International Treasurer - August 2010 - What Comes After Dodd-Frank Regarding Rulemaking and...

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AUGUST 2010

What Comes AfterDodd-Frank Re:Rulemaking andDerivativeExemptions?By Joseph Neu

With Dodd-Frank nowlaw, treasurers will con-tinue to help regula-tors with rulemaking

page

Helping ChineseBanks Play for RealBy Joseph Neu

Its in every treasurersinterest to interact withChinese banks in waysthat help make the casefor reform.

page

Anticipated

ExposuresFX Dealers Need theFlow Volume; ISDAReleases New Versionof FpML; and more.

page 4

Is SecuritiesLending In or Out?By Bryan Richardson

Determining the stateof securities lending forUS MNCs depends onwhom you ask.

page

UnderstandingFASBs ProposedChanges to HedgeAccountingBy Helen Kane

The ED on hedgeaccounting would rep-resent a game-changerfor many corporatehedgers.

page 12-

Regulatory watch

What Comes After Dodd-Frank Regarding

Rulemaking and Derivative Exemptions?By Joseph NeuWith Dodd-Frank now law, treasurers will continue to help regulators with rulemaking.

With Dodd-Frank now the law of the land, the realfun begins as treasurers watch what the regula-tors do, and perhaps try to coax them into notmaking any adverse decisions. Take for instancethe rulemaking on derivatives, which are still themajor focus for corporates.

Certainly what treasurers dont want is the un-intended result that is putting a chill on the asset-backed securities market. There, ratings agencieshave stopped allowing ABS issuers to use theirratings for fear of legal action if they are wrong.

Treasurers will get the chance at some inu-encing, as the SECone of several rulemakersplans to expand its normal process, by seekingpublic comment on rules required by the Act. Itplans to do this before the agency actually pro-poses any rules, rather than seek comment onlyafter it publishes its proposals.

END USER EXEMPTION CONSIDERATIONSOf top priority for corporate end-users is thestatus of their exemption from derivative clear-ing requirements when mitigating commercialrisk, usually due to foreign exchange or interestrate exposures, and the carve-out for foreign

exchange swaps and futures. Hedge exemption. According to a compre-

hensive summary by the law rm Davis Polk: Thebill provides an optional exemption from clearingto any swap counterparty that (1) is not a nancialentity, (2) is using the swap to hedge or mitigatecommercial risk and (3) noties the CFTC or SEChow it generally meets its nancial obligationsassociated with entering into uncleared swaps.

There is no specic mention of a hedge deni-tion, but there is reference to the fact that boththe CFTC and SEC have the right to adopt a ruledening commercial risk or any other termincluded in an amendment to the CommodityExchange Act. They can also modify denitions orfurther dene swap, swap dealer, major swapparticipant, and eligible contract participant, ifthey see transactions and entities that have beenstructured to evade [the rules].

Also, not to forget: The bill requires any issuerof securities registered under the Securities Actor reporting under the Exchange Act to obtainapproval to enter into swaps that are subject to anexemption from the clearing requirement from anappropriate committee of its board of directors.

Featured Meeting Summary:The Treasurers Group of Th

continued on page 3Source: Davis Polk

JURISDICTION AND RULEMAKING

CFTCn Swaps, including credit default

swaps on non-securities or abroad-based index of securities

n Major swap participantsn Swap dealersn Swap data repositories

n Swap execution facilitiesfor swaps

n Derivatives clearingorganizations with regardto swaps

SEC / CFTCn Mixed swaps

n CFTC-exempted agreements,contracts and transactions

n SEC-exempted accounts, agreements andtransactions involving a put, call or other

option on one or more securitiesn Consistent and comparable regulations

n Similar treatment for functionallyor economically similar

products or entities

SECn Security-based swaps, including

credit default swaps on a singlesecurity or a narrow-based index

of securitiesn Major security-based swap

participantsn Security-based swap dealers

n Security-based swap datarepositories

n Swap execution facilities forsecurity-based swaps

n Clearing agencies withregard to security-based swaps


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Founding Editor & PublisherJoseph Neu

Contributing EditorsAnne Friberg, CTP

Ted HowardBryan Richardson, CTP

Advisory BoardAndy Nash

SVP, Treasurer Ahold Finance Group

James HaddadCorporate Vice PresidentCadence Design Systems

Chris GrowneyPrincipal, Director of Sales & Marketing

Clearwater Analytics

Susan StalneckerVP & TreasurerE. I. DuPont Co.

Peter MarshallPartner

Ernst & Young LLP

Adam FriemanPartner

Etico Capital LLC

David RusateDeputy Treasurer

General Electric Company

Martin TruebSenior VP & TreasurerHasbro, Inc.

David WagstaffManaging Director, Head of US Tech, Media & Telecom

HSBC Securities (USA) Inc.

Michael IrgangSenior Director, Financial Risk Management

McDonalds Corporation

Arto SirvioDirector, Treasury Center Americas

Nokia

Peter ConnorsPartner

Orrick, Herrington & Sutcliffe LLP

Robert VettorettiDirector, Treasury and Financial Management Services

PricewaterhouseCoopers LLP

Doug Gerstle Assistant TreasurerProcter & Gamble

Susan A. HillmanPartner

Treasury Alliance Group LLC

Michael CollinsManaging Director, Head of Corporate Equity Derivatives

Wells Fargo Securities, LLC

Academic AdvisorsGunter Dufey

University of MichiganDonald Lessard

Massachusetts Institute of Technology Richard Levich

New York University

The company and organizational affiliationslisted above are for identication purposes only.

Advisors to International Treasurer are notresponsible for the information and opinions

that appear in this or related publications and websites. Responsibility is solely that of the publisher.

ISSN:1075-5691 Vol. 17, No. 6 2010 The NeuGroup, Inc.

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EDITORS NOTES

The difference between banks in Chinaand banks in the US is that when thegovernment asks banks to lend to stimulategrowth, the Chinese banks ask how much

and to whom. In the US, banks simply refuseand hold their cash in reserve. This oft-citedanecdote gets to the heart of concerns thattreasurers havealong with China observ-ers, generallyregarding Chinese banks:they are too intertwined with the Chinesegovernment and its policy priorities, whichmay not be aligned with MNC interests ortheir standing as reliable counterparties.

Its possible this situation is so bad thatit will eventually drag down the Chineseeconomy. This also would not be good newsfor treasurers. Neither would an ongoingtrend of unreformed Chinese banks continu-ing to rise atop global bank tables, thanksto ongoing Chinese expansion. Thus, it isin every treasurers interest to interact withChinese banks in ways that help make thecase for reform.

