimes-low priority business leaders can give to complying with IA’s requests. The discussion was kicked off by one member noting that his company’s risk-committee chairman had challenged management to inform the board about the risks they’ll be accepting in the business. 

Sometimes you have to assign risk to reluctant BU leaders to get their attention.

Complying with internal audit’s requests isn’t always front and center in terms of business leader priorities. But prompting them to accept responsibility for identified risks can change that.  

In a lengthy discussion at a recent meeting of NeuGroup’s Internal Auditors’ Peer Group, members discussed the inadequate funding internal audit (IA) often receives to perform its function as well as the sometimes-low priority business leaders can give to complying with IA’s requests. The discussion was kicked off by one member noting that his company’s risk-committee chairman had challenged management to inform the board about the risks they’ll be accepting in the business. 

A plan is hatched. Recognizing an effective approach, the chief information security officer (CISO) sent an email to the COO, who had provided less funding than requested, to tell him he would have to accept responsibility for the ensuing risk. “Within a week the CISO received the funding,” the IAPG member said. 

  • The tactic can be effective across risk functions. The member said the board’s risk-committee chairman took a similar approach, requesting the heads of business units to present the risks they see to the committee. “It’s changing the conversation,” the member said.

Multipurpose use. Another participant noted that the approach can be used for a variety of situations, including IA’s perpetual challenge of seeking final closure from managers on audits that were completed quarters ago. By letting that time pass, the business leader is essentially telling audit that he or she is accepting the risk. 

  • “It boils down to the question: Are you taking an inordinate amount of risk or not, and if you’re accepting that risk, then explain to the risk committee why you’re comfortable with it,” he said. 

Of course, the business leader may respond that the identified issue is no longer a risk or question audit’s expertise on the matter and argue that it doesn’t pose a significant risk. Those are common challenges faced by IA, to which the member said that it is incumbent upon IA to help management understand the priority of issues—whether it’s a “drop everything and fix it now,” or a “do this when you have some time.”

Making it transparent. The first member added that his company typically gives the business the option to say by what date, from a priority standpoint, it will “mitigate” the issue. “This transparency goes up to the audit committee, which can then say, ‘The business says it will take two years,'” and management then has to defend that time frame. 

He added that regulators are raising questions about companies’ vulnerabilities, but corporate culture often passes the buck on taking on who is responsible in correcting or mitigating those weaknesses. 

  • “There needs to be that type of discussion about who has responsibility for these risks, and the audit committee needs to be in the firing line for these types of things,” the member said.  
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Companies’ Buyback Addiction and Other Capital Allocation Insights

Why share repurchases become a drug for companies.

Responding to questions about their capital allocation priorities, assistant treasurers at a recent NeuGroup meeting acknowledged “regurgitating the standard [capital] deployment line,” as one participant put it, after organic growth captured nearly half the votes and M&A ranked second.

Stock buybacks ranked last, even though much of the discussion ended up focusing on that use of capital, which may be a clearer indication of capital priorities. Key insights included:

Why share repurchases become a drug for companies.

Responding to questions about their capital allocation priorities, assistant treasurers at a recent NeuGroup meeting acknowledged “regurgitating the standard [capital] deployment line,” as one participant put it, after organic growth captured nearly half the votes and M&A ranked second.

Stock buybacks ranked last, even though much of the discussion ended up focusing on that use of capital, which may be a clearer indication of capital priorities. Key insights included:

  • Like a drug. Returning capital to shareholders through stock repurchase programs often starts out as a way to dispose of leftover cash in a meaningful way. But soon the programs become a key element to achieve a targeted earnings-per-share (EPS), and then whatever remains becomes the leftover. “It’s like a drug that you can’t get off,” said a participant. “I’ve seen that in company after company.”
  • Analysis of buybacks’ value varies greatly. One member said her team performs extensive analysis on whether share repurchases are providing adequate returns. Another member said that if repurchases are the last choice in capital deployment, then there’s not a lot of value from examining their returns, although some may want to maximize even the returns of leftovers. 
     
  • A signal to investors. For fast-growing companies, noted the assistant treasurer of a major technology firm, announcing that cash will go to repurchases instead of capex tells investors the company no longer has opportunities in which to invest, and its business model is changing.
     
  • Downplaying repurchases. A company whose acquisition opportunities come in “chunks” may see repurchasing shares as a good way to return money to shareholders and even out cash levels. To downplay the importance of buybacks in managing their EPS, they may report earnings before share repurchases. 

    They have that line item because that’s what they want investors to focus on, a member said.

S&P 500 as a benchmark. Several participants acknowledged their companies assume the money they return to shareholders will earn S&P 500-type returns, so if a company’s stock is outperforming the index, it should slow repurchases, and vice versa. One member prompted peals of laughter by asking whether anybody had ever heard their CFO say the company’s current share price made repurchases too expensive to continue.

Accountability for allocation decisions? Sort of. Responses to a survey question asking whether there is accountability for ensuring that capital allocations generate anticipated returns were 53% affirmative and 35% saying no.

But further discussion revealed that for most members, the answer rests somewhere in between. Their companies may have rigorous accountability policies, but given the long-term nature of significant investments, the relevant decision-makers often have left the company or are in very different positions. Monitoring too closely for accountability can stifle innovation.

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Shining a Light on Proxy Advisors as Activist Allies

Founder’s Edition, by Joseph Neu

Investors and corporates need to know about conflicts of interest when proxy advisory firms team up with activist investors against management. 

The former CFO of a company that successfully defended against an attack by an activist investor shared some key lessons learned from the experience at a NeuGroup meeting last week. Here’s a big one:

  • Management at even the most shareholder-friendly corporations must court passive investors to counter the inherent power of proxy advisors that support the activists. 

Founder’s Edition, by Joseph Neu

Investors and corporates need to know about conflicts of interest when proxy advisory firms team up with activist investors against management. 

The former CFO of a company that successfully defended against an attack by an activist investor shared some key lessons learned from the experience at a NeuGroup meeting last week. Here’s a big one:

  • Management at even the most shareholder-friendly corporations must court passive investors to counter the inherent power of proxy advisors that support the activists. 

A powerful duopoly. An editorial in the Wall Street Journal on Monday highlighted the power of the proxy/corporate governance duopoly. It reveals:

  • In­sti­tu­tional Share­holder Ser­vices and Glass Lewis con­trol 97% of the proxy ad­vi­sory mar­ket.
  • ISS pro­vides rec­om­men­da­tions to 2,239 clients, in­clud­ing 189 pen­sion plans, and ex­e­cutes 10.2 mil­lion bal­lots an­nu­ally on their be­half.
  • Glass Lewis, which is owned by the On­tario Teach­ers’ Pen­sion Plan and Al­berta In­vest­ment Man­age­ment Corp., has more than 1,300 clients that man­age more than $35 tril­lion in as­sets.

