Where Are Foreign Exchange Rates Headed?
This article is a contribution from one of our content partners, Bound Introduction You know, we talk to a lot of people about exchange rates. One question we get all the time is where rates are going to go. First thing I want to be clear about here is that Bound is not in the business of trying to predict where rates are going to go. But one question that comes up a lot is what should be the default assumption? Where exchange rates will go if I want to assume nothing in terms of changes in supply and demand, volatility, and global macroeconomic changes. Bound’s Role and Services So I want to talk a little bit about how Bound thinks about that. The first thing I want to be clear about is what Bound is in the business of doing. Of course, we help companies make their foreign cash flows more stable and predictable. If you have unbound cash flows, so cash flows that just bounce around with the exchange rates, you can use one of our three automated programmes to make those cash flows more stable and predictable: The Flat Rate Assumption and Interest Rate Differentials But let’s get to the main question at hand here, which is, what should the assumption be if I assume zero volatility? A lot of people assume it’s going to be the same. Rates have been moving around over the last couple of years, and I know it’s not going to stay the same as we go into the future, but because I can’t predict it, I’m just going to assume that it’s going to stay the same. Because it’s just as likely to go up as it is to go down, so that’s my safest assumption. That ignores one really important principle, which is the interest rate on the two currencies, and that creates what’s called the forward curve. So let’s pretend we’re doing a trade today, dollars for euros, and then a year from now we’re trading those back. The current exchange rate today is about 110, so we would exchange 110 dollars for 100 euros. If the interest rates on those two currencies were exactly the same, we would just swap that money back. But since the dollar earns more interest over the course of the year, we can’t just swap those back and have that be fair, or whoever got the dollars on January 1st is in a way better position. So what we do instead is to take into consideration the interest earned over the course of the year, and the exchange rate needs to change. So in this example, the 110 becomes 115. The 100 euros become 103. The exchange rate needs to move, from 110 to 1.1214, to compensate for that small difference. Understanding the Forward Curve So that is the essence of the forward curve. Let’s take a look at a couple of real forward curves here. And again, this is the assumption that this is not about volatility. This is not about if the economy is going to strengthen or anything. This is just today’s exchange rate and the adjustment we need to make for the fact that these currencies have different interest rates on them. So you can see Pound<>Euro is going to dip a little bit, Dollar<>Swedish Krona is going to stay pretty level but come down, Euro<>USD and USD<>Brazilian Real are both going to go up. Because the Brazilian Real is quite a high-interest-rate currency relative to US dollars. And so this is almost a 5 percent adjustment over the course of the next 12 months, in where that exchange rate will go strictly because of the interest rate. So if supply and demand don’t change, if the economies of the US and Brazil stay exactly the same, there’s nothing else that changes. This is where a rational person would assume, just based on the interest rates, where this exchange rate would change. Misconceptions About Hedging That could be good for me or bad for me, depending on if I’m buying or selling BRL. Some people assume that this is a cost of hedging, saying, if I hedge the rate out a year from now, that rate could be potentially a lot worse for me. So I’m not going to hedge at all; I’m just gonna assume that it’s gonna be flat. But assuming that it’s flat is essentially making the assumption that it’s going to be volatile and it’s going to be volatile in the right direction to hold that flat because you’ll be fighting against the interest rate differences across these two currency pairs over the course of that whole year. The way Bound tends to think about volatility and exchange rates is that the default assumption is the forward curve itself, and volatility revolves not around a flat line but around the forward curve. Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below. Recommended Reading Notice: JavaScript is required for this content.
Franklin
The Broken State of Correspondent Banking
Written By:Royston Da CostaMastermind Board Member “The opinions expressed in this article are solely those of the author and not necessarily those of Ferguson.” Introduction Correspondent banking has long been the backbone of cross-border trade and global financial integration. However, having recently experienced what was an inefficient and complex system, I began to scrutinise the system for its vulnerabilities. In this article, I will explore the contributing factors to this, as well as the implications for global finance, and potential solutions for a more resilient and efficient system. Understanding Correspondent Banking Correspondent banking involves relationships between banks, where one bank (the correspondent) provides services on behalf of another bank (the respondent), usually in a different country. This system allows banks to access financial services in jurisdictions where they do not have a physical presence, enabling international payments, trade finance, and foreign exchange transactions. Usually, correspondent banks have a relationship with the respondent bank; however, there are occasions when a correspondent bank may be required to deal with a bank it does not have a primary correspondent relationship with, and this can be very frustrating for the Corporate caught in the middle. The correspondent banking model, which has remained largely unchanged for decades, is increasingly seen as outdated and inadequate for the demands of the modern global economy. This is further emphasised by the 14 days that it took a correspondent bank to return funds that do not belong to them to one Corporate I know. Key Issues Plaguing Correspondent Banking Operational Inefficiencies Correspondent banking is inherently complex, involving multiple intermediaries, time zones, and jurisdictions. This complexity often results in slow transaction processing times, high costs, and a lack of transparency. Payments can take several days to clear (sometimes weeks), with little visibility for customers on the status of their transactions. This inefficiency is particularly problematic in a world where consumers and businesses expect real-time financial services. Moreover, the reliance on legacy systems and outdated technology exacerbates these operational inefficiencies. Many banks, some even consider themselves as global players, still use systems that are decades old, making them ill-equipped to handle the demands of modern finance, such as instant payments, enhanced security, and data analytics. Regulatory and Compliance Burden I recognise that one of the most significant challenges facing correspondent banking today is the escalating regulatory and compliance burden. In the aftermath of the 2008 financial crisis and subsequent money laundering scandals, regulatory bodies around the world have tightened their grip on financial institutions. Anti-money laundering (AML) and counter-terrorism financing (CTF) regulations have become more stringent, with banks now required to conduct extensive due diligence on their counterparties, which is fair, in my opinion. While these regulations are necessary to safeguard the financial system, they have also made correspondent banking more cumbersome and costly. Cybersecurity Threats The rise of cybercrime poses another significant challenge to the correspondent banking system. The global nature of these networks makes them attractive targets for cybercriminals, who can exploit vulnerabilities in the system to commit fraud, theft, or other malicious activities. The risk of cyberattacks has grown as financial institutions have become more interconnected, and the potential for significant financial