Managing Liquidity & Other Risks Through Changing · PDF fileMaintain flexibility ... trapped...
Transcript of Managing Liquidity & Other Risks Through Changing · PDF fileMaintain flexibility ... trapped...
Elyse WeinerGlobal Head of Liquidity and Investments
Global Transaction Services, Citi
Managing Liquidity & Other Risks
Through Changing Times
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Corporate Finance Dynamics in 2011: Recovery
The global corporate sector enters 2011 in a position of strength. The overarching corporate finance challenge will be
deciding when and where to deploy this spending power – on organic growth opportunities, on M&A, on further
balance sheet strengthening or increased capital distribution.
Balance Sheet Trends
High cash buffers remain,
but much of it offshore or
trapped in regulated
environments
Tapping into attractive EM
capital and debt markets
Continued
de-leveraging and capital
building
Surge in shareholder
distributions
Corporate Recovery
Strategic Trends
Focus on delivering
sustained earnings
growth
Investment in high-growth
& emerging markets
Increase in M&A – buy
and sell side
Advanced trading and
treasury models
Diversification as a risk
mitigant
Pre-crisis operating margins
Surging cash levels
Decline in leverage
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Recent events confirm continued inter-connectivity of risk triggers…
Liquidity Lessons Learned
Risk triggers are always present, with varying degrees of prominence - regulatory, political, supply chain,
commodity prices currently in the forefront
Increasing importance of due diligence – know your counterparties and suppliers
Diversify sources of funding and other critical business drivers
Maintain flexibility
Develop contingency plans
Right size buffers to insure against unforeseen and stress events; balance against cost
Optimize internal utilization of resources
Monitor risk triggers through enterprise risk management process e.g. regulatory, fiscal, market,
geopolitical, environmental
Leverage local expertise
Optimize internal utilization and release trapped cash
Risk Assessment processes typically address direct risks and often neglect tangential or indirect risks.
Technology
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Evolving Economic & Business Landscape…
The economic environment remains challenging as a result of slower growth across developed markets,
concerns with European sovereign debt and impacts from changing market structures…
…As enterprises expand across markets adding complexity, and risk, to business processes
Foreign Exchange Custody Payments Collections Supply Chain
Increased in cross-border
transactions
Evolving regulatory landscape
adds complexity
Oversight and control to address
heightened risk profile
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…Driving Evolution of Business Models
Treasury functions and operating models re-engineered to address increased complexity and risk.
Corporate
Objectives
Trading Model
Legal and Tax Structure
Supply Chain Models
Manufacturing Models
Sales / Distribution Models
Treasury ModelWorking Capital
Management Model
Liquidity
Structure &
Forecasting
Treasury / Risk
Management Processes
Regional Treasury Centre
In House Bank
Legal entity
Risk
Management
AP / AR Processes
SSC
Netting Centre
Payments Factory
“…on Behalf of..”
Process
Execution
External Environment /
Factors
Customers, suppliers and
partners
Banks, equity stakeholders
and providers of capital
Regulatory, statutory/
compliance
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Challenges of Operating Cross-border1
Country Rules and Regulations
Keep Changing
When sending Kazakhstan Tenge,
the beneficiary’s 12-digit Tax ID
Number is required for every
payment
All Tunisian Dinar wires under
10,000.000/TND must include the
beneficiary’s 20-digit account
number
Payments (>USD1,000) in KRW
must include beneficiary phone
number; bank must contact the
beneficiary to receive acceptance
of the flows
Cross-border invoicing and
settlement in RMB now feasible
Dynamic Risk Environment
The Challenge
Keeping current with changing
rules, regulations and practices –
in some cases creating
opportunity
Understanding local clearing
systems (payments/securities)
Mitigating market and supply
chain exposures
Management of foreign currency
accounts and exposures
Transparency into transaction
fees and spreads; FX rates; lifting
fees
Rise in social unrest linked to political & economic climate
Localized and pan-regional regulatory and payment
infrastructures
Increasing state intervention
Trapped flows
Liberalization of capital constraints in some markets
Commodity risk and price volatility
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Dynamic Risk
Environment
Hidden Costs &
High Fees
Complex
Country
Rules &
Regulations
The Challenge
Overseas
Payments
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Case Study: Global Electronics Co. RMB Re-invoicing Center
Issues
China factories have cost inputs mostly in RMB, while
sales (mostly intercompany) were USD
Significant costs due to fragmented foreign exchange
exposure management, trapped liquidity
RMB deregulation appeared to offer potential to address
inefficiencies – the challenge was of establishing a viable
solution, given the new regulatory frontier, with few
precedents
In 2011, the company established a re-invoicing entity in Hong Kong to actively manage settlement of cross border
trade flows between their China operations and other entities. Citi has been selected as the trade settlement bank for
their China related supply chain flows.
