FTA Outlook 2015

OUTLOOKFINANCE AND TREASURY ASSOCIATION

2014


2015

LOOKING OVER THE HORIZON

FTA Outlook 2015 | 1

outlook

2015

FTA Outlook is published by CommStrat

on behalf of the Finance and Treasury Association

MANAGING EDITORChris Atkin

e: [email protected]

EDITORDavid Michell

e: [email protected]: +61 3 8534 5003

NATIONAL SALES MANAGERYuri Mamistvalov


ART DIRECTORAnnette Epifanidis


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Phone: +61 3 8534 5000

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not allowed without written permission from the Publisher.


2015

CONTENTSPresident’s Message 3CEO Report 4

ECONOMIC OUTLOOK

2015 – Accelerating Global

Disinflation Drives Currency

Wars

Andrew Roberts, Head of European Macro

Research, RBS 6

RATINGS OUTLOOK

Australian Non-Financial

Corporates: Outlook Stable, but

Weakness in Some Sectors

Maurice O’Connell, Vice President and

Senior Credit Officer at Moody’s Investors

Service 10

RISK OUTLOOK

Valuing Derivatives Under AASB

13 Fair Value Measurement

Steve Castleton, Global Co-Head

Accounting Advisory Services and

Andrew Brown CFTP, Head Australia &

New Zealand, Chatham Financial 14

TECHNOLOGY OUTLOOK

Understanding a True SaaS:

What You Don’t Know Can Cost

You

Philip Pettinato, Chief Technology Officer,

Reval 18

CHINA OUTLOOK

China’s renminbi: it’s high time

for decisive action

David Olsson, China Practice Consultant,

King & Wood Mallesons 20

Bringing cash back from China

Matthew Clarke CFTP, Group Treasurer,

Intertek Group 23

WORKING CAPITAL OUTLOOK

Supply Chain Finance –

Opportunities & Challenges for

Treasurers – an Interview with

ANZ

By Stephen Barnes FFTP, Director,

Byronvale Advisors 26

DEBT MARKETS OUTLOOK

Debt Markets in 2015 – Timing

Will Be Everything

By Stephen Boyd, Head of Corporate Debt

Markets Origination, National Australia

Bank 30

CAREER FEATURE

A global fintech career in the

front lines of gender diversity

by Kimberley Cole, Head of Sales

Specialists, Asia, Thomson Reuters 34

FINANCE EDUCATION FEATURE

Elevating Australia’s Finance

Learning Standards In Higher

Education

by Associate Professor Kevin Tant FFTP,

Monash University 38

TAX OUTLOOK

Globalisation and Profit Allocation

– The Tax Noose Tightens

Chris Kinsella, Partner and Stephen Jones,

Special Counsel, Minter Ellison Lawyers 42

CASH MANAGEMENT OUTLOOK

The Evolving Role of Cash and

Liquidity Management

Michael Leighton and Nels Mortensen

CFTP, First Treasury 44

REGULATORY OUTLOOK

Regulatory Reform: 2015 and

Beyond

Pieter Bierkens, Executive Director, Rates

Regulatory Strategy, CBA 48

TREASURY OUTLOOK

Aligning the Treasury Value Add

from Back Office to Board

by Alistair McLean FFTP, Group Treasurer,

Metcash Limited 52

2015 FTA Partner Directory 54

www.fi nance-treasury.com

PATHWAYS MEMBERSHIPFirst Year Membership $199

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outlook

2015

Welcome to the FTA

Outlook 2015 magazine.

This is the second year

of this magazine and I

am sure that you will find it a useful reference point

for current and new issues that we treasury and

finance professionals will face in the coming year.

The Finance and Treasury Association is committed

to continuing to build on the 30 year foundations

of this organisation and to provide a relevant,

enjoyable and productive membership offering

for all of our members. In 2015, we will continue

to provide forums for face to face learning and

discussion across a number of issues. We will also

build on the 2014 launch of the FTA Academy

which is another membership offering for those

who due to time pressures do not always have

the opportunity to get out of the office to attend

specific events. The FTA Academy also contains

articles on topics of relevance for researching or

looking for different perspectives of Treasury.

FTA is also committed to growing and rejuvenating

our membership and providing the relevant levels

of membership offerings for existing members

and potential new members. The Pathways

membership provides a way of introduction for

the next generation of members. We are also

looking for more seasoned treasury professionals

to provide mentoring for up-and-coming treasury

professionals. If you can offer some of your time,

please consider being a mentor and passing on

your knowledge.

The key networking and Professional Development

offering of the FTA is our annual Congress. This

year it will be in Melbourne, and we again look

forward to a successful and well attended event. I

encourage all members to attend the Congress. It

is the one forum where you can touch base with

your peers, meet with new people and also have the

opportunity to listen and interact with professionals

who share their thoughts and experiences across

many different topics in a condensed period of your

time. If you walk away with just one new idea or

solution to a potential conundrum you face within

your work environment, it should be regarded as

successful.

Similarly, I encourage attendance at all of the

events that the FTA puts together for its members

across Australia; you will see a range of differing

events throughout the year. Participation by way of

presentation or attendance to FTA events by our

members helps make us a stronger more relevant

and better offering for everyone.

Lastly, I would like to thank all of the contributors to

this magazine. I also thank all of you that continue

to sign up as FTA members. Personally I am

looking forward to what I hope is a challenging and

ultimately successful 2015.

“The Finance and Treasury Association is committed to continuing to build on the 30 year foundations

of this organisation

and to provide a relevant,

enjoyable and productive

membership offering for all of our members.”

ROSS MCKEAN CFTP (SNR)

PRESIDENT

THE FINANCE AND TREASURY ASSOCIATION

PRESIDENT’S MESSAGE

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2015

4 | FTA Outlook 2015

FTA Outlook

DAVID MICHELL CFTP (SNR)

CHIEF EXECUTIVE OFFICER

THE FINANCE AND TREASURY ASSOCIATION

EDITOR'S OVERVIEW

The theme of this year’s FTA

Outlook magazine is “Looking

over the Horizon” where we have

asked our authors to extrapolate

on current trends and to consider developments

barely on the horizon.

In our first article Andrew Roberts RBS Economist

asserts that the “number one global macro theme

remains … global disinflation” which is sourced in part

from the erstwhile growth engine in China. Roberts

indicates that despite US growth, global wages

growth will be minimal and oil prices will fall further.

Falling inflation will affect corporate pricing power in

most markets except the US. With rates zero bound

in Europe and Japan, “currency wars” will hot up.

NAB’s Steve Boyd notes on debt markets “a

common view that the sustained rally in credit

spreads globally over the past 18 months is overdue

for a correction and … that the correction could be

major”. While liquidity is expected to remain mostly

plentiful it will be more prone to dry up in periods of

uncertainty. Timing of deal execution will be critical

given heightened volatility.

Meanwhile, Maurice O’Connell of Moody’s Investors

Service highlights that in aggregate corporate

Australia is currently buffered from a return of

financial market volatility by “strong balance sheets

and liquidity, while leverage and refinancing needs

are low”. The article highlights sector-specific

challenges and canvasses “possible downside risk for

credit profiles next year [and] the potential for M&A

and shareholder-friendly activity”.

The article on Financial Regulation by Pieter Bierkens

of CBA is an important read to get an overview of

the next stage of regulation of derivatives notably the

impact of Basel-IOSCO margin requirements for non-

centrally cleared derivatives. While Australia appears

to have learnt some of the lessons from Europe’s

experience here, FTA considers that the capital

penalty to banks for transacting with corporates on

non-centrally cleared derivatives is excessive and will

further raise the cost of corporate risk management.

Bierkens and Boyd both highlight how overall

financial system liquidity risk has been heightened by

a combination of regulations notably, the Volcker rule

which limits dealer inventory.

Andrew Brown CFTP of Chatham Financial highlights

the benefits of a process for qualitative assessment

of Credit Value Adjustment (CVA) under AASB13

which helps an entity determine whether to explore a

“robust” (system and process-intensive) approach, or

a simplified approach. They also note “if an entity is

relying on periodic valuation statements from dealer

counterparties for fair value measurements in its

financial statements, it is very likely that entity is not

complying with the requirements in AASB 13”.

I am always delighted when practising treasurers

take pen to paper even if it is only figuratively these

days. In “Aligning the Treasury Value Add from Back

Office to Board” Alistair McLean FFTP Group

Treasurer at Metcash offers nine tips for treasurers

and their staff to add value and get noticed by

internal and external stakeholders - for the right

reasons.

“While liquidity

is expected to remain

mostly plentiful it will be

more prone to dry up in periods of

uncertainty. Timing of deal

execution will be

critical given heightened volatility.”


outlook

2015

One new thing more treasurers in Australia will do in 2015 will be to

transact in Renminbi (RMB) for the first time. David Olsson of King &

Wood Mallesons details Australia’s responses to the internationalisation

initiatives of the Chinese government and regulators. He argues that

although RMB is still far from being an international currency, Australian

companies should be paying closer attention to its evolution. “The use

of RMB is fast becoming both an immediate competitive advantage

and vital to future strategy for companies with any form of commercial

exposure to China”.

London-based FTA member Matthew Clarke CFTP is Group Treasurer

of Intertek Group plc which operates in over 100 countries including

China. Intertek provide an illuminating case study of Cash management

in China where they have implemented RMB pooling structures to

concentrate cash in China and RMB accounts in offshore RMB centres.

Clarke suggests that the recent regulatory changes make now a

good time for companies operating in China to review existing cash

management processes.

Nels Mortensen CFTP of First Treasury argues cash visibility is

the “basis of accurate cash flow forecasting” and is enhanced by

establishment of “internal bank” structures and payment factories.

While Intertek’s Clarke reserves SWIFT “for the accounts we can actually

control from treasury”, First Treasury are proponents, in general, of

greater SWIFT (and ERP) integration by Australian corporations.

Perhaps the key transformative change for treasurers in 2015 will be

the Cloud which is revolutionising core technology for treasurers - their

treasury system.

Reval’s Chief Technology Officer, Philip Pettinato maintains that

Software-as-a-Service (SaaS) allows companies to standardise their

workflow across the global treasury organisation, across functions,

geographies and time zones. With all of the application’s users working

on a common technology platform, scope for collaboration is enhanced.

With no sign that the pace of globalisation is slowing, former FTA Vice-

President Stephen Barnes FFTP interviews Catherine Mallanack and Ryan

Fernandes of ANZ about working capital management opportunities

for treasurers from cross-border supply-chain financing (SCF). While

traditional export and import trade in goods and services continues to

grow, the SCF is opening up new growth opportunities by facilitating

cross-border business-to-business collaboration.

Hong Kong-based former Melbournian Kimberley Cole argues that

having “a global mindset” and embracing gender diversity helps foster

collaboration and is a way the individual finance professional can

continue to evolve along with their operating environment. Concerned

by the perennial issue of low female representation and senior executive

roles, Cole who runs an Asia-Pacific wide business for Thomson Reuters

candidly shares her experience with introducing more flexible work

practices to retain own staff.

Tertiary education in business and finance is now one of Australia’s

major sources of service sector export income. The number of courses

and providers has grown rapidly adding variety and competition.

But the quality is variable which has implications for how finance

is practiced in this country, and also the reputation offshore of an

Australian education. In his article Associate Professor Kevin Tant

FFTP of Monash University highlights the response of Australia’s

peak universities by developing minimum competency standards that

tertiary-educated finance students must exhibit before they may be

permitted to graduate. FTA and other finance professional bodies

assisted by providing a practical focus.

Treasurer Hockey will hand down the Government’s response to the

Murray Financial System Report after a consultation period ending

late March. However, the main game after that for the Commonwealth

Government in 2015 is likely to be the Tax White Paper where lifting tax

revenue will be the over-riding objective.

“Perhaps the key transformative change for treasurers in 2015

will be the Cloud which is revolutionising core

technology for treasurers - their treasury system.”

Chris Kinsella and Stephen Green of Minter Ellison highlight how

Governments around the world are addressing erosion of their tax

base, and the ramifications for Australia's corporates of the G20/OECD

action on Base Erosion and Profit Shifting (BEPS).

Kinsella and Green highlight three key action areas for finance and

treasury professionals – hybrid mismatches, interest deductions and

the digital economy. They note the Australian Tax office is currently

investigating 86 multinational companies over their tax planning

arrangements, including concerns over intangibles; offshore marketing

and procurement hubs; hybrid entities and transfer pricing outcomes.

On the last point, the focus of future ATO enforcement activity related

to BEPS may well depend on the outcome of a Federal Court case

heard in October 2014 on which the judge has to date reserved his

decision. ATO is pursuing US oil company Chevron for $258m in unpaid

tax plus penalties for claiming tax-free interest on inter-company loans

which the ATO asserts were not at arms-length.

My brief summary does not do justice to the great analysis in the 2015

FTA Outlook. I hope you like it!

As technical and professional issues emerge throughout the year, you

will benefit from being part of the FTA network. Join FTA for discounts

on professional development and password-protected information.

Subscribe at www.finance-treasury.com to our fortnightly FTA Update

for my own CEO Comment on emerging developments and FTA

advocacy for the profession.

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Economic Outlook

So what are the developments in 2015 that are

not yet in view? Or, perhaps, are here, but not

fully recognised as here to stay, or to deepen

as issues for corporates/policymaker/fund

manager alike?

It is clear – at least through my lens - that the no.1

global macro theme remains that which I have

been pushing for nearly two years now – global

disinflation. Indeed, it took centre stage in the

article we wrote in this document 12 months ago.

However, the theme in this document is ‘Looking

over the Horizon’, at events which have not yet

appeared, or not yet appeared at least in full form.

I would argue vociferously that disinflation fits into

this camp.

Yes, we all know that inflation globally is low right

now. It entered deflation for the first time in the

Eurozone in January.

But we have to remember that even at such low

levels, with CPI rates continuing to decelerate

throughout 2014, market forecasters have

adamantly refused to take on board the shifting

nature of the global economy, and to believe

that this theme is a) here to stay, and is b) set to

deepen.

You can witness this by the fact that the move into

deflation was with yet another data release which

came in sub consensus. The actual inflationary

impulse is lower than forecasters think it is, even here.

I believe that 2015 will be the year when there is

more acceptance that some central banks may

have as much trouble getting inflation back up to

target over coming years, as they did getting it

down to targets through the 1970s and 1980s.

This has major implications, but first, the pillars

that support my view:

1) China. China is slowing. More to the point, China

is exporting deflation to the rest of the world. The

most important data point in the world in my view

is arguably Chinese producer price inflation, not US

payrolls. Yet the latter garners far more attention

globally. Indeed, both sets of data came out in the

same week as I write this. Rather neatly, Chinese

PPI decelerated sharply to now run at -3.3%yoy

(previously -2.7%yoy), and – yet again – came in

lower than the markets had expected. Compare

this to US payrolls, coming in 60k above consensus

(including revisions), and what do bonds do? Bring

forward rate hikes? No, 10y USTs rallied -7bp on the

day, because wages were expected to be running

at 2.2%yoy and actually came out at a very weak

1.7%yoy.

2015 – ACCELERATING GLOBAL DISINFLATION DRIVES CURRENCY WARSBY ANDREW ROBERTS, HEAD OF EUROPEAN MACRO RESEARCH, RBS

It is clear – at least through my lens - that the no.1 global macro theme remains that which I have been pushing for nearly two years now – global disinflation.”


outlook

2015Economic Outlook

I do not wish to dwell on one month’s data. But

the uncertainty in global macro in 2015 for us to

debate, is NOT whether the US grows ok. Too

many bond bearish investors lost money in 2014

thinking that if the US grew, the Fed would hike,

and bonds would sell off. It is disinflation that

matters most (and the reason there was no hike).

So we should focus on wages, not growth. (And

yes, I remain a US growth bull as I was in 2014,

thus limited or no Fed hikes, plus low inflation, plus

strong growth, is a good news story for 2015).

2) Global output gaps matter. So wages are all that

count? Yes. But the most important point I press

home in meetings now is that statistically the most

important determinant of any country’s CPI rate, are

not domestic employment conditions, but global

employment conditions. For those who are interested

to delve deeper into this, the seminal work was done

by the Bank for International Settlements in 2014.

Without wishing whatsoever to bamboozle readers

with econometrician jargon, domestic unemployment

gaps are just NOT statistically significant anymore

in explaining CPI or wages. As such, the latest US

employment data fit lovely with this theme, of payrolls

being strong yet wages not taking off, despite the

consensus expecting so. I expect a 2015 where there

continues to be scratching of heads about why wages

are not rising, even while payrolls is ticking along fine.

FIGURE 1. CHINESE PPI DEFLATION IS ACCELERATING. TAKE NOTE. VERY GLOBAL BOND BULLISH,

BEARISH FOR GLOBAL GOODS PRICES, WATCH FOR MORE GLOBAL DEFLATION SHOCKS IN 2015

Source: BIS; RBS

FIGURE 2. GLOBAL OUTPUT GAPS ARE ALL THAT

COUNT. SO AS CHINA SLOWS, PREPARE FOR MUCH

LOWER INFLATION & WAGES

Source: RBS; Bloomberg

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

10.0

5.0

0.0

-5.0

-10.0

PPI CPI

%

0.3

0.2

0.1

0.0

-0.1

1971-85 1986-98 1999-2013

Domestic output gap

Price Phillips curve

1971-85 1986-98 1999-2013

Global output gap

0.3

0.2

0.1

0.0

-0.1

1971-85 1986-98 1999-2013

Domestic unemployment gap

Insignificant at the 5% level

Significant at the 5% level

Wage Phillips curve

1971-85 1986-98 1999-2013

Global output gap

1.1972

I expect a 2015 where there continues to be scratching of heads about why wages are not rising, even while payrolls is ticking along fine.”

