The Right Way to Manage Liquidity Globally · The Right Way to Manage Liquidity Globally . ... Data...

The Right Way to Manage Liquidity Globally Elyse Weiner, Global Product Head Liquidity & Investments, Citi

Odette Izquierdo, Liquidity & Investment Head for Latin America, Citi Peter Langshaw, Client Management Global Sector Head, Energy, Power &

Chemicals, Citi

The Financial Professionals Forum 2012

Table of Contents

1. Global Perspectives 2

2. The Latin America Environment 7

3. Client Perspectives 13

4. Conclusion 16


The Right Way to Manage Liquidity Globally

What This Session Is About?

Maintaining access to funding is a fundamental objective of corporate treasurers. – With access challenged by regulation and market uncertainty, companies are turning inward to extract

cash from their working capital cycle. – Achieving this objective requires a comprehensive review of treasury and operating processes, as well

as organization structure

This session explores a strategic roadmap to enhancing global cash efficiency.

The benefits of achieving best practice liquidity management are tangible and measurable and include reduced days working capital, lower cost of funding and processing costs and enhanced returns on corporate assets.

Speakers Elyse Weiner - Global Head, Liquidity & Investments Odette Izquierdo - LatAm Regional Head, Liquidity & Investments Peter Langshaw – Client Management Global Sector Head, Energy, Power & Chemicals

1

Global Perspectives

Elyse Weiner


Evolving Economic & Business Landscape… The business and economic environment remains challenging due to slower global growth projections in both developed and emerging markets, continued stress in the eurozone and evolving regulation.

…As enterprises expand across markets, management of business processes becomes more complex

Foreign Exchange Custody Payments Collections Supply Chain

Increased cross-border transactions

EM/DM, EM/EM

Evolving regulatory landscape adds complexity

Oversight and control to address heightened risk profile

1 2 3

2


Major Trends Shaping the Financial Services Industry

Technology Innovation

Digitization: Drive to convert from paper to electronic solutions continues. Emergence of digital wallets replacing physical currency for convenience. Data management and mining

Mobility: Opportunities for mobile and kiosk payments, virtual accounts, and electronic receivables services. Banks must answer the call for high-speed, customizable, and innovative solutions

Globalization: Growth and economic decoupling of emerging markets; global companies are going local and local companies are going global

Urbanization: Today, 50% of world’s population live in cities—a figure that will grow to 75% by 2050. Population growth will require infrastructure investment and fiscal constraints in developed markets will require efficient administration

New financial regulations are changing the way we do business

Basel III: Tighter international capital and liquidity requirements; national frameworks

Dodd-Frank Financial Reform: Repeal of Reg Q, unlimited FDIC to 12/31/2012, derivatives clearing, Volcker rule, Durbin

SEPA/PSD

RMB de-regulation

Regulatory Reform

Globalization

3


Lessons Learned

Risk triggers are always present, with varying degrees of prominence, e.g. regulatory, political, supply chain, commodity prices and sovereign risks

Increasing importance of due diligence – know your counterparties and suppliers Diversify sources of funding and other critical business drivers Maintain flexibility Develop contingency plans – operations, suppliers, funding Right size buffers to insure against unforeseen and stress events; balance against cost Optimize internal utilization of resources Continuously monitor risk triggers through an enterprise-wide risk management process Leverage local expertise and your banking partners to keep abreast of shifts in operating environments –

both positive and negative

The financial crisis of 2008 heightened awareness of liquidity risk and placed greater emphasis on risk management practices that often ignored inter-related risks.

Review Re-structure Re-deploy

Evaluate exposures Update & enhance policies Document account structures Evaluate organizational structure Identify areas for process

improvement

Centralize & Consolidate Rationalize bank accounts and

providers Deploy COE’s – SSC’s, regional

Treasury Centers, payment factory Automate & streamline processing Improve visibility Supplier/vendor relationships

Invest in yourself Realign limits and counterparties in

view of risk & market conditions and operational requirements

Leverage opportunities to self-fund, e.g. Pooling & cash concentration

Align investments to risk/return considerations

4


Achieving Best in Class

Best in Class ▲ Liquidity Management is supported by 95%+

visibility and the use of automated cash concentration and pooling to mobilize cash