and reputational damage has increased. As the threat of cybercrime continues to increase, it is incumbent on banks within the correspondent network to invest in appropriate cyber security and ensure they are not reliant on outdated security protocols. Otherwise, this could not only expose them to potential breaches but also undermine the trust that is essential for the smooth functioning of correspondent banking relationships. Consequences of a Broken System Financial Inclusion The broken state of correspondent banking has wide-ranging implications for the global financial system. The most immediate impact is on financial inclusion. As correspondent relationships dwindle, so too do the opportunities for individuals and businesses in affected regions to participate in the global economy. This can exacerbate poverty, hinder economic development, and perpetuate inequality. Inefficiencies and Costs Additionally, the inefficiencies and costs associated with correspondent banking can stifle innovation. Fintech companies and other financial innovators often find it challenging to navigate the complex and costly correspondent banking landscape, limiting their ability to offer new and improved financial services to consumers. A good example of this is the solution for KYC (Know Your Customer), and whereas a number of Fintechs offer excellent solutions for this regulatory requirement, invariably the banks do not have the technology to plug in to the Fintech’s solution. Moreover, the fragility of the correspondent banking system poses a risk to global financial stability. As fewer institutions are willing or able to maintain these relationships, the system becomes more concentrated, increasing the risk that a failure in one part of the network could have cascading effects throughout the global financial system. Potential Solutions and the Way Forward Addressing the problems in correspondent banking requires a multifaceted approach that involves both technological innovation and regulatory reform. Adoption of New Technologies In my view, the adoption of blockchain and distributed ledger technologies (DLT) offers a promising solution to many of the issues plaguing correspondent banking. These technologies can enable faster, more secure, and more transparent transactions, reducing the reliance on multiple intermediaries and legacy systems. Blockchain’s potential to provide real-time settlement and immutable transaction records could significantly enhance the efficiency and security of cross-border payments. Rise of Central Bank Digital Currencies Moreover, the rise of central bank digital currencies (CBDCs) could also revolutionise the correspondent banking model. CBDCs, by offering a digital alternative to traditional currencies, could streamline cross-border payments and reduce the need for correspondent relationships. I recognise that this is unlikely to take place anytime soon, however, it certainly offers a worthy goal to aim for, especially if it eliminates the current experience of a bank being able to ‘sit on funds’ indefinitely with seemingly no accountability to anyone! Regulatory Harmonization and Cooperation To reduce the regulatory burden on correspondent banking, there is a need for greater harmonisation and cooperation among international regulatory bodies, another seemingly impossible challenge! By aligning AML and…
Unlocking new potential: integrate your Payment Service Providers
This article is written by Cobase Many businesses are familiar with integrating banks and other financial service providers into centralized platforms to streamline financial operations. However, what many do not realize is that you can now also integrate your Payment Service Providers (PSPs) with Cobase. This feature, facilitated via API, opens up new possibilities for enhancing efficiency, security, and control over your payment processes. Best of all, this integration makes your accounts immediately available within minutes of setup. The hidden potential of PSP integration Seamless payment processes Traditionally, businesses have had to manage multiple payment gateways and interfaces separately, leading to fragmented processes and increased operational complexity. With Cobase, you can integrate your PSPs directly into the platform, unifying all your payment processes in one place. This integration means that payments, whether local or international, can be initiated, tracked, and reconciled seamlessly through Cobase. For example, an e-commerce business handling transactions in multiple currencies can now manage all payments from different PSPs through a single, intuitive dashboard. Enhanced security measures Security is a critical concern when dealing with payment transactions. Integrating PSPs into Cobase enhances your security by incorporating advanced fraud detection and prevention measures directly into the platform. The Cobase platform’s robust security protocols, including multi-factor authentication and encryption, ensure that all payment transactions are protected against unauthorized access and cyber threats. Improved cash flow visibility Having real-time visibility into your cash flow is essential for effective financial management. By integrating PSPs with Cobase, you gain a comprehensive view of all your payment transactions across different providers. This holistic perspective allows for better cash flow management, accurate forecasting, and informed decision-making. For example, a retail chain can monitor daily sales and payment inflows from various PSPs in real-time, enabling better inventory management and financial planning. Automated and efficient operations Manual handling of payments can be labor-intensive and prone to errors. The Cobase integration with PSPs automates many of these processes, reducing the need for manual intervention. Payment files can be automatically distributed to the appropriate banks in the correct formats, ensuring accuracy and efficiency. This automation not only saves time but also minimizes the risk of errors and fraud. Businesses can focus their resources on strategic activities rather than getting bogged down by routine payment tasks. Simplified reconciliation of transactions Reconciliation of transactions is a critical aspect of financial management that ensures accuracy and completeness in your financial records. Cobase makes it easy to reconcile PSP transactions by automatically matching incoming payments with outstanding invoices and identifying discrepancies. This process reduces the manual effort required for reconciliation and improves the accuracy of financial statements. For example, a company dealing with high transaction volumes can benefit from automated reconciliation, which helps in identifying and resolving mismatched payments quickly, ensuring that the financial records are always up-to-date and accurate. Real-world applications and benefits Case study: global retailer Consider a global retailer with operations in multiple countries, each using different PSPs for local transactions. By integrating these PSPs into Cobase, the retailer achieved a unified payment process. This integration allowed the retailer to streamline its payment operations, gain real-time visibility into global cash flows, and enhance security across all transactions. The result was a 40% reduction in payment processing time, a significant decrease in operational costs, and more accurate transaction reconciliation. Strategic advantage Integrating PSPs with Cobase not only improves operational efficiency but also provides a strategic advantage in the competitive marketplace. With centralized control and real-time data, businesses can respond quickly to market changes, optimise their payment strategies, and enhance customer satisfaction through faster and more secure payment processes. The 7 habits of highly effective treasurers (E-book) Why are some treasury teams more adept at managing the financial challenges faced by their enterprises than others? Cobase decided to identify some of the factors that contribute to intelligent treasury management and operational excellence. Download this e-book now and you will be well on your way to better cash flow and working capital management. Also Read Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Notice: JavaScript is required for this content.