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2015


Economic Outlook

3) Oil. I have been a commodity bear all through

2014, mainly due to China. But oil has the extra

kicker for being negative thanks to the shale

revolution in US and Canada. The key is that 90%

of the projects are being done privately, so there

has been no official incentive to keep the oil in the

ground, as there exists in middle eastern countries

(remember that global usage estimates by the

International Energy Agency up to 2040 of 760bn

barrels is already far lower than the 1700bn proven

reserves, I asked in every client meeting last year,

‘why on earth is oil as high as it is’). I introduced a

$42 (Brent) forecast when doing my year ahead

when it traded at $70, but it looks like being met

far sooner than I expected. The big problem is

this is not just supply, it is also demand. If we

are ‘Looking over the horizon’, the big shock we

should all be preparing for is a collapse in oil even

from these levels. The chart to the side from the

IEA shows just how cheap oil development now

is. And note that finding and development (F&D)

costs are set-up costs, and as such the marginal

cost of supply for each barrel will be far lower.

Once we reach $42, the next technically driven

target is $20.

4) Technology is starting to bite, and will keep

output gaps wide, wages low, and a major

deflationary impulse (see Figure 4).

Another theme I suspect that will zoom into view

in 2015 is that of the role technology is playing in

changing labour markets (and so wage pressures).

The top piece on this was written in 2013, I repeat

the chart that shows that in the coming 10-20

years, 47% of all jobs are replaceable by machinery.

Normally long term influences are dismissed by

finance experts, because it is tough to pinpoint the

moment when everyone should start to focus on

them. I would argue that we are now there. Such

topics are now being reported in the mainstream

media far more.

This theme links directly with the earlier theme of

global output gaps mattering more than domestic

output gaps. I argue that the invention of the

Cloud (without doubt one of the top inventions in

history), brings potentially hundreds of millions of

FIGURE 3. F&D COSTS FOR NEW GLOBAL OIL IN NEXT 20 YEARS.

LOW COSTS + ABUNDANT SUPPLY = SELL OIL.

FIGURE 4. 47% OF JOBS AT RISK IN COMING 20 YEARS

Source: Frey and Osborne (2013)

Source: IEA; RBS

40

35

30

25

20

15

10

5

We

igh

ted

ave

rag

e F

&D

co

st

(Do

llars

pe

r b

arr

el)

Middle Eastconventional E

OR

Onshoreconventional

Sh

allo

w o

ffsh

ore

co

nve

nti

on

al

Lig

ht

tig

ht

oil

De

ep

wate

r

Extr

a-h

eavy

oil

0 100 200 300 400 500 600

Resources developed (billion barrels)

NOTES: Each basin and resource type has its own estimate of F&D costs; the levels shown here are averages, weighted by production over the period to 2035. Average values for shallow offshore production are pulled up by the exclusion of Middle East shallow water production and by relatively expensive developments in Kazakhstan and Norway; deepwater is pulled down by relatively low cost per barrel developments in Brazil.

EOR = enhanced oil recovery.

Oil resources developed to 2035 in the New Policies Scenario

Source: RBS

47% OF JOBS AT RISK IN COMING 20 YEARS

0 0.2 0.4 0.6 0.8 1

Probability of Computerisation

Medium19% Employment

High47% Employment

Low33% Employment

Em

plo

ymen

t

400m

300m

200m

100m

0m

Management, Business, and Financial Computer, Engineering, and Science Education, Legal, Community Service, Arts, and Media Healthcare Practitioners and Technical Service Sales and Related Office and Administrative Support Farming, Fishing, and Forestry Construction and Extraction Installation, Maintenance, and Repair Production Transportation and Material Moving


outlook

2015Economic Outlook

people onto the global labour market that were

not there before. Access to such a labour force

is now possible thanks to technology, and so it is

tough to see how wages will rise in the developed

world as a result. There are many ways to monitor

this developing eg Google’s Project Loon, looking

at giving the internet to the two thirds of the world

population that does not have it.

I could include a few other of my pet themes,

such as demographics, but space is short. But

everything points to one thing.

CONCLUSION 1: DEFLATION IS GOING TO BE A BIG PROBLEM.

Everyone knows the well publicised issues in EMU,

now officially in deflation (and as with the Roach

Motel, it is easier to check into deflation, than it is to

check out, I suspect it will be here for some time).

But to this we have to add the entirety of Eastern

Europe, grappling with weaker Russia and weaker

EMU on their borders. Add to this Sweden, in and out

of deflation for 18 months, and Israel. Basically every

country outside Russia should see inflation subside.

Even in Australia I am a seller of the consensus of

2.4% for 2015 inflation (source: Bloomberg consensus

survey). Even Japan is in trouble, producing a

peak of just 2.3% for CPI after a more than 30%

debasement of the yen; more to come on this front.

CONCLUSION 2: GLOBAL CURRENCY WAR IS COMING.

For central banks with rates at 0%, sinking into

deflation, the next step is to debase your currency.

So watch out for good falls in 2015 in Scandinavian

currencies, the euro, across Eastern Europe, and in

the yen. They are all good sells. As we said at the

FTA conference in October, we can add Australia to

this sell zone, though the country obviously is clearly

different to most others in that it still has positive

rates and positive inflation. As such, I suspect we

should see more weakness in the yen than the A$.

I expect the USD to rally against all majors in 2015.

And there is no coincidence that they are the only

major that is contemplating raising rates.

CONCLUSION 3: STAY BULLISH EQUITIES.

The fall in oil is equivalent to a large consumer

tax cut, and it should be viewed as an economy

positive, not negative. I am fading the equity

weakness of early 2015.

I have updated my favourite asset class chart in

the world that was in last year’s outlook: global

central bank liquidity.

As we said last year, call liquidity right and

everything else slots into place.

So, what does it tell us? The chart below just

shows that the ECB QE that we expect to be

announced certainly in Q1, merely takes over the

baton for driving global liquidity, handed to it by

the Fed.

The hiccup in equities in December (eg Australia

stocks -4% in one week) was entirely down to

market fears that the Fed was ending its QE but

the ECB might not be replacing it after all. Such

fears are now misplaced, and (non commodity)

equities do not look rich whatsoever. I am bullish,

favourite market USA.

FIGURE 5. GLOBAL LIQUIDITY, ABOUT TO FLOOD AGAIN.

DO NOT BE SHORT RISK/EQUITIES ETC


For central banks with rates at 0%, sinking into deflation, the next step is to debase your currency. So watch out for good falls in 2015 in Scandinavian currencies, the euro, across Eastern Europe, and in the yen. ”


GLOBAL LIQUIDITY, ABOUT TO FLOOD AGAIN. DO NOT BE SHORT RISK/EQUITIES ETC

Jan-09

10

8

6

4

2

0

-2

-4

-6

-8

70000

65000

60000

55000

50000

45000

40000

35000

30000

25000Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

BoJ

BoE

ECB

Fed

SNB

World equity (rhs)

PBOC

3mth rolling cumulative expansion of central bank balance sheets (LHS) Assuming ECB balance

sheet expands to

€3 tln

% change, balance sheet size wighted

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2015


Moody’s Investors Service sees a stable outlook

for Australian non-financial companies in 2015,

reflecting our view that domestic macroeconomic

conditions will remain broadly supportive of

business growth, assisted by historically low

interest rates. Corporate earnings and financial

profiles should support current ratings, helped by

a steady operating environment and lower levels of

capital spending.

In terms of specifics, most Moody’s-rated

corporates show strong balance sheets and

liquidity, leverage is at manageable levels and

refinancing needs are low. However, pressures are

growing in some sectors, namely those related to

mining and natural resources. A further possible

downside risk for credit profiles next year is the

potential for M&A and shareholder-friendly activity.

The overall stable outlook – which applies to

all sectors – assumes a modest improvement

in domestic GDP growth of close to 3% and the

continuation of accommodative monetary

policy settings.

Furthermore, weakness in the Australian dollar,

which is well off last year’s highs against the US

dollar, will benefit exporters and the resource

sector. At the same time, continuing growth

in China remains supportive of the overall

Australian corporate sector, although the

slowdown in the Chinese economy will pressure

the credit quality of companies in mining and

mining services, in particular those exposed to

coal and iron ore.

Currently, with Moody’s-rated corporate portfolio

for Australia, 77% of all ratings are stable, 19%

are negative and 4% are positive. However, the

proportion of negative outlooks — which outweighs

positives — indicates a negative bias. Mining and

mining services companies account for the majority

of negative outlooks.

Moody’s-rated corporates span the sectors of

metals & mining; retail & consumer; real estate

investment trusts; airlines; and building &

construction.

Under Moody’s stable scenario, the aggregate

EBITDA of investment-grade corporates is likely to

grow around 1%-3% in 2015. The airline sector will

benefit from an improving competitive environment

and lower fuel costs, although its recovery will

remain fragile.

Meanwhile, with the metals & mining sector,

EBITDA will fall by more than 15%. Construction

will also record a fall, but others sectors —

including airlines — will see a rise in EBITDA.

AUSTRALIAN NON-FINANCIAL CORPORATES: OUTLOOK STABLE, BUT WEAKNESS IN SOME SECTORS BY MAURICE O’CONNELL, VICE PRESIDENT AND SENIOR CREDIT OFFICER AT MOODY’S

INVESTORS SERVICE

In terms of specifics, most Moody’s-rated corporates show strong balance sheets and liquidity, leverage is at manageable levels and refinancing needs are low.”

Ratings Outlook


outlook

2015Ratings Outlook

Average leverage will remain steady throughout

2015, based on Moody’s forecast of modestly higher

EBITDA in aggregate, and continued conservative

levels of capital spending; offset by our expectation

of slightly higher shareholder returns.

Interest cover will improve on EBITDA growth

and slightly lower interest expenses.

A key downside risk in Moody’s stable scenario

is — as indicated — that limited organic

growth opportunities and the low cost of debt

could encourage M&A or shareholder-friendly

initiatives and lead to higher financial leverage.

A change in the outlook to negative for the

corporate sector — a scenario which is unlikely

at this stage — would require a further softening

in Chinese growth towards 5% in the next 12

months, and increased downward pressure on

the metals & mining sectors, with knock-on

effects.

Another factor for change would include a

weakening in domestic economic growth to

less than 1% annually. A move to negative would

also involve the total of negative issuer ratings

exceeding 30%.

By contrast, a change to a positive outlook for

the corporate sector would require Australian

GDP growth to surpass 4%, with an increased

contribution from the non-resource sectors. In

addition, negative issuer ratings would have to

exceed 30% of Moody’s total portfolio.

In terms of the specifics for each sector, our

analysis is as follows:

■ 2012 ■ 2013 ■ 2014

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Sh

are

of

Tota

l

Stable Negative

88%84%

77%

5% 7%2% 4%

14%19%

Positive

DISTRIBUTION OF RATING OUTLOOKS FOR AUSTRALIAN ISSUERS AS OF END 2012, 2013 AND SEPT 2014

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Ratings Outlook

Metals & Mining (Stable) – Softer Chinese

and global economic growth are driving down

prices for key commodities, and most single-

commodity producers will likely face further

pressures, with knock-on effects on the mining

services sector. Moody’s does not expect a

material improvement in demand.

Indeed, some commodities, such as iron ore,

face significant supply increases which will

outstrip the growth in demand. Ongoing cost

reductions will be necessary to support margins

and liquidity. However, the larger and more

diversified mining companies will prove more

resilient.

Retail & Consumer (Stable) – Steady growth will

be supported by continued non-discretionary

spending. But the discretionary retailers will

experience patchy growth in earnings. In

general, consumer sentiment remains volatile,

and competition continues to spur high levels of

discounting activity.

Australian Real Estate Investment Trusts

(Stable) – The presence of contracted fixed rental

lease structures will support earnings visibility,

while robust liquidity levels and staggered debt

maturity profiles will support ratings. However,

earnings growth will be restrained by subdued

fundamentals, including headwinds from high

CBD office vacancy levels and negative rental

renewals for the office and retail sectors.

Airlines (Stable) – The outlook for the sector

is stable. Although Issuers face operating

challenges, such as tough levels of competition

and an overhang in capacity. Other challenges

include the fragile and price-sensitive state of

demand. There are indications of an improvement

and lower fuel prices will support operating

margins.

■ 2012–2013 ■ 2013–2014 ■ 2014–2015F

30.00%

20.00%

10.00%

0.00%

-10.00%

-20.00%

-30.00%

Airlines Construction Others REITS Retail TelcoMetal & Mining

YOY % CHANGE IN ADJUSTED EBITDA BY SECTOR


outlook

2015Ratings Outlook

AVERAGE DEBT/EBITDA

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15F FY16F

5.0

4.0

3.0

2.0

1.0

0.0

Building & Construction (Stable) – Building

activity should hold up in 2015, helped by the

strength of demand for residential properties.

However, high office vacancy levels will limit

commercial construction. Government spending

on roads and rail infrastructure should help lower

the impact of lower private-sector engineering

spending.

ISSUERS OF INTEREST IN 2015

BHP Billiton (A1 stable) – Continued success at

reducing operating and capital costs and raising

production levels should help preserve margins

and cash flow, despite soft commodity prices.

Debt reduction to offset lower earnings should

help stem the deterioration in credit metrics,

which has caused the previously large cushion in

the company’s rating to fall.

Fortescue Metals (Ba1 stable) – Credit metrics

have improved following the completion of

expansion activities and debt-reduction initiatives.

However, lower iron ore prices, if sustained, will

limit further debt reduction and begin to pressure

metrics for its current rating level.

Qantas (Ba1 negative) – The intense competition

in both the international and domestic markets

has led to a significant deterioration in earnings

and credit metrics. Continued execution of the

company’s transformation program — combined

with further improvements in the competitive

environment and lower fuel prices, if sustained,

will lead to improving profitability and credit

metrics. Adjusted debt/EBITDA falling to 4.75x

or below and maintaining its high cash balances

would likely lead to a stabilisation of the rating.

Leighton Holdings (Baa3 stable) – Project

execution, working capital management and

ownership by a weaker parent are key challenges.

The company’s business profile is evolving, as it

has sold assets and is looking to expand into the

public private partnership sector.

Boral (Baa3 positive) – The company’s credit

profile should improve in 2015 on the back of

its improving US earnings and the recovery in

Australian residential housing. Exposure to road

infrastructure will also help its credit profile.

Lend Lease (Baa3 stable) – Investments in

multiple projects will increase financial leverage

and reduce the headroom within the company’s

rating to absorb further pressures. Successful

project execution, asset sales and delivery

of sustainable EBITDA generation are key to

supporting its current rating.

A change to a positive outlook for the corporate sector would require Australian GDP growth to surpass 4%, with an increased contribution from the non-resource sectors.”

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VALUING DERIVATIVES UNDER AASB 13 FAIR VALUE MEASUREMENT

INTRODUCTION

AASB 13, Fair Value Measurement (“AASB 13”)

was issued in 2011 and became effective January

1, 2013. Even though the standard has been

effective for nearly 2 years, many companies are

either still grappling with how to implement the

standard with respect to derivative valuations or

need to continue to refine their process based on

feedback from auditors or an evolving derivative

portfolio.

This standard is difficult to implement for a

number of reasons:

• AASB 13 requires that non-performance risk

(primarily credit risk) be incorporated into

derivative valuations, which is difficult to do

because, unlike debt, credit exposure changes

over the life of the contract

• AASB 13 doesn’t specify a method for

calculating credit exposure, only that an

entity must use the same assumptions market

participants use (i.e., the calculation cannot be

an entity-specific measure, but must comply

with the market’s best practices and with

prevailing financial theory)

• The market’s methodology for calculating

CVA/DVA can be complex and costly to

implement

BY STEVE CASTLETON, GLOBAL CO-HEAD ACCOUNTING ADVISORY SERVICES AND

ANDREW BROWN CFTP, HEAD AUSTRALIA & NEW ZEALAND, CHATHAM FINANCIAL

Risk Outlook

Because accurately estimating CVA/DVA is not a trivial exercise, qualitatively assessing the factors that have the largest impact on the size of CVA/DVA is a good place to start.”

• While CVA/DVAs may be small when

compared to the overall fair value of

derivatives, in certain circumstances they can

be significant and even lead to breaches of

hedge effectiveness

This article discusses three essential steps to

successfully implementing this standard. These

steps balance both the need for compliance with

the cost of compliance while considering overall

materiality.

1. Qualitatively assess the potential CVA/DVA and

make an initial determination about the type of

implementation necessary;

2. Identify and understand the inputs and

assumptions market participants use and the

factors that distinguish between a robust and a

simplified implementation approach;

3. Decide whether to build the model in-house or

to outsource.

QUALITATIVELY ASSESS THE IMPACT OF CVA/DVA

Because accurately estimating CVA/DVA is not a

trivial exercise, qualitatively assessing the factors

that have the largest impact on the size of CVA/

DVA is a good place to start – and it can be done


outlook

2015Risk Outlook

relatively easily with very little time and almost

no cost.

This qualitative assessment of CVA/DVA helps

an entity determine whether to explore a robust

approach or a simplified approach. The key

factors that drive the value of CVA/DVA are

listed in Table 1 below.

By considering the factors below, an entity can

begin to contemplate which type of CVA/DVA

model is best suited for its needs. A more robust

implementation may be warranted for those

entities with derivative portfolios consisting of

larger notional amounts, higher current fair values,

longer-dated trades, minimal netting, multiple

asset classes (especially when portfolios have

products like cross currency swaps that require an

exchange of principal at the end of the contract),

lower or no collateral requirements, and/or

high credit spreads. If an entity’s portfolio has

characteristics that suggest a smaller CVA/DVA,

then a more simplified approach may suffice.

Note: Due to the complexities of calculating CVA/

DVA and the interactions of the variables involved,

this table is intended to provide an indication of the

general impact of the individual factors identified. If

an entity is unsure after this initial assessment, they

may want to contract with a third-party provider to

obtain additional insight.

FACTORS INCREASES CVA/DVA

DECREASES CVA/DVA

DESCRIPTION

Portfolio size Large Small Both notional amount and the number of trades affect the CVA/DVA.

Current Fair Value

In or out-of-the-money

At-the-money The current fair value influences the credit exposure; whether a contract is significantly in or out of the money has a direct impact on the CVA/DVA.

Duration to Maturity

Longer Shorter Credit exposure of longer-dated contracts is more significant that shorter-dated contracts.

Netting No or low number of offsetting positions

Higher numbers of offsetting positions

If an entity executes pay and receive fixed swaps or buys and sells the same currency pairs with the same counterparty, netting will decrease credit exposure.