More: “Stud­ies have found that the two firms can swing 20% of votes in proxy elec­tions. An Amer­i­can Coun­cil for Cap­i­tal For­ma­tion re­view last year found that 175 as­set man­agers with $5 tril­lion of as­sets voted with ISS rec­ommen­da­tions 95% of the time. Ac­tivist hedge-fund in­vestors of­ten en­list the proxy firms to shake up man­age­ment, for bet­ter or worse.”

SEC scrutiny. This power has invited scrutiny from regulators. On November 5, the SEC voted to propose amendments to its rules governing proxy solicitations “to enhance the quality of the disclosure about material conflicts of interest that proxy voting advice businesses provide their clients. The proposal would also provide an opportunity for a period of review and feedback through which companies and other soliciting parties would be able to identify errors in the proxy voting advice.”

Allegations made by companies include:

  • Disparity in governance ratings given to firms that pay ISS or Glass Lewis for consulting vs. those that do not.
  • Conflicts of interest when proxy advisors are paid by activist investors or other institutional investors with an agenda.
  • Lack of adequate means to dispute proxy advisor recommendations and even to correct factual errors.
  • Poor transparency on shareholder vote counts, including point-in-time ownership and associated voting rights.

Of course, corporate managements only have themselves to blame if they don’t hold themselves accountable to governance standards—and increasingly to environmental and social standards for corporate behavior (E, S and G).

  • Still, companies that do all they can to be good corporate citizens and look out for shareholders (and all stakeholders) should expect a fair hearing.

Don’t wait. The best advice is not to wait for a proxy battle to tell your positive story. “We had heard that good investor relations was to be proactive to passive shareholders,” the former CFO speaking to our members said. Not only IR, but the C-suite needs to meet regularly with investors to share the company’s business strategy along with its ESG story. This is the best way to counter the proxy duopoly.

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Bank Account Rationalization: Taking a Page from Marie Kondo

One member’s approach to reviewing accounts, purging the inessential and optimizing.

A photo of a smiling Marie Kondo, author of The Life-Changing Magic of Tidying Up, helped set a positive tone for one member’s presentation on the thorny task of bank account rationalization. 

  • The treasury operations team’s embrace of purging clutter and keeping only what’s essential was fueled less by the desire to spark joy than the imminent, mundane chore of moving offices. That meant buckling down and weeding through each and every physical folder for every single bank account. 

One member’s approach to reviewing accounts, purging the inessential and optimizing.

A photo of a smiling Marie Kondo, author of The Life-Changing Magic of Tidying Up, helped set a positive tone for one member’s presentation on the thorny task of bank account rationalization. 

  • The treasury operations team’s embrace of purging clutter and keeping only what’s essential was fueled less by the desire to spark joy than the imminent, mundane chore of moving offices. That meant buckling down and weeding through each and every physical folder for every single bank account. 

Inventory overload. Taking inventory of bank accounts is an onerous task to say the least. In a quick poll of meeting attendees, about 95% of members have over 500 accounts, and only a handful have a formal bank account rationalization process. It is important to remember that a recently closed account can be just as important as an open one for audit and FBAR purposes.

  • Inventory checklists should evaluate the accounts’ ties to the overarching bank relationship, products and services, portal(s), and business/accounting purpose, usage and signers. 
     
  • To keep or not to keep, that is the question. With all the aforementioned information the question of “what do we do?” becomes easier to answer. The inventory process helps you discover accounts you may have overlooked and products and services you don’t use or aren’t using enough. And that drives decisions to help you achieve account optimization, improving efficiency.  

Leaner and nimbler. Starting with large amounts of bank account paperwork, the presenting company digitized bank account files for all open accounts and two years of previously closed accounts. Then it established an ongoing plan for maintenance as well as one designed for facing M&A integration projects. While recognizing that “no two integrations will be the same,” the focus is on keeping bank relationships but consolidating accounts wherever possible. 

  Pros:

  • Reduce administrative work, KYC, audit requests, online administration, account maintenance
  • Increase liquidity: concentrate cash balance, enhance and maximize yield on investable cash   

   Cons:

  • Time consuming up-front work
  •  Easy to accidentally overlook some bank products and services (example: letters of credit)

Cast a wide net and target end-goals. Involving all internal stakeholders such as tax, legal and payment operations allowed for transparency, educated account closures and keeping purpose-specific open accounts. The presenter advised other members that when tackling account rationalization in an M&A integration, the game plan should be established and clearly communicated, while being sensitive to human relations (i.e.: what is happening on the other side of the integration equation). 

Don’t forget where you came from. Unfortunately, bank account rationalization isn’t a one-and-done project. The presenter stressed that establishing timelines, setting milestone objectives and scheduling ongoing maintenance of the process is necessary for continued success. 

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Flying High with a Rare Bird: A Decentralized Treasury

The treasurer of a decentralized team says he’s more influencer than boss. And it works—for him. 

The corporate treasurer of a fast-growing, global holding company that owns multiple brands explained at a recent NeuGroup meeting that each brand has its own treasury team but that treasurers at the brands report to local CFOs—none of them have a formal, direct reporting line to him.

The treasurer of a decentralized team says he’s more influencer than boss. And it works—for him. 

The corporate treasurer of a fast-growing, global holding company that owns multiple brands explained at a recent NeuGroup meeting that each brand has its own treasury team but that treasurers at the brands report to local CFOs—none of them have a formal, direct reporting line to him.

  • Why. The member inherited this decentralized structure, which corresponds to a business model where each brand manages itself and the holding company, following an acquisition, strives to retain the company’s founding members and corporate culture. 
     
  • A rare bird. This structure is relatively rare among multinationals, stood in contrast to the other members at the meeting who have centralized treasuries, and struck some of them as far less than ideal.

What he does. The member sets goals for treasury, controls the banking group (“Strategy gets set at the top of the house with me,” he said.) and establishes risk tolerances for this high-growth company.

Why it works. The member, who has decades of experience and has worked at world-class companies with centralized treasury models where the treasurer is boss, says in his current role the word that best describes him may be influencer. He says this model works not only because of his skills and background but because of his ability to listen. 

  • “I have been successful in doing this using strong influencing skills,” he said. “But another treasurer who needs formalized reporting lines would not find the same success.”
     
  • He works closely with the treasury teams at each brand and admits he confronts pushback at times and sometimes loses when pursuing an initiative. 

The bottom line. The treasurer emphasizes that ultimately, it’s not the structure or process that determines success—it’s having the right the people in leadership positions. That applies to him and all the people he works with in treasury. 

  • “I do not advocate for centralized or decentralized,” the treasurer said. “Instead I have tried to adapt and maximize the effectiveness of our strategy based on the company’s overall structure, which is decentralized.”
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We’ll Get to Libor Later

Two surveys say nonfinancial firms are falling behind in Libor transition efforts.