Solution
Established an innovative Re-invoicing Center in
Hong Kong – consolidating trading flows through the
Re-invoicing center, with RMB cross-border trade
settlement.
Benefits:
– Reduces payments costs/fees; allows coordinated timing for
better liquidity management
– Centralizes and improves FX exposure management
– Reduces trapped liquidity, with transparent costing throughout
the supply chain with the use of local currency
Citi’s Role
Helping in defining and implementing the solution, from
concept to execution
Delivering an integrated approach covering China, Hong
Kong and HQ through Citi’s solution and relationship
teams
Negotiations with Chinese regulators to ensure
transparency and buy-in from regulators
Banking partner for all China-related flows
Re-invoicing
Center
RMB A/C
&
USD A/C
China
Factory 1
Invoice in USD
Hong KongChina Worldwide
China
Factory 2
Etc.
Sales US
Sales EU
Etc.
Invoice in
RMB
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Changing Regulatory Landscape2
Regulatory evolution reshaping the Financial Services industry and consequently bank interaction with clients.
Drivers Summary
Basel III
Comprehensive reform of international accord on capital adequacy and liquidity to
improve the banking sector’s ability to absorb shock arising from financial and economic
stress
Measures include:
– Consistency & transparency of regulatory capital base
– Higher capital standards and capital conservation buffers
– Strengthening cross-border bank resolution framework
– Internationally harmonized leverage and liquidity ratios
U.S. Dodd-
Frank
Comprehensive reform involving:
– Restrictions on certain business activities, e.g. proprietary trading
– Mandatory clearing requirements for OTC derivatives
– Amendment of Regulation Q
– More stringent prudential regulatory standards; expanded role of FDIC
– Enhanced corporate governance and executive compensation requirements
– Increased consumer protections
Accounting &
Tax Reform
Reform intended to create future accounting standards that are principles-based,
internally consistent and internationally converged, e.g. GAAP to IAS
FBAR and FATCA
EU Activity Comprehensive reform of financial institutions with similar aspects to Dodd-Frank
Solvency II: Regulatory requirements impacting (Re)insurance industry
Other Markets Limited country-level reform of financial institutions in Asia, including changes to capital
requirements, compensation and derivatives; ring-fencing
Relaxation of capital controls, e.g. RMB cross-border invoicing & settlement
Implications
Significantly higher capital
and liquidity requirements
Drift toward national ring-
fencing and inconsistent
regulatory regimes
Expanded set of
restricted/priced out
activities
More stringent regulatory
oversight; increased
compliance and reporting
requirements
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Implications of Regulatory Reform
Regulatory evolution reshaping the Financial Services industry and consequently bank interaction with clients.
Banks Clients
Increased capital requirements; liquidity and capital
buffers; higher provisions for trade finance and
contingents
Regulatory capital mix changes
Balance sheet valuations shift ; preference for term
and structural funding with greater reliance on
capital markets over wholesale funding
Cost of entry and maintaining infrastructure
increases
ROA/RORC hurdles harder to achieve
Refocus on strategic activities; exit non-core
businesses
Balance sheet efficiencies critical to offset higher
capital levels and costs
Bank borrowing and services , e.g. trade, become
more expensive as competition for capital market
sources increases
Rules on derivative clearing and collateral imply higher
cost of hedging
Balance sheet and operational efficiencies to offset
higher capital and banking costs
Timely information delivery and analytics critical to
improving performance
Rationalize bank relationships to ensure support for
global expansion & operational efficiency initiatives
Re-evaluate investment options in view of new bank
valuation models, regulatory and accounting treatment
and risk profile.
