TREASURY UPDATE

Counterparties are those entities on the other side of a financial transaction or exposure. This can be the other party to an FX trade, a bank who holds your balances or even a large customer.

Ongoing vigilance and diligence is in order here. Well, more than in order. It is required. Life would be a lot easier if counterparty failures began announcing themselves loudly several months ahead of time – and increased the volume as a failure or impairment got closer that might make things easier. Situations can deteriorate over time and then often seem to turn ugly very quickly.

The graphic shows a sample of four different ‘fails’ from the start of the financial crisis to some happening this fall and even today. There are many more that could be listed (including several hundred US banks that have been shuttered or absorbed) during this time.

10 of12 for 2012 Calibrate Your Counterparty Risk

Complexities abound with Counterparty risk monitoring and calibration. Let’s touch upon a few of these ideas.

• Hierarchy. Many companies are owned by others. You can have overlapping exposures and not know it. That can and must be stopped. This month, if not today.
• Rule Changes. The rule of law is a good thing. It offers a level of consistency and that is good for many things including a free economy. Rules can change. Ask GM bondholders whose priority was changed by government action. Care is required.  Rules can change with treasurers too. A number of firms used to invest in Auction Rate Securities WITHIN the limitations of their investment policy. When those markets seized up, some treasurers were fired.
• CAREFUL with NAMES. If you buy a credit default swap (CDS) and think you are covered nicely that may or may not be correct. You must make sure that your counterparty is the same counterparty named in the CDS. Did you mean to buy coverage on the bank or its parent, the bank holding company? Saying “I meant to…” won’t settle your claim.

It can often seem that there is a lull in the storm and Treasury can let their guard down. Counterparty risks need to be monitored. This is relatively obvious of course. You also need to calibrate that risk that takes into account, size of risk , direction of risk and the speed that risk is changing. Doing this effectively is not as easy as simply buying a service one afternoon and you are all set. However, today, it is far easier than  it used to be to simply monitor your bank balances globally. Let’s get moving.

There is an increasing level of interconnectedness of our trade and economies around the globe. A result of this is that a specific country-level risk can impact your organization directly or indirectly. Understanding that impact, calibrating that risk and acting appropriately begins with timely and solid country risk monitoring.

9 of 12 Country Risk Monitoring

The volatility of various risks – including country risk – continues at a high level. And, by country risk we are referring to more than just sovereign risk by itself. This includes economic risk (and the economic environment), political risk its environment as well as the business environment and risks. These impact everything from currency management, counterparty exposure and liquidity planning.

How are you monitoring country level risks? Europe? Asia? North America?
How are you calibrating your exposure to current and trending risk levels? Focused only on Greece?

We recommend that every firm take some time to familiarize themselves with what this means. Here are a few simple ideas:

• Subscribe to our monthly newsbrief on country risk. (send an email to countryTU@strategictreasurer.com)
• Attend one of our upcoming webinars on country risk monitoring.
• Schedule some time to talk to us about country risk monitoring specifically – or risk management more broadly (email above or +1 678 466-2220)

eBAM or electronic bank account management has been a red hot topic over the past few years. And, being able to pass common messages to add/change signers to your bank accounts (as part of what ebam is about) can act like wonderful aspirin on the account management migraine. eBAM is very important. However, for most organizations there is more value and a need to get their internal bank account management BAM process in order. (We are referring to those organizations with 100 or more bank accounts and 7 or more banks).

Internal BAM is often overlooked. What are your answers to the following questions:

• Do you have an effective bank account policy (or financial account policy) that delineates internal and bank service controls, responsibilities and reporting requirements?
• Do you have a continually up-to-date list of bank accounts, signers, services?
• Can you immediately tell what accounts are impacted if a signer leaves?
• What is the status of your account and transaction level controls for each accounts – in or out of compliance?
• You have 5 minutes to prepare, can you show your CFO your account flowcharts and explain how you mobilize cash throughout the globe?
• Do you have a regular internal process that helps you detect new accounts in the organization or with your banks?

Bank Account Management and eBAM

Bank account management is the foundation for electronic bank account management.  Communicating the changes to your banks is quite a pain and is fraught with errors and wasted time.

Every bank account represents a point of exposure to your organization and a source of cost. Protecting your organization requires a robust bank account management process. The great news about fixing BAM is that the effort usually pays off financially very quickly. The warning is that the ‘internal self assessment’ of your account inventory, without experience and tools to complete it effectively, is so much harder to get right than anyone seems to imagine.

Fix eBAM now (so it stays fixed). You will be very glad you did.

This isn’t a personal plea encouraging you to get your annual checkup. The focus is on your treasury group and your use of technology. There have been ongoing and significant changes across the technology landscape. These differences matter to your organization today and over the next year.

Many organizations are running short on treasury staff and budget and have come to an uncomfortable decision point. They feel they either need to repeat they are reasonably comfortable with their ‘razor-phone’ technology or push for some enormous system implementation they suspect will take too long, cost too much and be very disappointing. These are not the only options for treasury technology.

7 of 12 Technology Physical

The graphic highlights some relatively recent developments (SaaS – software as a service) and some much newer developments (CaaS – connectivity as a service and DaaS – data as a service). An assessment, or physical, will help you understand the landscape, technology developments and how they should be employed to help your organization.

Call an expert and get a treasury technology physical. And, make sure you get specific advice not just the generic exercise more and eat better.

Vision - 3 Sights

The 6th entry in 12 for 2012 employs the three sights. Hindsight, Insight and Foresight.  Treasury must have good vision in all three areas. This is much easier typed than accomplished.