Nonfinancial companies are taking a passive approach to prepping for the transition away from Libor, relying heavily on their banks and other financial firms to carry most of the burden. According to recent surveys, however, the financial community is lagging.

In its recently published “Liboration: A practical way to thrive in transition uncertainty,” Accenture spells out financial services firms’ lackadaisical efforts toward the transition, even though regulators have reinforced that they will no longer support the benchmark past 2021.

By John Hintze

Two surveys say nonfinancial firms are falling behind in Libor transition efforts.

Nonfinancial companies are taking a passive approach to prepping for the transition away from Libor, relying heavily on their banks and other financial firms to carry most of the burden. According to recent surveys, however, the financial community is lagging.

In its recently published “Liboration: A practical way to thrive in transition uncertainty,” Accenture spells out financial services firms’ lackadaisical efforts toward the transition, even though regulators have reinforced that they will no longer support the benchmark past 2021.

A survey of firms in the private equity, real estate and infrastructure sectors also found laggards. Conducted by JCRA, an independent financial risk advisory firm, and law firm Norton Rose Fulbright, it found that just 11% of derivative users in those sectors believe their Libor-referencing contracts contain provisions appropriate for the benchmark’s permanent discontinuation.

Furthermore, 38% of respondents described contract renegotiations to accommodate Libor’s discontinuation as “not having started,” while 26% said they were a work in progress, and 23% had yet to identify which contracts require amending. No respondents said they had completed renegotiations.

The seemingly less than urgent approach is of critical importance to corporates, which Accenture concludes are relying heavily on their financial services firms to aid their own transitions. Its survey describes numerous areas in which banks are lagging that corporate customers may want to inquire about:

  • Transition plans. More than 80% of survey respondents reported having a formal transition plan, but only 59% said they had a unified and consistent transition and remediation approach. Only a quarter of respondents plan to allocate funds to product design over the next three years, and just one in seven plans to invest in technology and one in ten in legal remediation, areas directly impacting customers and which Accenture calls critical to an effective transition. As far as corporates relying on their banks to hold their hands through the transition, the survey found less than a tenth of respondents expect to fund client outreach activities.
  • Preparedness. While 84% of respondents reported having a formal transition plan in place, only a third said those plans had been in place for more than a year. The survey found only 18% of respondents describing their plans as mature. In addition, “lower-level planning of granular detail and transition activities appear to have only begun in earnest in 2019,” despite regulators’ warnings since the summer of 2018.
  • Talent and capabilities. Only 53% of survey respondents reported having the necessary talent or capabilities to complete their transition by the end of 2021, the point after which Libor is likely to become “unrepresentative” of bank borrowing costs. And only 47% claim to have sufficient funding to support their Libor initiatives.
  • Pertinent to corporates. Accenture notes that “Banks and financial firms should also expect increased demand for information as the transition progresses and be prepared to provide updates on stress tests and risk forecasts as well as evidence of the changes put in place across the business and technology area to facilitate the transition.”
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Prepping Pensions for Potentially Perilous Periods

Managers of frozen or closed pension funds need to be prepared for transitional periods. 

Managers of pension funds on a decumulation journey (with more cash flows going out of the plan than coming in) need to be wary of the different dynamics in this stage of the savings cycle. Investors are more vulnerable to shocks and more susceptible to forced selling, all with a greater time dependency on realizing returns.

This is particularly true during periods of major, rapid, institutional transitions that Abdallah Nauphal, CEO of Insight Investment, calls “interregnums,” which can create increased volatility in asset markets. Mr. Nauphal shared his views at our Pension and Benefit Roundtable, sponsored by BNY Mellon, of which Insight Investment is a part.

What to do?

By Joseph Neu

Managers of frozen or closed pension funds need to be prepared for transitional periods. 

Managers of pension funds on a decumulation journey (with more cash flows going out of the plan than coming in) need to be wary of the different dynamics in this stage of the savings cycle. Investors are more vulnerable to shocks and more susceptible to forced selling, all with a greater time dependency on realizing returns.

This is particularly true during periods of major, rapid, institutional transitions that Abdallah Nauphal, CEO of Insight Investment, calls “interregnums,” which can create increased volatility in asset markets. Mr. Nauphal shared his views at our Pension and Benefit Roundtable, sponsored by BNY Mellon, of which Insight Investment is a part.

What to do? Part of the answer for investors is to focus their investment strategies on achieving specific outcomes rather than focusing on short-term volatility. This can only be done if pensions have a strategy in place to manage their cash flows ahead of time.

Pension plan solutions need to be tailored to individual plans’ situations. For example:

  • Add certainty. The better funded a given plan is, the easier it may be to design a strategy to maximize the certainty of meeting its objectives, e.g., minimizing funded status volatility.
  • Add resiliency. For plans that are significantly underfunded, it also becomes important to find ways to increase the resilience of the overall portfolio construction/asset allocation.

This is consistent with what I wrote at the start of the year in that now is the time to think about resiliency, or what Nassim Taleb calls being anti-fragile.

In case you’re curious, the road map Mr. Nauphal laid out for the current interregnum would look like this (see graphic on page 1):

  • The key developed economies move from exploring the limits of monetary policy to pursuing a monetized fiscal expansion: “Governments are prepared like never before to intervene in our economies,” he noted, but this activism may not stave off a crisis.
  • Monetizing the fiscal expansion leads to inflation.
  • Inflationary conditions lead to a crisis from which a new order emerges.

So, let’s hope the new order that emerges is an extremely prosperous one—e.g., an Industrial Revolution 4.0 that’s fueled by smart machines and AI—and the crisis that it begets is not too painful. Meanwhile, more of us will want to get on the glide path that guides us through the current interregnum.

Negative-Rate Concerns Spread to Pension Funds

Although the likelihood of negative interest rates in the US still seems remote, in Europe they’ve been a reality for several years, and pension funds are now grappling with what that means.

In another discussion at the Pension and Benefits Roundtable, the head of pension investments at a multinational corporation (MNC) with several European funds noted it will be the first time in his company’s history that it will have to use negative interest rates to value liabilities, specifically in a Swiss fund. He noted looking at IFRS accounting rules that apply to European companies and concluding a negative number must be used in those calculations, “even though it doesn’t sound right. You promised a $100 pension to someone, and you knew it wouldn’t be more than that, but today you have to say that my liability is $105.”

Falling rates are no fun either. Other participants noted that falling rates, even if not yet negative, are also problematic given the growing pressure they put on banks, and ultimately their services. One noted the impact of falling rates on her company’s P&L and said her team is now concentrating on manager searches and debating the value of passive versus active managers. “Do we think active management would provide us with a bit more of a defensive posture, in our equity lineup?” she said.