Complexity of Portfolio

Multiple asset classes

Single asset class

When a portfolio consists of derivatives based on multiple asset classes (interest rates, FX, and commodities), netting of positions is more difficult to achieve. Also, CVA/DVA volatility can be higher because different asset classes have different exposure profiles. For example, interest rate exposures tend to decline after about one third of the tenor has passed; on the other hand, FX and commodity exposures can stay elevated through maturity.

Collateral No or little collateral

Collateral is posted

When trades are fully collateralized, CVA/DVA is generally zero; when no collateral is posted, counterparties are fully exposed to counterparty credit risk.

Credit risk High level of credit risk

Lower level of risk

The degree of risk in own or counterparty nonperformance risk has a direct impact on CVA/DVA.

UNDERSTAND HOW MARKET PARTICIPANTS CALCULATE CVA/DVA

The decision between implementing a robust

or simplified CVA/DVA model matters because

the results and costs of implementing the

two models can be significantly different.

The list below highlights the key inputs and

assumptions market participants use in valuing

derivatives and that should be considered

when implementing AASB13. An understanding

of these key inputs and assumptions will help

an entity distinguish between a robust and

simplified approach to calculating CVA/DVA.

Credit Exposure: The most critical implementation

decision and the decision that will have the greatest

impact on calculated CVA/DVAs is the method

used to estimate the credit exposure of a derivative

or portfolio of derivatives. CVA/DVA models are

generally based on either a current exposure

(“CE”) or potential future exposure (“PFE”)

approach. A CE approach is based only on the

current termination value of the derivative as of the

reporting date and does not consider how credit

risk changes over time. The PFE approach is widely

used by dealers and sophisticated derivative users

because it more accurately represents the way

these entities evaluate and price nonperformance

risk and is more theoretically sound because it

estimates the credit risk of the derivative over time.

KEY FACTORS THAT IMPACT CVA/DVA

Using amore advanced method not only leads to closer compliance and fewer auditor concerns, but it can also reduce CVA/ DVA volatility.”

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While the PFE approach is more complicated

and costly to implement, many audit firms

believe this approach is preferable over the CE

approach because it results in a more economically

defensible valuation.

Chart 1 shows the credit exposure using both a

PFE and CE approach for a 10-year, $200 million,

AUD-USD cross currency swap with a fair value

of nearly $62 million.

While implementing a CE approach may reduce

cost and complexity, there are significant

drawbacks. For example, a CE approach can

result in a more volatile CVA/DVA than a PFE

approach. Also, CVA/DVAs calculated under

a pure CE approach can be larger than those

calculated under a PFE approach because

there is no consideration of the “decay” of the

exposure over time or the potential offsetting of

exposures for forward based contracts.

Table 2 shows how the CVA/DVA changes

over time for the same 10-year, $200 million,

AUD-USD cross currency swap (where credit

spreads are held constant and are 50bps for

bank/counterparty and 250bps for entity) and

compares the actual CVA/DVA under both PFE

and CE approaches.

Portfolio Level Unit of Account: When a master

netting arrangement exists (for example, an

ISDA Master Agreement), the appropriate unit of

account is the counterparty portfolio level. Credit

exposures should be calculated at that level so

the impact of netting offsetting exposures is

appropriately considered.

Collateral and Other Credit Enhancements:

Collateral arrangements should be considered

when calculating CVA/DVA because they

can significantly impact credit exposure. For

example, when trades are fully collateralized

the CVA/DVA is generally zero. Other credit

enhancements like mutual puts, mandatory cash

settlements, and guarantees also reduce credit

exposure and should be incorporated into CVA/

DVA calculations.

Unfortunately, credit enhancements are often

overlooked because their implications are less

obvious. For example, if a ten-year interest rate

swap requires mandatory cash settlement after

six months, the credit exposure is reduced by

nine and a half years.

Bilateral Credit Risk: Counterparty and

own credit risk should be considered when

calculating overall credit risk. However, this

may be easier said than done depending on

the availability of credit spread information.

For example, while CDS spreads may be readily

available for some counterparties, they may be

non-existent for others. A lack of credit spread

information would force entities to estimate

credit spreads when calculating CVA/DVAs.

Risk Outlook

Inception Period 1 Period 2 Period 3 Period 4 Period 5 Period 6

Date 12/31/09 6/30/10 6/30/11 6/30/12 6/30/13 6/30/14 12/31/14

Years to

Maturity

10 9.5 8.5 7.5 6.5 5.5 5

Spot Rate 0.8989 0.8416 1.07245 1.0236 0.9147 0.9431 0.81625

Termination

Value

0 1,597,089 (45,150,900) (62,482,898) (34,745,346) (44,073,357) (15,997,486)

PFE (CVA)/

DVA

666,158 873,311 4,811,332 6,319,461 3,077,547 3,076,538 1,142,199

CE (CVA)/DVA 0 (58,450) 7,528,217 10,106,284 4,982,895 5,514,859 1,858,633

Difference 666,158 931,761 (2,716,885) (3,786,823) (1,905,348) (2,438,321) (716,433)

TABLE 2: CROSS CURRENCY SWAP CVA/DVA USING BOTH CE AND PFE APPROACHES

CHART 1: PFE vs CE

40,000,000

20,000,000

_

(20,000,000)

(40,000,000)

(60,000,000)

(80,000,000)

J-1

2

0-1

2

F-1

3

J-1

3

0-1

3

F-1

4

J-1

4

0-1

4

F-1

5

J-1

5

0-1

5

F-1

6

J-1

6

0-1

6

F-1

7

J-1

7

0-1

7

F-1

8

J-1

8

0-1

8

F-1

9

J-1

9

0-1

9

PFD - Entity Exposure to Counterparty

PFE - Net Exposure

PFE - Counterparty Exposure to Entity

PFE - Current Exposure


outlook

2015Risk Outlook

Incorporating the key assumptions that market

participants use is complex. An entity will want

to weigh the materiality of the potential CVA/

DVA against the requirements of AASB 13 based

on the specific characteristics of its derivative

portfolio to produce compliant valuations

that meet the expectations of management,

audit committees, auditors, regulators and

shareholders.

DECIDE WHETHER TO BUILD IN-HOUSE OR TO OUTSOURCE

Generally only the largest derivative users

develop in-house models. The benefit of building

models in-house is that an entity has control

over model development and can keep them

updated for market changes. The down side

to in-house development is cost and time.

Creating in-house models from scratch can take

thousands of hours and most entities simply

don’t have the capacity or expertise.

Due to the complexity of calculating CVA/

DVA, some entities simply rely on counterparty

(dealer bank) valuation statements. However,

very few counterparty valuation statements

actually incorporate CVA/DVA because

banks typically view their CVA/DVA models

as proprietary. Because of this, if an entity

is relying on periodic valuation statements

from dealer counterparties for fair value

measurements in its financial statements, it is

very likely that entity is not complying with the

requirements in AASB 13.

Some entities look to auditors for guidance on

implementing CVA/DVA methods. However,

auditors are not an appropriate source to help

calculate CVA/DVAs due to independence

concerns. While some accounting firms do have

robust CVA/DVA models, they are typically

only used to serve non-audit clients. Auditors

can, however, recommend service providers

and discuss their preferences regarding various

CVA/DVA methods.

Many entities employ independent, third-party

valuation experts to calculate CVA/DVAs. This

can be a very cost effective alternative. Reliance

on the expertise of a third-party provider tends

to improve controls, enhance the sophistication

of the model, and increase independence – all

of which address common auditor concerns.

The best service providers have vetted their

approach with auditors and regulators, provide

a report on internal controls, and have built

systems that address many of the most difficult

implementation problems.

For those entities electing to employ a third-

party provider, it is important to understand

the inputs and assumptions being used in the

valuation. This can ensure that valuations are

fully compliant with AASB 13 and that the entity

isn’t simply using a “black box” valuation service.

While using an outside service provider does not

completely relieve an entity from the work and

challenges surrounding CVA/DVA calculations, it

can greatly reduce the time, resources, and cost

it takes to get up to speed and comply with the

standard.

CONCLUSION

Compliance with AASB 13 is not optional and its

requirements necessitate a serious evaluation

of the options available to implement CVA/DVA

calculations. Using a more advanced method

not only leads to closer compliance and fewer

auditor concerns, but it can also reduce CVA/

DVA volatility.

Rapid changes in market inputs (due to either

FX, interest rates, credit spreads) require

continual attention for each reporting period

to ensure what may previously have been ‘Not

Material’ does not suddenly become an issue at

the next reporting period. While implementing a

CVA/DVA can be very complex, using the steps

above will ensure you are implementing a model

that is appropriate for your portfolio.

ABOUT THE COMPANY

Chatham Financial provides CVA adjusted valuations for over

1000 companies globally, from ASX200 and Fortune 500, to

many small and medium sized enterprises. Services also include

derivatives advisory; where our experts advise on derivatives

execution, accounting and regulatory issues.

For those entities electing to employ a third-party provider, it is important to understand the inputs and assumptions being used in the valuation. This can ensure that valuations are fully compliant with AASB 13 and that the entity isn’t simply using a “black box” valuation service.”

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UNDERSTANDING A TRUE SAAS: WHAT YOU DON’T KNOW CAN COST YOU

Managing treasury in a transitioning economy was

the central theme at last year’s FTA Congress.

Conference organisers were encouraging

attendees that it was time to face a change - and

those who embrace change receive the benefits.

When it comes to treasury technology, it is the

SaaS model that supports change.

But ‘cloud’ is not enough to understand what

a true SaaS really is. What some are calling

SaaS applications are really application service

provider (ASP) applications or a mix of old

installed applications with new front-ends.

COMMUNITY DEFINES A TRUE SAAS

Technology has progressed from mainframes,

to personal computers, to installed client/

server systems, and now to the cloud. SaaS is

the way to deliver software in the cloud. A true

SaaS solution is a single-version, multi-tenant

application that hosts a community of users on

a common platform.

Community is the fundamental feature of a

true SaaS because all of the application’s users

benefit from working on a common technology

platform.

These benefits are felt inside every company

and across all users. It allows economies of

scale for both the provider and, therefore,

the user community. No one company has to

wait for an upgrade because all users are kept

current on the same version of the application,

at the same time.

In addition, a true SaaS community can

extend beyond users to integrate connectivity

seamlessly into third party solutions, enhancing

an all-in-one treasury workflow.

Treasury professionals want to know that the

software they are working on represents the

best practices of the industry. With a SaaS

solution, it is the work of its community of

users that continually feeds the ongoing

development of the solution and the richness of

its functionality over time.

This, in turn, allows companies to standardise their

workflow across the global treasury organisation,

across functions, geographies and time zones.

Ironically, it is the standardisation that a

true SaaS solution provides that is often

misunderstood, keeping companies tied to old

technology and old ideas of customisation.

IN A TRANSITIONAL PERIOD FOR TREASURERS, WHEN OLD TECHNOLOGY STILL EXISTS, NOT UNDERSTANDING WHAT A TRUE SOFTWARE-AS-A-SERVICE (SAAS) OFFERING IS AND HOW IT CAN BENEFIT YOUR BUSINESS CAN COST YOU - PARTICULARLY WHEN ‘ALTERNATIVES’ OR ‘CHOICES’ ARE THIN DISGUISES FOR STOP-GAP MEASURES USED BY PROVIDERS OF OLD TECHNOLOGY.BY PHILIP PETTINATO, CHIEF TECHNOLOGY OFFICER, REVAL

Technology Outlook

SaaS solution is a single-version, multi-tenant application that hosts a community of users on a common platform.”


outlook

2015Technology Outlook

STANDARDISATION IS NOT ABOUT RIGIDITY, IT IS ABOUT CONFIGURABILITY

There are many ways an organisation is

structured, depending on its industry, its size,

its regions, and whether it is centralised or

decentralised. A SaaS solution enables companies

to standardise workflow across the enterprise,

while enabling them to configure a set of

parameters to meet their own unique needs.

Getting the entire enterprise on a common

platform is necessary for global visibility into

positions and exposures, setting controls, and

assimilating new business entities into the

organisation. Companies really don’t want to

customise themselves into an island that, given

time or a change in leadership, would leave even

a support team unable to figure out their version.

This approach is not scalable and not sustainable.

As companies begin to grow out of their old

technology, they will want to adopt SaaS

solutions. SaaS remains the most popular form

of cloud service and adoption has more than

quintupled to 74% of surveyed respondents

in 2014 from 13% in 2011, according to North

Bridge Venture Partners´ 2014 Future of Cloud

Survey. But as companies begin to evaluate SaaS

offerings in treasury, they should make sure they

can identify a true SaaS in the mix.

HOW MISTAKING ASP FOR SAAS CAN COST YOU

You cannot simply substitute ASP for SaaS, or

think that they mean the same thing. Be aware

of what a SaaS should look like. Below is a chart

to demonstrate how a SaaS offering should

satisfy your needs:

WHAT YOU NEEDASP

HOUSE-TO-HOUSE

SAAS

THE POWER OF COMMUNITY

ROOM TO GROW

Economies of scale are limited – if you require

additional users, you need to pay for it. This

creates an unpredictable expense stream.

An annual subscription fee with no hidden costs. Your

subscription should already include upgrades, data, security

and integrated services. An annual fee ensures you control the

subscription requirements as your business grows.

PROVEN

SECURITY

Minimum security is provided. Clients must

dictate their security requirements to the ASP

provider at an additional fee.

SaaS environments provide the highest level of security.

Ongoing monitoring and testing should be performed by

internal and external parties. Users will benefit from SSAE16

compliant security protocols, including encryption, intrusion and

penetration testing at no extra cost.

FAST UPGRADES

Upgrades are individually deployed to meet

many single-instances of the application.

These upgrades are installed in your individual

environment for a fee and on a first come first

serve basis. Quality assurance and post-upgrade

testing costs are your responsibility.

There are no costs or investment of time when it comes to SaaS

upgrades. Upgrades should come with standard service and

should be rolled out at pre-defined periods. As every SaaS client

is on the same version of the application, timely upgrades allow

you to respond fast to market demands. Quality assurance and

testing is the responsibility of the SaaS provider.

INTEGRATION

WITH OTHER

SYSTEMS

Additional managed services, such as trade

portals, general ledger, market data and bank

connectivity are your responsibility to select,

implement and maintain.

SaaS solutions are designed from inception to be open and

easy to integrate with standard web service technologies,

such as trade portals, general ledger, market data and bank

connectivity. SaaS providers should integrate and maintain

value-added services as part of the core service offering,

removing the costs and hassle of maintaining disparate systems,

relationships and contracts.

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China Outlook

China is the world’s largest trader and is on

track to surpass the United States as the world’s

largest economy. Despite its recent slowdown,

it is still the largest contributor by far to global

economic growth.

So, as China takes its place as the biggest

economy on the globe, will its currency, the

Renminbi (RMB), become the most widely used

international currency as well?

If headlines translated into trading volumes and

influence, the RMB would be well on its way

to dominating the world’s currency markets. It

graces the front page and business headlines

consistently - and with good reason.

The RMB has vaulted ahead of the euro and

Japanese yen to become the second most widely

used currency in international trade finance. In

2013, companies used China’s currency for 8.7%

of all credit agreements tied to global trade, up

from 4.4% a year earlier, according to SWIFT,

which monitors international currency flows.

This puts the RMB well ahead of the euro

(6.64%) and the yen (1.36%) but still far behind

the US dollar which backs 81.1% of global trade

finance.

The adoption of RMB for trade is reflected in the

rising importance of the RMB in global foreign

exchange markets, rising in rank from 17th

position in 2010 (with a negligible 0.9% share)

to 9th at the end of 2013 (with a 2.2% share). In

volume terms this is significant growth for the

RMB, but the US dollar is still by far the most

traded currency, with an 87% share.

A third measure of the rising use of RMB is its

use as a payment (or trade settlement) currency.

The RMB now ranks 7th position, up from 35th

less than four years ago. Despite this increase, the

currency still holds a relatively modest 1.5% share

of overall global payment flows, according to mid

2014 data from SWIFT. One explanation of why

the RMB’s role in overall payment lags its role in

trade finance is that Chinese companies may be

using RMB denominated Letters of Credit finance

as way to borrow money more cheaply offshore.

While the rise in RMB globally is significant

and points to the RMB’s evolution from a trade

settlement currency to a trade finance and

treasury management currency, it will not be a

true global currency until it is fully convertible.

Chinese government policies and regulatory

reform have supported this ambition. Over the

past decade, we have witnessed the complete

opening up of cross-border RMB trade

settlement and the proliferation of offshore

RMB-denominated (dim sum) bond markets.

The launch and expansion of inbound and

outbound investment programs for institutional

investors are acting as a catalyst for market

participants to use the RMB not just for trade

CHINA’S RENMINBI: IT’S HIGH TIME FOR DECISIVE ACTION BY DAVID OLSSON, CHINA PRACTICE CONSULTANT, KING & WOOD MALLESONS

If headlines translated into trading volumes and influence, the RMB would be well on its way to dominating the world’s currency markets."


outlook

2015China Outlook

settlement but also for investment, asset

allocation and diversification.

The list keeps getting longer, with the latest

additions being the inception of the pilot Free

Trade Zone in Shanghai and the launch of the

Shanghai - Hong Kong Stock Connect allowing

mutual access between the stock exchanges in

Shanghai and Hong Kong.

Such developments come against a broader

backdrop of growing market confidence

and deeper financial market integration.

In November 2014, Sydney joined London,

Singapore, Frankfurt and a small number of

other international financial centres where RMB

transactions can be settled directly, confirming

Sydney’s status as an official offshore RMB hub.

What’s driving the RMB rise? Two key factors lie

behind the currency’s continued advance.

The first is China’s determination to use on-going

financial reforms to pursue its national goal of

growing a broader based consumer economy. A

determination to internationalise the RMB as a

means to economic growth goes hand in hand with

the liberalisation of interest rates, the widening

of the RMB trading band, the growth of the

bond market and the development of a stronger

institutional, regulatory and legal framework.