CHINESE BANK GROWTH RISKAlready, China boasts the worlds two largestbanks by market capitalizationICBC andChina Construction Bankand its bankingdominance may not end there. Accordingto Oliver Wymans most recent annual Stateof the Financial Services Industry report,Chinas banking sector is expected to growsome 10 percent per annum between 2009and 2014, besting almost every other G20country.

Unfortunately, as noted in a Knowledge@Wharton post sparked by the recent IPOof Agricultural Bank of China (the last ofthe four largest Chinese banks to list), thegrowth prospects for the sector have beenmarred by the decision to use Chinese banklending as the official conduit for economic

stimulus. This decision has reversed progresson reform efforts begun in 2000 to trans-form the sector away from the policy banktemplate established in the 1980s to fundstate-owned enterprises solely at govern-ment discretion.

The result has been highly suspect bankbalance sheets across China. Plus, question-able securitization practices, highlighted ina July report by Fitch, serve to keep banksmost aggressive lending off-balance sheet.Many of these toxic securities end up with

state-owned asset management compa-nies, as the banks special purpose vehicleof choice. These AMCs essentially buy upbad bank assets in exchange for bonds. The

banks classify these AMC bonds as qualityassets, because the Chinese governmentbacks them (sound familiar?).

As the Wharton article makes clear, thissort of government-supported shell gameis nothing new. However, now that Chinesebanks are listing, their minority shareholders,including multinational banks, are also in onthe nancing. Since such shell games are atodds with global nancial reform, at somepoint, Chinese banks must stop them if theywant to continue to grow and win the inter-national presence their size should dictate.

WHAT CAN TREASURERS DO?Aside from avoiding exposure to toxicChinese bank assets, what can treasurersactive in China do to encourage Chinesebanking reform and banks that lead the way?

One area of focus is working to changethe culture within banks. This will not beeasy. The Knowledge@Wharton articlecited Marshall Meyer, a Wharton manage-ment professor, who recalled a recent visitto China where a bank manager lamentedthat he had to choose between being aresponsible banker and keeping my job. This suggests that, thanks to joint ventures,education and training efforts to enhancetechnical knowledge, Chinese bankers doknow what best practice is. The problem isthat some members of bank boards dontcare as much.

Patrick Chovanec, a professor at TsinghuaUniversitys School of Economics andManagement in Beijing, also has noted onhis blog the problems with Chinese bankculture. For example, what look like best

practice approaches to employee perfor-mance reviews actually function as simplerotational sharing of best performer andmerit awards to everyone on the team. Treasurers can counter this by making theirown assessments of Chinese bank employ-ees and make these assessments known tolocal bank partners. Insisting on workingonly with high performers can help to fosterchange. Better this than to eventually faceChinese banks, and their current practices,not just in China but on the global stage.

Treasury management

Helping Chinese Banks Play for RealBy Joseph Neu


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FX carve-out. Per theDavis Polk summary: The billprovides that foreign exchangeswaps and forwards will beconsidered to be swaps, andsubject to CFTC jurisdiction,

unless Treasury makes a writ-ten determination that eitheror both types of transactions(1) should not be regulated asswaps and (2) are not struc-tured to evade the bill. As theDavis Polk summary also notes,the House and Senate couldnot agree on whether to scopeforeign exchange contracts inor out, so they left it up to theUS Treasury.

Margining scope-in. There is also disagreement asto where the controversy sur-rounding margining require-ments stands. According tothe Davis Polk summary, thebill does not expressly exemptfrom the margining require-ments those swaps counterpar-ties that are exempt from theclearing requirement. However,a June 30, 2010 letter from Sen.Dodd (D-CT) and Sen. Lincoln(D-AR) to Rep. Frank (D-MA)and Rep. Peterson (D-MN) hasstated that it is not the intentthat such non-nancial swapscounterparties be subject tothe margin requirements. Forsome market participants, theletter settles the issue, but

for others it leaves a sense ofuncertainty.

Grandfathering of ex-isting swaps? Unfortunately,Davis Polk also notes that thebill does not expressly provide

for grandfathering of existingswaps with respect to capital ormargin requirements. This hasbeen a point of great sensitivityfor a number of market partici-pants, and regulators will haveto weigh in. The bill requiresthe CFTC and SEC to issue inter-im nal rules providing for thereporting of uncleared swapsentered into before the dateof enactment within 90 days ofthe date of enactment. Mean-while, market participants have90 days (for those entered post-enactment, but pre-effectivedate) or 180 days (for swapsentered into prior to enact-ment) to report swaps that theywant to exempt from the billsclearing requirements.

Recordkeeping anddocumentation. As a study bythe US Chamber of Commercepoints out, both the CFTC andSEC will adopt rules to requirethe maintenance of records ofall activities in relation to trans-actions in swaps and securities-based swaps, including thosethat are uncleared.

And these are just the high-lights from the derivatives

section. Over the comingweeks, there will more todiscover about what regula-tors will be determining overthe next 12-18 months (seesidebar right) .

LOOKING AHEAD The rulemaking will not onlyhave to deal with the known is-sues outlined in the legislation,but also the unanticipated.

Rating agencies expertliability. For example, the SEChas already had to issue a noaction letter to exempt ABSissuers from requirements toinclude ratings in registrationstatements.

No one fully anticipatedthat rating agencies wouldwithhold consent to use theirratings in official documenta-tion immediately followingenactment. This came in re-sponse to Dodd-Franks revo-cation of their prior exemptionfrom expert liability consider-ations. Thus, the SEC has giventhem, and markets, six months(and likely more) to sort thematter out.

With so much uncertaintyremaining for all aspects of thebill, it will continue to cloudnancial markets and relation-ships with nancial institutionsuntil all the new rulemakingand studies are done.

ACCOUNTING & DISCLOSURE

Exemption, continued from page 1

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HUNDREDS OF RULES The number of new rule-makings under Dodd-Frankis mammoth, likely morethan 243. Here is the esti-mated breakdown accordingto Davis Polk & Wardwell: Bureau of Consumer

Financial Protection . . .24 CFTC . . . . . . . . . . . . . . . . . . 61 Financial Stability

Oversight Council . . . . .56 F D I C . . . . . . . . . . . . . . . . . . 3 1 Federal Reserve . . . . . . .54 FTC . . . . . . . . . . . . . . . . . . . . 2 O C C . . . . . . . . . . . . . . . . . . . 1 7 Office of Financial

Research . . . . . . . . . . . . . . . 4 SEC . . . . . . . . . . . . . . . . . . .95

Treasury. . . . . . . . . . . . . . . . 9Davis Polk said that these

estimates could be underthe actual totals as it only in-cludes rulemakings explicitlymentioned in the bill.

A similar study by the USChamber of Commerce putsthe number at 533 regulato-ry determinations, 60 studiesand 94 reports.

It is hoped that regulatorscharged with writing therules nd the right balancebetween properly imple-menting the legislation andbuilding in enough exibilityto address changes inmarket conditions.