▲ Treasury is actively engaged in Working Capital Management, e.g. transactional processes and financing programs to accelerate receipts, manage payment terms and promote control

▲Centralization of both process and positions; use of shared service centers, IHB, regional treasury centers, netting center

▲ Policies and governance structure are in place to address the full spectrum of risks from counterparty to liquidity to FX

Typical opportunities for improvement ► Increase visibility of positions ► Improve timely access to actionable data

for decision support ► Increase proportion of operating accounts

in liquidity structures; highest degree of consolidation

►Automate transactions to the extent possible

►Holistically link liquidity structures to operating and treasury models

►Create discipline around monitoring and measuring exposures on an ongoing and more frequent basis

►Measure and manage performance with metrics and KPIs

5


What are others doing? The centralization paradigm continues to underpin risk-aware operating efficiency. Leading global corporates are transferring best practices learned in Europe/North America and Asia to Latam.

Benchmark your Performance: Citi Treasury Diagnostics

My scorePeer scores (average)Universe scores (average)

My scorePeer scores (average)Universe scores (average)

Performance

Top 25% of responsesCore 50% (25-75%) of responsesBottom 25% of responsesAverage response

My Score Top 25% of responsesCore 50% (25-75%) of responsesBottom 25% of responsesAverage response

My Score

Benchmarks

Risk Management

3.2

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

6

Working Capital Treasury Treasury Involved in Working Capital Management – 64% Operate Netting Center – 56% Have Centralized Payments Processing – 61% Deploy single or minimal number of ERP systems – 54%

Centralized Treasury Policies - 92% Centralized Risk Management Processes - 74% Cash Concentration to Global or Regional level – 59% Utilize TWS – 66%

Only 6% of the survey sample represents LatAm parented names. Within that subset, we see greater emphasis on centralized payment processing, but less progress on centralization of treasury policies and

risk management processes than respondents in other regions.

http://www.alexanderhamiltonawards.com/

The Latin America Environment

Odette Izquierdo


Argentina more restrictive on FX transactions & more regulations on banks regulatory lending

Ecuador changes cross border transfer tax to 5%

Ecuador raises cross border transfers tax to 2%

Venezuela implements monetary re-conversion

Argentina establishes limits/restrictions on currency exchange

Ecuador central bank limits bank charges on transaction costs

Elimination of transaction tax (CPMF) in Brazil

2012

Changes in Regulations are Constant, but Trends are Mixed

2011 2010 2009 2008 2007 2006

Brazil defines rules that make offshore banking more flexible to residents

Brazil removes limit to hold process from exports to 10 days offshore

Argentinian export proceeds cannot stay more than 10 days in exporters offshore accounts

Brazil IOF .38% on FX transactions for imports and Financial F/X transactions.

Colombia changes rules on debit tax (4/1000)

7


Currency and Sovereign CDS Volatility

LatAm Sovereigns Credit Default Swap are highly volatile

Dealing with currency volatility is a challenge

8


Drivers Description

Three types of countries

Totally or highly dollarized economies – Ecuador, El Salvador, Puerto Rico, Panama

Freely exchangeable currencies & limited central bank reporting – Chile, Costa Rica, Guatemala, Honduras, Jamaica, Mexico, Peru, Uruguay,

Paraguay and Trinidad Controlled currencies and central bank reporting requirements

– Argentina, Brazil, Colombia, Venezuela

Three regulatory constraints

Currency controls: convertibility and transferability Limits on inter-company lending Different tax regimes

Three building blocks

Bank account Domestic concentration Cross border concentration

Widespread Regulatory Controls

Controls can be barriers, but can also present opportunities.

9


3 Areas of focus Details

Local Structures

Resident Structures – Same currency Intra Entity structures can be implemented across the region – Inter Entity structures available in selected countries (Mexico, Caribbean and

Central America). Main restriction – debit tax (Argentina, Colombia, Peru) Non Resident accounts: Not available in all markets

Convertibility and Transferability

FX controls – LCY – different regulations per country (More controls i.e Venezuela,

Argentina; less control: Costa Rica, Mexico) – USD as main currency in Central America and Caribbean

Regional Structures

NY is the standard hub to concentrate funds: Time-zone – NY facilitates operations

USD concentration currency for most of Latin American Companies Physical pooling is the standard vs. Notional pooling

– Notional Pooling is generally very challenging due to tight regulations

Most important Trends Latin America can be a complex region to extract value from regional liquidity structures. Understanding the latest regulatory landscape as well as the market environment allows you to be the opportunistic towards these goals.