Winners announced for the EuroFinance Treasury Excellence Awards 2024
Spotify, Bristol Myers Squibb, DEME, Crocs, Inc, GE Healthcare and UNHCR named as the winners. Roche were given a special commendation for the annual awards recognised as the benchmark for Treasury excellence globally. EuroFinance has unveiled the winners of the annual EuroFinance Treasury Excellence Awards 2024 recognised as the benchmark for treasury excellence globally. Each year, the theme changes to reflect the key trends that have emerged in treasury over 12 months. This year’s winners have been awarded in 5 categories; Strategic change, Technology transformation, Cash champion, Financing and liquidity and Risk and resilience. Roche has been named Specially commended for industry-wide digital transformation for its leadership in driving digital transformation and making treasury operations a driving force behind the company’s broader mission. Specially commended for industry-wide digital transformation Roach Roche has been specially commended for its leadership in driving digital transformation across treasury. The treasury team has leveraged innovations to enhance cash flow forecasting, optimise capital allocation, and improve real-time decision-making, all of which are critical for funding its ambitious research and development initiatives. This transformation has allowed Roche to navigate the complexities of global financial markets with greater agility and precision, ensuring that the company remains financially robust while pursuing cutting-edge healthcare solutions. The treasury’s role in this digital evolution underscores Roche’s commitment to not only advancing medical science but also to setting new standards for financial innovation within the industry. By pioneering these changes, Roche is leading the way in making treasury operations a driving force behind the broader mission of delivering more personalised and efficient healthcare solutions. Cash Champion Spotify (Winner) Digital music-streaming services company, Spotify, faced challenges in managing account receivables across its 180+ markets. With premium customers paying in local currencies, the treasury team encountered high FX costs and operational complexity, especially in minor currencies where in-house management was challenging. To address this, Spotify implemented a virtual account setup that allows the collection of funds in more local currencies through payment service providers (PSPs). This forward-thinking approach by the treasury team not only meets immediate needs but also positions Spotify to adapt to global challenges, demonstrating its strategic foresight and commitment to operational excellence. Marelli (Highly commended) Marelli, a leading name in the automotive industry, has adeptly managed recent industry challenges, including supply chain disruptions and market volatility. The company’s treasury team played a pivotal role in overcoming these hurdles by implementing a cutting-edge cash management system. This strategic solution has significantly improved Marelli’s liquidity management and cash flow optimization. By leveraging advanced financial technologies and enhancing operational efficiency, Marelli’s treasury team has successfully navigated market uncertainties, demonstrating the vital role of effective treasury management in driving stability and growth. Financing & liquidity Bristol Myers Squibb (Winner) Bristol Myers Squibb (BMS) has effectively navigated a challenging landscape marked by regulatory changes and increased competition. The company responded with strategic acquisitions, including Karuna Therapeutics and RayzeBio, to bolster its portfolio and address high unmet medical needs. BMS’s Treasury team played a crucial role by designing and executing a $16 billion financing plan, including a notable $4.5 billion debt offering. Their strategic foresight and adept management of cash flow and liquidity underscore BMS’s capability to maintain financial stability and support long-term growth despite evolving industry pressures. Sodexo (Highly commended) Sodexo, the world’s second-largest provider of on-site food and facility management services, faced a complex challenge in 2023 with the spin-off of its Benefits & Rewards business, now known as Pluxee. The Group Treasury team played a pivotal role in ensuring that Sodexo’s strong credit rating and attractive financing terms were retained, in addition to raising new financing at Pluxee. This achievement not only created significant shareholder value but also positioned both Sodexo and Pluxee for robust future growth with strong balance sheets, setting a new standard for successful corporate restructurings. Risk & resilience DEME (Winner) DEME, a global leader in dredging, marine engineering, and environmental solutions, continues to demonstrate exceptional resilience in managing the complex risks inherent in its operations. The company’s proactive risk management strategies, combined with cutting-edge technologies and sustainable practices, enable DEME to navigate environmental uncertainties and stringent regulatory demands effectively. Central to this resilience is DEME’s treasury team, which plays a critical role in ensuring financial stability and liquidity. Through strategic cash flow management and careful financial planning, the treasury team supports DEME’s ability to deliver on ambitious projects, even in challenging conditions, underscoring the company’s leadership in both operational and financial resilience. Strategic change Crocs, Inc (Winner) Crocs, Inc., renowned for its iconic footwear, has undergone significant strategic changes to adapt to evolving market demands and consumer preferences. In recent years, the company has diversified its product offerings, expanded its digital presence, and embraced sustainability initiatives, all while maintaining its brand identity. Crocs’ treasury team has played a vital role in this transformation, ensuring financial stability and providing the flexibility needed for strategic investments. These efforts have revitalised the brand, enabling Crocs to tap into new customer segments and position itself for sustained success in a competitive retail environment. The company has also focused on collaborations and limited-edition releases to create buzz and tap into new customer segments. Salesforce (Highly commended) Salesforce, a cloud-based CRM software, is redefining its strategic direction to meet the demands of a rapidly evolving digital economy. Recognizing the need to offer more than just CRM, Salesforce has aggressively expanded into new territories like artificial intelligence, data-driven insights, and industry-specific platforms. The acquisition of Slack marked a bold step towards transforming how organisations collaborate in the digital workspace, signalling Salesforce’s shift towards becoming a comprehensive business solutions provider. Salesforce’s treasury team has been pivotal in managing the financial complexities, from optimising capital allocation to securing liquidity for major investments. Their strategic oversight has ensured that Salesforce can pursue growth opportunities while maintaining financial stability. Alongside these initiatives, Salesforce has committed to ambitious sustainability goals, reinforcing its intent to shape the future of digital business. Technology transformation GE Healthcare (Joint Winner) GE Healthcare is at the forefront…