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Capital markets

FX Dealers Need theFlow Volume

Throughout the nancial crisis, FX

trading volume dropped off marked-ly, although spreads more than made upfor the ow declines. This in turn allowedmajor FX banks to still prot from FXtrading. So with FX trading volumes com-ing back to pre-crisis levels, is currencytrading going to again become a mostlyow business?

BUT WILL IT WEIGH ON SPREADS?Data released from the Bank of England[date] show that currency trading owsin the UK grew by 15 percent in the sixmonths to April, taking the daily aver-age to $1.747 trillion. Spot trading was asignicant part of that, as the most basicspot products surged by one-quarter to$642 billion a day

In the US, meanwhile, according tothe New York Fed, daily currency owsgrew at 11.8 percent to $754 billion inthe six months to Apriljust short of therecord $762 billion hit in October 2008.While continued global economic uncer-tainty has sparked much of the trading(along with central bank intervention)and implied vols for major currencies arestill in the teens, the good news is thatthe trading is taking place.

The next question is will spreads stayhealthy enough to keep FX trading as aprot engine for dealers? The hope forthese banks is that the volume increasedoes not fully erode their spreads. Look-ing beyond spot, they also must factorin the impact of OTC derivatives reform. This impact will be enormous if theUS Treasury decides not to exempt

FX forwards and swaps from centralclearing. But it will also be signicantwith the exemptions.

CHARGES REMAINWhereas trades subject to marginingwill have credit charges stripped out ofbid-offer spreads, non-margined tradesfor exempt instruments or end-users willmaintain these charges, along with newcapital and liquidity requirements forderivatives business, and sundry add-on

costs. This will tend to keep upward pres-sure on spreads and perhaps introduceseparate fees to offset the higher costsof doing business in FX instrumentsgenerally.

Downward pressure on dealer spreads

is going to be felt, too, however. Corpo-rates do have the opportunity to trade FXon electronic platforms, and access two-way streaming pricing, so this will makeit difficult for any one dealer to seek tosubsidize other parts of their FX businesswith spot spreads.

As a result, we may see furtherimpetus for FX forwards, swaps andoptions trading to migrate to e-tradingplatforms, too, or traditional exchanges,to keep spreads tighteven if thismigration eventually comes with somecentral clearing and margin component.Remember, exempt corporates still havethe option of going to exchanges if theywant, and they may well choose to do soif the lines between e-trading platforms(like FXall) and exchanges blur and theeconomics are right.

Plus, as recent market commentaryfrom Citi has noted: Although banks aresure to pass on added costs to their cor-porate clients, it is also likely that bankswill compete more than ever for availableow business in order to earn bid-offerspreads. Thus, it looks like we are indeedreturning to an era where FX is a owbusiness and competition for volumebetween banks, e-trading platforms,exchanges and other non-banks will helpreinforce this turn and take it beyondspot trading.

Software and systems

ISDA Releases New

Version of FpMLXML standardization may eventuallyautomate and integrate nancialinformation exchange across allmarkets front-to-back. Moving the OTCderivatives markets in this direction isthe International Swaps and DerivativesAssociation (ISDA) with its release ofVersion 5.0 of its Financial productsMarkup Language (FpML).

This represents FpMLs rst major

update since 2004; and, with additionalpost-trade processing schemas, it iswell-timed to aid development of thenext-generation of OTC clearing andsettlement systems to cope with post-reform derivatives markets. Hopefully,

all market participants will be on thesame page when it comes to standardsto handle the evolving mix of standard-ized, CCP-cleared, and custom, non-CCPcleared instruments in an integrated andautomated fashion.

Version 5.0 covers mainly interest-rate,credit, equity and commodity deriva-tives. Version 5.1, expected to be outat the end the year, will cover FX andsyndicates loans, as well as incorporaterecommendations of the collateralworking group.

COVERAGEFor the instruments covered, version5.0 provides mark-up to help automate,for example, the following post-tradeprocesses:

Execution notication (for platformsto report order lls)

Execution advice (to reportexecutions and settlement infoto service providers)

Allocation (expanded for version 5) Conrmation r Consent negotiation Clearing (new for Version 5) Status reporting

As treasurers consider systems andservice provider alternatives to supportderivatives use, post-market reform, theyshould inquire about the status of vendorofferings with regard to FpML.

Treasury management

Collateral MgmtSystems Academy

When it comes to navigating theemerging landscape of collat-eral management for derivatives postDodd-Frank, corporate treasurers will befollowing to some extent in the buy-sidefootsteps of asset managers. Looking tothem for whats ahead in implementingcollateral management systems can help

ANTICIPATED EXPOSURES

4 International Treasurer / August 2010 n For additional information visit iTreasurer.com


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ANTICIPATED EXPOSURES

guide technology decisionsincludingthose of third-party providers who maysupport post-trade processing.

A recent IntegriData survey of opera-tions managers and C-level executives atnancial buy-side rms has the following

key ndings:Non-standard data is a problem

As with every business process, datacapture and standardization is a criticallyimportant prerequisite for process ef-fectiveness. Non-standard le and dataformats, as well as lack of robust deliverymethods, hamper the ability to achieve ahigh level of process automation.

Adoption of specialized software While larger rms utilize specializedapplications software, small-to-mediumsized rms use Excel to varying degrees;still, end-to-end automation is rare forall rms.

People-intensive Most buy-siderms were found to need highly-skilledstaff to achieve acceptable control levels.Given the process complexity and thepotential nancial consequences associ-ated with errors, according to Integ-riData, highly-skilled knowledgeableworkers tend to be used to overcome theinherent data and systems limitations.

THE CURRENT STATE OF TECHGiven that specialized applications andsystems offer limited opportunities forautomation at this stage, the current

state of technology is utilized most forcreating a centralized collateral manage-ment database. The survey revealed that76 percent of respondents have sometype of a central repository that holdssome or all of their collateral and margin

data. Of those that have a repository,44 percent utilize 3rd party software;38 percent have a propriety database,and the remaining 18 percent use Excel.

It should come as no surprise, then,that a central repository for all collateraland margin related data was the func-tionality ranked as the most vital (by80 percent) when choosing a system. This functionality was followed byposition holdings matching and marginreconciliation (75 percent) and le collec-tion and data transformation/normaliza-tion (61 percent). This functionality also isin line with the daily execution of opera-tional risk management tasks consideredto be best practice: reconcile collateral(63 percent); verify broker margin(63 percent) and match/reconcileholdings (60 percent).

While ultimately the state of playwill improve rapidly as more derivativestrading migrates to regulated exchangeswith their own systems and standards,as IntegriData notes, this will not hap-pen overnight, nor will it occur for allactivity. Perhaps to a lesser degree thanasset managers, corporate treasurers willconfront the same challenge IntergriData

highlighted: to work with counterpar-ties and systems vendors to encouragestandardization and appropriate technol-ogy development to facilitate processingefficiency and control automation.

