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External Treasury: Navigating a Course Through Europe’s Rough Seas

White paper exclusively published by Writed by Carlo Nazareno, Global Head of Managed Treasury and Liquidity Services Product, Bank of America Merrill Lynch.

Uncertainty generated by the debt crisis in the eurozone has added to the challenges faced by treasurers. Making judgments about sovereign and counterparty risk is difficult, especially for companies not headquartered in the region. This paper explores the potential advantages of engaging external expertise to free up treasurers’ time to focus on core, value-added treasury tasks during such turbulent times. It analyses the broader benefits of contracting out treasury services in terms of increasing efficiency and lowering costs at a time when resources are limited. Additionally this paper assesses the capabilities of organisations that provide treasury services, and what treasurers must consider before taking this course.

Continued Crisis in the Eurozone
The debt crisis in the eurozone shows few signs of being resolved in the near future. Greece continues to teeter on the brink of default. And recent credit rating downgrades for many eurozone countries and the European Financial Stability Facility have again highlighted the vulnerability of the region. Many countries in the eurozone are already in recession. For companies that do business in the region, it is understandably a worrying time.

Corporates that are headquartered in the U.S. or Asia Pacific, but which operate in the eurozone, are challenged to keep up-to-date with such a rapidly changing situation. Sifting through the masses of information and conflicting opinions from E.U. institutions and member states, and third party views from crucial players such as rating agencies is time-consuming. Working out what really matters is harder still.

Markets’ uncertainty about the future of the euro — at least with its current 17 members — increases sovereign and counterparty risk for companies operating in the region. It requires companies to make tough decisions about how they invest surplus funds and where they keep their cash. They need to have a view on whether some countries will be forced out of the euro, and the probability of increased regulation and control over capital flows.

Eurozone instability also means that corporates need to understand the extent to which the banks they work with can withstand shocks. These shocks might be to the financial system in the form of a liquidity squeeze (some non-U.S. banks are already experiencing difficulties in securing access to U.S. dollar funds). Alternatively, the shocks could result from a sovereign default, given huge bond holdings by some banks. Either scenario is complex and tricky to gauge.

Treasurers’ Increased Responsibilities
Managing the consequences of the eurozone crisis is just the latest responsibility added to treasurers’ job descriptions in recent years. In addition to cutting costs, enhancing efficiency and ensuring the smooth functioning of payments and collections — while trying to increase the speed with which cash travels through the business — treasurers have taken on numerous additional risk management roles.

The financial crisis that began in 2008 elevated counterparty risk — relating to both customers and banks — to a board-level concern and placed management of it in the hands of treasurers. Similarly, increased concerns about the stability of banks have resulted in a need to more skillfully manage bank relationships. Both concerns mean that treasurers have had to devise strategies for continuity of business in case of country or counterparty default.

The slew of new regulations following the crisis has led to increased complexity in financial services and markets. Inevitably some of the burden of these new compliance requirements, such as the Dodd-Frank Act in the U.S., has been laid at the door of treasurers. In addition, for companies that operate cross-border, heightened foreign exchange volatility has increased the importance of managing foreign exchange risk — another treasury responsibility.

Given such challenges, accurate and timely information about liquidity, foreign exchange and other parameters — and the ability to process data to derive useful intelligence — is crucial if treasurers are to maintain visibility and control. Moreover, it is essential that processes are in place to enable treasurers to react quickly to changes. Treasurers must have considered multiple contingency scenarios, and made detailed plans to ensure a swift response — treasury operations must be able to keep going whatever happens.

Prioritising Strate gic Decision-Making
For most companies, the greater role of treasurers in making strategic risk management decisions has not been accompanied by an increase in resources for the treasury.

Treasurers seeking to free up time and resources to focus on strategic goals such as risk management, or value-added tasks such as working capital management, hedging and funding, may consider working with an outside organisation for some non-core treasury processes and requirements. Contracting treasury services with an external provider can make sense for companies based within, as well as outside the region.

Working with an external resource for non-core treasury activities has the potential to lower costs and improve efficiency through economies of scale. It allows a treasurer to retain total control of decision making, strategy and policy, while entrusting execution to external experts.