10


Latam’s Regulatory Environment Summary

11

Local NR R

LCYLCY

OnshoreLCY

OffshoreLCY FCY LCY FCY LCY -> FCY

LCY Debit Tax

Argentina ARS 2 5 4 4 4 4 4 YBahamas BSD 2 4 1 1 1 1 2 NBarbados BBD 1 5 1 1 1 1 2 NBrazil BRL 5 5 4 5 4 5 3 YChile CLP 4 5 5 2 2 2 2 NColombia COP 1 5 1 1 1 5 2 YCosta Rica CRC 1 1 1 1 1 1 1 NDominican Republic DOP 1 1 1 1 1 1 1 NEcuador USD 1 1 1 1 1 1 1 NEl Salvador USD 2 1 1 1 1 1 1 NGuatemala GTQ 2 5 1 1 1 1 1 NHaiti HTG 1 1 1 1 1 1 1 NHonduras HNL 2 5 1 1 5 1 2 NJamaica JMD 1 5 1 2 2 2 1 NMexico MXN 2 1 2 2 2 2 1 NPanama USD 1 1 1 1 1 1 1 NParaguay PYG 1 1 1 1 1 1 1 NPeru PEN 2 1 1 1 1 1 1 YPuerto Rico USD 1 1 1 1 1 1 1 NTrinidad and Tobago TTD 1 1 1 1 1 1 1 NUruguay UYU 1 1 1 1 1 1 1 NVenezuela VEF 1 5 1 5 1 5 4 N

N.B. 1 - Allowed, No Material Restrictions2 - Allowed, Straightforward regulations, approval, or license3 - Allowed, Challenging regulatory approval or license4 - Allowed, subject to a complex set of rules5 - Disallowed, Strictly prohibited

Operating Account Intercompany Lending FX ControlR -> NR NR -> R


Type 4 e.g. Mexico

Type 1 e.g. Brazil, Argentina

Type 2 e.g. Peru, Costa Rica

Type 3 e.g. El Salvador,

Panama

Ons

hore

Invest Invest Invest Invest

USD Non-Res

USD Non-Res

USD Non-Res

USD Non-Res

LCY Non-Res

Pool

Invest Invest Invest Invest Invest Invest

LCY Resident

LCY Resident

LCY Resident

LCY Resident

LCY Resident

LCY Resident

LCY Resident

LCY Resident

LCY Resident

USD Resident

USD Resident

USD Resident

USD Resident

USD Resident

USD Resident

USD Resident

Offs

hore

LatAm Regulatory Environment – Complex And Evolving The LatAm regulatory environment poses unique challenges and continues to evolve. Need to assess on a case-by-case basis to implement an optimal solution.

12

Client Perspectives

Peter Langshaw


Vale: A Global Leader in Creating Long-term Value

13


Rationalization

• Consolidate banks and bank accounts

• Rationalize credit providers

• Reduce banking client service contacts

• Select best-in-class banks with full service offerings

Optimization

• Reduce overall costs

• Implement integrated pooling structure, where feasible

• Centralize local FX operations

Standardization

• Standardize XML format across all banks

• Increase system integration and security

• Standardize platforms

Case Study – Summary of Client Objectives

S

R

O

A Latam Regional Treasury Center wanted to rationalize banks, standardize operational processes and optimize internal “organic” liquidity.

13


Integration and Straight-through-processing Liquidity, Investment and Risk Management

Portal – Treasury Vision Centralized FX management - FXPulse Flexible Global Liquidity Management

infrastructure – Optional linkages to global Multi-currency

Notional Pool managed by global treasury in Europe

– Efficient Cash Concentration Services mobilization and local currency funding

– Streamlined inter-company loan tracking – Automated and manual Multi-banking tools

Local on-balance sheet Investments as well as Money Market Funds depending on jurisdiction – Investment channels including OnLine

Investment (OLI) platform and placement desks

At the “top of the house” regional treasury leverages the scale of their banking provider to execute locally and optimize across the region.