Accounting and regulation

Basel Softens,US Toughens

The Basel Committees Board of Gov-ernors recently agreed to changes inbank capital and liquidity requirementsto be introduced in November underBasel III. At the time of the agreement,Germany opposed them as not easing upenough. It appears the US isnt liking iteither for opposite reasons.

One big takeaway from the Baselchanges is that they respond to concernsabout introducing tough new rules in theearly phases of economic recovery.

This is not sitting well with SenatorChris Dodd and Representative BarneyFrank, since Dodd-Frank included pre-ordained adherence to presumed stricterBasel rules. They thus plan to hold hear-ings. The concern, expressed by Senator Ted Kaufman, is that it will result in weakand perhaps even nonbinding provisionsthat provide credit to banks for holdingforms of capital that have little or novalue in absorbing losses.

Source: NeuGroup Peer Research, Spring 2010

ADDING RISK ONE TOE AT A TIME

B usiness media outlets have repeat-edly pointed out that corporate Americais stockpiling cash in response to the ongoingconcern over the economy and to Washingtonsanti-business posturing. In further support of thisfact, the AFP recently released its fth annualliquidity survey highlighting that companies areplacing this cash into ultra-conservative invest-ment vehicles; valuing safety of principal overboth liquidity and yield.

The AFP liquidity survey respondents in-cluded 337 companies, of which only 12 percenthad annual revenues of $5 billion or greater. Bycontrast, in a March survey of The NeuGroupsTreasury Investment Managers Peer Group(TIMPG) where 69 percent of participants hadrevenues of $5 billion or greater, and well overa billion in their portfolios, a slightly differentstory emerges.

While this group has been taking a more

conservative duration posture with 62 percentstating their current portfolio duration is shorterthan their target, they are generally planningto add more risk to the portfolio. Indeed, 55percent of TIMPG members indicated they planto increase duration risk in 2010 and 70 percentindicated they plan to increase credit risk. Thismay lead to a conclusion that the more dollarsyou have to play with, the more comfortableyou will be with a riskier investment strategy.

RISK TYPE PLANNED SPRING 2009 SPRING 2010

Duration Risk 35% 55%Credit Risk 35% 70%Asset Class 70% 25%

Note: The question in 2009 was actually about diversifying asset classes while 2010 was about adding risky assets.

The appetite for risk is returning.But there will be plenty of analysis and approval to go with it:n 70% will perform research and credit analysisn 45% will perform scenario analysisn 85% will go to the CFO or board committee for approval

For additional information visit iTreasurer.com n International Treasurer / August 2010 5


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The securities lending practice of mostcustodian banks certainly took its lumpsduring the nancial crisis.

Unfortunately it continues to plaguecertain institutions. Witness State StreetBanks recent Q2 nancial results. Thecompany missed expectations dueprimarily to a $251 million after-taxcharge emanating from its securitieslending business; this on top of its needlast year to curb redemptions fromthe program, which will be eased thismonth. The overall product categoryhas seen a dramatic drop-off in activitysince the crisis.

According to a recent report fromBernstein Research, lending volumesat the three large US custodian banksin late 2009 were down by 40-60 per-cent compared with the previous threeyears. The reason for the businessrun-off comes down to the risks in-volved. Like so many other securities orpractices that were assumed to be safe,the nancial crisis exposed weaknessesthat many knew were there but neverimagined would materialize.

The two big risks in securities lend-ing are borrower default and collateralinvestment risk. If the borrower of yoursecurities fails to return your securitiesby the agreed upon time, you may liq-uidate their collateral to make yourselfwhole. Collateral is commonly in theform of cash, which gets invested forthe benet of the lender. However, if thecollateral was invested in somethingthat has lost value or become illiquid

you now have a problem. It is these risksthat have been an obstacle for many in-stitutional investors to utilize this serviceand sent many others to the exits.

WHAT THE TIMPG SAYSIn recent discussion among The Neu-Groups Treasury Investment ManagersPeer Group (TIMPG), representing high-ly cash-rich rms, one member askedthe group, Who is doing securitieslending and what types of investments

do you permit for the collateral? Out of13 responses, only one was participat-ing in a securities lending program. Twohad participated formerly but discon-tinued sometime in the past two yearsdue to risk concerns. Two others hadresearched the option and concludedthe risk was not worth the return.

Initiating a securities lending program is like picking up pennies

in front of a steamroller?

Scott J. Whalen, an executive vicepresident and senior consultant withWurts & Associates Inc. in Los Angeles,supports this view, noting that many ofhis clients who participate in securitieslending may well decide to withdraw,concluding that they were picking uppennies in front of a steam roller.

PROVIDER RESPONSE The environment has impacted the ser-vice providers, too. These entities, alsoknown as agents, have tightened uptheir risk tolerances for their collateralpools where customer collateral is oftenco-mingled. After moving into thosesafe assets, such as MBS, to enhancereturns on the collateral pools, agentshave been dialing down the risk. In aBlackRock marketing brochure for Secu-rities Lending dated January 2010, thefollowing frequently asked questionand answer is included:

Question: How has BlackRocks cashmanagement changed as a result of the

credit crisis? Answer: During the credit crisis, ourstrategy has been to reduce risk in thecash collateral portfolios by reducingexposures to sectors most impacted bythe dislocation, shortening the maturity prole and maintaining increased levelsof liquidity.

So agents, with the help of regulatorsand investors, have been reviewing howto best restructure their programs in or-der to reignite the product. Among the

options reported as being consideredare replacing commingled collateralfunds with separate accounts, establish-ing a greater reliance on non-cash col-lateral which would eliminate the needfor reinvestment, separating the func-tions of matching lenders and borrow-ers, and investing collateral by assigningthem to different specialized providersand simply implementing more conser-vative investment policies. There is alsotalk of establishing a central clearing-house regulated by the SEC.

All of this will no doubt have a nega-tive impact on returns from the productand revenue for agents. Goldman Sachs,in its recent Q2 results reported, Secu-rities Services net revenues were $397million, 35 percent lower than the sec-ond quarter of 2009. The decrease in netrevenues primarily reected tighter se-curities lending spreads, principally dueto the impact of changes in the com-position of securities lending customerbalances, partially offset by the impactof higher average customer balances.

THE OPTIMISTSIn spite of the blight on securities lend-ing, many rms are seeing clients regain-ing condence in the product. North-ern Trust recently recruited two seniormanagers from JPMorgan to supportrenewed interest for securities lendingamong its clients, according to AndyClayton, global head of securities lend-ing at Northern Trust. Eight executivesand senior managers at State Street

have enough condence in the productand market that they left State Street inJune to join a securities lending startup.