Increased reporting requirements and infrastructure
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Dealing with Increasing Complexity3
With CEO/CFO priorities shifting from crisis management to “risk aware” sustainable growth, the role of the Treasurer
has been re-defined as a strategic partner and “gatekeeper” of the balance sheet..
*Global Growth Generators, Citi, February 2011
Strategic Focus – Optimizing capital allocation & funding structure
Acting as gatekeeper of the balance sheet
Addressing the treasury and funding implications of internal processes, policies and capital actions
Identifying appropriate level of liquidity to support operations vs. strategic cash available for investment and expansion
Extracting value from working capital / supply chain financing options to create in-house liquidity
Rationalize account structures, processes and technology
Cash consolidation
Centralized treasury operations and services
Release cash from working capital cycle
Improve cash forecasting
Improve Risk Management Manage Growth
Develop firm-wide view of exposures
Implement policies and governance framework to monitor compliance
De-risk supply chain
Centralize decision-making
Plan ahead
Evaluate options to free trapped cash
Tap into local knowledge and expertise in growth markets
Extend best practice
Integrate treasury management as a “functionally centralized/globally distributed” process
Leverage technology to drive efficiency and de-risk processes
Maximize Cash Efficiency
Key Challenges – Increasing Complexity
High proportion of expansion into EM countries and currencies; increasing importance of managing currency risk
“Beware of any proclamations of an end to volatility”*
Restrictive regulatory and operational environments
Proliferation of systems and data formats; insufficient global visibility into positions
Aggregating critical information for real-time decision support
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Advanced Treasury Structures
In-house bank, housed within a Global Treasury Center
(may be in a tax-favorable location)
Global Treasury Center becomes exclusive owner of
external credit limits and management of bank relationships
Intercompany commercial flows are settled from Netting
Center through In-house Bank (cashless settlement) and
physical payments
Trading model may use (for example) Limited Risk Distributors
and Contract Manufacturing, where feasible
Global Treasury Center provides Treasury support services
to non-IHB participants
▲ Minimizes external transaction volumes, reducing banking
fees and processing costs
▲ Aggregates cash for most efficient use by the enterprise,
optimizes use of external credit lines with banks
▲ Optimizes FX risk management and reduces external
spreads taken
▲ Liquidity structure overseen by Global Treasury Center:
Automates liquidity concentration
Optimizes Interest earned
Supporting “risk-aware” business growth and performance with advanced treasury and liquidity management
structures, e.g., In-house Banks, global pooling structures, netting and payment factories.
Global
Treasury Center
Netting
Center &
Payments
Factory
Banks
In-house Bank
BU
BU
Liquidity
Structures
Payments
I/C
Trade Flows
MM and
FX Trades
Stand-
alone
accounts
BU
JVs
I/C T
rad
e F
low
s
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Global
Treasury Center
(NA)
Case Study: Global Consumer and Health Care CompanyCompany (revenue $20bl) with Global Business Strategy aligned Global Treasury organization to support a 5%
CAGG revenue growth strategy.
Single
Global
Netting
Center
(Based in
WE SSC)
Citi
WE
NA
Single
Integrated
Global
Liquidity
Structures
Payments
I/C
Trade Flows
MM and
FX Trades
Stand-
alone
accounts
Asia
(New)
Latam
(New)
I/C T
rad
e F
low
s
Issues
Emerging growth markets identified
Net borrower with debt concentrated in US; untapped cash of
$600mm residing globally.
Existing centralized treasury function for NA and WE and in-
country finance support covering Asia and Latam.
Significant real and opportunity costs due to localized liquidity
and Foreign Exchange processes.
Solution
Extend treasury structure aligned to further centralize working
capital management across all regions.
Global consolidation through IHB and additional RTC for non-
IHB participants.
Deploy single instance TWS, KPI identification and
measurement processes to all newly established RTC’s.
Design and deploy global liquidity structure to minimize bank relationships and standardize bank communications.
Establish Global Netting Centre to minimize payments and FX volumes and costs.
Citi’s Role
Helping in defining and implementing the solution, from concept to execution
Delivering an integrated approach covering 80 countries of
operation for liquidity and payments in both Treasury and
SSC.
