Treasury for Non-Treasurers: What is Treasury?
Treasury for Non-Treasurers: Article 1 – What is Treasury? Summary: 4 pillars, simple but with massive implications.
Nicholas
Organizations Shift Deposits to Large Banks Amid Economic Uncertainty
In a proactive response to the challenging economic environment, 45% of organizations have moved their deposits to large banks, according to the 2024 AFP Liquidity Survey. This strategic shift aims to enhance financial security by leveraging the stability of systemically important financial institutions. Additionally, 35% of organizations diversified their deposits among multiple banks to mitigate counterparty risk. The survey also revealed an 8% increase in cash holdings within the U.S. over the past year, with 44% of treasury professionals reporting this rise. Larger organizations prioritize safety in their investment policies, with 69% emphasizing this, compared to 58% of smaller organizations. Despite rising interest rates, over two-thirds of respondents noted that their companies’ earnings credit rate did not keep pace. The overall relationship with banks remains crucial, as 89% of professionals consider it the most important factor in selecting a banking partner, surpassing credit quality and counterparty risk. Money market fund reform has had minimal impact, with only 4% of allocations in prime or diversified funds. However, 32% are adopting a “wait and see” approach regarding upcoming regulatory changes. The survey underscores the importance of robust banking relationships and prudent liquidity management in navigating economic challenges. Counterparty Risk in Corporate Cash Management From a corporate perspective, counterparty risk—the risk that the bank holding the deposits might default—is a significant concern. In the current volatile economic environment, this risk has become more pronounced, prompting organizations to reassess their banking strategies. 1. Diversification to Mitigate Risk By spreading deposits across multiple banks, corporations aim to reduce their exposure to any single financial institution’s potential failure. This strategy ensures that a company’s liquidity is not overly dependent on one entity, thereby safeguarding its cash reserves. 2. Preference for Large Banks Larger banks are often deemed more stable due to their substantial capital reserves, regulatory oversight, and systemic importance. These institutions are typically considered too big to fail, which provides an added layer of security for depositors. The recent trend of moving deposits to these banks reflects a strategic move to enhance financial stability. 3. Monitoring and Evaluation Continuous monitoring of the financial health of banking partners is crucial. Corporations are increasingly relying on credit ratings and other financial metrics to evaluate the solvency and reliability of their banks. This ongoing assessment helps in making informed decisions about where to place their deposits. 4. Regulatory Environment Changes in banking regulations can impact counterparty risk. Corporations need to stay informed about regulatory developments that may affect the stability of their banking partners. The evolving landscape of money market fund reforms and other financial regulations requires a proactive approach to risk management. 5. Balancing Yield and Safety While seeking to maximize returns on their cash reserves, corporations must balance this objective with the need for safety. Higher yields often come with higher risk, and in uncertain times, the focus tends to shift more towards preserving capital than earning high returns. Insights from Treasury Experts We thought it would be valuable to get perspectives from Treasury professional, Jessica Oku, who is also Treasury masterminds board member Jessica Oku, Director of Fund Development at Women’s Health Coalition Canada, Comments A shift of 45% of organizations moving their deposits to large banks is expected. This trend is driven by the safety net provided by large banks, attributed to their substantial balance sheet size, robust risk management frameworks, and strong corporate governance, which are crucial for treasurers aiming to protect their assets. Additionally, 35% of organizations are diversifying their deposits among multiple banks to mitigate counterparty risk, which is also expected. This is because counterparty risk has become a growing concern. Spreading deposits helps to protect your organization’s liquidity from the potential failure of any single institution. It is also crucial to choose institutions with top ratings to further secure your funds. Larger organizations prioritize safety in their investment policies shows that there’s a clear trend towards capital preservation over higher returns. Invariably, these organization’s risk appetites will be clearly reflected in their policies and affect investment decisions. Which is understandable, especially in the current economic climate. Conclusion In conclusion, counterparty risk is a critical factor in corporate cash management strategies. By diversifying deposits, choosing stable banking partners, and staying vigilant about regulatory changes, organizations can effectively manage this risk and ensure the security of their financial assets. 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.