Second, there are commercial benefits to be

gained from settling obligations of Chinese

enterprises in RMB. Today, companies around the

world are using the RMB to achieve better terms

of trade with China and more effective treasury

management of China-related cash pools.

In addition, for foreign companies with a growing

presence in the country, adopting the RMB

enables them to self-fund investments and/or

expand their market share with greater flexibility

than if they had to raise RMB from the market.

SWITCHING TO RMB

Of course, as with any new initiative, there are

challenges, including tax, legal, and operational

issues that have prompted some companies to

delay their full participation until some of the

uncertainties are resolved.

The adoption of a new currency is not an easy

task requiring Corporate Treasurers and Chief

Financial Officers to assess the scope and cost

of a move to RMB, as well as determining how

precisely RMB can be leveraged to the benefit of

their organisation.

Critical to this assessment is the fact that the

internationalisation process is a policy driven

initiative linked to China’s overall development

goals. This requires a clear understanding of

the RMB’s policy driven trajectory and the

multi-faceted legal, regulatory and operational

environment.

The launch and expansion of inbound and outbound investment programs for institutional investors are acting as a catalyst for market participants to use the RMB not just for trade settlement but also for investment, asset allocation and diversification."

FIGURE 1: DEVELOPMENT IN RMB INTERNATIONALISATION

Offshore RMB Development

Offshore RMB Clearing(currency swap agreement, direct FX cross,

appointed clearing banks)

A Deepening Offshore RMB Market(offshore FX deliverable market, liquidity pool)

Rising International Presence as a Trading and Investment Currency

(Senior Officials, country level dialogues/visit)

Onshore RMB Liberalisation

Interest Rate Liberalisation(Lifting lending rate restriction, FCY deposit rate in SH)

Greater Exchange Rate Flexibility(onshore FX trading band, FX spread/pricing)

Capital Account Liberalisation(2-way sweeping, XB borrowing, Q’s schemes

RQFII, QFII, QDII, FDI, ODI, SH- HK Stock Connect)

Source: Standard Chartered Bank

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China Outlook

For example, while the RMB is a single currency,

FX controls and regulations mean companies need

to separate RMB funds into two distinct onshore

and offshore pools. In practical terms, this means

treating RMB as two currencies: CNY (renminbi

held onshore) and CNH (renminbi held offshore).

Companies need to make every effort to stay

abreast of regulatory developments. All of the

major banks (local, international and Chinese)

operating in Australia and legal and accounting

firms with strong China capability are well placed

to provide education and consultative support.

A recurrent theme in surveys undertaken over

the course of the last two years in Australia is

the importance of internal engagement and buy-

in to an RMB strategy. Ensuring that in-house

operations and thinking are aligned across all

parts of the organisation is a vital consideration.

There is also the more practical question of

technology. Corporates will need to upgrade

their treasury and accounting systems to

make them RMB-ready. The good news is that

developments at the market level such as the

new RMB settlement platform set up by ASX/

Austraclear and Bank of China and the new RMB

Clearing Bank arrangements in Sydney plus other

policy initiatives put Australian corporates in a

strong starting position.

USING RMB FOR COMPETITIVE ADVANTAGE

Understanding all these changes is undoubtedly a

challenging task and carries with it an element of

risk. For many, there is a tendency take a reactive

approach and neglect market trends. They are stuck

in the rut of thinking that the western focussed

market will remain dominant.

With the rise of the RMB and importance of Chinese

companies to global supply chains set to continue,

such hesitant companies run the risk of losing

business as the ability to settle in RMB becomes

not only a competitive advantage but a minimum

requirement.

RMB is already a major trade finance and trade

settlement currency. The continued breakdown

of onshore/offshore barriers heightens the RMB’s

use and importance as a treasury management

currency. And ongoing financial reform and capital

markets expansion mean the RMB’s progress as an

investment currency is picking up pace.

Although still far from being an international

currency comparable to the US dollar or euro,

Australian companies should be paying close

attention to these developments. The use of RMB

is fast becoming both an immediate competitive

advantage and vital to future strategy for companies

with any form of commercial exposure to China.

ABOUT THE AUTHOR

David Olsson is China Practice Consultant at King & Wood

Mallesons. He chairs the private-sector led Australian RMB

Internationalisation Working Group and the recently established

NSW government steering committee to drive Sydney’s

ambitions as an offshore RMB hub.

FIGURE 2: KEY CONSIDERATIONS FOR RMB INVOICING

KEY CONSIDERATIONS

TO START RMB INVOICING

Change Management

Risk Management

Procurement and Sales

Operational Process and Procedure

Legal and Taxation

FX Liquidity Management

Collections and Receivable Management

Accounting and Finance

Source: Standard Chartered Bank


outlook

2015China Outlook

As a service provider, Intertek is not a capital

intensive company. “Our biggest investment is

our people,” says Matthew Clarke, the company’s

UK-based group treasurer. “We’re in over 100

countries; we tend to be profitable in all those

countries. The main treasury challenges lie in

repatriating cash and profits back to the UK,

as well as the currency risk management which

arises from being in so many countries.”

As a result, when Clarke joined in 2010,

increasing visibility over Intertek’s cash, and

repatriating cash back to the UK more effectively

were key objectives. But, with around £150

million held in almost 1,000 bank accounts, with

over 100 banks around the world, gaining better

control over the company’s cash would be a

significant challenge.

“We had visibility through the accounting

consolidation process once a month, but that

couldn’t tell us in which banks the cash was held

with or what currency it was in,” Clarke explains.

“It didn’t give us anything we needed to manage

that cash from a risk management point of view.”

In order to increase visibility, Clarke oversaw

the development of an online reporting tool

which is used by the entities to report their bank

balances.

The new tool provided the treasury team with

weekly visibility over the company’s group

wide cash. “Arguably, anything more than that

is unnecessary at this time,” says Clarke. “It’s

would be nice to know how much cash we’ve

got in Bangladesh each morning, but I can’t

really do a lot with it from London. SWIFT

based daily reporting is expensive for so many

bank accounts and not even available in some

countries. Knowing what I have once a week

means that if there’s a significant market event

I can quickly check how much I’ve got in a

particular country and take some action. We

reserve SWIFT based reporting solutions for the

accounts we can actually control from treasury.”

The next step was to tackle the repatriation

of cash. While some of Intertek’s entities were

able to send surplus cash to treasury in the

form of short term loans, others were subject

to various currency restrictions. In the countries

with freely convertible currencies, Intertek took

advantage of cash pooling techniques such as

zero balancing in order to replace manual cash

movements with automated sweeping. Working

with Bank of America Merrill Lynch (BofA Merrill)

and Deutsche Bank the company implemented

USD and EUR cash sweeping structures in

Europe and North America.

In the meantime, the company began working to

repatriate cash more effectively from countries

with restricted currencies. A particular focus

was China, where Intertek has over 100 offices

and labs in more than 30 cities. China accounts

for nearly 20% of the company’s revenue and a

greater percentage of its operating profit and

cash flow.

Until recently, cash had been repatriated from

China in the form of an annual dividend. “We

could have done it more frequently, but for us

the process was quite onerous with numerous

regulatory sign-offs,” says Clarke.

BRINGING CASH BACK FROM CHINABY MATTHEW CLARKE CFTP, GROUP TREASURER, INTERTEK GROUP

Knowing what I have once a week means that if there’s a significant market event I can quickly check how much I’ve got in a particular country and take some action.”

China Outlook

outl

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2015


“So we paid an annual dividend in June or July,

and the cash would then start to build up over

the course of the year. We would place the cash

on deposit and achieve the regulated rate, but

there wasn’t much else we could do with it.”

In order to optimise its China balances, Intertek

worked with BofA Merrill to put in place an

entrusted loan structure allowing the company

to move cash more effectively between entities.

But over the next couple of years, a series of

regulatory developments paved the way for

the company to move cash out of China more

effectively.

The first significant development came in

late 2012, when Intertek was invited by Bank

of China to take part in a pilot cross-border

inter-company loan programme being run by

the Peoples Bank of China (“PBOC”). Under

the programme, companies could apply for

a quota for their onshore entities to lend to

related offshore entities. “We did one of these

transactions in Shanghai with Bank of China

and then with the help of BofA Merrill we were

able to apply the same process to the other

provinces,” says Clarke. “We were one of the first

ten companies to get the approvals in Shanghai,

and the first in Guangzhou.”

The new structure, which was approved in

April 2013, enabled the company to achieve a

significant reduction of its trapped cash in China.

It did, however, have some limitations: loans had

to be provided via a one year bullet arrangement

and any cash returned early couldn’t be redrawn.

Further developments were to follow. When

Intertek’s loans came up for renewal in 2014,

greater flexibility was available: the company was

able to use a revolver structure, whereby cash

could be repaid and then redrawn as required.

The loans are also now subject to an annual

review rather than annual maturity.

Further regulatory developments allowed the

company to implement RMB pooling structures

to concentrate cash in China. At the same time,

the need for approval direct from the PBOC was

relaxed, with companies now able to gain the

necessary approvals via their banks.

As a result of these changes, Intertek is now

putting the finishing touches on a structure

which will allow funds to be swept automatically

to an account in the UK once a week. A target

balance of RMB will be left in the pool, and

sweeping will take place on a one-way basis.

“It’s partly due to the timings,” says Clarke.

China Outlook

Guangzhou

Dongguan

Shenzhen

Zhanjiang

XiamenHuizhou

Hainan

ShanghaiHangzhou

WuxiSuzhou

NingboYuyao

Tianjin

Qingdao

Wuhu

Zhengzhou

Dalian

Lianyungang

Urumchi

Beijing

Rizhao

Kunming

Wuhan

NanjingZhangjiagang

9,000+ people

30 cities,

100+ labs and offices

Chengdu

ShijiazhuangWeihai

Xian

Wenzhou

Ningde

Beihai Yangjiang

Qinzhou

Intertek China

●

●

●

In order to send funds back to China, I can draw RMB direct down from my revolver and send it back for a period of time – or I can draw in USD and swap it into RMB. So there are options available and I’m very pleased with the outcome.”


outlook

2015

“At present we only have the one treasury centre,

in London. By the time we know there’s a shortfall

in China, it’s too late to fund with same day value.”

Instead, the company will rely on its cash flow

forecast and target balancing structure to keep the

necessary level of cash in China, and will send back

cash manually if required.

The next piece of the puzzle was the effective

management of the company’s RMB balances in

the UK. When the company’s first loan quota was

obtained in 2013, the company opened accounts in

the UK so that cash could be converted to dollars

or pounds using swaps in order to pay down loan

facilities. Intertek has since opened a standard

header account with BofA Merrill in the UK which

will be linked to the China cash pool.

In the meantime, the company is also working to

broaden its sources for RMB liquidity in the UK. “As

our core revolver facility was up for renewal in 2014,

I asked our core banks if we could have a separate

tranche under that facility that could be drawn

in either USD or RMB in the UK,” says Clarke. “In

order to send funds back to China, I can draw RMB

direct down from my revolver and send it back for

a period of time – or I can draw in USD and swap

it into RMB. So there are options available and

I’m very pleased with the outcome. As far as we

are aware this is the first time this has been done

outside of Asia.”

Clarke says that the company’s strong local

management and local finance team has been

instrumental in the success of the project so far.

While there has been a lot of documentation to

process, this has largely been handled by the

company’s local teams. “On at least one occasion

Bank of China arranged for our local team to meet

with PBOC to talk through some of the challenges

that arise and come up with solutions,” he explains.

“The international banks have helped a lot as well by

streamlining documentary requirements.”

As an early adopter of the new regulations, Clarke

has a clear insight into the impact the latest

developments have had for cash management

in China. “In the last 24 months there has been

a real drive to internationalise the currency,” he

observes. “There are now quite a few options

available. Eighteen months ago, most companies

were broadly taking the same approach – but today

companies are using a lot of different products.”

China Outlook

Cash management China

0%

5%

10%

15%

20%

25%

30%

Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14

China cash as % of China annual revenue

2014 2013 2010

• EntrustmentLoan

• Annual dividend

• Pilot cross borderRMB intercompanyloans

• RMB intercompanysettlements

• Domestic RMBpool

• Cross border RMBsweep

• RMB revolver inUK

For other companies operating in China, Clarke

suggests that the recent regulatory changes

make this a good time to review existing cash

management processes. “If you looked at the

situation 18 months ago and decided there wasn’t

much you could do, you need to look at it again

now because there’s quite a bit of flexibility

available,” he says.

Looking forward, Clarke says there may be room

for further improvement where other currencies

in China are concerned. “Most of our revenue

in China is in RMB, but we do have some USD

income as well,” he concludes.

“There’s some new flexibility available in the

Shanghai Free Trade Zone to make payments on

behalf of and collections on behalf of. This will

allow us to improve the efficiency of processing

our foreign currencies in China – so that’s

probably the 2015 project for the local team.”

ABOUT INTERTEK GROUP

Intertek Group plc is a leading global quality solutions

company providing testing, inspecting and certification

services across a wide range of industries. The company is

listed on the FTSE 100 and employs more than 36,000 people

in over 100 countries.

If you looked at the situation 18 months ago and decided there wasn’t much you could do, you need to look at it again now because there’s quite a bit of flexibility available.”

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Working Capital Outlook

SUPPLY CHAIN FINANCE– OPPORTUNITIES & CHALLENGES FOR TREASURERS AN INTERVIEW WITH ANZ

Supply Chain Finance (SCF) is a term that is

gaining a lot of attention and momentum at

present. So I talked to Catherine Manallack and

Ryan Fernandes, two ANZ Bank specialists in

Supply Chain Finance, to understand more about

SCF - why it is attractive at the moment and why

treasurers should look at SCF as a tool in their

treasury department’s management.

SCF can be traced back to the 1980s when

competition in the apparel and textile industry

intensified. A US industry group ‘Crafted With

Pride’ commissioned Kurt Salmon Associates to

do a supply chain study. The study found the

length of the supply chain (from raw material

to consumer) was 66 weeks, of which 40 weeks

were spent in warehouses or in transit. The long

supply chain resulted in high working capital

costs and the lack of the right product in the

right place at the right time.

Move forward 30 odd years and the world

is in the midst of the Global Financial Crisis,

credit and financing is tight, everyone is using

computers and technology advances are moving

at lightning speed.

Globalisation has dramatically altered the supply

chains of corporations. Goods are ‘now made

in the world’ with design, manufacturing and

assembling happening in multiple countries

before the final sale to customers.

SB: Catherine, what is your elevator, layperson

description of what Supply Chain Finance

(SCF) is?

CM: "SCF provides cost effective liquidity for

open account trade flows between buyers and

suppliers. The key to SCF is that the supplier

is able to access funding which leverages the

buyer’s credit rating. SCF is run through smart

technology linking the buyer/supplier and

provides for Days Sales Outstanding and Days

Payable Outstanding to be improved and for

customers to unlock working capital, reduce

costs and risks."

SB: Why, now, do you think SCF is becoming

increasingly prevalent? What factors have

brought this about?

RF: “We have been operating on Letters of

Credit and funded solutions for a long time,

but the GFC was the tipping point when

companies started to want to actively manage

their working capital. From an external lender

perspective the supply chain itself is changing

BY STEPHEN BARNES FFTP, DIRECTOR, BYRONVALE ADVISORS

Globalisation has dramatically altered the supply chains of corporations. Goods are ‘now made in the world’ with design, manufacturing and assembling happening in multiple countries before the final sale to customers. ”


outlook

2015

– it has gone a lot more global, there is much

more fragmentation with corporates trying

to manage suppliers and customers in many

different locations. There is more risk that

companies are looking to manage.

I think the need for liquidity has become

a priority, especially when dealing with

counterparties in Asia for example where their

cost of funding or access to liquidity may not be

as reliable so they are looking to benefit from

better, cheaper funding. Another impetus to SCF

has been advancement in technology compared

to ten years ago.”

CM: “Companies now have a mandate to look

for alternative sources of funding and not be

so reliant on debt, and look at ways to fund

themselves in ways that are more aligned to the

trade flows of the company.”

RF: “The regulatory landscape has also changed,

and with changes like Basel III that is coming up

that will potentially push the cost of vanilla debt

up, companies are looking for smarter solutions.”


Buyers want to extend their payment terms as far as possible, and sellers want to shorten their payment terms as much as possible. SCF facilitates both these aims.”

SB: When you call a Treasurer to ask to see them

about implementing a SCF process, what are the

reasons they would want lock in time to see you?

CM: “It provides flexibility. If you are a buyer, it

gives you flexibility in that you can change your

payment terms with suppliers, and it gives you the

flexibility to reduce the risk in your supply chain by

allowing suppliers to have access to liquidity.”

RF: “It may also affect your gearing ratios

because SCF may not be seen as debt (subject

to auditors opinion), and it may help you

negotiate better pricing from the supplier. Also

from a risk management perspective, especially

if you are dependent on a few suppliers and the

suppliers are struggling to get enough liquidity,

you can help inject liquidity into their business

and make them and the supply more certain.

It also brings a lot more visibility and efficiency

to your account payables or receivables.

Everyone can see when invoices are approved

and paid, and with the technology nowadays

everyone can see at what stage the invoice is at.

CATHERINE MANALLACKGLOBAL PRODUCT MANAGER, SUPPLY CHAIN FINANCE, INTERNATIONAL &

INSTITUTIONAL BANKING, ANZ

Since joining in 2008, Catherine is responsible for structuring innovative supply chain

finance solutions, assisting clients to maximise efficiencies while reducing risk within

their business. With an emphasis on growth throughout Asia, Catherine draws on her

extensive knowledge of legal, technology and country regulations to ensure ANZ’s

capabilities are fit for market. Catherine holds a Bachelor of Commerce (Finance /

Economics) from Monash University.

RYAN FERNANDESGLOBAL PRODUCT MANAGER, SUPPLY CHAIN FINANCE, INTERNATIONAL &

INSTITUTIONAL BANKING, ANZ

With over 10 years’ experience, Ryan is responsible for deploying and implementing

domestic and cross border Supply Chain Finance capabilities across the ANZ network

of 33 markets. Ryan works with large corporate clients to help them optimise working

capital, manage risk and achieve greater operational efficiencies across their financial

supply chain. Ryan holds a Bachelor of Commerce and Master of Science in Technology

Management & Systems from Monash University.