Cutting costs. The topic of centralizing pension plans across European countries arose during the roundtable, to enable pensions facing the challenge of negative rates to cut costs while potentially smoothing out imbalances when some of an MNC’s funds across different countries are well funded and others in the red. A participant noted that Belgian law permits pooling pension-fund assets, and his team has considered the move with respect to funds in smaller European countries—Belgium, Austria, etc.—but the complexity has hindered progress. “We don’t see blending Germany and the UK, Switzerland and the UK, or those in other large countries,” he said.

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Cyber Risk Committees and Related Governance Tips

Founder’s Edition, by Joseph Neu

Cybersecurity is now a board-level risk and that might justify a board-level cyber risk committee, NeuGroup members said during our recent Internal Auditors’ Peer Group meeting. 

In a discussion about cyber risk and a tangential conversation on separate audit and risk committees, chief audit executive members from tech and other IP-intensive firms highlighted the issue of cybersecurity expertise and experience at the board level. Directors on most audit or risk committees don’t necessarily have this specialty expertise in their backgrounds.

Founder’s Edition, by Joseph Neu

Cybersecurity is now a board-level risk and that might justify a board-level cyber risk committee, NeuGroup members said during our recent Internal Auditors’ Peer Group meeting. 

In a discussion about cyber risk and a tangential conversation on separate audit and risk committees, chief audit executive members from tech and other IP-intensive firms highlighted the issue of cybersecurity expertise and experience at the board level. Directors on most audit or risk committees don’t necessarily have this specialty expertise in their backgrounds.

  • Don’t wait for the mandate. While other specialty areas of expertise, e.g., finance, have been mandated, cyber risk is too important to leave off the list of desired qualifications for board of director recruiting.
  • A dedicated cyber risk committee would help with recruiting. Forming a separate committee for cyber risk would help focus minds on recruiting such directors. It would also elevate the CISO or Infosec head with a board committefe reporting line.

Separating the chief information security officer (CISO) or information security reporting lines from the chief technology officer or IT function was also a takeaway for several members. The reason: 

  • It’s too easy for the technology group to allocate budget away from cybersecurity-related projects to favor shiny-object, customer-facing or revenue-generating technology spend. 

Some firms thus have CISO/InfoSec reporting into the CFO if there is no CRO instead, but: 

  • A CISO/InfoSec reporting line to the chair of the board’s cyber risk committee would give them that much more autonomy. 

If you’re looking for a driver to push this initiative, look no further than the SEC’s  Commission Statement and Guidance on Public Company Cybersecurity Disclosures, which came out in February 2018. In the wake of Equifax and other breaches, the SEC had felt an increasing need to issue guidance on disclosures because senior executives were found to have sold company shares during the period when they were aware of an incident, but before it had been publicly disclosed.

Generally, once specific risk factors are called out for disclosure the need for governance of them also rises. The SEC guidance includes the following on board risk oversight:

  • Current SEC regulations “require a company to disclose the extent of its board of directors’ role in the risk oversight of the company, such as how the board administers its oversight function and the effect this has on the board’s leadership structure.” How does it look if the board doesn’t have cyber in one of its committee’s mandates?
  • Such disclosures “should provide important information to investors about how a company perceives the role of its board and the relationship between the board and senior management in managing the material risks facing the company.” This is where the reporting line to cyber risk head comes in.
  • “To the extent cybersecurity risks are material to a company’s business, we believe this discussion should include the nature of the board’s role in overseeing the management of that risk.” Yes, cyber risk counts as important!
  • “In addition, we believe disclosures regarding a company’s cybersecurity risk management program and how the board of directors engages with management on cybersecurity issues allow investors to assess how a board of directors is discharging its risk oversight responsibility in this increasingly important area.” Outlining the program in SEC reporting is one thing, but investors and regulators will also naturally look into the qualifications of the directors charged with cyber risk oversight.

Have you done your due diligence on the need for a cyber risk committee? Hint: Consider rolling privacy into their mandate, too.

Rolling in the Deep (Data)

As a related issue, data and data privacy are other areas that boards are going to need to have some knowledge of, particularly when it comes to requirements for last year’s general data protection regulation – GDPR – and now California’s similar California Consumer Privacy Act (CCPA).

Data collection, storage and management, as just about every corporation is learning (in some cases, the hard way), is critical to success. Like blood it needs to course through the company’s veins in order to stay competitive. However, if there’s a breach and that data starts pouring into cyberspace, it could cost the company dearly. That’s why governments are stepping in.

Both GDPR and CCPA are regulations that require companies to get a handle on their sprawling data troves, make sure they are secure and be ready when someone – the “data subject” – wants their personal data purged from wherever the company holds that data.

As IAPG members learned at their recent meeting, complying with the data subject part isn’t that easy.

  • What is personal data? What is personally identifiable information? GDPR thinks of them as two distinct things – but both critically important. And who will manage it all? The DPO of course. If your company doesn’t have a data privacy officer already, then it should be looking for one posthaste.  

But even with the best data organizing efforts, total control is elusive. As a presenter at the IAPG meeting pointed out, “100% GDPR compliance is an illusion.”

  • That’s because there are “many systems, files, hard copies containing personal data. Think about the human resources archives, systems backup and archives, one-time used Excel work files, etc. There is no company that has a complete and accurate inventory of personal data,” he said.

Nonetheless, companies should be able to show that they are making a solid effort. 

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Containing the Cost of Hedging

Zeroing in on the cost of carry can help companies get a handle on hedge costs.

Volatile markets require an effective hedge program while ensuring the cost is reasonable for the level of risk reduction. At a recent FX Managers’ Peer Group meeting, in a session co-led by a member and a sponsor’s risk advisory team, the group pondered ways to contain the cost of hedging and the trade-offs.

Zeroing in on the cost of carry can help companies get a handle on hedge costs.

Volatile markets require an effective hedge program while ensuring the cost is reasonable for the level of risk reduction. At a recent FX Managers’ Peer Group meeting, in a session co-led by a member and a sponsor’s risk advisory team, the group pondered ways to contain the cost of hedging and the trade-offs.

A critical takeaway was that one of the first things practitioners must do is to consider the cost of carry. This is determined by the interest differential between the two currencies in the hedge (this, rather than basis spread, is the main driver of carry cost). In the currency market environment at the time of the meeting (September), that would indicate favorable hedge costs for long G10 exposures (ability to lock in a hedge gain with a forward contract) while hedging emerging markets (EM) currencies the same way would result in a loss. For companies with primarily short FX exposures, such as the presenting FX member, the scenario would be the opposite.

What’s your hedge “value for money?” Another way to view cost is using the ratio of dividing the carry gain or loss by the implied volatility for the considered hedge period. The higher that ratio is, themore value for money it is to hedge that currency risk. This ratio varies over time and can often tip from favorable to unfavorable, especially in EM currencies. And, the more volatile the currency, the more the timing of the hedge transaction matters.