Franklin
Decoding the Impact of ChatGPT for Treasury
This article is written by Kyriba Generative AI, represented by groundbreaking models like ChatGPT, is poised to revolutionize treasury management. However, its integration brings forth a spectrum of implications, from promising opportunities to potential risks. We highlight the potential benefits and risks associated with integrating generative AI in treasury and finance operations. Exploring Generative AI Generative artificial intelligence (AI) is a subset of artificial intelligence technology. Unlike traditional AI systems that are often limited to specific tasks or domains, generative AI models are designed to generate novel outputs, including text, audio, images, and even entire virtual environments. Put simply, these models are usually trained on large datasets to learn patterns and relationships within the data. This allows generative AI models to create new content that is coherent and relevant to the input provided.. One of the main characteristics of generative AI is its ability to produce diverse and realistic outputs that mimic human creativity and intelligence. Although it has the potential to automate manual tasks and improve efficiency, there are concerns about fake or misleading content and the potential for misuse, like deepfakes. ChatGPT Is a Pioneer in the GenAI Space A prominent example of generative AI in action is ChatGPT, developed by OpenAI. Since its launch, ChatGPT has garnered widespread acclaim, reaching 180.5 million users by March 2024. OpenAI and ChatGPT gained further notoriety by recently partnering with Microsoft for a multi-year alliance valued at $10 billion. Google has also taken notice; even though ChatGPT is not a search engine, it is already being viewed as competition for the online search giant. Google’s management has developed a chatbot of its own, though in a recent demo, it made a mistake that has already cost the company $100 billion in market value. What GenAI Means for Treasury GenAI, including ChatGPT, offers a range of new options for treasury teams, including the ability to ask questions of your treasury data – typed or by voice – as well as build new reports, queries, dashboards and even new programming and scripts. The biggest challenge for treasury teams is how to manage GenAI in a secure and safe manner. Different organizations will have different policies around the use of tools such as ChatGPT, including when open source language models can be used versus closed models such as ChatGPT Enterprise. To be responsible to all their customers, including those organizations that prohibit the use of ChatGPT altogether for their finance teams, most treasury system providers will not (and arguably should not!) embed ChatGPT directly into their software platforms. Rather they are opening their data models through APIs to make treasury data available to GenAI tools – which allows treasury teams to make their own choices about what, if any, GenAI tools they integrate into their treasury processes. For those that choose to introduce ChatGPT and similar tools into their treasury operation, here are examples – both good and scary – where we have seen GenAI increase its relevance for treasury: Payments Fraud Detection It’s been well documented that AI is being used regularly for both payments fraud and payments fraud prevention. Generative AI has now become the latest tool in fraudsters’ arsenals – making it a ‘scary’ scenario for treasury teams to combat. Cybercriminals are using generative AI tools–including ChatGPT–to help craft sophisticated phishing messages. There has been a 1,265% increase in malicious phishing emails since Q4 2022. Check Point, another cybersecurity firm, noted that using ChatGPT helped it create an end-to-end social engineering campaign from phishing emails all the way to embedded malware within an email attachment. The result was disturbingly convincing and confirmed that GenAI tools have lowered the bar for code generation, making it easier than ever for bad actors to attempt fraud. In response, cybersecurity experts all say the same thing: use automated systems to detect and prevent cyberattacks at machine speed. In treasury, this presents an opportunity to use AI in the payment process to detect suspicious payments, using adversarial networks to identify payment anomalies compared to an organization’s own payment history. While this is an example of GenAI being used for nefarious purposes, embedding a closed AI model to use only an organization’s own payment data to identify potential fraudulent payments is a great way to use AI to fight the AI employed by fraudsters. Enhancing Excel with AI Imagine a world where generative AI technologies seamlessly integrate with essential business tools, transforming traditional treasury management systems without disrupting existing structures. This vision is now a reality with Excel, supercharged with AI tools like ChatGPT and Copilot through OpenAI’s partnership with Microsoft. This integration not only enhances workflows with secure and streamlined interactions but also revolutionizes how data is managed and presented. Excel’s AI-powered features offer a GenAI function to engage with your data, capturing insights from both internal models and external sources. With Copilot, users can effortlessly create complex and easy-to-read spreadsheets. Need an extra column? Copilot will create it. Forgot that unique combination of formulas? Copilot has you covered. ChatGPT’s large language model unifies the data you need, while Copilot formats it into the most impressive spreadsheet you’ve seen. Microsoft addresses automation and data security concerns with Appsource store’s treasury apps, which automate the secure delivery of data into your spreadsheets. These embedded apps allow data to be queried from the cloud and presented directly into your spreadsheet. Simply sit back and enjoy the AI ride as your treasury management capabilities become more efficient and secure. Bank Payment Formats with AI One of the most challenging capabilities for both finance and IT teams is the bank payment format transformation process. This difficulty comes with the multitude of format variations banks require, making a standard such as XML ISO20022 PAIN v9 into more of a guideline with sometimes dozens of different file format requirements, even within the same bank. ChatGPT becomes a great solution to build these unique file format customizations on the fly for a payments system user or the IT professional tasked with updating the file delivery from their ERP to the bank. The ERP or treasury system exposes,…