Treasury for Non-Treasurers: A Tale of two Operational Treasuries – Basic and Control-Oriented
A case study: Building a Control-Oriented Treasury out of a Basic One Background: “You want to reduce the chances of losses due to foreign exchange movements; First you need to set up a controlled treasury environment” Once upon a time, I was fortunate enough to have a senior Treasury position in a fast-growing company. My first contact with the company was as a consultant, advising on foreign exchange risk management, part of the pillar we’ve called profitability support (see the 1st article – link below). As the company had become more international, the possibility of significant losses due to foreign exchange rate movements had increased to an uncomfortably high level for management. My advice as a consultant was ‘Fine, you can do this. It makes sense. Treasury functions tend to start when the company has about $ 200 M in sales, and you have that. But having a more active treasury will increase the number and value of financial transactions and associated high-value payments to be done. Your current setup and processes are not well controlled. Frauds and material errors are possible and could become more likely. You first need to change this”. Saying yes would turn their basic treasury into a control-oriented one. They did agree, and I was appointed to set that better treasury up. What did the basic treasury look like? The situation was unsatisfactory both from solvency and profitability support perspectives. When I first arrived, the Treasury function had one employee. He would manage head office’s borrowing and lending needs and provide cash to or from subsidiaries based on monthly reports prepared by the operations (cash forecasts) or as requested. The forecasts were not normally challenged, and it was clear to me from the subsidiaries’ accounts they were sitting on a lot of cash. This was happening at the same time as the company had significant borrowings at the parent level, where the cash could be used to reduce debt, and where the cash was providing no return to offset the inefficient borrowing. The situation was unsatisfactory both from solvency and profitability support perspectives. Everything was seen through the lens of accounting It was also clear that the current Group Treasurer (by title) lacked significant treasury skills and could not influence the CFO to do the basics. One example was that when funds were provided to the companies, no repayment date was set. Borrowings and loans were treated the same way as non-repayable payments and collections (accounts payable and receivable.) Since no date for repayment was set, no foreign-exchange hedging could take place (a specific date for the return cashflow is needed to protect the company against FX risk). But management was fine with this because the accounting treatment on accounts payable and receivable was that they were long-term in nature, not planned to be repaid, and therefore not regularly revalued. Therefore not causing a volatile foreign exchange gain or loss. This was acceptable from an accountant’s point of view. From a treasury perspective, it was not. Providing money at one exchange rate and receiving it back at another would cause a real economic exchange gain or loss. It was a risk that was not tracked and would not show up until it was too late to be managed. We’ll discuss this difference between treasurers and accountants more in a later article. Unlike in this case study, most Treasury and Accounting departments get on well together. However, in my experience, both frequently struggle to explain WHY they are different. It’s important both for accountants and CFOs directly to understand this difference better (CFOs usually come from an accounting background.) It’s equally important for non-Treasurers to understand the differences so that they can get most out of their interactions with each. Note that neither is right or wrong; they are just different, like someone who is Japanese and another American. Nobody should confuse one for the other. Productivity and management strategy impacts were immaterial All of this was typical in a basic treasury. Accounting was understood, while treasury was not. Solvency was not optimised, profitability not supported and productivity and management strategy impacts immaterial. Building the Control-Oriented Treasury How did it go? It was difficult I’d love to tell you that the transition was smooth, but it was not. This highlights why moving to even a ‘simple’ controlled treasury operation is not a no-brainer or easy to implement. It is difficult and helps explain why moving even further from an operational to a strategic treasury is so hard and, therefore, happens so rarely. What went right? People with experience were recruited and efficiently tasked People with experience were recruited. One became the expert in cash management (payments and receipts, borrowing and investing), another in risk management (mostly foreign exchange), a third in interfacing with the subsidiaries over their cash needs and availability, the last with supporting long-term financing needs and internal controls. We selected a global banking partner I managed the team and worked on getting a common bank in place, to achieve automatic visibility over global cash balances, reduced banking costs and a controlled environment. Banks with the right capabilities were asked to present, and one was selected as the global provider. The implementation of transferring accounts from other banks to this one was started. A specialist treasury management system would be bought once the basics were in place It was accepted that a specialist treasury management system would be purchased when we started getting more sophisticated in our FX risk management, the strategic end-goal, by which point automation would be needed to make the function productive more productive and better controlled. Note, in passing, this was in the days when treasury management systems were significantly more expensive than they are now. These days, one of these systems would be co-equal on the shopping list as a global bank. What went wrong? The company culture Showing figures that were different from the accountants’ was taken as an attack on their previously unchallenged dominant position. Several…