What about correlation? Members were shown how the carry cost of developed markets (DM) currencies were strongly correlated to 3-month USD Libor where carry cost of EMs were not. Not only that, but because short-term rates are linked to economic cycles and central bank policies, forecasted rates changes are, more often than not, better indicators than forward curves. As one banker noted: “It’s good to look at forecasts, because banks are not always wrong.”

What’s the implication for corporate hedging? Because of correlation effects, offsetting exposures generally benefits those with both long and short exposures. For one member who revealed primarily short FX exposures, it pays to consider groups of currencies more, in this case DM/G10 vs. EMs. In periods like those of the last 12 months, when EM currencies have been negatively correlated vs. the USD, and the size of the exposure relative to the G10s is lower, there is a case for little to no hedging, unless a gain can be locked in from the get-go. For more material exposures (G10 for this company) where the correlations are also higher, a more careful approach is needed when the FX team is also mandated to contain the cost of hedging.

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Fishing for Clarity: Murky Bank Fees and Whether to Pay to Reduce Them

Why paying for performance when trying to cut bank fees may not hold water.

The pain point of bank fees is not significant enough to justify paying vendors who promise to analyze and reduce them on a performance basis. This was the consensus of NeuGroup members discussing bank fee management—one of their top priorities—at a recent meeting. 

Why paying for performance when trying to cut bank fees may not hold water.

The pain point of bank fees is not significant enough to justify paying vendors who promise to analyze and reduce them on a performance basis. This was the consensus of NeuGroup members discussing bank fee management—one of their top priorities—at a recent meeting. 

While in theory it might make sense to pay a contingency fee based on how much a vendor saves a company, treasury operations managers are understandably reluctant. 

  • “We pay our banks a lot in fees, so paying a vendor a percentage of savings would amount to a significant payout,” one NeuGroup member said recently. 
     
  • Charging 30% of the savings as payment—what one vendor making the rounds has been quoting—is too high.

On a pure cash outflow basis, treasury has some idea of what it’s paying banks, but the full picture is murky since much of what banks earn off each client in the transaction banking realm is embedded in foreign exchange and interest-rate spreads. Indeed, sometimes an effort to reduce visible fees can lead to uneconomic decisions.

  • If your bank fee analysis vendor has an incentive to reduce fees, they may do so at the cost of better interest or FX rates, earnings credit rates (ECRs), or may push other economically irrational decisions.

Further, treasury needs to step back and consider how much it is paying in fees versus the level of bank service it is receiving, including the credit commitment. In other words, it needs to look at the total wallet. Here are three points to consider:

  • Is this worthwhile? One banker with experience in transaction banking at a global leader told me he thinks that the relentless focus on bank fees is akin to being obsessed with finding all the coins in your couch cushions.

    “Competition among banks has driven fees down, so it should not be as big a concern,” he said. NeuGroup members shot down this notion, however.
     
  • More clarity needed. The wallet considerations with bank fees for transaction banking services need to be clearer and banks do themselves a disservice by failing to adopt global standards to make them more transparent and comparable.
     
  • Rate environment is conducive to it. Now is the time to get a handle on fees. With persistent negative and lower interest, flatter yield curves, across much of the major developed economies, transaction banking is becoming more reliant on fees to sustain their businesses.   

The bottom line.  To fix the pain point of bank fees, banks and bank fee solution providers needs to:

  1. Establish more clarity on what bank fees represent, and the market price for them.
     
  2. Put them in the context of overall wallet management so treasurers can assess if the upcharge to pay for other services that are not market priced, like credit commitments, is acceptable.

This is the game being played: Banks deliver a range of services for which their corporate customers pay them X, aka the wallet; the allocation of that wallet to various services and fees is used to justify a credit commitment that is otherwise not fully paid for.

  • To pay a bank fee analysis vendor on contingency to reduce bank fees may be a fool’s errand unless the contingency fee is reflected in the total wallet picture. 
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Rating and Ranking External Investment Managers

Key elements for designing a scorecard to evaluate external manager performance.

Members at a recent meeting of cash investment managers discussed effective external manager evaluations, including what belongs in scorecards. 

Big picture. The presenting member runs the credit portion of her company’s portfolio and considers various criteria to score managers. She is increasingly using more qualitative metrics in addition to portfolio returns. Her team’s key elements to evaluate managers are:

  1. Investment performance 
  2. Market and credit insight 
  3. Risk management and compliance 
  4. Client service and reporting
  5. Team stability; diversity and inclusion

Key elements for designing a scorecard to evaluate external manager performance.

Members at a recent meeting of cash investment managers discussed effective external manager evaluations, including what belongs in scorecards. 

Big picture. The presenting member runs the credit portion of her company’s portfolio and considers various criteria to score managers. She is increasingly using more qualitative metrics in addition to portfolio returns. Her team’s key elements to evaluate managers are:

  1. Investment performance 
  2. Market and credit insight 
  3. Risk management and compliance 
  4. Client service and reporting
  5. Team stability; diversity and inclusion

Evaluating the value proposition. The company’s deemphasis on performance and its decision to place greater value on the services managers provide involves evaluating:

  • Market and credit insight by way of macroeconomic interpretations, asset allocation recommendations and credit research expertise to provide valuable aid in investment decisions.
     
  • Risk management and compliance support via timely and accurate reporting to check off all regulatory and compliance boxes.
     
  • The responsiveness and reliability of client service and delivery on special requests.
     
  • The team itself should have a key contact in place, low turnover and diversity throughout to maximize the relationship. 

Dynamic design. Using a weighted average scoring system, the scorecard evaluates portfolio performance quantitatively by comparing a manager’s returns to market benchmarks and peers. All other categories involve subjective ratings of qualitative measures.  

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Safety First: Investment Managers Reduce Risk, Shorten Duration

Cash investment managers are shying away from risk and heading toward safety and liquidity.   

The vast majority of members at recent NeuGroup meeting of cash investment managers expressed very little desire to increase the risk or duration of their portfolios to boost yield. Indeed, their priorities—in order—may be best expressed as SLY: safety, liquidity, yield. 

  • The inverted curve. One key factor in this low-risk stance was the inverted or flat shape of the yield curve at the time of the meeting. “We’ve liquidated all long-term investments, all treasuries and corporate bonds, because of the curve,” one member said. 

Cash investment managers are shying away from risk and heading toward safety and liquidity.   

The vast majority of members at recent NeuGroup meeting of cash investment managers expressed very little desire to increase the risk or duration of their portfolios to boost yield. Indeed, their priorities—in order—may be best expressed as SLY: safety, liquidity, yield. 