HSBC Partners with Visa to Develop Zing International Money App
In a significant move towards enhancing digital financial services, HSBC has teamed up with Visa to launch the Zing international money app. This collaboration marks a strategic effort by both financial giants to simplify and innovate cross-border transactions for consumers globally. Streamlining Cross-Border Payments The Zing app aims to streamline the often complex and time-consuming process of international money transfers. By leveraging Visa’s robust payment network and HSBC’s extensive global reach, the app promises users a seamless and efficient experience. This initiative comes at a time when the demand for convenient and cost-effective digital payment solutions is rapidly increasing worldwide. Key Features and Benefits Market Impact and Future Prospects This collaboration underscores HSBC’s commitment to digital transformation and innovation within the financial services sector. By harnessing Visa’s technological capabilities and HSBC’s extensive market presence, the Zing app is positioned to capture a significant share of the rapidly growing digital payments market. Moreover, the launch of Zing reflects broader industry trends towards enhancing digital banking experiences and meeting the evolving needs of consumers in an increasingly interconnected world. As more consumers opt for digital solutions over traditional banking methods, partnerships like the one between HSBC and Visa are crucial for staying competitive and meeting customer expectations. Insights from Treasury Experts We thought it would be valuable to get perspectives from Treasury professional, Lorena Pérez Sandroni, who is also Treasury masterminds board member Lorena Pérez Sandroni, Head of Treasury at PayU GPO, comments The collaboration between HSBC and Visa indeed represents a strategic move that capitalizes on their combined expertise. By leveraging HSBC’s extensive experience in banking and payments alongside Visa’s open banking technology, they aim to create a seamless and secure international money app. This collaboration is crucial for the fintech companies journey to empower people worldwide with easy-to-use financial services. From my perspective, transferring money should be as straightforward as sending a text message, and cost-effectiveness is crucial. While traditional methods still dominate in some regions, not mentioning the restrictions and regulatory aspects in complex countries. Partnerships like this one can drive innovation and expand the possibilities for users. It’s exciting to witness how this collaboration will impact the global financial landscape. What is clear to me is that traditional banking and fintech partnerships are becoming increasingly prevalent, signaling a dynamic shift in the industry and the allocation of resources. This partnership reinforces the idea that traditional banking and fintech collaborations are here to stay!! Conclusion The partnership between HSBC and Visa to develop the Zing international money app represents a pivotal moment in the evolution of digital financial services. By combining their expertise and resources, both companies aim to redefine how individuals and businesses conduct cross-border transactions, offering greater convenience, transparency, and security. As the app rolls out globally, it will be interesting to observe how it influences the digital payments landscape and sets new benchmarks for customer experience in international banking. For consumers seeking efficient, reliable, and user-centric financial solutions, Zing promises to be a compelling option in the ever-expanding realm of digital banking. 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.
AI for Fraud Detection: The Complete Guide
This article is written by Trustpair After rising fraud attempts in the 2010s, J.P. Morgan implemented an AI detection system. The bank created a machine learning algorithm to track live transactions and identify anomalies (even at scale). Since it was developed, JP Morgan has reported ‘lower levels of fraud, a better customer experience, and a reduction in false positives’. What is AI in fraud detection? Being widely accessible, but without a set guide-book has caused the perfect storm of misuse in AI. Bad use cases have tarnished the reputation of artificial intelligence, and many won’t know that there are actually plenty of AI applications for good. For example, AI algorithms can be applied to detect bank account changes, classify how suspicious these changes are, and detect threats of fraud. It’s one of the key finance and accounting trends for 2024! AI in fraud detection typically refers to a range of machine learning technologies. Machine learning works by applying a set of rules (known as an algorithm) to a scenario to make a decision. In this case, decide whether there is a threat of fraud or not. But the great advantage is that these rules evolve over time as technology feeds more information. AI “learns” from previous scenarios, and