The same Bernstein Research reportcited earlier predictions of 6 percentvolume growth for US securities lendingin 2010, followed by 18 percent growth.However, this increase is driven mostlyby growth in M&A activity and hedgefund assets. But for now, those with anydoubts are perhaps best suited for thesidelines.

TVA

Capital markets

Is Securities Lending In or Out?By Bryan Richardson

Determining the state of securities lending for US MNCs depends on whom you ask.



7/16

The meetings first session was a spiriteddiscussion, led by HSBC, on how the capitaland bank credit markets have continued toimprove. There was also debate about thedecision whether to refinance now or wait,and how Basel II and presumed Basel III regu-

lations will affect pricing and availability inthe bank credit market and how both banksand corporates have become more discerningabout whom they do business with. As ofpublication, the Basel Committee came to anagreement on capital and liquidity require-ments. Many consider the new rules, whichwill take effect seven years from implementa-tion in November 2010, to be less onerous thanearlier proposals and give banks much moreleeway in defining what counts as high-quali-ty, or Tier 1, capital.

KEY TAKEAWAYS1) Bank Group Rationalization Accelerates. HSBCs Richard Jackson noted that manycorporates are shrinking their number ofliquidity providers, but want more liquiditynonetheless:n Corporates pre-crisis established more

revolvers because they were nearly freeoptions (pricing was in the single-digit basis-point range), but with the cost ofthose now much higher, counterparty riskissues top of mind and the desire to workmore exclusively with banks that have

proved their mettle in the crisis, morecorporates are scaling back.

n The desire to more efficiently manage bankrelationships favors having fewer institutionsthat are willing to provide bigger percentag-es of financings rather than more banks that

are only willing to step up for, say, 10 percentof a deal. As one member noted: Thats whyyou dont want to take just a little from a bank, because youre still going to have totake calls from them just to say thanks butno thanks later on.

n Another member added that banks interestin developing core relationships was onefactor driving the uptick in reverse inquiries.2) ...But its a Two-Way Street. HSBC, for

example, described the workings of its DealPrioritization Committee, which is essentiallya capital allocation decision body that looks

at each transactions return in the context ofthe relationship.n Getting a transaction through the DPC can be

harder than getting it approved by the creditcommittee.

n Jeremy Bollington, HSBCs head of corporate banking for the Americas, who sits on thecommittee, said it reflects a fundamentalshift in the banks strategy toward a focus ona smaller group of clients. Most banks arehaving this sort of conversation about whatclient makes senseit depends on footprint,geographic focus, etc., he says.

When members of the Treasurers Group ofThirty met in March 2010, credit had begunto flow again and members were able to startthinking of other aspects of running treasury.Key areas of discussion included:

1) Funding markets. Meeting sponsorHSBC led a discussion of funding markets,touching on how capital and bank creditmarkets continued to improve.

Key Takeaway: Capital markets are back toas-good-as-it-can-get status, but bank creditmarkets could still improve for those who can wait.

2) Counterparty Risk Management.Sustained, greater attention to counterpartyrisk remains a reality for T30 members.

Key Takeaway: Treasurers should consider theneed for credit support on derivatives transactions

and inevitabilityits a when, not an if toimplement solutions for collateral and marginingmanagement.

3) Cash Forecasting and Working Capital.Improvements are still to be had, though eachround of efficiency becomes more difficult.

Key Takeaway: Most companies will soonhave exhausted the gains to be made withoutinvestments in new systems and the processesthey enable.

4) Board-Level Reporting. Board-levelreporting on treasury metrics continues to be apriority for most members.

Key Takeaway: Even a modicum standard-ization or accepted practice on what and how muchinformation boards should receive would bebeneficial.

THE TREASURERS GROUP OF THIRTYSpring 2010 meeting briefing

Better Access to Capital ContinuesMore time for cash forecasting, reporting

Funding Markets Update Most banks arehaving [a]

conversation about

what client makes

senseit depends

on footprint,

geographic focus, etc.

HSBC

Sponsored by:

Facilitated by

2010 The NeuGroup. Thisinformation is sourced fromthe Treasurers Group of Thirty Peer Group.

For more information:www.NeuGroup.com


8/16


9/16


The general trend revealed by the pre-meet-ing survey was that the beefed-up monitor-ing of counterparty risk as a result of thefinancial crisis was being continued for themajority of firms. The members discussed theuse of internal counterparty risk analysisand how they applied it to their financialcounterparties, including now to their insur-ance counterparties, and considered whatmore they can do to get involved on the business counterparty side.

Having assured their own survivalthrough the crisis, more member firms wereturning to look to the health of smaller, yetcritical components of their value chain(customers and suppliers).

The discussion also touched on CSAs: onemember explained how he implementedCSAs with his counterparties, which he saidalso gave him more credibility when engag-ing legislators amid regulatory reform effortsin Washington.

KEY TAKEAWAYS1) Dont forget insurers. Several membersnow apply internal counterparty credit mea-sures to their insurance counterparties. Onemember, for example, asks its insurers fortheir portfolios, not just to assess credit risk but to evaluate their liquidity risk as well.

2) Adding value on the business counter-party side. Though treasury generallyplays less of a role here than with financialcounterparties, the value of greater treasuryinvolvement is seen and the role of treasurywill likely grow at more companies. Forinstance, most members agreed that the D&Bself-assessment approach is flawed and business credit profiling can be improvedwith treasury involvement, even usingD&Bs data rather than its scores.

3) CSA benefits. The principal reason topursue CSAs and collateral management

processes is that they are probably inevitableoutcomes, regardless of how new regs endup. In terms of the regulatory reform debate,including OTC derivatives, one memberexplained that as an early adopter its exten-sive use of CSAs gives him and his companya lot of credibility with policy-makers. Wehave two dozen and people say that if every-one did what you do, there wouldnt be aproblem. Pricing benefits are harder to seefor the company, which already benchmarksthe midpoints, but this member admitted

there is a likelihood that his treasury will beable to avoid or postpone erosion from those benchmarks thanks to its CSAs.

While most companies may not needCSAs immediately, David Wagstaff fromHSBC urged beginning the process ofputting ISDAs and CSAs into place whentheyre not needed. You dont want to goto CSA negotiations when theres a problemaround your credit. And if you are thinkingabout it, realize it will take 3-6 months towork through your counterparties.

4) Dont get too stuck on a single CSAtemplate. One member attempted to use thesame template across all counterparties, butthat didnt work. The company ended upwith three versions. It argued with counter-parties to get all existing trades under theCSAs, and there was a lot of push-back; histrading partners said he was changing therules of the game.