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On the seller side you may be able to access

the buyer’s lower cost of debt, especially if the

buyer is a far bigger entity as the SCF cost of

funds utilises the buyer’s cost of funds based on

the buyer’s payment risk. It can also improve

your liquidity by reducing your DSOs (Days

Sales Outstanding).”

SB: I hear SCF being described as a win: win for

both the supplier and the buyer. How is this so?

CM: “Buyers want to extend their payment

terms as far as possible, and sellers want

to shorten their payment terms as much as

possible. SCF facilitates both these aims.

Buyers can negotiate longer payment terms

with the supplier, but for the supplier they can

access their receipt of funds as soon as the

buyer accepts the invoice and loads it into the

technology platform.”

SB: I suppose from a treasurer’s perspective

and as a supplier, having the bank in the middle

ensures I’m going to get paid, which may be

more important than the reduction in DSO or the

lowering of the cost of funds.

CM: “SCF facilities that we put in place are

limited recourse agreements – we don’t take

performance risk if say the product doesn’t

work, we take the default risk only.”

SB: SCF facilities also change the relationship

dynamic between the buyer and seller – the

seller doesn’t have to worry that every time the

buyer places an order that they may not get paid

or not paid when the invoice is due. There is no

requirement for additional collateral to support

the purchase or additional terms and conditions.

RF: “Correct, it’s not all about the financing – it

impacts the other aspects like the relationship

and even pricing of the product.”

CM: “If you’re a supplier and you’re tendering

for a contract with a buyer, you don’t have to

compete on price, and you may be able to offer

the buyer better payment terms than the other

tenderers.”

SB: What tips would you give corporate

treasurers who were looking at implementing a

SCF process in their organisation? How would

you help them sell a SCF process into their

organisation?

RF: “The first thing we would ask you is what

your drivers are for implementing a program.

We would look at how a SCF program would

unlock some working capital for you and use

SCF as the enabler. We would talk to you about

how you would roll the SCF process out in your

organisation. Who was going to ‘sponsor’ the

SCF program at a C-level in the organisation?

You would also need to understand the drivers

within the other parts of the business such as

accounts receivable, procurement or finance

area so you could demonstrate the benefits to

these areas.

Engage your legal team and auditors early on

and get them comfortable with the contracts


outlook

2015Working Capital Outlook

Through the implementation of the SCF process, treasurers are value-adding to the organisation and broadening their knowledge and understanding of the entire enterprise.”

and the implications of the contracts. Lastly get

alignment of KPIs to ensure the success of the

SCP process.”

SB: You mentioned getting the legal team and

auditors engaged early. Why? What types of

things as a treasurer should I be aware of that the

legal team or auditors may come back with?

CM: “Legal is going to be looking at the

assignment issues. With regard to the auditors,

these SCF contracts are often deemed to be

balance sheet effective. On the buyer side it may

change the mix between trade payables and short-

term debt. On the supplier side the mix between

trade receivables and cash.”

RF: “Each auditor may have a slightly different

view as to how the SCF contracts should be

treated. They will also be interested in the legal

aspects and the fee and interest components.”

SB: What sort of push back questions do you get

from potential clients?

CM: “How is this different from factoring? It’s

different in a number of areas. Rather than looking

at a pool of debtors or the whole debtor book,

it looks at discrete debtors – chunky individual

debtors. It is limited recourse typically – so the

bank takes on the debtor’s insolvency risk and not

your insolvency risk (in a seller-led SCF facility).

Lastly it is generally cheaper than factoring due

to the discrete debtors with generally better

credit rating than the pool of debtors.”

RF: “On the payable side, it is more about selling

the benefits to your suppliers, particularly if they

are in different markets. Treasurers ask how they

go about selling the SCF to the suppliers.”

With working capital management a priority

of Boards and senior executives, Supply

Chain Finance is a useful tool in managing

working capital, with the additional benefits

of assisting other areas of the organisation

such as procurement, and sales, the reduction

of risk, and through the use of technology

become operationally more efficient and

effective. Through the implementation of the

SCF process, treasurers are value-adding to the

organisation and broadening their knowledge

and understanding of the entire enterprise.

ABOUT THE AUTHOR

Stephen Barnes has worked as a corporate treasurer, capital

markets consultant, CFO, company director, and currency and

derivatives trader, and is the immediate past Vice-President of

the Finance and Treasury Association.

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The outlook for global debt markets in 2015 poses

an interesting dynamic between fundamental and

technical market forces, with the winning influence

likely to shape market conditions in the year ahead.

Undoubtedly, the high level of global investor

liquidity competing for a relatively scarce universe

of corporate exposure will continue to underpin

the favourable issuance environment we have

experienced over the past 18 months. However,

despite this positive technical market backdrop,

headwinds are likely to arise over the course

of 2015 as global markets digest event driven

volatility, the reality of slower global economic

growth, particularly in Europe and the impact of the

impending rise in US interest rates.

On the whole, the outlook remains positive and global

debt markets are expected to continue to provide

constructive issuance conditions for corporate

borrowers in 2015, with a wide array of funding

options available. However, as we have seen recently,

market conditions remain susceptible to sudden

shifts in investor sentiment and associated periods of

heightened volatility. As such, timing the market to

take advantage of windows of relative market stability

is likely to be of greater importance for issuers in 2015.

UNDERSUPPLY OF CORPORATE CREDIT

While the majority of 2014 provided a relatively

stable market backdrop - ideal for primary issuance,

a key theme across global debt markets has been

the general lack of corporate new issuance relative

to demand. This is in part a result of the prudent

funding strategies adopted by corporate Australia

to strengthen their balance sheets over recent years

- diversifying sources of funding and extending debt

maturity profiles, but also reflects the lack of credit

growth seen amidst limited capital expenditure and

sluggish merger and acquisition activity.

This theme is expected to continue across

corporate Australia generally into 2015; however

a key change anticipated to result in a material

increase in additional supply is likely to arise in the

form of the privatisation of government owned

assets.

DEBT MARKETS IN 2015 – TIMING WILL BE EVERYTHINGBY STEPHEN BOYD, HEAD OF CORPORATE DEBT MARKETS ORIGINATION,

NATIONAL AUSTRALIA BANK

Timing to market to take advantage of windows of relative market stability is likely to be of greater importance in 2015.”

Debt Markets Outlook

FIGURE 1. CREDIT GROWTH REMAINS LIMITED

%

20

10

0

-10

%

20

10

0

-102002 2006 2010 2014

BUSINESS CREDIT GROWTH

Year-ended

Business

Sources: APRA; RBA


outlook

2015

The traditional debt markets accessed by Australian corporates – loans, A$MTN, EMTN, 144A and US Private Placement are all expected to offer competitive financing alternatives in 2015, providing corporate treasurers choice in terms of both markets and execution.”


Privatisations such as the proposed sale by the New

South Wales and Queensland government of their

respective “Poles and Wires” electricity transmission

and distribution businesses represents a significant

amount of potential new financing. While the

associated increase in funding requirements tied to

these prospective privatisations can be adequately

met through the bank and various global debt capital

markets without materially impacting the capacity for

other issuers, borrowers will need to consider their

targeted debt raising timeframes and sequencing of

markets within the context of avoiding competing

with these larger financings, particularly utility and

infrastructure borrowers of a similar nature.

HIGH LEVELS OF INVESTOR LIQUIDITY SUPPORTING ISSUANCE

Throughout 2014 Australian corporates enjoyed the

benefits of having a choice of competitive funding

alternatives across global markets. Tight credit

spreads, coupled with low base interest rates and

a high level of investor liquidity combined to set a

highly attractive environment for both inaugural and

repeat issuers.

The historically low interest rate environment has

driven investors to seek yield by increasing the

duration of their exposures and by investing further

down the credit rating spectrum. Domestically, this

has seen the rise of BBB-band rated issuance and

also led to an extension of the ‘sweet spot’ of the

A$ MTN market for corporate issuance from 5 to

7 years, and further resulted in some encouraging

signs of investors increasing their willingness to

provide tenor out to 10 years.

In addition to historically low yields, a common

theme across debt markets overriding corporate

issuance has been the heavy oversubscription

of transactions, which has subsequently led to

scaling of investor allocations below their desired

exposure. Aided by excess liquidity created via

supportive monetary policy, the high level of

investor demand relative to new issuance supply

has driven a number of positive developments for

corporate issuers as investors seek ways to obtain

their desired level of corporate exposure, creating

an increased number of funding options and more

issuance flexibility.

In the Euro market, which has seen notable growth

in issuance from Australian corporates over the

last two years, traditional investors of publically

issued benchmark bonds are now seeking to

further diversify their portfolios and increase

their corporate exposure via participating in

private placements, sub-benchmark issuance and

Institutional Term Loans. This trend is expected to

continue, further underpinned by systemic liquidity

generated by the expansion of ECB’s Quantitative

Easing programme.

Similarly, in the US Private Placement market – a

core source of longer term funding for Australian

corporates, a structural lack of supply has seen

investors provide more accommodative and flexible

structures such as providing foreign currency,

longer delayed funding and non-standard tenors,

allowing issuers to further tailor their issuance.

While a potential increase in financing activity is

likely to draw additional focus on execution, ample

liquidity and a search for yield will continue to offer

constructive issuance conditions for corporates

in the medium term. The traditional debt markets

accessed by Australian corporates – loans, A$MTN,

EMTN, 144A and US Private Placement are all

expected to offer competitive financing alternatives

in 2015, providing corporate treasurers choice in

terms of both markets and execution.

FIGURE 2. BORROWERS CONTINUE TO DIVERSIFY

FUNDING AMIDST A BROAD CHOICE OF

COMPETITIVE ALTERNATIVES

Page 2

~A$35bn

Source: Bloomberg, NAB Debt Markets Origination

A$MTN 27%

USPP 22%

USD 8%

EMTN 43%

Figure 2. Borrowers continue to diversify funding amidst a broad choice of competitive options

Source: Bloomberg, Private Placement Monitor, NAB

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INCREASED POTENTIAL FOR PERIODS OF HEIGHTENED VOLATILITY

In recent times a number of geo-political events

that could have destabilised markets had little

effect on market sentiment, with investors

seemingly increasingly hardened to this peripheral

noise, with little change in investor sentiment

seen. However, collectively these events, coupled

with emerging concerns of slower global growth,

eventually resulted in a softening of investor risk

appetite and increase in volatility, culminating with

the ‘Flash Crash’ experienced in mid-October in the

US Treasury markets which had broader adverse

effects on fixed income market conditions.

Looking ahead into 2015, global markets are likely

to display an increased focus on events surrounding

geo-political tensions, slower global growth and

other headline risks such as weaker oil prices and

their associated repercussions. In addition, any

unexpected change in the projected path of the US

Fed Fund Rate and/or other change in central bank

intervention will be closely monitored, with any

unforeseen shift viewed adversely likely to similarly

cause a market disruption or impact liquidity.

Underpinning this heightened focus is a common

view that the sustained rally in credit spreads

globally over the past 18 months is overdue for a

correction and the possibility that this correction

could be major. In addition, there is growing

concern in the Euro and US markets that increased

banking regulation surrounding Basel III capital

requirements, Volcker Rule and other trading

restrictions may have the unintended consequences

of increasing market volatility - exacerbating credit

spread weakness through a lack of liquidity and at

the very worst potentially leading to frozen capital

markets. Liquidity returning to the secondary

market is integral to markets recovering following a

destabilising event, and if these concerns eventuate

this could lengthen the time needed for markets

to recover and normalise - potentially leading to

extended periods of market dislocation, associated

higher credit spreads and increases in new issuance

premiums required.

SUMMARY

The heightened susceptibility of markets to

an adverse change in sentiment will be a key

consideration for borrowers planning to issue

into the debt markets during 2015, with issuers

recommended to position themselves with

adequate flexibility and the ability to move

quickly in order to take advantage of constructive

windows of opportunity for issuance. However, the

strong lending appetite of banks and global debt

investors alike for high quality corporate exposure

is expected to continue to support a positive

borrowing environment. To that effect, corporates

seeking to raise funds should continue to have a

wide array of competitive local and offshore debt

market alternatives open to them in 2015, and we

expect that short of a marked deterioration in the

broader environment, the structural under supply

of corporate borrowing across global debt markets

and the associated scarcity factor should ensure

transactions remain well supported throughout

2015.

FIGURE 3. MARKETS ARE DISPLAYING AN INCREASED SUSCEPTIBILITY TO PERIODS OF VOLATILITY

Page 3

Figure 3. Markets are displaying an increased susceptibility to periods of volatility

0

5

10

15

20

25

30

40

60

80

100

120

Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14

5yr Australian Investment Grade iTraxx (LHS) 5yr European Investment Grade CDX Index (LHS)

5yr North Amercian Investment Grade CDX Index (LHS) Chicago Board Options Exchange Volatility (VIX) Index (RHS)

Source: Bloomberg, NAB Debt Markets Origination

Looking ahead into 2015, global markets are likely to display an increased focus on events surrounding geo-political tensions, slower global growth and other headline risks such as weaker oil prices and their associated repercussions.”

Source: Bloomberg, NAB

M I SS E D AN EVENT?

Watch it in FTA’s

ftaacademy.com.au

ACAD

EMY

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A GLOBAL FINTECH CAREER IN THE FRONT LINES OF GENDER DIVERSITY

Diversity and women in leadership are topics close

to my heart. They attract a lot of column inches but

in my view still not enough action, and certainly not

enough results. The pace of change remains glacial.

There has been a focus on women on Boards and

we have seen slow improvement but the executive

ranks now pose the bigger challenge (see Figure 1).

My own journey has been a positive one and one

that has allowed me to become a truly global citizen

in what is increasingly an interconnected world.

However, the question of how to continue to climb

the corporate ladder and help others is often full of

conflicting ideas and advice.

Gender diversity is in the spotlight and we have

both men and women involved in the cause. We

have the He for She campaign with the wonderful

speech by the actress Emma Watson, the great

work in Australia by the Male Champions of Change

and many publications now focused on raising

the gender issues and pushing for change from

The Women’s Agenda to Women on Boards. Still

progress is slow. Different perspectives are crucial

to limit group think shown often to be the cause

of corporate risk issues. Women have been noted

to challenge traditional thinking in the Boardroom,

and being associated with lowering of corporate

controversies.

In our Thomson Reuters Climb to the Top study

we look at the rate of adoption over the past five

years by companies of processes to promote

BY KIMBERLEY COLE, HEAD OF SALES SPECIALISTS, ASIA, THOMSON REUTERS

Career Feature

The two regions that have the most companies complying with regulations dealing with gender diversity also have the fewest controversies so perhaps another good reason to drive for more diversity.”Source: Thomson Reuters, Climb to the Top Study

diversity and equal opportunity to see if any

link exists between the number of controversies

published in the media relating to diversity and

equal opportunity. Although across the board

Asia Pacific companies have shown increased

implementation of processes for equal opportunity

and diversity, Australian companies have shown

the greatest improvement, followed by Indian and

South Korean firms.

It should be noted that the dramatic rise in

Australian companies having such processes

and policies is driven by the “comply or explain”

approach adopted by the Australian Stock

Exchange in January 2011 in which companies

disclose in each annual report the objectives for

achieving gender diversity.

You can see in Figure 2 that the two regions

that have the most companies complying with

regulations dealing with gender diversity also have

the fewest controversies so perhaps another good

reason to drive for more diversity.

However, it could be argued that training has

done more to develop women to better succeed

in their current organisation and we have done

little to adapt or change organisational cultures to

accommodate more flexibility or inclusiveness.

A study published in December 2014 by Oliver

Wyman, a consultancy, found that the proportion


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2015

Figure 2 (a) and (b)

Figure 1 (a) and (b)

of women on executive committees of big

financial institutions at 13%, having risen by only

3 percentage points between 2003 and 2013. At

this rate it will take women 120 years to achieve

executive parity! However, Australia is 5th in the

ranking of Exco members in front of the UK, USA,

Singapore and HK. What will it take to move

faster and how and why do we help women on the

journey?

10%

20%

30%

40%

50%

60%

70%

80%

2009 2010 2011 2012 2013

EMEA

Americas

Asia Pacific

Corporate Diversity Policy and Processes Adoption by Region

0

500

1000

1500

2000

0

10

30

20

40

50

60

Total

Does the company describe, claim to have or mention processes in place to drive diversity and equal opportunity?

Does the company comply with regulations regarding the gender diversity of the board?

Nu

mb

er

of

Co

mp

an

ies

Nu

mb

er

of

Co

ntr

overs

ies

EMEA

Is the company under the spotlight of the media because of a controversy linked to workforce diversity and opportunity?

AmericasAsia Pacific

Corporate Diversity Compliance and Controversy by Region

2009 2010 2011 2012 2013

13%20%18%

40%

51%48%

64%

56%

62%

13%

40%

56%

15%

44%

59%

Companies with >20% women on the board


Companies with any women on the board

2009 2010 2011 2012 2013

1230

1731

3066

4031503

2099

486

3724

2336

1743

600

3946

1978

2548

4109

746

2155

2710

4255

863



Companies with any women on the board

ASSET4 Universe

Global Trends in Board Diversity 2009 – 2013 (Percent)

Global Trends in Board Diversity 2009 – 2013 (Numbers)

Career Feature

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2015


My career began in Melbourne. Leaving Monash

University with my Bachelor of Economics I secured

a role at Reuters as a client specialist. My role was

to provide training and support on our systems and

content to all the end users from traders to brokers

including corporate treasurers. Reuters was a very

global organization, and diversity and “freedom from

bias” were core and part of our DNA and the Trust

principles that the company was built on.

This all stems from our editorial background for

unbiased and accurate reporting. The demonstration

of this was a global workforce who travelled and was

sent on assignment which removed boundaries and

nationalistic sentiments. Our Melbourne office was

a united nations with citizens of USA, Spain, Poland,

NZ, South Africa, Hong Kong, Malaysia, Korea and a

couple of Aussies. So cultural diversity was always

there and my view that globalization and global

mindset are key success factors for companies and

individuals started then.