gets more and more accurate over time. Some examples of machine learning technology include: How does AI work to detect fraud? There are several steps for fraud detection that AI is involved with: What are the benefits of AI in fraud detection? A recent study by PWC and the Bank of England found that, despite all the potential cases for misuse, AI is more effective at fraud detection than manual controls. It’s obvious, then, that compared to no controls at all, AI provides a significant advantage to organizations in their fight against fraud. There are several key benefits, including: Dynamic rules Before AI, fraud detection strategies relied on applying static rules to data in order to find anomalies. But this could cause inaccuracies and false positives, since the rules never evolved unless the entire algorithm was changed. Instead, AI learns from itself, setting dynamic rules that change with the circumstances. For example, an email sorting platform might evolve its rule for categorizing junk emails once it discovers ‘off-brand’ domains. After learning that an email from google.com has a high likelihood of being spam, the AI platform can start categorizing all typo’d domain names into the junk folder. And this personalization can be scaled up to thousands of customers and vendors each month. By applying dynamic rules over pre-defined rules, companies using AI can benefit from higher accuracy. With fewer risks of false positive results, they’ll also keep the user experience intact, generating less friction within the sales process. Real-time Prior to the adoption of AI for fraud detection, companies were faced with employing a full time statistician to continuously analyze for threats. Not only was this a costly venture, but it relied on this individual not making manual errors, and working quickly. This left companies at a significant disadvantage: they couldn’t scale up and maintain the same levels of oversight. But with AI algorithms working in real-time, organizations can benefit from scale without incurring the same costs. This leads to further benefits when suspicious activities are detected, since AI algorithms can instantly block, freeze, or protect their accounts and report back to team members instantaneously. Having this all completed while continuing to assess more data in the background makes AI the multi-tasker of the times. Long term cost optimization It’s no secret that employing AI to prevent and detect fraud can be a costly investment. But with its heightened levels of accuracy, speed, and ultimate success, AI might ultimately provide long-term saving. That’s due to the lower likelihood of realized fraud events. By effectively preventing cases of fraud, companies face fewer reimbursements, fewer embarrassing reputational problems, and a reduced risk of fines for non-compliance. It can be compared to insurance, since you never really know if you’ll need it. But with 96% of US companies targeted at least once in 2023, it’s a question of when, not if. Wouldn’t you rather invest in order to be better protected against fraud? What are the types of fraud AI can detect? One of the best use cases for AI in fraud detection is to prevent payment fraud, which Sade Telecom, a construction company, experienced first hand. It occurred when the company’s accounting department received a letter requesting to change the payment details of one of their well-known suppliers. They had already received the accompanying invoice, so simply input the new account number and routing code, and off the payment went. Except for the fact that three weeks later, Sade Telecom received another notice from their supplier: a warning that their most recent invoice had become overdue. After some investigation, they realized that the letter was fake and that they had in fact paid the latest invoice to fraudsters. Having suffered significant financial losses, Sade Telecom turned to Trustpair. We use a proprietary hello@thesearchcure.com algorithm as part of our payment fraud prevention platform, which continuously checks account details with external databases to ensure they are correct. And when suspicious activity is detected, we automatically block payments to ensure your organization has all the time they need to investigate. Some of the other types of fraud that AI can detect include: What are the challenges of using AI in fraud detection? Being open about the key challenges of using AI in fraud detection will support companies in applying the right systems, practices and procedures to make the investment of their AI technologies effective. The two top challenges are: Black box Many AI algorithms are created in something known as a black box, which effectively hides its decision-making process. This means that AI lacks transparency, can cause huge trust problems when errors occur, and might be hard to effectively control. Black boxes are also at the crux of many of the morality arguments around AI; after all, if you can’t monitor how it’s being…
A guide to SME Payment hubs: Streamlined payment processes