5) Chose your triggers carefully. Giventhe hassles of posting margin and collateralmanagement, treasury will do well to con-sider a well-thought-out mix of CDS-basedtriggers or ratings-based triggers on theCSAs. HSBCs Mr. Wagstaff worries thatthere might be huge swings in CDS spreadsand the possibility of market manipulation.

6) Get help from third parties. JPMorgan

manages the collateral and related valuationprocessing for one member firm. This member is not entirely comfortable with the bankhaving his book and calculating the mark-to-market every day, but theres not a betteralternative. He also uses a third-party firmfor marks to help avoid pricing disputes.

OUTLOOK: The continuing member empha-sis on counterparty-risk mitigation will even-tually prompt more T30 companies to movetoward more comprehensive credit supportfor financial transactions such as derivative

trades, regardless of new OTC derivativesreform legislation. It is really a question ofwhat the appropriate timetable is for yourfirmand most treasurers would ratherfollow their own timetable than one set bygovernment.

However, should firms be allowed tomove according to their own timeframe theyshould not use this as an excuse to refrainfrom starting down the path to supportfinancial trades with collateral and margin-ing positioning.

BOARD LEVELREPORTINGMembers comparednotes on their reportsto senior managementand boards, and alsodiscussed how muchinformation really isenough.

KEY TAKEAWAY1) Approaches vary butless-is-more approachprevails. For example,one member providesa two-page quarterlyreport to senior man-agement with metricssuch as interest rates;

shareholder repurchas-es; dividends; counter-party information;liquidity targets; creditrating; total cash; FCF;shares out; credit facili-ties; maturities; and banks. It also providesmacro indicators used by planners and busi-ness leaders.

Another memberprovides even less

one side of one page but more frequently: inthis case each week. Itreports CP outstand-ing; dealers; longer-term debt and pricing;debt to ebitda; somemarket data; cash posi-tion by country; cur-rencies and commodi-ties. This gets modifiedfrom time to time withanything else thatmanagement is inter-ested in and goes tothe CEO, CFO andgeneral managers ofthe business units.Treasury reports to the board on an ad hoc basis, or more regular-ly during the crisis.

(continued on p. 10)

Managing Counterpary Risk

PEER INSIGHT: T30


10/16

CONCLUSION & NEXT STEPS


This session addressed whether cash forecast-ing, visibility and working capital initiativesrealistically could be improved beyond effortsalready made or being implemented.Members noted that the crisis had taughtthem that forecasting is vital and that thereare always ways to win improvements, start-ing with incentivizing the business units toprovide as accurate a forecast as they canand ensure their data is spot on.

However, these gains were hard won andfurther gains in refining cash and workingcapital initiatives will be harder still. We seethe ability to further pursue wins for the nexttwo-three years, one member noted, butthere is a concern about how to continue toimprove performance after that.

Members dont have a sense of how muchimprovement is enough, but now is not yetthe time to signal that enough has been done.

KEY TAKEAWAYS1) Two different needs. You need two differentthings: a cash balance versus a cash flowforecast. A cash balance is no challenge. But acash-flow forecast is a really difficult numberfor a lot of reasons.

2) Getting company-wide focus on cash.Basing part of annual compensation on freecash flow, rather than earnings alone, helps

focus employees on it.3) The curse of the spreadsheet. The holygrail of integrating cash processes into a stra-tegic planning process remains held up bycontinued reliance on spreadsheets. Somemembers say that checking discrepancieswith cash flow forecasts, and having specific

cash generation targets, can help a companymove toward having a more consolidatedprocess. IBM, which was one of the membercompanies that expressed greater satisfactionwith its cash forecasting capabilities, makesuse of Cognos to consolidate data collectionand perform high-order analysis.

After a few years of success in working capital,there is a concern about how to continue

to improve performance after that. T30 member

4) The curse of the spreadsheet. Severalmembers discussed DSO metrics, which needto be adjusted for the fact that you can getdiscounts for early payments.

OUTLOOK:The unspoken conclusion of this session isthat no treasurer wants to tell their CFO thatfurther efforts to make gains in cash flowforecasting and working capital are going toyield ever-dwindling returns. At some point,the relative value of efforts to generate cashand working capital through businessgrowth will be higher, but its not reallytreasurys job to determine when that is.Regardless, however, the next generation ofefficiencies will not be won unless CFOs are

willing to make the investment in the newsystemsand the processes they enablethat will be required bring them about.Helping CFOs to see this need is somethingtreasurers can help to do; for example, asowners of order-to-cash cycles they can for-mulate the business case for new systems.

TO LEARN MOREContact:

Joseph Neu914-232-4069

[email protected] [email protected]

(continued from p. 9)Other members offer

more detailed, longerreports that have moreinternal metrics andmarket benchmarks orhave capital markets,investment and FXdashboards, all withvarious data and tar-gets, for managementto review.

CONCLUSIONSustained higher levelsof board interactionwith treasury and trea-sury metrics reportinghave not yet led tostandardization.However, increasingcalls for financial andrisk management ele-ments as part of corpo-rate governance bestpractices should even-tually encourage great-er standardizationwhen it comes to whatshould be included intreasury reporting andin what format.Directors participatingacross multiple compa-ny boards will help tocross-fertilize reportinginnovations. To stayahead of the curve,members should peri-odically share advanc-es in their board-levelreporting and encour-age standardization ina direction that makesthe most sense from atreasury perspective.

Although financial reform has passed and someof its impacts known, and with a debt and bank-

ing crisis in Europe abatingon the surface,anywaymembers preliminary topics for thenext meeting still include updates on regulation,the impact of FinReg on rating agencies andinsurers as well as banks, and the state of theglobal economic recovery.

A continued focus on cash is also likely to beon the agenda, including staples like determin-ing optimal cash levels for the balance sheet, onthe one hand, and share repurchase economicson the other. Given the continued volatility in

foreign exchange markets, currency manage-ment is also on the list for consideration, along

with the ramifications of updated guidance onhedging accounting that has been exposed sincethe last meeting.

The next meeting will take place in NewYork City on October 13-14, 2010. Other topicssuggested for that meeting include:n Example of counterparty credit reportsn New FASB guidelines re derivatives

accountingn FX hedging strategyn Economics of share repurchase

Cash Forecasting and Working Capital Initiatives

PEER INSIGHT: T30


11/16

These are challenging timesso dont look for solutions alone

Join a Peer Group Today!n The Treasurers Group of Thirtyn Tech20 Treasurers Peer Groupn The Bank Treasurers Peer Groupn Internal Auditors Peer Groupn The Corporate ERM Group

n FX Managers Peer Groups 1 and 2n Global Cash and Banking Groupn Treasury Investment Managers Peer Groupn Latin American Treasury Managers Peer Groupn European Treasurers Peer Groupn Engineering & Construction Treasurers Peer Group

HELP US FORM NEW GROUPS:Sr. Exec. Sector Peer Groups: Insurance, Energy, HealthcareRegional Peer Groups: Asia Pacic, India, ChinaFunctional Peer Groups: Payments, Supply Chain Finance

To learn more, go to www.neugroup.com/peergroupsor contact Joseph Neu (914) 232-4069 n [email protected]


12/16


13/16

ACCOUNTING & DISCLOSURE

difference between that date and the perfectdate(s) are minimal. This may require increasedanalysis of the expected dates within themonth or quarter that the transaction(s) willbe recorded.