A global mindset and cultural diversity I think

can also help us in the journey to improve gender

diversity. As a company we institute programs

globally with a local overlay. We have a strong focus

on emerging women leaders with 120 women each

year progressing through an 8 week program. We

have strong support from the top of the organisation

and mandates on diverse slates among other

initiatives.

So to continue the journey, from Melbourne I

focused on gaining a role in Singapore to build my

exposure to Asia. To win this role I had already

moved into a sales position managing my own

sales territory and book of clients, with clear goals

on revenue and retention along with customer

satisfaction.

I knew frontline experience was a key criterion for

progression. After this I set my sights on head office

in London and to expand my experience from sales

to a more strategic role in product management. I

secured a role as Product Manager for Commodities

and Energy. In this role I learned a lot about the end

to end process of data collection and distribution

which is at the heart of our business.

After a couple of years in that role I was

transferred to transaction products to lead product

management of the next version of our FX dealing

service, the first electronic dealing service in the

world and one of the main revenue streams for the

company. Commodities and Energy was high growth

but our transaction products were highly strategic

and attracted board level attention. This was a

fascinating role where customer engagement to

build our next generation product was key.

During this time in the UK I was also lucky enough

to give birth to both my daughters. Reuters had a

scheme that meant maternity provision was better

Career Feature

10% Women on Boards

2009 2010 2011 2012

50

2013

100

>10% Women on Boards Difference to MSCI World

0% Women on Boards Difference to MSCI World

150

200

2009 2010 2011 2012 2013

50

100

150

MSCI WORLD

0% Women on BoardsThomson Reuters Global

200

0

-10

10

20

30

40

50

0

-10

10

20

30

40

50

Returns Comparison: Women on Boards and No Women on Boards to Benchmark

Source: Thomson Reuters Datastream

Figure 3


outlook

2015

than the statutory requirements with 21 weeks

paid and 15 unpaid allowing most mothers a great

opportunity to balance birth and a successful return

to work if they wished and the returnship was high.

I remained career focused and had the belief that

the corporate norm required me to work full-time in

order to keep progressing. However understanding

the challenges has meant a desire to look for ways

to support women who want more flexibility so

we maintain talent. One example during my time

as Head of Sales for Aust & NZ was when 2 of my

best AM’s wanted to return to work 4 days a week

following their maternity leave. Both were excellent

at collaborating and communicating with their

broader account teams and ensured full knowledge

and coverage even when they were not in the office.

One customer complained when initially told of the

4 day coverage however after a 3 month trial was

happier than he had been with all previous account

managers. So supporting flexible work patterns

and continuing to sponsor career progression was

something I focused on and feel was well informed

by my own experience.

After almost 6 years in London I returned to work

in Australia. Firstly, based in my old hometown of

Melbourne to move back into a sales management

role for the southern States and then to Sydney

to manage sales for Australia and New Zealand.

Returning to Australia was a great joy but after 5

years my husband and I were ready for the next

move. This was a surprise to many and needed to

be stated openly or else the assumption would have

been that I had done my overseas posting and was

now home for good. I was also fortunate to have a

globally mobile husband who managed to move his

career in parallel.

Our next posting was Hong Kong where we find

ourselves again, having had 4.5 years along with a

3 year assignment in London only to return to the

gateway to China 18 months ago. Moving between

roles in marketing and now back into sales the

journey has taught me a lot about life, leadership

and being a global citizen with a global mindset.

My journey has allowed me to develop certain skills

and qualities of leadership that I have found valuable

in dealing with diverse teams. Generally my style

would be assessed as one with more traditional

leadership elements of confidence and career focus

which I feel have helped me succeed in a very male-

dominated and sometimes aggressive environment.

But increasingly I see collaboration, team building

and intuition are valued and coming to the fore.

Global mindset is defined as one that combines

an openness to and awareness of diversity across

cultures and markets with a propensity and ability

to see common patterns across countries and

markets. In a company with a global mindset,

people view cultural and geographic diversity as

opportunities to exploit and are prepared to adopt

successful practices and good ideas wherever

they come from. Having a true global approach

along with a focus on gender diversity I see being

factors that will make companies and leaders truly

sustainable and successful. The expectations of

what a future leader will look like are expanding to

require more and new traits. A global outlook is a

key but I feel the next generation will value even

more highly trustworthy, candid and collaborative

leaders who promote flexibility and inclusiveness.

Their demands will require diverse leadership teams

in order to meet all expectations.

The case for gender diversity has been well stated in

many studies.

Companies with gender-diverse boards showed better

performance results in the Climb to the Top survey of

4,255 companies in our 2013 ASSET4 Universe. Just

over 2,700 report gender-diverse boards, but only 863

report 20% or more of their boards are female (see

Figure 3). Once again this shows how much further

we have to go to achieve real gender diversity at the

Board or the executive table.

Will an increasing focus by investors on screening for

companies with gender-diverse boards and robust

diversity policies increase the trends? And if there is

value-add, even alpha generation in having a diverse

board, might even greater diversity increase the

performance gap between companies that enable

women to climb to the top versus those that do not?

What is clear to me is that a corporate culture that

encourages flexibility will be better positioned for

the future and enable improved talent management

benefitting all – customers, share-holders and

employees.

The case for gender diversity has been well stated in many studies. Companies with gender-diverse boards showed better performance results in the Climb to the Top survey of 4,255 companies in our 2013 ASSET4 Universe.”

Career Feature

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ELEVATING AUSTRALIA’S FINANCE LEARNING STANDARDS IN HIGHER EDUCATION

INTRODUCTION

The current deregulation process in higher

education has its origins in the Bradley Review

of Higher Education, initiated in March 2008 by

the federal government “to examine the future

direction of the higher education sector, its fitness

for purpose in meeting the needs of the Australian

community and economy, and the options for

ongoing reform”.1

In December 2008 the Bradley Review

recommended major reforms to the financing

and regulatory frameworks for higher education

including targets for participation in higher

education, funding certainty, upgrade of

infrastructure, reforms to student income support,

improved pathways between the higher education

sector and vocational education and training,

promoting diversity and quality by allocating

funding to student demand and the establishment

of the Tertiary Education Quality and Standards

Agency (TEQSA) (subsequently established under

the TEQSA Act 2011)2 to enhance quality and

support accreditation. Most of these items are still

on the political agenda today!

Beyond the political debate, however, we are all

aware of the significant effect education has in

developing graduates who are prepared for the

rigours of a continuously changing professional

and social landscape. Whilst the current political

debate will ultimately have a profound effect on

the delivery of higher education, our commitment

to the profession and to finance and treasury

education should not wait until the political issues

are resolved. The world and key challenges facing

treasury professionals will continue to evolve as the

current higher education debate continues.

One of the primary objectives of higher

education is the sustainable development of

professional skills, capacity and capability to

meet Australia’s future economic and social

needs. Higher education has a responsibility to

assist graduates develop awareness, knowledge,

skills and values. From a professional and

societal perspective, however, there is a need

and responsibility to also take the educational

experience from a theoretical to a practical level

to make graduates “work ready”. Corporate

finance and treasury professionals have a key

leadership role to play in contributing to this

transformative change as graduates must

develop the business skills, behavioural skills and

technical skills required for the future challenges

of the profession for sustainable development of

the economy.

DEREGULATION OF THE HIGHER EDUCATION SYSTEM IS A TOPIC OF GREAT DEBATE IN THE CURRENT POLITICAL CLIMATE. HIGHER EDUCATION PROVIDERS, THE FINANCE PROFESSION AND OTHER STAKEHOLDERS MUST WORK CLOSELY TOGETHER TO ENSURE THAT FINANCE GRADUATES ARE PREPARED FOR THEIR CHOSEN PROFESSION AND THEIR ROLE IN THE WORKPLACE.BY ASSOCIATE PROFESSOR KEVIN TANT FFTP, MONASH UNIVERSITY

Finance Education Feature

The finance learning standards needed to focus on acceptable minimum outcomes for the diverse range of finance degrees offered by all higher education providers in Australia.”


outlook

2015

DEVELOPMENT OF THE FINANCE LEARNING STANDARDS

Increasingly over the past two decades one

education debate has shifted towards graduates

developing non-technical skills encompassed

in concepts surrounding employability, generic

skills, competency skills and graduate attributes;

recognising their importance for workplace

employment. Many employers suggest that more

emphasis is still required in these areas.

The Australian Qualifications Framework (AQF)

provides (generic) summary statements describing

the typical learning outcomes a graduate

should possess at various levels of educational

qualification from certificate1 through to doctoral

degree level.

TEQSA regulation requires higher education

providers to comply with AQF and also benchmark

graduate outcomes against other education

providers of similar status. That is, higher

education providers must demonstrate that their

degree programs explicitly teach and assess the

achievement of knowledge and skills specified by

the AQF.

Since 2010, the Australian Business Deans Council

(ABDC)3 has been working progressively towards

interpretation of the generic learning outcomes

outlined under AFQ4 as discipline-specific learning

outcomes for each of the business disciplines

through working parties and expert advisory

groups. Learning outcomes have been developed

and endorsed by the ABDC for the disciplines of

accounting (2011), marketing (2012), economics

(2013) and finance (November 2014).

The finance learning standards were developed

through research into world practice, interpretation

of the AQF and consultation with higher education

providers, finance professionals5 and other

stakeholders (including students).

A key concern was to focus on “what should be”

rather than “what is” to ensure that Bachelor and

Coursework Masters graduates are equipped to

handle the challenges and demands of the future

and to ensure that the high quality of Australian

higher education continues into the future.6

In promoting diversity with higher education

providers (for example corporate finance degrees,

banking and finance degrees, financial planning

degrees) the learning outcomes could not be

prescriptive in terms of curriculum content. The

finance learning standards needed to focus on

acceptable minimum outcomes for the diverse

range of finance degrees offered by all higher

education providers in Australia (private providers,

universities and TAFE). There is an expectation

that providers of all finance degrees will produce

graduates who perform beyond the minimum

learning outcomes.

From a professional perspective, the Finance

and Treasury Association (FTA) contributed

significantly through the consultation process

via its technical committee and through its

Chief Executive Officer who was a member

of the Finance Expert Advisory Group that

recommended endorsement of the finance

learning standards by the ABDC.

In this way, the perspective of treasury and

corporate financial risk managers was included in

the finance learning standards including the clear

need to take the educational experience from a

theoretical to a practical level to make graduates

“work ready” and in providing the definition

below that reflected the practice of treasury

professionals.7

“Finance is a discipline which describes,

measures and optimises the financial relationship

between the owners of capital (monetary

assets) and the users of capital for the mutual

benefit of both parties [while taking into

account wider stakeholder interests]…Often the

finance professional will ‘own’ the analysis, but

management will ‘own’ the decision and will make

that call in light of stakeholder interests other

than the owners/users of capital (e.g. regulators,

governments, communities etc.)”

THE FINANCE LEARNING STANDARDS ENDORSED BY THE ABDC

Figure 1 (see next page) reflects the integrated

approach of each of the learning domains of the

finance learning standards.

Corporate finance and treasury professionals have a key leadership role to play in contributing to this transformative change as graduates must develop the business skills, behavioural skills and technical skills required for the future challenges of the profession for sustainable development of the economy.”


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Table 1 provides a summary of the finance

learning standards and learning outcomes that

graduates should possess by the time they

graduate with their Bachelor or Coursework

Masters Degree.8

FUTURE CHALLENGES – NEXT STEPS

Close collaboration with the FTA was crucial in the

development of the finance learning standards.

It will be just as crucial in the development of a

methodology for higher education providers to

benchmark their degree; demonstrating outcomes

against other providers of degrees with similar

knowledge content (e.g. corporate finance,

banking and finance, financial planning).

KNOWLEDGE

APPLICATION

JUDGEMENTCOMMUNICATION AND TEAMWORK

REFLECTION

FINANCE LEARNING

STANDARDS

FIGURE 1: GRADUATES MUST USE MULTIPLE LEARNING OUTCOMES FOR ANY FINANCE TASK - FINANCE LEARNING STANDARDS

The finance learning standards provide guidance,

but additional input from the FTA and other

stakeholders is required to ensure that the

benchmarking process demonstrates the

outcomes reflected from both the education

regulatory perspective and “work ready”

perspective. Thus the continued input from the

FTA and its members is sought to ensure that

benchmarking is not an educational regulatory

outcome, but the reality of preparing graduates

for national and international employment.

When the ABDC endorsed the finance learning

standards they recognised that the process

needed to continue to reflect this reality and

provided seed funds to commence a benchmarking

process, similar to that undertaken at the time the

accounting learning standards were endorsed.

This process will commence in 2015 and we seek

your continued support and commitment to ensure

that we take the educational experience from a

theoretical to a practical level as graduates develop

the skills to navigate the world of work, skills to

interact with others and skills to get the work done.

ABOUT THE AUTHOR

Kevin Tant FFTP, FFin, CPA is a former national councillor of the

FTA (formerly the Australian Society of Corporate Treasurers),

former editor of its journal The Corporate Treasurer and former

Chairman of its education committee. He was Chair of the

Finance learning Standards Working Party that developed the

finance learning standards.

REFERENCES AND WEBSITE DIRECTORY

Academic Learning Standards for Finance in the Australian

Higher Education Context. Available at http://www.abdc.edu.au/

pages/finance-learning-standards.html

Achievement Matters. Available at http://achievementmatters.

com.au/

Australian Business Deans Council (ABDC) (2013). Teaching

and Learning Network Updates; Learning and Teaching

Academic Standards Project. Available at http://www.abdc.edu.

au/3.74.0.0.1.0.htm

Australian Government (2011), Higher Education Standards

Framework (Threshold Standards) – F2012L00003. Available

at www.comlaw.gov.au/details/F2012L00003/Html/Text#_

Toc311791711


Source: Academic Learning Standards for Finance in the Australian Higher Education Context (2014)


outlook

2015

Australian Government Tertiary Education Quality

and Standards Agency (2011). TEQSA Act. Available at http://

www.teqsa.gov.au/about/legislation

Australian Qualifications Framework (AQF) Council (second

edition) (2013), Australian Qualifications Framework. Adelaide,

Australia: Australian Qualifications Framework Council. Available

at www.aqf.edu.au

Department of Education, Employment and Workplace

Relations (DEEWR) (2009), Transforming Australia’s Higher

Education System. Canberra, Australia: Commonwealth of

Australia. Available at www.innovation.gov.au/HigherEducation/

Documents/TransformingAusHigherED.pdf

Discipline Scholars Network (2014). Discipline Standards in

Australia. Available at http://disciplinestandards.pbworks.com

Review of Australian Higher Education. Available at http://www.

industry.gov.au/highereducation/ResourcesAndPublications/

ReviewOfAustralianHigherEducation/Pages/default.aspx

LEARNING

DOMAIN

LEARNING OUTCOMES

BACHELOR DEGREE MASTERS DEGREE

Graduates of a Bachelor degree

majoring in finance will be able

to:

Graduates of a Masters degree

majoring in finance will be able

to:

KNOWLEDGE

Explain the context and

integrate theoretical and

technical finance knowledge.

Explain the context and

integrate advanced theoretical

and technical finance knowledge

including research and recent

developments.

APPLICATION

Apply theoretical and technical

finance knowledge to critically

analyse financial data to solve

rudimentary financial problems

in straightforward contexts.

Apply advanced theoretical and

technical finance knowledge to

critically analyse financial data

to solve sophisticated financial

problems in complex contexts.

Prepare and execute a research-

based project, capstone

experience or piece of

scholarship.

JUDGEMENT

Exercise judgement, under

guidance, to apply financial

solutions using ethical,

social, regulatory, economic,

sustainability and global

perspectives.

Exercise judgement, under

minimal guidance, to apply

financial solutions using ethical,

social, regulatory, economic,

sustainability and global

perspectives.

COMMUNICATION

AND TEAMWORK

Present and justify, orally and

in writing, financial information

and decisions in straightforward

collaborative contexts involving

specialist and non-specialist

audiences.

Present, justify and defend,

orally and in writing, financial

information and decisions in

complex collaborative contexts

involving specialist and non-

specialist audiences.

REFLECTION

Reflect on:

• the nature and implications

of assumptions and value

judgements in analysis,

• interactions with other

disciplines,

• historical and

contemporary events

affecting the finance

profession,

• responsibilities of their

role in both the finance

profession and in the

broader society.

Reflect on and evaluate:

• the nature and implications

of assumptions and value

judgements in analysis,

• interactions with other

disciplines,

• historical and contemporary

events affecting the finance

profession,

• responsibilities of their

role in both the finance

profession and in the

broader society.

TABLE 1 - SUMMARY OF FINANCE LEARNING STANDARDS

Source: Academic Learning Standards for Finance in the Australian Higher Education Context (2014)

FOOTNOTES

1. See http://www.industry.gov.au/highereducation/

ResourcesAndPublications/ReviewOfAustralianHigherEducation/

Pages/default.aspx

2. TEQSA has a regulatory and quality assurance function with the

primary aim of ensuring that students receive high quality education

from any Australian higher education provider.

3. ABDC is the authoritative and collective voice of pro vice-

chancellors, executive deans and heads of all business faculties

and schools in Australia. Currently over one in three Australian

university students graduate from their schools (and three-fifths of

all international university students in Australia).

4. Levels 7 (Bachelor Degree) and Level 9 (Coursework Masters

Degrees).

5. This included individual finance professionals and the Chief

Executive Officers of the FTA, FINSIA and FPA.

6. Education is Australia’s fourth largest export after coal, iron ore

and gold. Quality of the first three exports can be determined; there

is an element of greater subjectivity in terms of education quality.

7. Barbuio, F (FFTP and FCPA) (2014) - a senior Finance and

Treasury professional.

8. The publication Academic Learning Standards for Finance in the

Australian Higher Education Context (2014) provides illustrative

examples to provide context to the finance learning outcomes. See

http://www.abdc.edu.au/pages/finance-learning-standards.html


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Tax Outlook

GLOBALISATION AND PROFIT ALLOCATION – THE TAX NOOSE TIGHTENS

The integration of the world and digital

economies has enabled multinational

corporations (MNC's) to arbitrage their global

tax exposure to an unprecedented level.