Moreover, in the current volatile environment corporates can enjoy the benefit of regular interaction with an informed and connected expert treasury services provider that is monitoring the situation.

The Importa nce of Trust
Working with an external treasury services provider is a big step for a treasurer. However, for companies of a certain size and level of international activity, there is usually a strong business case, especially during a time when resources are stretched. Equally, the benefits of being able to focus on risk management and decision-making rather than non-core treasury process management can be significant.

When deciding to engage external expertise, a treasurer needs to know that they will receive candid advice on the options available. They also must be confident of the level and quality of assistance and support they will be given during migration, and know that any transition will be seamless.

Regardless of the extent to which a company decides to manage treasury services externally, it is crucial that the treasurer feels they retain full control of all treasury strategy and policy, and that final decisions are always their responsibility. At the heart of externally-provided treasury services; therefore, must be a strong relationship and genuine trust between a company and the resources it chooses to work with.

That trust can only come from the certainty that the company’s provider of choice can ensure timely and accurate of information — visibility of its treasury services must be equal to having those services operating in-house. Moreover, the treasurer must be confident in the robustness of systems, controls, processes and expertise of an external treasury services provider. They must be relied upon for a fast response in the event of emergency or crisis — in the eurozone or elsewhere.

Finding the Right Provider for External Treasury Services
Once a treasurer has decided to delegate some non-core treasury activities to an outside provider, they need to think carefully about their requirements in terms of service delivery and their risk tolerance — especially given the critical nature of treasury operations — when selecting a provider.

There are two main types of entities offering treasury services at the current time. Business process outsourcing (BPO) has become increasingly high profile with a number of technology and other dedicated companies seeking to work with corporates. Some of these firms offer treasury services alongside many other types of business outsourcing for the back office, such as human resources, or the front office, such as call centres.

BPO companies have a long track record of improving efficiency and enhancing operational flexibility across many areas of business; some firms also have experience in providing treasury services. For some companies, contracting out treasury services to a BPO company may be the right choice, depending on the level of expertise they require and their appetite for risk.

An alternative to working with a BPO company is to work with a bank for treasury services. Banks may offer some advantages over BPO firms for treasury services, although it is impossible to generalise, and a bank’s offerings must be evaluated individually.

Robust Controls and Expertise
As financial institutions, banks are tightly regulated by dedicated authorities such as the Financial Services Authority in the U.K., for example. As a result, banks’ processes and controls are more robust and rigidly applied than those of BPO companies. Banks active in managed treasury services also have a depth of experience and employ large numbers of treasury personnel across the world, with detailed knowledge of the specific challenges faced by companies.

In terms of technology, banks have sufficient scale to invest in systems that set the benchmark in terms of handling contingencies. Moreover, such systems are continually tested to reflect changes in market conditions. Equally, the high costs of auditing, documentation, controls and back-up systems — required by Sarbanes-Oxley, for example — are more easily absorbed by banks given their economies of scale. And such services can be delivered as part of an externally managed treasury services package at no extra cost to companies.

By virtue of their constant involvement in financial markets and regular contact with regulators, banks are immersed in the day-to-day changes taking place in the eurozone and elsewhere. They are therefore well placed to access information at the right time, understand its implications rapidly and communicate the impact of any changes to companies immediately while outlining possible options for clients.

Focusing on Strate gic Priorities
The benefits of engaging external expertise for treasury services in terms of cost savings, efficiency and freeing up treasurers’ time to focus on strategic tasks, can be compelling. What is crucial is that a treasurer fully understands the relative merits of BPO firms and banks, and can therefore make a fully-informed decision based on the needs of their company and the broader challenges faced by the market. Determining the final outcome in the eurozone crisis is extremely difficult, thus having complete confidence in your treasury services resources must therefore be every treasurers’ priority.

Carlo Nazareno
Global Head of Managed Treasury and Liquidity Services Product, Bank of America Merrill Lynch

“ Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured • May Lose Value • Are Not Bank Guaranteed. ©2012 Bank of America Corporation.

Vendredi 13 Avril 2012