Nicholas
Ripple USD (RLUSD): A New Player in the Stablecoin Market
Ripple Labs, a prominent player in the blockchain and cryptocurrency space, has introduced a new stablecoin, Ripple USD (RLUSD). This stablecoin, currently in its beta phase, is designed to be pegged 1:1 to the US dollar, offering a stable value that is fully backed by traditional financial assets. Ripple’s RLUSD represents a significant step in the evolution of the company’s offerings, potentially reshaping the landscape of digital payments and finance. The Concept Behind RLUSD Stablecoins have emerged as a critical component of the cryptocurrency ecosystem, providing a bridge between volatile digital assets and stable traditional currencies. Ripple’s RLUSD is no different in its core objective—offering stability. What sets RLUSD apart is its backing by US dollar deposits, short-term US government treasuries, and other cash equivalents, ensuring a high level of trust and reliability. These assets will be regularly audited by independent third parties, with Ripple committed to publishing monthly attestations to maintain transparency and build confidence among users. Recommended Reading Integration with Ripple’s Ecosystem Ripple has been at the forefront of blockchain innovation, particularly in the realm of cross-border payments. The introduction of RLUSD is expected to further enhance Ripple’s ecosystem, particularly on the XRP Ledger (XRPL) and Ethereum. By leveraging these platforms, Ripple aims to integrate RLUSD into its existing payment solutions, providing a seamless, low-cost option for international transactions. The integration of RLUSD into the XRPL and Ethereum is part of a broader strategy to enhance liquidity and support institutional use cases. As Ripple continues to test RLUSD with its enterprise partners, the company is focusing on ensuring that the stablecoin meets stringent standards of security, efficiency, and reliability before its full launch. This beta phase is crucial for ironing out any potential issues and ensuring that RLUSD can handle the demands of a global market. The Strategic Importance of RLUSD The launch of RLUSD is timely, given the growing importance of stablecoins in the global financial system. According to market projections, the stablecoin market is expected to grow to over $2.8 trillion by 2028. Ripple’s entry into this market with RLUSD could position the company as a key player in providing stable, reliable digital assets that are integrated into traditional financial systems. RLUSD also aligns with Ripple’s broader vision of transforming global payments. The stablecoin is expected to enhance the efficiency and reduce the cost of cross-border transactions, a core focus area for Ripple. By offering a stable digital currency that is fully backed and audited, Ripple is addressing some of the key concerns that have historically limited the adoption of cryptocurrencies in traditional finance. Corporate Treasury and Stablecoins: A Natural Fit? In recent years, corporate treasurers have increasingly recognized the potential of digital assets, including stablecoins like RLUSD, to enhance treasury management. Corporate treasurers are responsible for managing a company’s liquidity, funding, and financial risk, and stablecoins could offer several advantages in these areas. Stablecoins like RLUSD can enable real-time, cross-border transfers of funds without the delays and costs associated with traditional banking systems. This ability to move funds quickly and cheaply across borders can help treasurers manage liquidity more effectively, ensuring that capital is available where and when it is needed. One of the primary roles of corporate treasury is to mitigate financial risks, including currency risk. Stablecoins pegged to the US dollar, such as RLUSD, provide a means for companies to hedge against currency fluctuations, particularly in volatile markets. By holding stablecoins, treasurers can maintain exposure to the US dollar without the need for complex hedging strategies. Traditional cross-border payments often involve multiple intermediaries, each adding fees and delays to the process. Stablecoins eliminate many of these intermediaries, reducing the cost and time involved in international transactions. For companies with global operations, this can result in significant savings and improved cash flow management. The regular audits and public attestations associated with RLUSD can provide corporate treasurers with confidence in the stability and backing of the stablecoin. This transparency is crucial for ensuring that RLUSD can be relied upon as a safe asset for Treasury functions. As DeFi (Decentralized Finance) continues to grow, treasurers may find additional opportunities to deploy idle funds in yield-generating strategies within DeFi ecosystems. Stablecoins like RLUSD could serve as a gateway for treasurers to explore such opportunities, balancing the need for liquidity with the potential for returns. Future Prospects and Challenges While the introduction of RLUSD is a significant development, it is not without challenges. Regulatory scrutiny is a major hurdle that Ripple must navigate before the stablecoin can be fully launched. Ripple has emphasized that RLUSD is not yet available for trading or purchase, as it is still awaiting regulatory approval. This cautious approach underscores the complexity of launching a stablecoin in today’s regulatory environment, where authorities are increasingly vigilant about the risks posed by digital assets. Ripple has also warned the public about potential scams that might falsely claim to offer early access to RLUSD, reinforcing the need for caution in the rapidly evolving crypto space. Insights from Treasury Experts We thought it would be valuable to get perspectives from a Treasury professional, Royston DaCosta who is also a Treasury masterminds board member Royston Da Costa, Assistant Treasurer at Ferguson PLC, Comments Ripple USD (RLUSD) being pegged to the US dollar is a promising development, as no treasurer prefers volatility in their currency balances. This stablecoin, backed by US dollar deposits and short-term government securities, offers a reassuring option for corporate treasurers considering cryptocurrency. However, a key question remains regarding whether cryptocurrency deposits backed by these assets are covered under local regulations around bank failures, such as the £85k guarantee in the UK or the $250k guarantee in the USA. The integration of RLUSD into Ripple’s ecosystem is a fantastic idea that could prevent banks from unnecessarily sitting on funds for prolonged periods. It makes sense for Ripple to focus on security, efficiency, and reliability during this beta phase, as these are critical for handling global market demands. As central bank digital currencies (CBDCs) and digital assets…
What is enterprise risk management (ERM)?