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In-house Bank
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Keep abreast of changing market conditions
Supporting Growth: 2011 and Beyond Execution Imperatives
Continued volatile market conditions and evolving regulations
require real-time information management and improved
monitoring and reporting capabilities
Maintain financial, process and supply chain flexibility to
respond to changing conditions
Implement robust control processes to monitor
operational & financial risks that come with growth
Reassess banking relationships with a view towards
future growth strategies and plans
Company-wide cash and liquidity management programs are a
must
Rethink trading models; legal and tax structures
“Piggyback” treasury objectives on organization-wide
technology/process initiatives to help drive the business case
Close coordination with businesses, regions and partners to
identify issues and mitigants
Implement functionally centralized policies and controls
Establish governance framework, KPI’s and alerts
Ensure ability to monitor
Long-term view of requirements across a broader network
Rationalize providers to improve operating and cost efficiency
Think strategically of treasury transformation
opportunities
Technology and Infrastructure Investment to support
global complexityContinuous Process Improvement
Industrialize global reparative processes through deployment of
technology to support working capital management
Increase ability to generate actionable information, risk
management and analytics from global business flows
Streamline connectivity to suppliers, customers and banking
partners to minimize cost and maintenance
Implement structures and processes to continuously align
business, capital and liquidity requirements
Mitigate risk through centrally administered processes and
policies
Streamline and standardize; eliminate repetitive and parallel
processing
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What are others doing?
Working Capital Treasury
Treasury Involved in Working Capital Management – 60%
Operate Netting Centre – 61%
Have Centralized Payments Processing – 60%
Deploy single or minimal number of ERP systems – 55%
Centralized Treasury Policies - 93%
Centralized Risk Management Processes - 72%
Cash Concentration to Global or Regional level – 69%
Utilize TWS – 65%
The centralization paradigm continues to underpin risk-aware operating efficiency. Companies continue to develop
and extend organizational structures within which the supply chain operates.
Identifying Best In Class: Citi Treasury Diagnostics
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1
2
3
4
5
Policy &
Governance
Liquidity
Working Capital
Sub Funding &
Repatriation
Risk Management
Systems &
Technology
My score
Peer scores (average)
Universe scores (average)
My score
Peer scores (average)
Universe scores (average)
Performance
Top 25% of responses
Core 50% (25-75%) of responses
Bottom 25% of responses
Average response
My Score Top 25% of responses
Core 50% (25-75%) of responses
Bottom 25% of responses
Average response
My Score
Benchmarks
Risk Management
4.6
4.6
4.1
4.0
2.6
2.6
4.4
0.5
1.6
My Score
Peer Group
Universe3.2
3.4
BetterBetterInterest rate risk
My Relative Performance+/-
BetterBetterForeign Exchange
(Transactional)
BetterBetterLiquidity/funding risk
Against UniverseAgainst Peer GroupProcess Area
BetterBetterInterest rate risk
My Relative Performance+/-
BetterBetterForeign Exchange
(Transactional)
BetterBetterLiquidity/funding risk
Against UniverseAgainst Peer GroupProcess Area
Identify where you stand relative to peers - Learn what
counts as best in class
Systems & Technology
Policy & Governance
Subsidiary Funding &
Repatriation
Risk Management
Cash Management –
Working Capital
Management
Cash Management –
Liquidity
Celent Model Bank Award
Alexander Hamilton: Silver Winner, Solution of the Year, Treasury & Risk Winner, Innovative Product
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Information as a Key Enabler: Looking Ahead
Integrity – quality and timeliness of data
Transparency – Easy to understand, standardized data
Holistic – encompassing all available data points and positions
Flexible – customize ways of gathering and examining data
Integrated – within risk and business management processes to quickly evaluate impact and take action
In an increasingly complex environment, the aggregation and review of enterprise wide data is critical to effective risk
management.
Transforming to actionable data management
Fundamentals of an operational visibility program
Companies initially focus on utilizing enterprise-wide data aggregation to improve operating efficiency, cut costs
and raise returns
Visibility provides an added measure of control and oversight to ensure regulatory and corporate compliance
Top-performing companies move up the value chain, adopting data-driven decision making practices
Transformed companies utilize data to optimize business performance across a broad range of functions.
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