At its simplest it is preferable for such

taxpayers to declare their profit in low tax

jurisdictions rather than high tax jurisdictions.

But this brings risks to such taxpayers.

Governments around the world are scrambling

to address this erosion to their tax base and

Australia's support of the G20/OECD Action

Plan on Base Erosion and Profit Shifting (BEPS)

demonstrates its resolve to tackle those trends.

In July 2013 the OECD listed 15 action points

requiring further work. Some of those action

points are particularly relevant to finance and

treasury operations including:

• Hybrid mismatches (BEPS Action

2) – neutralising hybrid mismatch

arrangements. In September 2014 the

OECD issued its hybrid recommendations

which are aimed at neutralising tax

mismatches in respect of cross-border

arrangements between two or more

jurisdictions where the arrangement

is characterised differently in each

jurisdiction for tax purposes.

• Interest Deductions (BEPS Action 4) – limit

base erosion via interest deductions and

other financial payments. In December

2014 the OECD issued a discussion draft on

developing recommendations regarding best

practices in the design of rules to prevent

base erosion through the use of interest

expense, for example through the use of

related party and third party debt to achieve

excessive interest deductions or to finance

the production of exempt or deferred

income, and other financial payments that

are economically equivalent to interest

payments.

• The Digital Economy (BEPS Action 1) – in

September 2014 the OECD issued a paper

which highlights the many issues the

digital economy presents for taxation, for

example whether the current physical nexus

tests for residence or the existence of a

permanent establishment continue to have

relevance in the digital economy. The OECD

acknowledged the difficulties in defining a

separate digital economy, and has accepted

it is not possible to have a separate tax

regime to 'ring fence' pure digital enterprises

such as Google.

Mark Konza, Deputy Commissioner –

International, Public Groups and International at

BY CHRIS KINSELLA, PARTNER AND STEPHEN JONES, SPECIAL COUNSEL,

MINTER ELLISON LAWYERS

Governments around the world are scrambling to address this erosion to their tax base and Australia's support of the G20/OECD Action Plan on Base Erosion and Profit Shifting (BEPS) demonstrates its resolve to tackle those trends. ”


outlook

2015Tax Outlook

the ATO is the person tasked with implementing

the BEPS initiatives on behalf of the Australian

Government. In 2014 he announced the ATO

are currently investigating 86 multinational

companies over their tax planning arrangements,

and in particular, tax concerns over:

• migration of intangibles;

• offshore marketing and procurement hubs;

• debt pushdown/excessive interest

arrangements;

• tax arbitrage by hybrid entities; and

• transfer pricing outcomes which are

inconsistent with arm's length outcomes.

On 19 December 2014, the OECD released

a discussion draft of proposed revisions to

the OECD Transfer Pricing Guidelines (the

Guidelines). These revisions are important as

Australia's domestic transfer pricing rules (now

contained primarily in Division 815-B of the

Income Tax Assessment Act 1997) requires that

the arm's length conditions identified in the

domestic legislation should be interpreted so as

to be consistent with the Guidelines.

A key focus of Division 815-B in working out

whether an Australian member of a MNC gets

a transfer pricing benefit, is to identify with

specificity, the actual conditions operating

between members of the MNC, then using

one or more of the OECD recognised transfer

pricing methods, identify the arm's length

conditions, and to then price the transaction on

the basis that arm's length conditions applied.

The substitution of arm's length conditions for

the actual conditions is colloquially known as

reconstruction.

Under the transfer pricing rules that applied

prior to the 2014 income tax year, the legislation

did not specifically provide for 'reconstruction',

and the relevant text in the Guidelines was

that generally, tax administrations would not

reconstruct the actual transaction unless the

economic substance of the transaction differed

from its form, or the arrangements viewed in

their totality differed from those which might

have been adopted by independent enterprises

and the tax structure adopted practically

impeded the tax administration from determining

an arm's length price.

In contrast, the new discussion guidelines include

an entirely new section which provides not only

for reconstruction of an arrangement between

related parties of an MNC if the conditions

operating would not have been entered into by

independent entities dealing with each other at

arm's length, but calls for the complete non-

recognition of the transactions for transfer

pricing purposes if the transaction possesses

fundamental economic attributes which would

not be undertaken by independent parties acting

in their own self interest.

The draft guidelines also propose special

measures to address the BEPS initiatives for:

(i) Rules to prevent BEPS by transferring risks

among, or allocating excessive capital to, group

members. This will involve adopting transfer

pricing rules or special measures to ensure that

inappropriate returns will not accrue to an entity

solely because it has contractually assumed

risks or has provided capital. The rules to be

developed will also require alignment of returns

with value creation.

(ii) Rules to prevent BEPS by engaging in

transactions which would not, or would only

very rarely, occur between third parties. This will

involve adopting transfer pricing rules or special

measures to clarify the circumstances in which

transactions can be recharacterised.

(iii) Transfer pricing rules or special measures for

transfers of hard-to-value intangibles.

It is now more important than ever for MNC's to

carefully assess their transfer pricing positions

and to ensure they have robust documentation

which demonstrates the conditions operating

within the MNC are arm's length, or if not arm's

length, then appropriate adjustments have been

made to ensure an arm's length outcome which

complies with the new transfer pricing regime

now in operation.

It is now more important than ever for MNC's to carefully assess their transfer pricing positions and to ensure they have robust documentation which demonstrates the conditions operating within the MNC are arm's length, or if not arm's length, then appropriate adjustments have been made to ensure an arm's length outcome which complies with the new transfer pricing regime now in operation. ”

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THE EVOLVING ROLE OF CASH AND LIQUIDITY MANAGEMENT

Following the GFC of 2008, the business

environment for corporate treasurers was

characterised by liquidity shortage, high volatility

in exchange and interest rates and a widespread

credit crunch. Suddenly no financial institutions,

outside Australia at least, were “too-big-to-fail”.

The regulatory follow-ons (Basel III, Dodd-Franck

etc.) have affected the way banks operate,

further impacting corporates. Today, 6 years

on, this has led to an increased importance in

- and increased responsibilities for - Treasury

in regards to the disciplines of cash and

liquidity risk management. At the same time,

Treasury faces increased pressure from their

banks, regulatory authorities, rating agencies,

management and board.

In this article we will look at the changing role

of Treasury focusing on the disciplines of cash

and liquidity management, as well as some best-

practise approaches, and by taking a more global

look we will give a prediction of what may be

coming next for Australian corporates.

Cash management was previously primarily

viewed as a secondary task to Treasury, and

the main purpose was “to know how much

cash is in our bank accounts today” (or more

likely “yesterday” or “last week”). Today, it is

one the most important disciplines and has an

impact on nearly all areas of the treasury. Cash

management today entails the following areas:

• Choosing house banks

• Managing bank accounts

• Achieving cash visibility

• Cash pooling

• Cash forecasting

• Internal banking

• Payment factories

• Working capital management

Especially the last item, working capital

management (WCM), may be unexplored

territory for most treasuries, but as more and

more treasuries have optimised their other

areas of cash management, the focus has

shifted to WCM, which traditionally has been the

responsibility of the financial controllers.

Due to the increasing responsibilities of Treasury

throughout the company, treasury departments

are at the same time becoming more centralised.

The main pillar of Treasury, the Finance Policy,

is no longer a policy just for Treasury, but for

the whole company. Key performance indicators

(KPIs) are set up to ensure the entities and

subsidiaries satisfy the demands of Treasury, so

they can make the best use of cash and liquidity.

At the same time, centralisation of standard

systems ensures automation, with incorruptible

reporting and solid audit trails.

Historically cash management functions were

decentralised in the company. The positive side

of this is that local people could deal with local

BY MICHAEL LEIGHTON AND NELS MORTENSEN CFTP, FIRST TREASURY

Cash Management Outlook

The main pillar of Treasury, the Finance Policy, is no longer a policy just for Treasury, but for the whole company.”


outlook

2015

issues and relationships were with local banks.

It could be said that with the move by many

companies to do business with the developing

countries that these positives are still there.

However, the requirements of Treasury today

require centralisation.

Cash visibility is at the heart of cash

management. Having control over the company’s

cash gives a number of quantitative and

qualitative benefits and often provides its own

business case:

• Fewer bank accounts reduce bank fees, reduce

risk in their maintenance, and leave less idle

cash

• Control of the present cash in bank is a

necessary starting point for cash flow

forecasting

• Control of the cash balance means less

likelihood to need to draw on overdraft facilities

• Control of the currency balances helps in the

FX management

• Control of cash can help to attain better ratings

(and therefore cheaper funding)

Companies should therefore keep banks and

bank accounts to a minimum and keep account

balances continuously updated in their systems.

Even a small improvement can facilitate huge

savings for the company, and the business cases

in this area are often compelling.

Cash flow forecasting can offer many benefits

to Treasury and to the company as a whole. In

general, cash flow forecasts should be dynamic

with a rolling horizon and include the ability

to drill down to currency and entity. Manual

inputs to cash flow forecasts, or budgeted

figures, can be unreliable, both in size and

timing. Optimisation is therefore dependent on

automation, taking as much data as possible

from the companies ERP (A/R, A/P etc.) and

from the treasury management system (TMS).

Reporting is an essential element of the process,

so the cash manager can compare version to

version to see where changes have come from

and also to compare actual balances against

previous forecasts to find out where data was

unreliable and take the necessary course to

rectify data quality in the future.

Other benefits of accurate and reliable cash

forecast include:

• Reduction of idle cash in bank accounts

(reduced need for a ‘float’)

• Visibility of present cash balances and

forecasted balances in the future

• Funding manager can use cash flow forecast in

his own funding management

• Cash manager can use cash flow forecast

to optimise short-term loans/ investments,

reducing number of deals and operational risk

• FX manager can use currency cash flow

forecasts to optimise FX management,

reducing number of deals and operational risk

(provided the forecast is at sufficient level of

detail)

• Subsidiaries can use drill-down cash flow

forecast to entity, optimising internal loan/

deposit requirements

Finally, the forecast can also be useful to the

CFO, strategy department, tax department and

is also an integral part of a public rating process.

Rating agencies do not look at P&L or balance

sheet items, their focus is liquidity.

Good cash visibility is an essential foundation to

a good cash flow forecast.

An often heard excuse for not having a reliable

forecast is that the data providers, mainly the

operational subsidiaries of the group, do not

deliver data of a sufficient quality. Here it is

important to set the right incentives and be able

to measure accuracy.

As an example, the treasury department of a

large electricity producer was unhappy with the

efficiency of its cash processes. A large float

had to be kept on the bank accounts in case of

unexpected payments and a large amount of

guesswork was used in judging how far forward

to hedge FX exposures. Short-term investments

of excess cash had to be rolled forward, or cut

short increasing costs and operational risk.

Unfortunately, this is not an uncommon scenario.

A cash flow forecasting solution was set up with

the ERP system providing the system support.

Bank balances and short term business flows

An often heard excuse for not having a reliable forecast is that the data providers, mainly the operational subsidiaries of the group, do not deliver data of a sufficient quality. Here it is important to set the right incentives and be able to measure accuracy.”


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came from the ERP and known and forecasted

treasury flows were imported from the TMS.

Longer term flows came from manual forecasts

from 15 business units.

The cash float was immediately reduced by

2/3, and as the forecast could be drilled-down

to currency, individual currency forecasts were

used to find optimal terms for FX forward

hedging. Short-term investments and loans

were optimised and the forecasts could also

be drilled-down to entity level, the subsidiaries

could use the individual forecasts for their own

purposes.

Initially manual forecasts were not optimal,

but version-to-version and version-to-actual

reporting was used to set up a “league table”

of forecasting accuracy. This league table was

sent to the business units each month and within

6 months manual forecasting accuracy had

improved enormously.

Liquidity management takes cash flow

forecasting a step further. Liquidity not only

includes cash, but also short-term investments,

which can be easily converted to cash, and

unutilised bank facilities.

The main goal in managing liquidity is to avoid

financial stress (the inability to fund the daily

business). The risk of financial stress is usually

managed by means of the calculation of a

liquidity ratio, i.e. the ratio of available liquidity

to the company’s outgoings over a particular

horizon. The ratio used and the horizon of the

outgoings is dependent on the business and the

company’s risk appetite.



outlook

2015

Another benefit of proper liquidity management

is that it can be used as a driver to improve the

company’s ratings and therefore funding costs.

Good cash flow forecasting is an essential

foundation of good liquidity management.

Other tools that can improve cash management,

which we won’t go into too much detail on,

are Internal Banks and Payment Factories.

These are rarely seen at a larger scale among

Australian companies, but are widely used in

Europe and the US.

When done right, setting up an Internal

Bank can help optimise cash synergies across

the business. An internal bank should be

thought of as a real bank – it just happens to

be internal and managed within the Group by

Treasury. It should involve the design of new

business structures, processes, organisational

setup as well as a system to support the

transactions being handled and executed via

the internal bank.

Payment factories allow a company to optimise

straight-through processing of their payment

solutions via centralisation and automation of

the payment process. It is most commonly

channelled through a system in order to

optimise automation. Payment factories might

be in the perimeter of a traditional treasury

area of responsibility, but it is imperative that

Treasury is involved in the project of setting up

the factory, and their skills can be extremely

useful in the process.

Working capital management is another area

which traditionally may not lie within Treasury.

However, as described above, the evolving role

of Treasury has made it even more important

that Treasury is engaged in this process in order

to optimise cash usability. One of the first areas

to look at is around collections and dispute

management. The reason for this is that it is an

internal process and it is not needed to involve

suppliers, customers, banks, or other third

parties.

Optimisation of collections and dispute

management is the improvement of processes

and the systematic management around the

sending of invoices, collections of payments due

and in the management of disputed payments.

Much can be automated in order to reduce

operational risk as well as optimise straight-

through-processing and reduce outstanding

debtors. Good processes around collections

and dispute management will reduce Days Sales

Outstanding (DSO), the Cash Conversion Cycle

(CCC) and help optimise both working capital

and cash management.

WHERE DO WE GO FROM HERE?

The increased focus on cash and liquidity

management has been high on the agenda in

Europe and the US for the past few years and

the trends are gaining ground in Australia as

well.

The pressure for change can seem a little

incomprehensible with today's strained

budgets, ever changing regulatory and market

environments, all the while trying to manage

your day jobs at the same time.

Overall it is important that a coherent approach

is deployed. It is often seen that companies

focus on one problem at a time, potentially

“burning bridges” in the process. As the

potential benefits can be huge from optimising

your processes, a good starting point is that

Treasury formulates a Treasury Roadmap which

should be based on a clear understanding of the

overall financial objectives of the company as a

whole.

As part of this, Treasury should be prioritising

which initiatives (i.e. improve cash management

and forecasting, bank account management,

payment factory etc.) should be the focus for

the coming years. Technology is becoming a

more integral part of all aspects of the business,

and this is ever true for treasury. It should be

included as an integral part of the roadmap

vision. This could include streamlining bank

connectivity (i.e. SWIFT), closely integrating data

sources (ERP integration), and implementing

treasury, cash and working capital management

solutions.

The pressure for change can seem a little incomprehensible with today's strained budgets, ever changing regulatory and market environments, all the while trying to manage your day jobs at the same time."


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REGULATORY REFORM: 2015 AND BEYOND

Since the start of the GFC, each year brought

further developments in the global regulatory

environment. The new year will be no exception.

TREASURY ANNOUNCES A CLEARING MANDATE AND EXEMPTS END-USERS

As 2014 drew to a close, Australia’s Department

of the Treasury announced a central clearing

mandate for interest rate derivatives transactions

denominated in A$ or ‘G4’ (Euro, Yen, British

Pound, and US$) currencies, to apply to

transactions between ‘the major domestic and

foreign banks’.

Treasury also provided relief from trade

reporting for financial services organisations

that undertake small amounts of OTC derivatives

activity, by allowing ‘single sided reporting’ to

such ‘Phase 3B’ entities.

End-users such as non-financial corporations will

be permanently excluded from the regulatory

framework applying to OTC derivatives, given

that ‘research indicates they don’t play a

systemically significant role in the Australian

OTC derivatives market’, where the eight largest

dealers traditionally account for approximately

90 percent of the A$ interest rate derivatives

market (AFMA). The immediate impact of the

clearing mandate will be limited, as most inter-

BY PIETER BIERKENS, EXECUTIVE DIRECTOR, RATES REGULATORY STRATEGY, CBA

Regulatory Outlook

The immediate impact of the clearing mandate will be limited, as most inter-dealer trades in products for which clearing is available, are being cleared already.”

dealer trades in products for which clearing is

available, are being cleared already.

NON-DEALERS AND CENTRAL CLEARING

Illustrating the concentration of derivatives

activity among dealers, is a ‘non-dealer’ survey

published last year by the Council of Financial

Regulators (APRA, ASIC, RBA). Although larger

non-dealers were over-represented in the

sample, the respondents’ median outstanding

notional of around A$10bn is a small fraction of

the A$1.2tr average outstanding for a dealer in

the Australian market (see Figure 1).

The survey further showed that a small number

of non-dealers currently have client clearing

arrangements in place.

In addition, a significant number of respondents

reported they were at least considering central

clearing, even in the absence of an actual

clearing mandate. In so doing, they may seek

access to optimal pricing and liquidity, even if

this may not yet be reflected in current market

conditions.

Similarly, price differentials between

collateralised and uncollateralised transactions

have prompted a number of financial institutions

to start posting variation margin.


outlook

2015Regulatory Outlook

As for any clearing requirement applying to non-

dealers in the future, regulators will ‘continue to

monitor the availability of client clearing for OTC

interest rate derivatives and the incentives-led

migration to central clearing, particularly by non-

dealers with access to sufficient liquidity’. They do

acknowledge, however, that ‘for some non-dealers

it is unclear if [the benefits of clearing] will ever

be sufficient to offset the costs’ (Report on the

Australian OTC Derivatives Market, 2014).