This article is written by Nomentia There are a few things that are more important for small and medium-sized businesses than efficient payment processing. Prompt payment processing drives liquidity and makes cash flow management make sense. Smooth payment processes contribute to competitive advantage, reduce costs, help manage risks, and, in tandem with your other systems, make it clear what’s going on in your business. That’s value, is it not? Have you ever considered a payment hub? Payment hub – painless payment processes for SMEs? Payment hub – what is that? You might think a payment hub is something only large enterprises require, but nothing could be further from the truth. If you’re making payments consistently, chances are high that you need a payment hub. Large enterprises and small and medium-sized enterprises (SMEs) differ in their payment hub needs due to varying scale and complexity. While large enterprises handle high transaction volumes with diverse payment types and complex workflows across multiple subsidiaries, SMEs generally have lower transaction volumes and simpler processes, needing a payment hub that integrates easily with existing systems like accounting software. Both large enterprises and SMEs require payment hubs that seamlessly integrate with existing IT infrastructure, but SMEs tend to operate in comparatively less complex IT environments. Scalability is crucial for both. Large enterprises need hubs to handle growth and, depending on the nature of their industry, seasonal spikes in cash flow, while SMEs need flexibility to expand operations without disruption. Think about it this way; if large enterprises can leverage payment hubs to improve operations and drive financial strategy, why would that be any different for small and mid-size businesses? Aren’t they also in dire need of efficiency, accuracy, security, and other improvements in their payment processes? There’s no better way to bring together multiple payment channels, methods, and transactions for streamlined processing and management. Payment hub functionalities for SMEs: When implemented right payment hubs provide several concrete benefits for finance and treasury teams. SME payment hub success stories “NOMENTIA’S WEB-BASED, EASY TO CUSTOMIZE SOLUTION WITH ALREADY-ESTABLISHED BANK CONNECTIONS WAS THE MOST OBVIOUS CHOICE.” Greenchoice was struggling with ineffective manual cash management processes across multiple banks. They sought to streamline operations, improve visibility into cash flows, and simplify payment processes with Nomentia. Nomentia’s web-based, customizable solution offered established bank connections and affordable pricing, aligning with Greenchoice’s needs. Read about Greenchoices success with Nomentia here… Brita was burdened by complex payment processing due to using multiple banks and lacking a centralized system. To address these issues, they opted for Nomentia, a single tool independent of banks, to streamline their payment operations. Implementing Nomentia required strategic moves such as ensuring subsidiaries use the same ERP system and connecting with group banks for all payment types. Read about Brita’s success with Nomentia here… When implementing a modern payment hub there is no shortage of challenges. Luckily, they can be overcome with forethought, careful planning – and support. Payment hub implementation and integration strategies for SMEs Implementing a payment hub to centralize your payment operations can seem like a daunting task, but there’s no reason for dread. With careful planning and consideration of key factors, payment hub implementation will lead to streamlined payment processes and improved efficiency. We had the good fortune of having a seasoned treasury professional to give us the details. Roadmap to payment hub implementation success Before selecting a payment hub, clearly define your objectives and requirements. It’s good to consider factors such as the volume of transactions, types of payment methods used, integration with existing systems, and scalability for future growth. Understanding your needs will help you choose a solution that aligns with your business goals. Money’s always tight, so it is essential to choose a payment hub solution that offers enough bang for your buck. Look for providers that understand your needs while providing the necessary payment hub features and functionalities. As your business grows, your payment processing needs will evolve too. Selecting a payment hub solution that can scale with your business, accommodating increasing transaction volumes, new payment methods, and expansion into new markets is the best way to future-proof your payment operations. Make sure that your chosen payment hub solution offers scalability without compromising performance or incurring significant additional costs. Integration with your existing systems is critical for the seamless adoption of a payment hub, which is why you should prioritize payment hubs that offer easy integration with popular accounting software, ERP systems, and other essential business systems. It’s always best to choose a provider that offers pre-built integration and APIs that simplify the integration process and minimize disruption to your operations. To make sure your payment operations hit the ground running when your payment hub implementation is ready, follow these steps: Steps to payment hub implementation success Common payment hub challenges and concerns SMEs are often concerned about wastage while their opportunities tend to be hampered by limited resources like budget, personnel, and time. Pricing models are a key factor when lessening these worries, but it’s equally important to prioritize features that streamline payment processes and reduce manual effort, allowing you to maximize the efficiency of your existing resources, while not jeopardizing security. Adopting modern technologies like a payment hub can breed cyber security concerns that need to be addressed. A payment hub solution provider that prioritizes security and compliance, with robust encryption, tokenization, and fraud detection measures in place should be on top of every SMEs list if their security principles are built on technical expertise. Experienced payment hub providers who offer comprehensive support and guidance throughout the implementation process should also offer training programs, documentation, and ongoing customer support to help your team gain the necessary skills and knowledge. Also Read Join our Treasury Community Treasury Mastermind 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.