Customized Latin American Banking Structure

14


Rationalization

• Innovative regional solution to reduce borrowing costs and improve yield – in this case $500,000+ in savings

• Real-time visibility on all balances using TreasuryVision

• Local and regional pooling, where regulations allow

Optimization

• Local unique liquidity and working capital management solutions - e.g. Prestação, Receivables Discounting Mexico

• True end-of-day cross-border cash concentration

– Multi-banks extensions • Money Market Fund options for additional earnings power

• FX Pulse for delivering institutional spreads and streamlined local currency funding/concentration

Standardization

• Fully integrated liquidity solution in all nine markets

• Regional controls, visibility (to Citi and third-party banks) and enhanced security

• Standardized and integrated liquidity platforms and technology

Best in Class Regional Liquidity Benefits Delivered

S

R

O

15

Conclusion


Recognize the complexity and volatility in the region

In consideration of the tax and regulatory environment, primary goals are Visibility & Control

Trend to regionalize processing and financial operations

– Partial solutions may be proposed based on local and international cash cycles of each company

Where markets allow, various schemes to concentrate and pool funds

Localized solutions for more regulated environments

Information delivery is a key requirement for decision support and management

Consideration of regulatory and tax implications specific to Latin America is critical to implementing a successful Liquidity & Investments strategy for the region.

Key Takeaways

16


Treasury Evolution

• Cash Visibility • Cash Pooling • Bank Relationship • Interco Funding

Decentralized Treasury

Treasury Centers

Commissionaire Structure

Re-invoicing Center

Netting Center

Shared Service Center

Payments Factory

Global Pools

In-House Bank

• Internal Bank Accounts

• Accounts Receivable • Accounts Payable • Accounting

• Interco Payments • Interco Collections • Interco Netting

• FX Management • Interest Management • Long-term Funding

Treasury Flows Commercial Flows Treasury & Commercial Flows

Degree of Centralization

Functions Centralized

Overlay Structures

Treasury/Trading Models

Integrated Processing Centers

Multinational companies adopt varying degrees of centralization to bring efficiencies to their organization. The path towards an optimized structure is evolutionary and not always linear.

17


Client Requirement Liquidity and Investment Capabilities

Visibility ► Real-time actionable visibility on cash positions and flows for accurate cash positioning and risk mitigation

► Treasury Vision - state-of-the-art capability that aggregates real-time financial information from Citi and third party banks; analytics & workflow tools

► Citi Treasury Diagnostics – web-based survey and evaluation of current practice

Mobilization ► Automated movements to mobilize accessible cash for centralized access and control

► Customized to regulations and tax rules

► Advanced rules-based movement

► Global Cash Concentration Services - Extensive feature and functionality, including: choice of periodicity; intra-day & EOD, multi-bank services; multi-currency, interest reallocation, intercompany tracking and reporting; specialized structures for regulated environments and IHB support

► Specialized domestic “pooling” & optimization structures for more regulated environments

Optimization ► Options for cash deployment for optimal return to the company

► Alternative channels to streamline operational requirements

► Multi/Single-Currency Notional Pooling to provide internal offset and self-funding opportunities; centralized investment

► Citi Interest Optimization provides enhanced return on liquidity that cannot be consolidated into a commingled structure

► Citibank® Online Investments with investments in 28 countries and 19 currencies, access to 150+ money market funds (offshore and domestic) from 14 premier fund providers.

► Citi Liquidity & Investment Desks in New York, Dublin, HK and Singapore in addition to 20+ local desks

► Directed Agency Investment Services

► Automated Investment Sweeps

n b r y n l p t v c n b r

Treasury Challenges: Increasing Complexity

Multiple countries and currencies of operation

Proliferating number of bank accounts to support international activities, with varying local banking practices / standards

Multiple systems and data formats

Insufficient global visibility into liquidity and risk

Challenges in consolidating critical information for senior management decision-support

Aligning with Treasury Requirements Citi’s product offering and capability development is aligned to three basic client requirements -- with the objective to deliver integrated, comprehensive liquidity and working capital management solutions.

18

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