This article is written by Trustpair In 2009, Dutch banking company ING suffered a loss of $8.5 million at a huge cost to the business due to employee embezzlement. That is one of the risks that enterprises face. The fraudster, an accounting manager at the company, used other employees’ passwords so he could sign in as a colleague and give the green light to checks of up to £250,000. Enterprise risk management (ERM) solutions could have prevented the fraud before it occurred to avoid costs to the organization. Read on to learn more about ERM definition, process, and best practices. Enterprise risk management, a definition Enterprise risk management refers to the steps and processes taken to manage and deal with risks from the viewpoint of the whole organization or business. It looks at any internal or external risks that could stand in the way of the organization’s objectives. These risks can look like internal fraud or embezzlement and range from compliance with regulations to supply chain issues. For example, payment fraud is on the rise for large companies and should be managed. Trustpair’s latest data found that comparing 2022 to 2023, there was a 71% increase in the number of businesses targeted by payment fraud. Also, the data revealed that 96% of companies were targeted by at least one fraud attempt. Enterprise risk management processes will enable you to stay on top of risks that threaten the organization’s operations and be proactive, rather than reactive. Therefore, you can reduce the financial and reputational damage of any risk if it were to occur. Enterprise risk management vs traditional risk management Traditionally, risk management could involve responding to an individual risk after it had occurred to ensure it doesn’t happen again. Whereas, enterprise risk management is more proactive and involves analyzing the company-wide risks before it comes to fruition. ERM assesses whether these risks are worth it. Also, the view of risks is different too. Traditional risk management surrounds avoiding the risks at all costs. However, ERM involves choosing strategic risks to take where you can gain. For example, let’s say your business orders 10,000 items of stock when you have sold 500 products. The risk is that you may be left with a backlog of inventory. Though, if you;ve had lots of people sign up for the waiting list, an opportunity arises to sell 10,000 products rather than just 500 and to please more potential customers. For example, a proactive risk management process around embezzlement could be not allowing one person to handle the control of assets (cash or money) and also making payments to suppliers. This could be split between employees. A real-life example of this is when the office manager of a Scottish property firm embezzled more than $1.1 million. The criminal was able to take deposits from tenants that weren’t required and send rent payments to bank accounts controlled by herself. Perhaps if she wasn’t able to solely take deposits from tenants and send payments to bank accounts, staff members may have been able to identify the embezzlement. It follows the segregation of duties (SOD) principle, which is a useful internal control. SOD means that more than one person is involved in a process so no one can commit and conceal fraud or suspicious activity with it going unnoticed. Also, enterprise risk management can be much more flexible to adapt to a new type of fraud and put a risk management process in place. Whereas traditional risk management will be one pre-determined action. Finally, traditional risk management usually puts management in charge of risk within their department. However, this can mean that risks slip through the cracks in the crossover between departments and leaders. On the other hand, the ERM approach offers more of a holistic view of risks. It focuses on risks that could hamper the company’s objectives. Instead of being department focused, it is company-wide and a chief risk officer (CRO) may be employed to deal with these risks in an enterprise. What is the ERM process? An ERM framework includes the following: Outlining risks Identify and outline key risks so you know what your business is facing as part of the ERM framework. This process involves making a risk statement and researching the risk to learn more. Analyzing risk There are two main considerations in the risk analysis process; the likelihood of the risk and how severe the consequences would be. Your company must also bear in mind the current risk management strategies that are in place and how well-equipped they are to deal with newer risks. Creating strategies Based on the risk analysis, create and implement an action plan for how to deal with specific types of risks. For example, a risk may be that the supply chain may be damaged if your preferred supplier is late with their order. A risk strategy could be to have an approved backup supplier in case that occurs. If you don’t have that plan in place, you may have to rush the onboarding of a new supplier or third party and may miss that they aren’t compliant with regulations. This could then result in a financial penalty for your company. Tracking risks Once the risk management strategy is in place, it’s not a case of just leaving it and forgetting about it. The monitoring and tracking of risks is important to see if there has been any change in the risk and therefore the strategy can be adapted. Staying on top of risks is important. For example, a company may be placed on an international blacklist. Software like Trustpair’s can raise this as a red flag so you can take action and avoid penalties. What are ERM best practices? Here are some of the most effective best practises for managing risks: Ensure there are open communication channels The decision to deploy an enterprise risk management process must be spoken about with stakeholders to ensure everyone is on board with the decision. Additionally, the changes must be communicated to the staff to get full buy-in. There should be open communication channels set up. That way, employees can…
The Evolving Role of Treasury in the Crypto World: A Comparison with Traditional Corporate Treasury Functions