When Interim CFOs become Sustainability Managers
This article is written by HedgeGo Interim CFOs and their challenges The appointment of an interim CFO often includes the company’s desire to change or transform existing processes and directions. This may involve restructuring the entire company or “just” introducing new systems; in any case, “change” is the order of the day. The deployment of such an interim manager can often take six to nine months. Interim CFOs of international companies are very familiar with areas of responsibility such as risk and change management. This means being able to react flexibly to changing data situations and mediate between all interests. In addition, the added value for the company must be proven quickly and this requires a robust set of tools and flexible processes. The Interim CFO and FX Management Interim CFOs are often very well-trained managers who have to prove themselves in all areas of financial management. The specific depth of FX management is often neglected. In any case, it is important to know the mechanisms of the company, for example the willingness to take or avoid risks – and this applies across parent and subsidiary companies. Rules for risk assessment and treatment cannot therefore be defined from the ivory tower of the Treasury, but require proximity to the actual business and the use cases hidden within it. At the end of the day, the success of FX management will be rewarded with a balance between value-at-risk (the protection of the balance sheet) and cash flow-at-risk (the costs incurred for protection). So how can an interim CFO find pragmatic solutions in a relatively short time that support this goal? Cash, cash and more cash Interim CFOs usually only have a short period of time to optimize FX management processes. This requires smart data (decision data). This is less about providing market prices, which are easy to obtain using standard applications. Decision data from FX intelligence is more about elaborate market assessments that enable well-founded and rapid implementation of cash management processes. Such core tasks include CCT (cash conversion timing), i.e. the optimized conversion of risk currency into base currency. There are a wide variety of approaches here. Some companies prefer quantitative approaches, i.e. converting USD into EUR, for example, when a certain amount is reached. Others fix the conversion on certain days of the month to support other processes. But there are other adjustment wheels that should not be neglected. Just as important as CCT is the optimization of payables through improved timing of payments, i.e. BTP (Best Timing Payables). Our FX intelligence has proven that the expenditure of base currency to pay claims in foreign currency can be reduced by up to 2% per year. In one of our cases, this form of active management was able to pay the entire treasury department. Systems that provide early warning of changes in the FX market are also very useful. For example, a PMA (Pressure Map) gives good interim CFOs time to prepare for upcoming actions. This is less about long-term “predictions”, which in most cases do not work, but rather about short-term forecasts based on the latest forecasting technology using machine learning. Interim becomes sustainable Despite the often short duration of interim CFOs, sustainable results can be achieved through the use of good FX intelligence. It is important to note that FX decision data has nothing to do with the execution of specific security mechanisms. The “execution” is carried out with professional payment providers, and FX intelligence serves as a preliminary stage, as qualitative input for decision-making. However, FX intelligence requires a sustainable change in existing processes, away from rigid “no-brains” and towards intelligent, flexible systems that fundamentally improve cash management. Of course, the effort involved should not be underestimated, especially the human component that has “always done it this way” and resists change. First steps So what would be the first steps of an interim CFO towards improved FX management? Every action begins with an analysis of existing processes and use cases. Is there financing with FX components, so-called inter-company loans? Is cash conversion controlled quantitatively or qualitatively? What do contracts with suppliers that are influenced by FX look like? Is there an early warning system, an FX intelligence that automatically provides the decision data that enables rapid action? Are all exposures known? All of these questions must be answered before implementing FX decision data. Interim CFOs often do not have much time, but this should not involve a lot of effort in FX management, which would certainly be ensured by using FX intelligence. More information on this can be found here . 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.
Understanding the Differences in Treasury Teams & functions: Middle East vs. Europe and the US
In the intricate world of corporate finance, the structure and setup of treasury teams can vary significantly depending on the region. From the oil-rich landscapes of the Middle East to the regulatory frameworks of Europe and the dynamic capital markets of the US, each region has distinct characteristics that shape how treasury functions operate. Understanding these differences is crucial for multinational corporations looking to optimize their financial strategies across diverse markets. The Middle East: Navigating a Unique Financial Terrain The Middle East presents a unique financial landscape characterized by its regulatory environment, corporate governance structures, and economic dependencies. In this region, the regulatory environment is notably complex due to the presence of multiple financial regulations across different countries. For Treasury teams, this means a heightened focus on compliance to navigate these varied regulations effectively. A distinguishing feature of the Middle Eastern financial landscape is the influence of Islamic finance. Some companies may need to adhere to Sharia-compliant financial practices, which prohibit earning interest