  • The inverted curve. One key factor in this low-risk stance was the inverted or flat shape of the yield curve at the time of the meeting. “We’ve liquidated all long-term investments, all treasuries and corporate bonds, because of the curve,” one member said. 

Changing stripes. Another member whose company once owned emerging market debt has derisked and the portfolio is now “very conservatively managed,” she said. It’s largely allocated to bank deposits, government and prime money market funds, commercial paper (CP), some asset-backed CP, mortgage-backed securities and munis. All of it is fairly short duration. 

Investment-grade reality check. Before the meeting, one member wrote:

  • “Our major point of interest related to the balance sheet is liquidity. There have a been a number of research pieces floating around suggesting that many corporate BBB bonds are actually BB. During a downturn, those bonds will trade with reduced liquidity. We’re scrubbing our portfolio to identify any concerns of that nature.”

Exceptions to the rule. A few members are willing to venture out the risk curve a bit and invest in high yield corporate debt. But with plenty of due diligence: One member in this camp said that his group “spends a lot of time on credit,” allocating the portfolio to the right geographies and striving to “optimize relative to risk and liquidity.”

The pendulum swing. The only constant, of course, is change. So don’t be surprised if some cash investment managers are singing a slightly different tune at the group’s next meeting about their appetite for risk.  

  • One of the members said her team is already asking, “Did we get too conservative?” At some point in the future, she said, there is a “high likelihood we’ll take more risk.”
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The Art of Rising in Finance: A CFO’s Advice on Job Selection

One woman’s criteria for choosing new jobs that lead to higher rungs on the professional ladder.

At the latest Women in NeuGroup* event, held at Expedia in Seattle, Jenny Ceran, CFO of Smartsheet, suggested that women moving up the ladder should take chances—and take a job even if it means most of it would be learning. 

One woman’s criteria for choosing new jobs that lead to higher rungs on the professional ladder.

At the latest Women in NeuGroup* event, held at Expedia in Seattle, Jenny Ceran, CFO of Smartsheet, suggested that women moving up the ladder should take chances—and take a job even if it means most of it would be learning. 

Her path to CFO. After working in finance at Sara Lee and Cisco, Ms. Ceran won the treasurer’s job at eBay at age 39 ¾., achieving her goal of becoming treasurer by the time she turned 40. Also cool: She was a member of NeuGroup’s Tech20 Treasurers’ Peer Group.

  • After nine years in the role, she was ready for a new job at the company. She set her sights on investor relations, a learn-on-the-job opportunity for which she ended up earning accolades but was criticized for not having sharp enough elbows.
     
  • Not only that, in order to do investor relations, she also had to take on FP&A, a combination that can be too much for one person with a small team at a multi-billion dollar organization.

After eBay, she served as treasurer and head of IR at Box, before becoming CFO for the first time, at a publicly-traded digital coupon company. She took the CFO job at Smartsheet three years ago.

Shoulda done it earlier. The CFO job is a big one that requires a lot of energy. If she had to do it over again, Ms. Ceran would have gunned for the CFO job earlier in her career when she had more of it. Lesson: Don’t wait.

Picking the next job: Follow your heart. Ms. Ceran advises careful consideration of the following five criteria whenever faced with an opportunity for a new role:

  1. Find an industry that excites you. Work in industries that are compelling. The internet was a big draw for Ms. Ceran at the time internet-enabled businesses burst onto the scene, and that brought her to Cisco.
     
  2. What work will I be doing? Ask yourself, “Will I learn something new or just reapply skills I’ve already developed?”
     
  3. Who’s the boss? It’s important that you have chemistry with your boss. Remember: people don’t leave companies, they leave bosses.
     
  4. Is the corporate culture a fit? Does it require you to behave in ways that go against your character? If you speak up about unacceptable behavior, how will that be received? Women in particular need to look out for signs of a “bro culture.”
     
  5. The Money: Last and always last. Take the job if it fits your criteria, even if it’s less money. “I’ve taken jobs that pay less because they fit the above four so well,” Ms. Ceran said. “I ended up learning so much and it enabled me to pivot to greater things over the long-term.”

*The next WiNG event is in New York City in spring 2020. To receive an invitation, please email mkmoore@neugroup.com.

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Another Reason to Keep on Top of Bank Fees

Only treasury is positioned to fully evaluate bank fees, so ensure your team does not provide reasons for other groups like procurement to intervene.

As organizations look to reduce spending on vendors and drive organizational savings, it is critical that treasury provide proper bank fee analysis to prevent other internal functions from viewing bank spend as a lever to hit savings goals. That key takeaway emerged at a recent NeuGroup meeting of cash managers.

Only treasury is positioned to fully evaluate bank fees, so ensure your team does not provide reasons for other groups like procurement to intervene.

As organizations look to reduce spending on vendors and drive organizational savings, it is critical that treasury provide proper bank fee analysis to prevent other internal functions from viewing bank spend as a lever to hit savings goals. That key takeaway emerged at a recent NeuGroup meeting of cash managers.

One NeuGroup member present said he’s afraid that if his team does not properly manage bank fees, the procurement team will attempt to take ownership of all bank spend.

  • The member said that while it’s not clear if there would be material savings to wring out of bank fees, his concern is that procurement could seize on examples of unnecessary services (such as CD-ROM bank statement delivery) or off-market fees, and build a case for taking a leading role in pressuring banks to reduce fees.
  • “We can do better at bank fee analysis. We want to show the organization that treasury has it under control,” the member said. Many in the group shared his frustration with bank fee analysis.
  • At least one other member said she had to jump up and object when procurement at her company wanted “to treat banks like any other supplier.”

You can’t touch this. The overwhelming consensus of the group is that no one but treasury should have control over bank relationships, which are about far more than fees. The nuances of wallet management, one member said, are only understood by treasury and that’s where bank account management belongs.

  • “It’s not hardware,” another treasurer said in exasperation. “Nobody but treasury should be involved.”
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The Heavy Lift of Automating Cash Flow Forecasting

Consider the time and money needed to put AI to use in cash forecasts.

The pain of accurate cash flow forecasting is all too familiar to treasurers used to struggling with multiple models, getting access to data and convincing business units of the importance of timely and accurate forecast submissions. No wonder many treasurers are eager to learn more about using artificial intelligence (AI) and machine learning to make the job easier.

 

Consider the time and money needed to put AI to use in cash forecasts.

The pain of accurate cash flow forecasting is all too familiar to treasurers used to struggling with multiple models, getting access to data and convincing business units of the importance of timely and accurate forecast submissions. No wonder many treasurers are eager to learn more about using artificial intelligence (AI) and machine learning to make the job easier.

Good news, bad news. The treasurer of a large multinational gave his peers plenty to think about at a recent meeting by telling them the encouraging news that his company has automated the process of cash flow forecasting successfully. The bad news: It took a decade. 