Given the focus on measuring amounts of in-

effectiveness and not assuming perfect effective-ness, HedgeTrackers recommends those treasur-ies hedging groups of transactions happeningover time be prepared to select and support amaturity date that differs from the derivative.

HEDGED ITEM VALUE FUNOne interesting measurement question thathas not received much attention concerns themalleability of the hedged items inception rateor value.

Take a case where a perfectly effective hypo-thetical derivative is established at the outsetand assigned a rate or value (e.g., a 3.5 percentxed rate on an interest-rate swap calculated toachieve zero fair value at inception). If duringthe life of the transaction the actual cash owson the underlying debt change from quarterlyto monthly, should ineffectiveness be calculatedbased on the 3.5 percent originally establishedfor the relationship? Or should one return to theinception model and recalculate an inceptionvalue (perhaps 3.45 percent) that recognizes theinstrument as quarterly for the rst few yearsand monthly thereafter?

In other words, does the originally es-tablished hypothetical derivative change inresponse to the underlying or must the hypo-thetically perfect derivative set at inception bethe benchmark against which the P&L impact ismeasured?

It is rare, but possible, to encounter auditorswith the view that the inception model shouldbe refreshed; however, as rms refocus on mea-surement, this operationally difficult approachmay grow in popularity.

INCEPTION DOC CHANGES?

Speaking of inception model changes, the EDproposes ongoing amendments to hedge desig-nation documentation.

The ED makes clear that the FASB continuesto be concerned about companies designating,dedesignating and redesignating hedge rela-tionships. However, far and away the greatestapplication of dedesignations and redesigna-tions are related to adjusting hedge relation-ships or documentation to avoid failures.

In the current environment announcementsof restatements (positive or negative) attributed

to hedge accounting failures are met with yawnsor even annoyance by investors, and frustrationand resentment by issuers.

The FASB has learned from these experiencesthat when companies fail hedge accountingand restate nancials or record one-time adjust-

ments, the usability of the nancial statementsis reduced. As a result one of the key objectivesof the proposed draft is to provide consistentaccounting for instruments in the nancials overtime.

Inserting the ability to update and modifyhedge relationship documentation over timeis necessary given the FASB proposal to disal-low dedesignation of relationships and theirobjective to maintain hedge accounting forconsistency in reporting.

The good news in general seems to outweighthe bad in this latest ED, unless the interco edit

nds its way into the redline draft.

The proposal to eliminate dedesignation andthe ability to update documentation will needto be further explored, especially for compa-nies with de/redesignation programs currentlyemployed to modify the proportion of an under-lying hedged, generally in net investment andfair value relationships.Will companies simplychange their hedge documentation to reectproportion changes daily, or quarterly?

The ability to modify documentation ismentioned in the draft but not elaborated on,so it remains to be seen how substantial animprovement this represents.

A STICKY EDITStill unsettled is the 2008 ED edit that precludedintercompany hedge accounting that does notsurvive consolidation (oxymoron?). The FASBhas indicated that this edit would not be con-sidered a change in hedgeable transactions butrather a clarication of the existing standard.

If reinserted the rst we will learn of it will be

in the redline version of ASC 815, now due outin late August. With a September 30 comment-period deadline, this wont leave much timefor digesting the impact and reaching out tothe FASB. The good news in general seemsto outweigh the bad in this latest ED, unlessthe intercompany edit nds its way into theredline draft.

We encourage corporates to explore thevagaries with their audit rms, push the FASBfor clarication and tool up for the new rigorsaround measuring changes in hedged items.

OPTIONS STILLSOME TROUBLEAs the FASB approaches con-vergence, one substantialdifference has been, andmight remain, accountingfor the time value in options.

US GAAP has allowed theeffective changes in premi-ums to be recorded in incometogether with the hedgeditems earnings effect.International GAAP capturesall changes in time value aseither ineffective or excludeddepending on designationan anathema of volatility forUS reporting companies.

In the Exposure Draft theFASB is offering a com-promise: allow effective

changes in the time valueto amortize to income in areasonable fashion over thelife of the derivative.

A palatable compromise? This makes for a confusingbut palatable result for USconstituents who will likelybe willing to lose the matchof recording the optionpremium and the hedgeditem together, for anotherpredictable method.

Under this method,HedgeTrackers believesan entity would model aperfectly effective hypotheti-cal option, capture changesin the hypothetical in OCIand separately calculate a(straightline?) amortizationof the hypothetical premiumthat would be recorded inincome over the life of theoption.

For interest-rate orother cap/oor strategies this

would require each caplet tobe amortized over the capletlife because amortizing theentire premium would resultin amounts associated withthe very rst caplet being rec-ognized in periods after theexercise date. Again this willbe operationally messy.


Helen Kane is the Founder andPresident of HedgeTrackers. Shecan be reached at (408) 350-8580or [email protected]


14/16

Members of The NeuGroups FX ManagersPeer Groups 1 & 2 set agendas in recent weeksfor their meetings in September. The resultingagendas overlap on topics of high importance,starting with the implications of nancial reformand necessary action items for corporates.

IMMEDIATE CONCERNS OF REFORM The principle concern for FX managers is theimpact of OTC derivatives reform to be usheredin by the Dodd-Frank legislation. Members ofthe FX groups give priority to the immediatepractical concerns, such as:

Will ISDAs need to be renegotiated ifbanks have to push out certain activities toa separate legal entity, and what happensto bilateral CSAs? Naturally, they want toknow what steps their bank counterparties arerequired to take and how it will impact them froma process, credit risk, and cost point of view.

There are already reports circulating of deal-ers changing the processing entity for derivativetrades, which has got FX managers antennae upto see if master agreements need to be amendedto avert settlement issues. Treasuries that haveCSAs in place also are asking about changesrequired for these, including regulatory margin-ing requirements vs. the negotiated terms oftheir CSA.

How to navigate potential OTC marketshifts offshore? There has long been the ex-pectation that derivatives dealers would look togure out how to move OTC trades offshore tocircumvent at least some of the reform regula-tion. If this shift happens, it will be starting soon,so FX managers want to know how to manageattempts at jurisdictional arbitrage from theirperspective.