and promote risk-sharing This affects treasury operations significantly, influencing investment choices and financing activities to ensure compliance with Islamic principles. Corporate governance in the Middle East is also unique, with a significant number of family-owned businesses and state-owned enterprises. Family-owned businesses often exhibit centralized decision-making, where treasury functions are closely knit with the core leadership. This can lead to a more streamlined, albeit less flexible, approach to treasury operations & liquidity On the other hand, state-owned enterprises, particularly in sectors like oil and gas, have distinct reporting structures and strategic priorities, often driven by national economic policies. Given the region’s economic and political volatility and heavy reliance on oil revenues, treasury teams in the Middle East place a strong emphasis on liquidity management. Ensuring sufficient liquidity to navigate market fluctuations and manage foreign exchange and commodity risks becomes a top priority. This also involves risks around currency devaluation and repatriation due to exchange control regulations that are in place in some of these territories. This risk management focus is essential to mitigating the impact of global market dependencies on local economies. Europe: A Harmonized Yet Diverse Financial Environment In contrast, Europe’s treasury teams operate within a relatively harmonized regulatory framework, thanks to the European Union’s unified regulations. This harmonization facilitates streamlined compliance and reporting, allowing Treasury operations to function more smoothly across multiple countries within the EU. However, the General Data Protection Regulation (GDPR) imposes strict data protection requirements, impacting the handling of financial information and necessitating robust data governance practices. European corporate governance exhibits a diverse mix of ownership structures, including family-owned businesses, publicly traded companies, and multinational corporations. This diversity necessitates varied Treasury practices tailored to different governance models. High transparency and detailed financial reporting standards are hallmarks of European corporate governance, demanding meticulous financial stewardship from treasury teams. One of the key focuses for European Treasury teams is optimizing cash flow and working capital management. Operating across multiple currencies and jurisdictions, these teams must adeptly manage cash flows to ensure liquidity and minimize currency risks. Additionally, Europe is at the forefront of sustainable finance, with increasing emphasis on green finance initiatives. Treasury teams are increasingly tasked with integrating sustainability into their financial strategies, aligning with broader environmental and social governance goals. The US: A Dynamic and Technologically Advanced Financial Landscape Across the Atlantic, US Treasury teams navigate a dynamic regulatory and corporate environment shaped by landmark legislation like the Sarbanes-Oxley Act (SOX) and the Dodd-Frank Act. SOX compliance requires stringent internal controls and financial reporting for publicly traded companies, while the Dodd-Frank Act imposes regulations on financial transactions and risk management. These regulations drive US Treasury teams to maintain rigorous financial oversight and robust risk management practices. Corporate governance in the US often emphasizes shareholder value, influencing treasury practices to support stock performance and dividends. The US market features a blend of large public corporations and innovative private companies, particularly in sectors like technology and finance. This blend fosters a dynamic treasury environment where accessing and optimizing capital markets for funding becomes paramount. US Treasury teams are also at the forefront of technology integration, leveraging advanced tools and automation to enhance efficiency and data analytics. The adoption of fintech solutions and blockchain technology is transforming Treasury operations, enabling real-time financial management and improved decision-making. Common Threads in a Globalized World Despite these regional differences, there are common trends shaping Treasury teams globally. Digital transformation is a unifying theme, with increasing adoption of digital tools and technologies to improve efficiency and data analytics in Treasury operations. Globalization also necessitates managing cross-border transactions and risks, driving Treasury teams to develop strategies that can navigate diverse financial landscapes. Moreover, talent development is crucial across all regions. Developing skilled treasury professionals who can adeptly manage complex financial environments is a priority for companies worldwide. As the financial landscape continues to evolve, the ability to attract and retain top talent will be a key determinant of success for Treasury teams globally. Insights from Treasury Experts We thought it would be valuable to get perspectives from Treasury professional, Nena Koronidi, who is also Treasury masterminds board member Nena Koronidi, Strategic Corporate Finance and Treasury Advisory, Family Office Advisory The majority of businesses in Middle east do not adhere to Sharia compliant financial practices and they choose to use between conventional or Islamic finance depending on their needs and associated costs. With regards to Islamic financing, the most significant challenge is the increased documentation and the rollover of the loan (e.g. tied with a commodity transaction in a commodity Murabaha financing case); the rest is the same as conventional. In conclusion, while the structure and setup of treasury teams in the Middle East, Europe, and the US are shaped by distinct regional characteristics, they are united by common challenges and opportunities in a globalized world. Understanding these nuances is essential for multinational corporations aiming to optimize their financial strategies and navigate the complexities of international markets. Also Read Notice: JavaScript is required for this content.