  • It took 10 years, he explained, because that’s how long it took the company to create and use a single instance of SAP. “One instance is necessary for an automated cash forecasting process,” he said. “It was a significant project.”

Single truth source. “Our forecasting uses machine learning and you can only do that with one data hub that is a single source of the truth,” the treasurer said, adding that senior management must mandate that everyone uses the hub, not just treasury. 

  • The universal data hub sits on top of SAP and takes information directly from Quantum and other systems, including those for budgeting, tax and logistics. Spotfire, from TIBCO, sits on top of the data hub for reporting. 

Share the financial pain. The treasurer said getting budget for the project was a big issue, but commercial groups shared in the cost, which was well into the millions of dollars.

Worth it. “The benefits significantly outweighed the cost given the ability to proactively identify where pools of cash would be created allowing early action to dollarize and repatriate excess cash,” the treasurer said. 

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Diving Into UniCredit’s Russia Pooling Solution

The benefits of using nonresident and resident accounts in a cash pool. 

Ears perked up at a NeuGroup meeting of treasurers sponsored by UniCredit when the bank described an international cash pooling product to improve an MNC’s liquidity management in Russia while ensuring compliance with the local legal and regulatory constraints. Here are highlights:

The benefits of using nonresident and resident accounts in a cash pool. 

Ears perked up at a NeuGroup meeting of treasurers sponsored by UniCredit when the bank described an international cash pooling product to improve an MNC’s liquidity management in Russia while ensuring compliance with the local legal and regulatory constraints. Here are highlights:

  • UniCredit owns the largest foreign-owned bank in Russia and the solution gives clients the ability to manage RUB liquidity via a nonresident account as part of a cash pooling setup, providing maximum control over liquidity in Russia.
     
  • The parent company opens the nonresident account with UniCredit Russia, which is incorporated into the pool. “The pool is the way to establish a connection between the resident or subsidiary account and nonresident or parent company account,” one banker explained.
     
  • There are no limitations on the parent’s use of the nonresident account, which is not subject to Russian currency control legislation.
     
  • This structure will help facilitate intercompany financing, the underlying basis for transactions within the pool, from the parent to its Russian subsidiary.
     
  • The bank has a legal opinion confirming its cash pooling product is fully compliant with current Russian legislation. 
     
  • In an alternative funding solution, the nonresident account can be funded by the offshore parent by entering into a swap arrangement (USD/RUB) with UniCredit. The parent funds in USD and swaps with UniCredit, which sends rubles to the nonresident account. The swap ensures there is no ruble FX exposure; offshore USD cash flows avoid the risk of trapped cash; and the ruble funding level achieved is often more attractive than a local ruble loan.

“I found the UniCredit Russia presentation very interesting,” the treasurer of a large pharmaceutical company said. “It seems an efficient way to address exchange exposure and surplus cash in Russia.”

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People Risk and the Cyberfraud Balancing Act

Treasurers walk a fine line as they try to reduce the risk of cybercrime by taking humans—often the last line of defense—out of vulnerable processes like payments.

Mitigating cyberfraud in the treasury and payments area (including AP) is tricky when it comes to people risk. 

  • On the one hand, people are the weakest link because they can be convinced by cyberfraudsters deploying social engineering to violate procedure to send out payments they shouldn’t. Or, being human and fallible, they click on a link that they should not or enter a real password into a phony site.       

Treasurers walk a fine line as they try to reduce the risk of cybercrime by taking humans—often the last line of defense—out of vulnerable processes like payments.

Mitigating cyberfraud in the treasury and payments area (including AP) is tricky when it comes to people risk. 

  • On the one hand, people are the weakest link because they can be convinced by cyberfraudsters deploying social engineering to violate procedure to send out payments they shouldn’t. Or, being human and fallible, they click on a link that they should not or enter a real password into a phony site.       

Get people out of the process. Human fallibility prompts cybersecurity experts, like one from JP Morgan at our Asia Treasury Peer Group Meeting in Singapore last April, to recommend straight-through, or machine automated, processing of payments. Machines can be programmed to stick with protocols and even evaluate the authenticity of change requests.

Keep people involved in oversight. On the other hand, there are plenty of anecdotes where human beings have proven to be the last line of defense. People who show good judgment or sense something is amiss can be the difference between a cyberevent succeeding or being stopped.

This tension was a focal point of a session on cyberfraud led by Societe Generale at our recent Global Cash and Banking Group meeting. The bank cited both the need for artificial intelligence and machine verification of IBAN numbers along with robust callback procedures (just make sure there’s a secondary verification that the person on the phone is who he or she says she is, even if it sounds like them).

  • “It’s important to have a balance,” one member said. She cited internal, red team exercises where the team’s efforts to hack into treasury systems are often recognized by the treasury team after noticing that something does not look right. “People are part of the defense.”

If people are to be part of a balanced approach to cyber risk, then they have to remain educated and aware of what to look for. This is one reason treasurers updating their cybersecurity practices at our Treasurers’ Group of Mega-Caps meeting recently cited increasing the frequency of meetings with information security heads to at least quarterly. 

  • “The types of attacks and various vulnerabilities change so fast now, that we need to keep up,” one treasurer noted.

People pleasers beware. Customer service (aka business support) oriented roles or individuals with a service mind-set are often those targeted. 

Remote country staffers. Another area of vulnerability is people with access to payment systems at the periphery, such as joint ventures or minor affiliates in remote countries far from headquarters. 

  • So don’t ignore these cohorts when balancing cybersecurity systems and people training.
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Digital and People Savvy Applicants Desired

What skills should corporate finance functions look for? AI understanding, yes, but a human touch, too.

Today and certainly in the not-too-distant future, success will come to finance leaders who find the right balance between digital savvy and human self-awareness to solve problems and perform at a high level; and do this with a diverse set of people across the enterprise. 

What skills should corporate finance functions look for? AI understanding, yes, but a human touch, too.

Today and certainly in the not-too-distant future, success will come to finance leaders who find the right balance between digital savvy and human self-awareness to solve problems and perform at a high level; and do this with a diverse set of people across the enterprise. 

  • Digital savvy and will to learn. HR finance leads who joined our treasury peer group members at a recent meeting noted how experienced finance professionals need to show a willingness to become digital savvy. Learning from digitally native millennials and Gen Zers is a good place to start.
  • Mentor and mentee. The give-to-get is to mentor the digitally savvy on finance specialty skills and show how finance supports the business (all while absorbing a little digital savviness).  

This will transition us to an AI future where machines do the heavy lift of processing transactions, accounting, auditing, pulling data and doing logical analysis based on learned technical procedures. Humans will then tell the stories that motivate action, adhere to culture and judge whether machine-made decisions are appropriate for us as human stakeholders.

Accordingly, human skills will become increasingly important with time.