Barring a non-dealer clearing mandate taking

effect, any end-user decision to clear, or post

collateral when trading bilaterally, involves a

careful weighing of among other things, liquidity

costs, operational costs, and capital costs

charged by the bank counter party. Generally

speaking, only standardised and liquid derivatives

transactions are clearable. Costs, risks, and

operational aspects of setting up a clearing

account will be weighed against any pricing and

liquidity advantages to end-users that trade

actively in those clearable derivatives.

The posting of collateral affects pricing on

bilateral derivatives transactions. This dynamic

changes as bank capital requirements, and

approaches for measuring counter party credit

risk change. Bank capital requirements may be

impacted by recommendations of the Murray

Financial System Inquiry.

Managing collateral presents its own operational

challenges and risks, but some end-users will have

the collateral decision made for them, by the Basel

framework for margining of uncleared swaps.

THE MARGINING OF UNCLEARED SWAPS

In September of 2013, BCBS-IOSCO published

its ‘Margin Requirements for Non-Centrally

Cleared Derivatives’. They are to take effect from

December of this year, for transactions between

‘financial firms and systemically important non-

financial entities’: so-called ‘covered entities’.

Such transactions are subject to variation margin

from December, and depending on the size of the

entity’s derivatives book, initial margin as well.

Initial margin requirements are to be implemented

incrementally, according to the nearby schedule.

Importantly for Australia, fx forwards, and the

fixed physically settled fx transactions associated

with the exchange of principal of cross-

currency swaps are exempt from initial margin

requirements.

How the framework will take shape in

Australia is not exactly known as yet, but any

implementation is to be consistent with overseas

regulations. Suggested collateral requirements

may require some modifications to Australia’s

legal framework, providing a challenge to the

intended implementation date.

Besides the timing, the framework presents

a number of other challenges to the covered

entities. These include the daily posting of

collateral, CSA agreements, limits on the re-

use of collateral, the posting of initial margin

on a gross basis, the modelling of initial margin

requirements, and cross-border harmonization of

rules, to name a few. ISDA has requested a delay

in the global implementation schedule.

$b

40

30

20

10

0

$b

40

30

20

10

0All

non-dealers

Governmentagencies

Notional principal outstanding, September 2013

Source: Regulators’ survey

Investmentmanagers

SmallerADIs

Median

Average

Non-financial

corporations

Insurancecompaniesand super

funds

FIGURE 1. AUSTRALIAN NON-DEALER RESPONDENTS’ OTC DERIVATIVES

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One of the key planks of the global regulatory agenda, is addressing the issue of banks being ‘too big to fail’. An important ingredient of this is an effective resolution regime, which should prevent a run by the firm’s creditors and counter parties.”

Regulatory Outlook

Dec 2015 Dec 2016 Dec 2017 Dec 2018 Dec 2019

Any covered entity with a derivatives portfolio of

over 3 trillion Euro

Any covered entity with a derivatives portfolio of over 2.25

trillion Euro


over 1.5 trillion Euro


over 750 billion Euro


over 8 billion Euro

Initial margin requirements are to be implemented

as above, subject to a ¤50 m Euro threshold.

Importantly, the calculation of ‘outstanding OTC

derivatives’ does include fx forwards and cross-

currency swaps, although these transactions are

exempt from actual initial margin requirements.

As much as derivatives reform is a key aspect

of regulatory change, other changes are afoot

as well, including measures to address ‘too

big to fail’, and measures to strengthen banks’

prudential standards.

LIQUIDITY COVERAGE RATIO, AN ISDA PROTOCOL

On January 1, the Liquidity Coverage Ratio took

effect in Australia, requiring Australian deposit

taking institutions to hold high quality liquid

assets in excess of the expected cash outflow

over the next 30 days. This impacts the market

for deposits of any kind, especially those of

corporates and financial institutions. Given the

requirement, longer dated deposits will become

commensurately more attractive to banks, and

therefore relatively higher yielding, while at-

call money will be less attractive with pricing

reflecting this.

One of the key planks of the global regulatory

agenda, is addressing the issue of banks being

‘too big to fail’. An important ingredient of this

is an effective resolution regime, which should

prevent a run by the firm’s creditors and counter

parties.

In the absence of a cross-border regulatory

framework of resolution of systemically

important financial institutions, the Financial

Stability Board (FSB) coordinated with ISDA

the development of a Resolution Stay Protocol,

signed late last year by eighteen major

international banks.

The signatories agree on a stay of resolution in

the close-out of derivatives contracts, deemed

critical for the orderly resolution of the signatory

banks. The FSB expects any adoption of the

protocol, or more broadly, of the necessary

contractual language on stays in resolution, to

become more widespread, through market-

based regulation or market conduct regulation,

in the near future.

MARKET LIQUIDITY AND THE AVAILABILITY OF COLLATERAL

The increased collateral demand resulting from

regulatory reform, combined with the fact that

Central Banks are now buying highly rated

securities in their pursuit of unconventional

monetary policies, has raised concern about a

dearth of highly rated assets.

FIGURE 2.


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2015

Estimates suggest, however, that incremental

collateral demand resulting from global

regulatory reform is around $4tr (BIS),

arguably a manageable number in light of the

more than $50tr in outstanding high quality

assets, or the annual $1tr net available issuance

of AA and AAA rated government securities

(IMF). In Australia itself, the supply of high

quality assets ‘would appear sufficient to

support current demand for collateral’ (RBA).

Notwithstanding a sanguine outlook for global

collateral availability, market participants

increasingly prioritize the optimal use of

collateral. ISDA data suggest that one-third

of market participants now see this as a front

office function.

Increased regulatory scrutiny is also being

directed to the global allocation to higher

yielding, less liquid asset classes, by investors

searching for yield in today’s low rate

environment. An example is US mutual funds’

appetite for bank loans, an asset class whose

net inflows in 2013 exceeded those of the

entire decade prior.

This asset allocation coincides with a

substantial drop in market making activity

across many asset classes, including markets

for corporate bonds. This raises concern for

market pricing and liquidity, in the event of

a sudden reversal of this investor demand.

‘The exits can get jammed unexpectedly

and rapidly’, as RBA’s Guy Debelle put it late

last year.

To some extent, the decline in dealer liquidity

is a consequence of regulatory change. The

upcoming Volcker rule curtails banks’ ability to

take proprietary risk, limiting dealer inventory

to what is needed to service ‘reasonably

expected near-term customer demand’.

As a result of this legislation, as well as

developing regulations on capital, margining,

and liquidity, dealers’ inventories have declined

by an estimated thirty to eighty percent since

the GFC, depending on the asset class. Some

dealers have significantly curtailed their

overseas presence:

Whether it is OTC derivatives reform, the

strengthening of banks’ prudential standards,

managing ‘too big to fail’ or monitoring market

liquidity: regulatory reform will continue to

impact markets and market participants in the

new year, and beyond.

Regulatory Outlook

FIGURE 3. AUSTRALIAN AND FOREIGN BANKS

ACTIVE IN AUSTRALIAN MARKETS

2006 2008 2010 2012

Per cent AUD bn

Lhs:

Foreign bank share of net trading

securities2

Rhs:

Central government securities3

Corporate securities3

2 four-quarter rolling averages

3 Australian banks’ net holdings

Source: BIS, 2014

60

40

20

0

20

10

0

-10

To some extent, the decline in dealer liquidity is a consequence of regulatory change. The upcoming Volcker rule curtails banks’ ability to take proprietary risk, limiting dealer inventory to what is needed to service ‘reasonably expected near-term customer demand’.”

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2015


ALIGNING THE TREASURY VALUE ADD FROM BACK OFFICE TO BOARD

I had the privilege of addressing the FTA’s

Treasury Operations conference in August 2014, a

group with the potential to become the Treasurers

of the future. I wanted to explore the idea that

an operations team can go beyond operational

excellence. I therefore chose to discuss how a

Treasury can add value to an organisation from

Back Office through to Board.

The philosophy for my Treasury team is quite

simple: a well-functioning Treasury should

never be noticed. At first this might seem a

strange statement to make. However where all

the risks within a Treasury have been managed

appropriately, funding for the future is in place

then Treasury is enabling the organisation to

focus on what it does best which usually is to

make money.

Throughout my career I have noticed the same

thing about the best Treasury teams: they are

generally highly regarded and visible (even if

they are not noticed), they empower their people

to manage risks and there is a real collective

integrity to that team. A good treasury team will

make risk management easily understood by the

business without making things too technical.

So what can a Treasury team do to never be

noticed? From my experience of working in

Treasury teams over the last 15 years, I would give

the following advice:

Add intellectual capital to everything which

crosses your desk. Whether in person or by

e-mail, I encourage everyone to question every

interaction they have with others and try to

ensure that they add something to the process.

Ask yourself whether that task is important: if

yes always contribute something to further the

process, if not ensure that the process does not

need to be repeated.

Always put your hand up if a mistake is made.

Errors happen in Treasury, it is part of the job.

Treasury disasters often begin with someone

hiding simple errors which later become major

problems. Let someone more senior know

immediately about any error and then together

take the necessary steps to fix the problem.

Finally put a control in place to ensure the same

error never happens again.

Make sure people understand what is important

to you. Everyone you work with has something

different which motivates them. Integrity is

an important value to me, but many people in

Treasury share this same value. In my dealings

with others I try to ensure that they understand

the importance of this value. I have always

found it useful to be mentored by someone

else whether that is done formally or informally.

When I find myself in a tricky situation I ask

myself two questions: what would my Mentor do

in this situation and how do I differentiate my

BY ALISTAIR MCLEAN FFTP, GROUP TREASURER, METCASH LIMITED

Treasury Outlook

Errors happen in Treasury, it is part of the job. Treasury disasters often begin with someone hiding simple errors which later become major problems.”


outlook

2015

solution from that of my Mentor to ensure that

solution I propose aligns with my values?

Never be frightened to put forward an idea.

Great ideas always come up in conversation and

the key is to pick these ideas up and take them

forward. Simply talking to both internal and

external parties will often give you those ideas.

However, particularly when dealing with banks, if

someone comes up with a truly proprietary idea

then make sure that they are rewarded for this,

rather than shopping that idea around.

Always speak up if you are not comfortable.

In any work environment it is important to

understand what you are doing and why. If you

don’t feel comfortable, try and establish the

reasons and motivations behind that request.

Treasury disasters often arise where one person

is able to manipulate another. I try to create an

environment where my team feel that they can

speak up, but at the same time know that there

is someone else outside Treasury who they can

talk to if they still feel something is wrong.

People are the key to long term sustainable

relationships. One party cannot lay off risk

without another party being willing to take

it on. I believe that you need strong personal

relationships with those in the market so that

you can create a win-win situation for both

parties. To this end it is important to know all the

people who you deal with and to have regular

face to face contact with them. Whatever you do,

don’t hide behind long e-mail trails.

Become an expert. This is one of the easiest

ways to move your treasury career forward.

Treasury is an environment which is constantly

changing, therefore there is always the

opportunity to personally learn and develop (and

occasionally the opportunity for advancement

and reward).

Be consistent. Treasury is about managing

risks for the long term sustainability of an

organisation. Whilst people may not always

agree with your opinion, you will be respected

for that clear and consistent message. Often you

will find that consistency turns disagreement into

agreement.

Don’t bypass controls. The older and wiser

me knows that controls are there for a good

reason. Almost every mistake in a Treasury can

be traced back to a failure in control. By all

means challenge them and then improve them or

remove them if necessary, but whatever you do

always follow controls.

So where is the value from the Operations team

to the Board? A treasury department makes the

average Board very nervous as it manages some

very significant risks. A Board has no choice

but to trust its treasury team. I often say that

it is easier for a Treasury to deal billion dollar

derivatives than order a box of pens, as long as

it is done in line with policy.

A Board doesn’t want to see a treasury team

who has significant control failures in their day

to day operations. Every time an internal audit

report picks up simple control failures a Board is

less inclined to trust that Treasury team when it

comes to managing the significant risks within

the organisation. By following the advice above

a Treasury operations team will gain the trust

of their Treasurer, their Organisation and their

Board thereby making themselves an invaluable

asset to their organisation.

ABOUT THE AUTHOR

Alistair McLean, FFTP, is currently Group Treasurer at Metcash

Limited and has worked in a variety of different treasury roles in

both Australia and the UK over the last 15 years covering front

to back office. Alistair is a Fellow of the FTA and a Member of

the Association of Corporate Treasurers.

Become an expert. This is one of the easiest ways to move your treasury career forward. Treasury is an environment which is constantly changing, therefore there is always the opportunity to personally learn and develop.”

Treasury Outlook

outl

ook

2015


Moody’s Investors ServiceContact | Philip Christie, Vice President & Head of Relationship Management AUS/NZ Phone | +61 2 9270 8115

Email | [email protected] Website | www.moodys.com

RevalContact | George Chapman, Sales Director Phone | +61 2 9224 5900

Email | [email protected] Website | www.reval.com

Moody's Investors Service is a leading provider of credit ratings, research, and risk analysis. Moody’s covers

approximately 130 sovereign nations, 11,000 corporates, 21,000 public finance entities and 76,000 structured

finance obligations. Moody’s won Australia’s KangaNews “Rating Agency of the Year” award for 2014. In

addition, Moody’s was recognized as “Asia’s Most Influential Credit-Rating Agency” by FinanceAsia in 2013 and

2014; and “Best Credit-Rating Agency” by AsiaMoney and Institutional Investor in 2012, 2013, and 2014. Moody's

Investors Service is a subsidiary of Moody's Corporation (NYSE: MCO), which maintains a presence in 33

countries and employs 9,700 people.

Reval is a leading, global Software-as-a-Service (SaaS) provider of comprehensive and integrated Treasury

and Risk Management (TRM) solutions. Our cloud-based software and related offerings enable enterprises to

better manage cash, liquidity and financial risk, and includes specialised capabilities to account for and report

on complex financial instruments and hedging activities. Using Reval, companies can optimise treasury and risk

management activities across the enterprise for greater operational efficiency, security, control and compliance.

Founded in 1999, Reval is headquartered in New York with regional centers across North America, EMEA and

Asia Pacific.

2015 FTA Partner Directory

ANZContact | Catherine Manallack, Global Product Manager – Supply Chain Finance Phone | +61 3 86554788

Email | : [email protected] Website | www.anz.com

Byronvale Advisors Contact | Stephen Barnes, Managing Director Phone | 0402 034 490

Email | [email protected] Website | www.byronvaleadvisors.com

ANZ is one of the world’s 25 largest listed banks by market capitalisation, a top 5 listed company on the

Australian Securities Exchange and the largest bank in New Zealand; with over 50,000 staff servicing over 9

million customers worldwide. ANZ is among the highest-rated banks globally having retained an ‘AA’ band

credit rating with all three major rating agencies. Our geographic location and footprint (33 markets globally, 29

in Asia Pacific) coupled with our enhanced Trade, Clearing and Payments & Cash Management services, position

us well to better service customers’ growing activities throughout Asia Pacific.

Byronvale Advisors is a boutique management consulting company that advises clients whose businesses are

struggling to understand and manage financial drivers within their business, and assists them improve their

cash flow, implement systems and processes, and reduce their risk. Their hands-on approach both teaches and

mentors the clients so these skills are both imparted and learned. Byronvale Advisors has specialised knowledge

of a range of industries including financial services, construction, manufacturing, software development,

property development, energy, horse breeding and not-for-profit, and have worked restructuring and

reorganising organisations from multi-nationals to start-ups and not-for-profits.


outlook

2015

Veda Corporate Ratings Contact | Brad Walters, Head of Rating Services Phone | +61 2 9278 7925

Email | [email protected] Website | www.veda.com.au

Veda Corporate Ratings (AFS #341391) is a leading Australasian Credit Rating Agency specialising in the

corporate and broader mid-market. With more than 100,000 financial statements and one of the country’s

largest databases of comparable private financial statement data, Veda Ratings is uniquely positioned to provide

invaluable sector intelligence. Whether you’re looking for an issuer or counterparty rating, and/or a public or

private assessment, Veda can provide you with corporate credit ratings that are highly credible, comprehensive

and authoritative reports that stand up to public and political scrutiny.

SWIFTContact | Kees Middendorp, Commerical Director – Oceania Phone | +61 2 9225 8104

Email | [email protected] Website | www.swift.com

Thomson ReutersContact | Sydney – Dave Stewart, Melbourne – Edwars Arias Suarez Phone | +61 2 9373 1500

Email | [email protected] Website | www.thomsonreuters.com

Visual RiskContact | Richard Hughes, Managing Director Phone | +61 2 9262 6969

Email | [email protected] Website | www.visualrisk.com

SWIFT is a member-owned cooperative that provides the communications platform, products and services to connect

more than 10,500 banking organisations, securities institutions and corporate customers in 215 countries and territories.

SWIFT enables users to exchange automated, standardised financial information securely and reliably, thereby lowering

costs, reducing operational risk and eliminating operational inefficiencies. SWIFT brings the financial community together

to work collaboratively to shape market practice, define standards and debate issues of mutual interest. SWIFT is

delighted to have been selected as the vendor for Australia’s New Payments Platform. With NPP, we will take a new

journey with the Australian community.

Thomson Reuters is the world's leading source of intelligent information for businesses and professionals. We

combine industry expertise with innovative technology to deliver critical information to leading decision makers in

the financial and risk, legal, tax and accounting, intellectual property and science and media markets, powered by

the world's most trusted news organization. Thomson Reuters shares are listed on the Toronto and New York Stock

Exchanges (symbol: TRI).

Visual Risk is the most advanced treasury system of its kind for Corporates. At the core of our solution is the ability

to process, analyse and display complex data in a unique graphical manner. This assists treasury to better visualise,

understand and report complex information to senior management, leading to better decisions. Modular by design,

integrated by nature, it delivers the broadest range of functionality available in the market today, covering risk

analytics, treasury management, hedge accounting and cash/liquidity management. Whether your requirements

are simple or complex, we can deliver a system to perfectly meet your needs.

Membership enquiries to 03 8534 5003 [email protected]

Finance and Treasury Association members are at the forefront of the key trends faced by the treasury and fi nance functions of major corporations. Advance your career today with respected professional development and credentials, and apply for a certifi ed membership.

www. fi nance-treasury.com

Join a powerful network with knowledge gateways for treasury and financial

risk professionals.

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