Foreign Exchange Risk: A Comprehensive Guide
This article is written by Kantox Foreign exchange risk, also known as currency risk or FX risk, refers to the potential for financial loss or gain resulting from fluctuations in exchange rates. This risk is particularly relevant to businesses engaged in international operations. Understanding and effectively managing foreign exchange risk is crucial for maintaining profitability, cash flow stability, and overall financial well-being. In this comprehensive guide, we will delve into the concept of foreign exchange risk, explore its various types, examine its causes, delve into measurement techniques, and provide strategies for effective risk management. What is Foreign Exchange Risk? Foreign exchange risk can be defined as the potential losses or gains due to changes in currency exchange rates. It arises from the volatility of global currency markets, where exchange rates fluctuate based on various factors such as supply and demand dynamics, economic indicators, political events, and market sentiment. Businesses that engage in international transactions, whether importing or exporting goods and services, are vulnerable to foreign exchange risk. Importance of Foreign Exchange Risk Management Foreign exchange risk management is crucial for several reasons. Firstly, it helps businesses and individuals mitigate potential financial losses caused by unfavourable currency movements. Secondly, effective risk management enhances cash flow predictability and facilitates better budgeting and financial planning. Lastly, by managing foreign currency risk, firms can maintain competitive pricing, improve profitability, and discover potential growth opportunities by embracing more currencies. Types of Foreign Exchange Risk Transaction Risk: Transaction risk refers to the potential loss or gain arising from foreign currency fluctuations between the time a transaction is initiated and the time it is settled. It primarily affects businesses engaged in importing or exporting goods and services, making cross-border purchases or payments. Translation Risk: Translation risk, also known as accounting risk, arises when a company consolidates the financial statements of its foreign subsidiaries or affiliates into the reporting currency. Fluctuations in exchange rates can affect the valuation of assets, liabilities, revenues, and expenses denominated in foreign currencies. Economic Risk: Economic risk, also known as operating risk, stems from the impact of currency fluctuations on a company’s competitive position, market share, and profitability. It affects businesses with significant international operations, as changes in exchange rates can influence export demand, import costs, and the competitiveness of products in foreign markets. Causes of Foreign Exchange Risk Market Forces: Supply and Demand Fluctuations in exchange rates are primarily driven by supply and demand dynamics in global currency markets. Factors such as interest rate differentials, trade imbalances, capital flows, geopolitical events, and investor sentiment can all contribute to shifts in currency valuations. Economic Factors: Inflation, Interest Rates, and GDP Economic indicators, including inflation rates, interest rates, and gross domestic product (GDP) growth, can significantly impact currency values. Higher interest rates relative to other countries can attract foreign investors, leading to currency appreciation. Conversely, lower interest rates may lead to currency depreciation. Political and Regulatory Factors Political stability, government policies, and regulatory changes can have a profound impact on foreign exchange rates. Elections, geopolitical tensions, changes in trade policies, and capital controls are examples of political and regulatory factors that can influence currency values. Measurement of Foreign Exchange Risk Volatility and Standard Deviation: Volatility measures the degree of fluctuation in exchange rates over a specific period. It is calculated with the standard deviation of currency returns, a statistical measure that, quantifies the dispersion of exchange rate movements around their average value. Higher volatility indicates greater foreign exchange risk. Value at Risk (VaR): Value at Risk is a risk measurement technique that estimates the potential loss an entity could incur due to adverse exchange rate movements. It helps quantify the maximum loss with a specified level of confidence over a given time horizon. Scenario Analysis: Scenario analysis involves assessing the potential impact of specific events or scenarios on exchange rates. By simulating different scenarios, firms can evaluate the potential outcomes and associated risks. Sensitivity Analysis: Sensitivity analysis involves evaluating the sensitivity of an entity’s financial performance to changes in exchange rates. By analysing the impact of different rate movements, firms can identify vulnerabilities and develop appropriate risk management strategies. Strategies for Managing Foreign Exchange Risk Hedging Techniques: Forwards, Futures, Options, and Swaps Hedging involves taking offsetting positions in financial instruments to minimise the impact of adverse currency movements. Common hedging instruments include currency forwards, futures, options, and swaps. These instruments allow businesses and individuals to lock in exchange rates or establish predetermined exchange rate ranges to protect against volatility. Natural Hedging: Natural hedging refers to managing foreign exchange risk by matching revenues and expenses in the same currency. This strategy is applicable to businesses operating in multiple countries or individuals with diverse income and expenditure streams. Diversification: Diversification involves spreading business operations or investment portfolios across different countries and currencies. By diversifying, firms can reduce their exposure to a single currency and potentially mitigate the impact of adverse exchange rate movements. Netting and Offset Arrangements: Netting involves offsetting payables and receivables denominated in the same currency. Companies with significant intercompany transactions or subsidiaries in different countries can utilise netting arrangements to reduce foreign currency risk. Best Practices for Foreign Exchange Risk Management Establishing Risk Management Policies Firms should develop comprehensive risk management policies and guidelines that outline the objectives, strategies, and processes for managing foreign exchange risk. These policies should be aligned with the finance leader’s overall risk appetite and business objectives. Regular Monitoring and Reporting Ongoing monitoring and reporting of FX risk exposure are critical. Firms should regularly assess their risk positions, monitor market developments, and maintain systems for timely and accurate risk reporting. Continuous Education and Training Staying informed about developments in global currency markets, risk management techniques, automation technology and regulatory changes is essential. Continuous education and training enable firms to adapt to evolving market conditions and enhance their risk management capabilities. Future Trends and Challenges in Foreign Exchange Risk Management: Automation Advancements in technology, such as automation, are transforming foreign exchange risk management. Automated currency management systems, make it possible for treasury professionals to handle any…