With the rise of cryptocurrencies and blockchain technology, the role of Treasury is undergoing a significant transformation. Traditional corporate treasury functions have long been the backbone of financial management, ensuring liquidity, managing risk, and overseeing cash flow. However, with companies like Ripple leading the charge in the crypto and digital payments space, a new type of treasury function has emerged—one that blends these conventional responsibilities with the added complexities of managing digital assets. In this blog post, we’ll explore the key differences between a traditional corporate treasury function and a crypto treasury function, using Ripple’s unique approach as a case study. Traditional Corporate Treasury: A Brief Overview In a traditional corporate setting, the treasury function’s role is centred around managing the company’s financial resources to ensure stability and growth. The primary responsibilities include: These functions are typically executed in fiat currencies, with a focus on traditional financial instruments and banking relationships. Treasury in a Crypto Company: The Ripple Case In contrast, a treasury function in a crypto company like Ripple operates in a vastly different environment, where digital assets and blockchain technology are at the core of the business. Ripple, a company known for its cryptocurrency XRP and blockchain-based payment solutions, splits its treasury function into two distinct sides: the crypto side and the fiat side. Each of these sides comes with its own set of challenges and responsibilities, which differ significantly from those in traditional corporate treasury functions. 1. The Crypto Side: Managing Digital Assets The crypto side of Ripple’s Treasury function focusses on managing the liquidity of XRP and various stablecoins used to fund customer transactions and facilitate settlements. Here’s a closer look at the key responsibilities: Just like in traditional Treasury function, liquidity management is crucial, but the assets involved are cryptocurrencies. The crypto treasury team must ensure that there is sufficient liquidity in XRP and other digital assets to meet the company’s operational needs and customer demands. For a crypto treasury function, it is critical to have excellent forecasting and close relationships with upstream and downstream partners, because holding excess liquidity of any crypto asset may result in increased risk of impairment. It also underscores the need for high-trust stablecoins that minimise these risks. For a company like Ripple, the crypto treasury function works to understand customer demand for various crypto assets (by engaging customer-facing functions internally), and ensure proper fiat currency funding is in place to facilitate the repurchase of said crypto assets from open markets. A critical part of the crypto treasury function’s role is facilitating settlements for the repurchase of assets like XRP on the open market. This task requires a deep understanding of the mechanics of blockchain-based transactions, which vary between different blockchains and crypto assets. The crypto treasury function must be adept at timing these operations to minimise costs and optimise asset value. This may involve settling trades either in fiat currencies or using stablecoins, each having distinct advantages and limitations. Liquidity in crypto markets—especially in stablecoins—is growing rapidly, and consequently, the settlement of crypto trades and cross border movements will become much easier for traditional corporations in the coming years. The volatility of cryptocurrencies introduces unique risks that require constant monitoring and management. Unlike traditional treasury functions, which primarily deal with fiat currency risks, a crypto treasury function must navigate the complexities of price swings, regulatory changes, and market liquidity challenges in real-time. Minimising balance sheet holdings of volatile assets is a primary focus for crypto treasury functions and underscores the need and appetite for stablecoins. As non-FIs seek to mitigate the potential risks of utilising crypto assets in their operations, the demand for stable, high-trust stablecoins will surely grow. Managing digital assets also involves ensuring their security. This includes using custodial services, managing private keys, and implementing measures to protect against cyber threats. The crypto treasury function must be familiar with the latest blockchain security practices and technology and proactively mitigate risks by applying sufficient resourcing to the systems and headcount required to properly secure crypto holdings. 2. The Fiat Side: Traditional Responsibilities with a Twist While Ripple operates heavily in the crypto space, it still maintains a traditional fiat side to its treasury function. This side of the treasury handles many of the same responsibilities as a conventional corporate treasurer but with additional complexities brought about by the integration of crypto operations. Similar to traditional treasury roles, managing cash flow remains a priority. However, the integration with crypto operations means the treasurer must coordinate between fiat and digital assets, ensuring that both sides are aligned in meeting the company’s financial needs. Ripple’s fiat treasury function manages relationships with traditional banks and financial institutions, but with the added complexity of integrating crypto transactions. This often involves navigating a regulatory environment and KYC challenges that are still catching up with the realities of digital assets and the pace of innovation in the blockchain economy. As a company operating in both fiat and crypto worlds, Ripple’s treasury function must stay compliant with a diverse set of regulations. The fiat treasury function must adhere to both traditional financial regulations and the evolving standards in the crypto industry to ensure a compliance-first mindset and build trust with customers and trading partners. Key Differences and Challenges Traditional treasury functions primarily manage assets that have relatively stable values, such as cash, bonds, or equities. In contrast, a crypto treasury deals with highly volatile digital assets, requiring a laser-focused approach to risk management and liquidity planning. While traditional treasury functions rely on well-established financial systems and security protocols, crypto treasury functions must be well-versed in fledgling blockchain technology, cybersecurity, and the unique and evolving risks associated with many different digital assets. Traditional Treasury functions are governed by well-established regulations. In the crypto space, however, regulations are still evolving, and the crypto treasury function must be proactive in navigating this uncertain environment to establish trust and provide transparency for customers and regulators. The crypto market operates 24/7 and is highly reactive to global events. A crypto…
Adam
Revolutionising Treasury Operations with Premium Banking APIs