Understanding the various mechanismsavailable to clear exempt and non-exemptderivative trades, including connectivity toexchange CCPs and alternatives. Standard-ized contracts will be migrating to exchangeclearinghouses as well as electronic multilateralclearing platforms. The latter may also accom-modate some forms of remaining OTC deriva-tives. As corporate end-users, FX managers willwant to know how current clearing will workand evolve over time to capture new efficiencyopportunities (e.g., STP) and mitigate operating

and counterparty risks. What are the available derivative pro-

cessing solutions? A related point for discussioninvolves the specialty applications, new treasurysystem functionality and services by externalproviders that are or will be offered to FX manag-ers to help them process derivative trades underthe new market rules. This includes a comparisonof in-house vs. outsourced solutions offered bydealers and custodial banks. With new deriva-tives trading rules as a backdrop, FX managersalso are eager to digest the FASBs proposedupdate on hedge accounting guidance currentlyout for comment.

Will the proposed hedge accounting guid-ance be the net benet to hedgers that earlyassessments indicate? While the new guidancewould make it easier for hedges to qualify forhedge accounting, the P&L impact requires ashift in focus to measuring the difference in fairvalue between hedge and hedge item.

REPORTING FX IMPACTS The results of hedge programs are also partof the discussion of FX managers interest inreviewing management and external reportingof FX impacts.

The impact of high FX volatility on companyearnings has generated increasing focus on be-ing able to explain to management and outsidestakeholders both the impact of FX and how theFX teams actions mitigate the swings. The bulletpoints for this discussion include:

How to calculate FX performance: How doyou do it and what is best practice?

What is included in management reportingpackages for FX. What do reports look like andhow frequently are they produced?

How is the impact of FX and mitigatingactions communicated to investors?

Concerns about what is being hedged and thevalue of hedging is also inuencing FX managersinterest in taking deep dives on cash-ow hedg-ing strategies. Also, how are companies tweakingtheir cash-ow hedge programs due to changesin their business or management attitude?

While subject to change, these topics indicatethe current priorities of leading FX managers asthey look to the second half of the year.

GOING DEEPFX group members havealso expressed concernsabout what is being hedgedand the value of hedging. This is inuencing a pushamong members to take adeeper dive on cash-owhedging strategies. Otherquestions surrounding cash-ow hedges include: How are companies

tweaking their cash-owhedge programs due tochanges in their businessor management attitude?

How is FX volatilityimpacting dynamic hedgestrategies, includingsystematic or formula-based approaches?

What impact is being seenon instrument selection,starting with the cost/benet of options?

PEER GROUP UPDATE

Risk management

NeuGroup FX Groups Set AgendasBy Anne Friberg and Joseph Neu

FX Managers set top priorities for September meeting agendas



15/16

PEER GROUP UPDATE


At the March meeting of the GlobalCash and Banking Group (GCBG), thepeer group decided it would conducta survey of members to determine thekey principles for operating a world-class cash management organization,regardless of size and budget.

The members from 3M, Bechtel, Dell,Kimberly-Clark, Merck, and later Eli Lilly,volunteered to form the Core Team thatwould perform the heavy lifting of iden-tifying the key areas of interest, suchas organization structure, policies andprocedures and technology, and devel-oping those critical survey questionsthat would help determine those world-class principles.

Shortly after the Core Team beganits work, Citibank, the sponsor for theSeptember meeting, volunteered tostep into the picture with their TreasuryDiagnostics tools.

TOO BIG FOR ONE MEETINGDuring the survey developmentprocess, the group determined it wouldbe best to split the project into twophases. The rst phase, to be coveredat the September meeting, includes thefollowing categories:

Member demographics Treasury and shared service

centers Centralization Organization Policies and procedures Talent Technology Bank relationship management The second phase, to be covered at

the March, 2011 meeting will includethese following categories:

Bank account management Accounting Liquidity management Cash-ow forecasting Cash positioning Intercompany transactionsAfter a series of testing and survey

iterations, the nal survey was launched

on July 29. The rst phase is focusedmostly on structural categories such asgeographical locations, responsibilities,and supporting policies and technol-ogy. The second phase will be focusedprimarily on core operations and pro-cesses within cash management.

THE PROJECTS GOAL The survey aims to collect useful bench-marking data that will help GCBG mem-bers improve their global cash manage-ment efforts by comparing their ownmetrics to those of their peers and cre-ate guiding principles that dene what isworld-class in this area. It is important tonote that the effort is to focus on world-class principles that can apply to anycompany. It would be easy to concludethat a world-class treasury operationsurely has the latest version of the mostrobust treasury management system inplace, or that they use only three banksglobally to get their jobs done. But thisis inaccurate. Many smaller companieshave very sophisticated and stream-lined operations using their bankson-line banking products efficiently.

Technology is one of the topics ofparticular interest as companies seem toalways be in pursuit of some technologi-cal improvement. One line of questionsin the survey is about the realistic end-state vision of the members, includingwhat the end state looks like in termsof system utilization, straight-through-processing and the like, as well as howclose they are to achieving it. Therefore,

is the principle in play here that a world-class company is constantly pursuingimprovement? Or, is it a simple matterof technology advancing faster thancompanies can keep up?

TREASURYS GOT TALENTAnother interesting category is that oftalent. The survey questions addressvarious sub-topics such as rotationalprograms, succession plans, employeedevelopment, recruiting and reten-

tion practices. Certainly these are top-ics a responsible treasury leader wouldseek to manage well. But how doesa world- class organization approachthem? Is high employee turnover due tostrong development programs a sign ofexcellence, or is longevity, stability andwell-rounded experience in treasury abetter indicator of world-class status?

CENTRALIZED VS. DECENTRALIZEDFinally, one area that has garnered extraattention in the project planning is thematter of centralization versus decen-tralization of treasury activities. This isin line with the general reassessmentof optimal centralization taking placeacross the peer member companies of The NeuGroups.

Without it being overtly expressed, judging from recent back and forth withmembers, it seems there is a legitimateneed to dismantle the presumption thatcentralization is inherently better thandecentralization in every case and toview them both as potentially effectivestructures each with their pros and cons. Thus, as a practical matter when bench-marking key processes, for example,it is not always safe to assume thatcentral treasury executes all aspects ofthe process. There may be regional orlocal execution elements and these maynot be entirely standardized throughoutthe world.

Where and how processes get donecan provide useful insight into how trea-surers should think about centralization

vs. decentralization going forward. These are the considerations theGCBGs 28 members will be working onat the September meeting to determineamongst themselves, not what systems,turnover ratios or organizational struc-tures are best, but how these areas areapproached and managed within thecontext of industries, company size,geographical coverage and so forth. Youcan look forward to more reports of thiseffort in the coming months.

Organization

Getting to World-Class Cash ManagementBy Bryan Richardson

The NeuGroups Global Cash & Banking Group seeks to determine what world-class means.


16/16

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