  • EQ and self-awareness. Perhaps the most important part of the skill wheel is a high emotional quotient, in order to be aware of your own emotions and those around you. It’s important to be socially aware and able to read people in order to best share and learn from them and manage them as a team.
  • Read the culture. A big part of this is being able to read and play your role in line with the organizational culture. There’s a lot of emphasis these days on diversity and inclusion, which also means people with different skill sets, specialist and generalist finance experiences, as well as those intimately familiar with the business. Each may look at a problem differently.
  • Dance when invited. As one member put it, “Our organization goes out of its way to invite everyone to the dance, but people still have be willing to dance.” 

But what do you do when the super specialists and digital savvy don’t know that they have to dance? Can EQ, self-awareness and becoming more human be learned in a leadership development program or elsewhere on the job?

This is where mentoring and coaching are important. Future finance leaders, like today’s, will need to learn how to speak to people on the phone, make eye contact and understand how they “show up” in meetings. To be relevant in the future, however, those that can will also need to be digitally savvy enough to interface with the apps and intelligent machines that will be processing the data to support and make key finance-related decisions in order to make them human.

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What’s Keeping Bank Treasurers Busy This Fall

Banks should get ready for “a relatively active fall” when it comes to capital and liquidity, as well as Basel rules, one expert said.

Ben Weiner, a partner at law firm Sullivan & Cromwell, told members of NeuGroup’s bank treasurers group to be ready for lots of activity when it comes to managing capital and liquidity. New rules like accounting for current expected credit losses (CECL) have dominated the conversation but there are other areas that need to be considered:

Banks should get ready for “a relatively active fall” when it comes to capital and liquidity, as well as Basel rules, one expert said.

Ben Weiner, a partner at law firm Sullivan & Cromwell, told members of NeuGroup’s bank treasurers group to be ready for lots of activity when it comes to managing capital and liquidity. New rules like accounting for current expected credit losses (CECL) have dominated the conversation but there are other areas that need to be considered:

  • Trading book review. The Basel Market Risk Capital Standard, which is referred to as a fundamental review of the trading book, is on the horizon, Mr. Weiner said. He said this issue was on the regulatory agendas published by the OCC and the FDIC this past spring, indicating that the release of a proposal to revise market risk capital requirements is a priority of the banking agencies. 
     
  • Basel IV. There’s the more comprehensive implementation of what’s commonly referred to by industry participants as Basel IV, which are the standards that the Basel committee released in December 2017.

    This again presents complex questions that relate to many different aspects of the bank capital framework, including the future role and relevance of the advanced approaches (that is, the internal ratings-based approach for credit risk), how the standardized approach for operational risk will factor into the overall capital and stress testing framework, and which banking entities will be subject to the revised Basel standards.
     
  • Share repurchases. Mr. Weiner also discussed what has changed for non-CCAR bank holding companies in terms of the overall requirements for share repurchases. He said the reg requirements relating to share purchases developed over time and the framework “as it exists now has duplicative, overlapping and inconsistent requirements.”

    For a long time, there’s been a rule that requires bank holding companies to provide notice and gain prior approval for repurchases in some circumstances if they would make aggregate repurchases net of any issuances that exceed 10% of their net worth. 

    In 2009, the Fed released SR letter 09-4, which established a supervisory expectation that bank holding companies would consult with supervisory staff and seek a non-objection before repurchases in some cases. The Basel III capital rules introduced graduated constraints through the “capital conservation buffer,” as well as a stand-alone requirement that banking entities obtain prior approval for any repurchase of common stock. 

    The stand-alone prior approval requirement, which was eliminated in the simplifications rulemaking, had presented significant practical difficulties for non-CCAR bank holding companies, especially when they sought to conduct repurchases promptly in response to market conditions.

    Tailoring. The Fed and other banking agencies have proposed tailoring the application of capital and liquidity requirements, as well as enhanced prudential standards, to large domestic banking organizations and the US operations of foreign banking organizations. Agency principals have signaled that the goal is to finalize the proposals this fall, by the 18-month anniversary of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act.
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Treasurers Grapple with the Prospect of Negative Interest Rates in the US

The only thing that’s certain about interest rates is uncertainty and divided opinions.

In Europe. Treasurers at a NeuGroup meeting sponsored by Unicredit last week heard a senior bank executive say he expects to see negative interest rates in Europe for the next two to three years. More than $17 trillion in debt now carries negative yields.

  • This week, Unicredit’s CEO told a French TV channel that the bank is working on measures to transfer the European Central Bank’s negative rates “onto big companies or some big clients”—those with deposits of more than 100,000 euros. 

The only thing that’s certain about interest rates is uncertainty and divided opinions.

In Europe. Treasurers at a NeuGroup meeting sponsored by Unicredit last week heard a senior bank executive say he expects to see negative interest rates in Europe for the next two to three years. More than $17 trillion in debt now carries negative yields.

  • This week, Unicredit’s CEO told a French TV channel that the bank is working on measures to transfer the European Central Bank’s negative rates “onto big companies or some big clients”—those with deposits of more than 100,000 euros. 

In the US. At an earlier meeting of assistant treasurers, members held sharply different views about whether negative rates would cross the Atlantic. They also discussed how companies should prepare for the possibility.

It could happen here. One member whose company requires significant cash on its balance sheet was gloomy about the direction of fed funds, which have been cut twice by 0.25% in as many months, and now rest between 1.75% and 2%. The company also has a large bond portfolio, and treasury will be discussing the negative-rate issue with the board of directors later this year. 

  • The assistant treasurer said the Fed appears to have bowed to President Trump’s wish for lower rates—he recently called for rates at zero or below—if not to the extent the president wants. 
     
  • Given where fed funds stand today and the likelihood of an economic downturn prompting further cuts, the possibility has become less far-fetched. Former Fed Chair Alan Greenspan said in an August interview with Bloomberg that there is no barrier to US treasury yields falling below zero. 

It can’t happen here. Most participants argued that fed funds would remain in positive territory, with one member mentioning two Fed studies that argue against negative rates. “Since the Fed’s own studies say don’t go there, they probably won’t,” he said.

  • The San Francisco Fed concluded in a late August study that negative rates actually decreased rather than increased Japan’s immediate and medium-term inflation, with the caveat that its economic deterioration could have been steeper without them. 
     
  • However, another San Francisco Fed paper argued in February that negative rates could have mitigated the depth of the Great Recession and sped up economic recovery.

If it does. One option may be for companies to lower cash balances by making payments faster, members said, or when parking cash, go further out the yield curve and take on more credit risk. One member suggested returning more cash to shareholders, but then questioned whether they would want it. 

  • In the end, said the pessimist, companies concerned about the stability of the market may simply resign themselves to negative rates. “It’s negative, but it’s a known negative.” 
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