This article is written by Necto Corporate treasuries are under increasing pressure to optimise cash management, enhance liquidity, and mitigate risk. All while navigating a complex and rapidly changing global economy. The introduction of premium banking Application Programming Interfaces (APIs ) is set to revolutionise these operations. It is offering unprecedented levels of real-time data access, seamless integration, and operational efficiency. This evolution marks a significant shift from traditional bank connectivity methods, promising to transform how treasurers manage their finances. The Historical Context of Bank Connectivity To appreciate the transformative power of premium banking APIs, it’s important to understand the evolution of bank connectivity. For decades, treasurers have relied on legacy systems to interact with their banking partners. In the 1970s, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) emerged as a groundbreaking development. This enabled standardised cross-border financial transactions. SWIFT became the global standard for secure, reliable, and efficient financial messaging, but it was not without its limitations. The system often required batch processing, leading to delays and a lack of real-time data availability. In the 1990s and early 2000s, host-to-host (H2H) systems and bank portals began to gain traction. These systems allowed corporations to establish direct connections with their banks, providing more immediate access to banking services. However, these connections often required significant IT resources to set up and maintain. And they still didn’t provide the level of flexibility or real-time access that modern treasurers need. Additionally, each bank had its own proprietary system, leading to a fragmented and complex connectivity landscape. The Shift to API-Driven Connectivity As technology advanced, the financial industry began to recognise the need for a more agile and integrated approach to bank connectivity. This need gave rise to API-driven connectivity—a game-changer in the world of corporate treasury. APIs, which allow different software applications to communicate with each other, have become the backbone of modern digital ecosystems. In the context of treasury operations, APIs facilitate real-time access to banking data. Thus, enabling treasurers to make informed decisions based on current, accurate information. Unlike traditional connectivity methods, APIs are designed for flexibility and scalability. They enable seamless multi-bank connectivity, allowing treasurers to manage accounts and transactions across multiple banks through a single interface. This is a significant improvement over the siloed systems of the past, where each bank required a separate integration and manual data reconciliation. Overcoming the Challenges of Traditional Connectivity Traditional bank connectivity methods have long been plagued by several challenges, including: 1. Complex Integrations: Setting up H2H connections or integrating with SWIFT often requires significant time, effort, and technical expertise. Each bank has its own protocols and systems, necessitating custom integrations that can take months to complete. 2. Outdated Data: Traditional systems typically operate on a “prior day” basis, meaning that treasurers are often working with outdated information. This delay can hinder effective cash management, making it difficult to optimise liquidity or respond to market fluctuations in real time. 3. High Costs: Maintaining multiple bank connections and managing the necessary IT infrastructure can be costly. Additionally, the lack of standardisation across banks means that treasurers often need to invest in specialised software or services to manage their connectivity. 4. Limited Flexibility: Traditional systems are often rigid and difficult to adapt to changing business needs. This lack of flexibility can be a significant barrier in today’s dynamic financial environment, where agility is key to staying competitive. These pain points highlight the urgent need for a more efficient and agile approach to bank connectivity—one that can meet the demands of modern treasury operations. The Advantages of Premium Banking APIs Premium banking APIs offer a powerful solution to the challenges of traditional connectivity, providing a range of benefits that can transform Treasury operations: 1. Real-Time Data Access One of the most significant advantages of premium banking APIs is their ability to provide real-time access to banking data. Treasurers can monitor cash positions, track payments, and reconcile accounts instantly, enabling more accurate and timely decision-making. 2. Simplified Integration APIs are designed for easy integration, reducing the time and effort required to connect with multiple banks. Many APIs follow industry standards, which further simplifies the integration process and reduces the need for custom development. 3. Enhanced Security Security is a top concern in Treasury operations. And premium banking APIs are built with robust security features to protect sensitive financial data. These APIs often include encryption, secure authentication methods, and compliance with industry regulations. Ensuring that data is transmitted securely between systems. 4. Scalability As businesses grow and their financial needs become more complex, premium banking APIs offer the scalability required to manage increasing volumes of transactions and data. APIs can easily be extended or modified to accommodate new services or additional banking partners, providing the flexibility needed to support business growth. 5. Cost Efficiency By reducing the need for extensive IT resources and minimising the complexity of managing multiple bank connections, premium banking APIs can lower the overall cost of Treasury operations. Additionally, the ability to access real-time data can lead to more efficient cash management, reducing the cost of borrowing and optimising liquidity. 6. Future-Ready Premium banking APIs are designed with the future in mind. As emerging technologies like artificial intelligence (AI) and quantum computing become more prevalent, APIs will play a crucial role in enabling these technologies to interact with financial systems. This positions treasuries to take advantage of the latest innovations and remain competitive in an increasingly digital world. Case Study: API-Driven Treasury Transformation Consider the example of a multinational corporation that operates in multiple currencies and manages a complex web of bank accounts across different countries. In the past, this corporation relied on traditional H2H connections to manage its banking relationships. However, the process was cumbersome and time-consuming, often leading to delays in accessing cash positions and difficulties in managing liquidity. By transitioning to an API-driven approach, the corporation was able to streamline its treasury operations significantly. Premium banking APIs provided real-time visibility into cash positions across all accounts, enabling the Treasury…