Here are three questions to determine where you are on the continuum:

• Hindsight. How quickly and effectively can you see historical trends and yesterday’s/today’s position information? How automated and accurate is it?
• Insight. Does your group systematically evaluate the forecast accuracy? Are you able to readily see your exposures with changing (and historical) market conditions?
• Foresight. What scenarios may happen – and have you run them to determine the impact on your organization? Can you calibrate your exposures based upon a variety of factors? Can you respond flexibly to new demands and risks as they emerge? Or do each of these require guessing, modeling on a spreadsheet, reworking the model, hoping…

Which view is most lacking in your organization? What are your plans to move to achieve all three sights?

There are several reasons Treasury professionals must stay alert and connected. Two top reasons are:

1. ‘Events’ Seem to Spin Out of Control Rapidly. And, the official ratings may lag the word on the street.  i.e. Lehman Brothers. One municipality went on a buying spree just as everyone else was lightening their exposure. What was the cost of not having a monitoring ‘network’ up?
2. Treasury technology has had major shifts and the overall environment is a moving target. How are you keeping your finger on the pulse of what is going on and analyzing what that means for your organization?

Here are FIVE simple ways to stay connected with Strategic Treasurer and hear about changes in treasury and technology:

1 * Join our new TREASURY Group on LinkedIn. We just started a Treasury group focused on: international treasury management, debt management, investment management, cash management and more. Please join! You can join at the following location. http://www.linkedin.com/groups?about=&gid=4221375 , You can also connect to our other LinkedIn groups via our website.

2 * Attend our WEBINARS. Part 1 of a two part series on the New Normal is next week. See for more information or to register. http://events.constantcontact.com/register/event?llr=jlanovdab&oeidk=a07e5hokif3b018a633 . Strategic Treasurer Webinars can be bookmarked.

3 * Blog 12 for 2012. We began a short series on 12 ideas, issues and comments for 2012. The landing page is a great way to jump to the different topics. We are rolling out about three short blog entries each week. http://blog.strategictreasurer.com/TU/?p=515

4 * Follow us on Twitter. We use Twitter @StratTreasurer for treasury related news, announcements. It is not used to republish newsfeeds or create other annoying traffic.

5 * Sign up for our Newsletter. You can sign up for a subscription (for free) or download copies of our Treasury Update Newsletter.
Happy New Year.
Strategic Treasurer

There are a number of relationships that must be managed formally. From rating agencies, custodians, investment managers and banks. We will skew these comments towards managing corporate banks – but take the necessary principles and apply them  as warranted.

We were originally going to say “Intentionally Manage Relationships” but that may not get one of the main points across – too many ‘wing it’. They talk about how well they manage relationships, but they are usually the only person in the firm that understands what they are doing. And, if the leave, the institutional relationship (between organizations) is the one that suffers.

Relationships should provide capital, services, ideas and more over time. Obviously, a treasurer is responsible for ensuring that the organization has enough liquidity for the next few months. And, the treasurer must make sure that s/he has the right relationships in place to support the balance sheet that is needed two or more years out into the future.

Every organization has a relationship plan in place. It is either formal or informal. In 2012, make sure that it is formal…which means treasury and senior management can point to something in writing and can also explain what that means. Here are a few items that will show you intentionally (and formally) intend to manage your vital bank relationships.

4 of 12 Relationship Management

Could you demonstrate how you formally manage your bank relationships to a new board member if you had 30 minutes to ‘pull your stuff together”?

To celebrate the start of 2012 we are sharing 12 blog entries for 2012 during the month of January. These represent various ideas, recommendations and suggestions for your consideration. We’ll try to be brief. Emphasis on the try. Click on the links to jump to the corresponding entry.

12 for 2012 Series

These entries are created by Strategic Treasurer – Consultants in Treasury.

1. 1 of 12: Move from Denial to a Solution
2. 2 of 12: Prepare for Changes in Short-Term Investments
3. 3 of 12: Linear Solutions for Non-Linear Threats?
4. 4 of 12: Formally Manage Relationships…Really.
5. 5 of 12: Stay Alert and Connected.
6. 6 of 12: Move from Hindsight to Insight
7. 7 of 12: Schedule Your Annual Physical – For Technology
8. 8 of 12: Get Ready for eBAM by Fixing BAM!
9. 9 of 12: Monitor Country Level Risks.
10. 10 of 12:
11. 11 of 12:
12. 12 of 12:

The ‘new normal’ has to be defined in a way that would include non-linear threats. These are threats and risks that arise in unpredictable ways, in unexpected combinations or with a great rate of speed (’things went bad so fast’). Examples abound and every treasury professional can list counterparties (Lehman, Dexia, MF Global, various banks), instruments (ARS, funds), currencies, countries and macro economic situations (PIIGS, European financial crisis).

The cinematic phrase about “you don’t bring a knife to a gun fight” seems to apply to treasury too. The threats are non-linear. Why do the vast majority of treasury groups try to solve non-linear problems with linear solutions?  See if this chart brings back some bad memories.

3 Linear solutions for non-linear issues

There is a different approach…It requires a type of staff and the treasury technology stack – and a few more things.

On 12/31/2012 FDIC insurance on non-interest bearing accounts drops from unlimited to the newer standard of $250,000 impacting some investment tactics. Having a full backstop and, for many companies, a decent return in the form of earnings credit rates (ECR) meant leaving cash parked in the bank account made sense. That is about to change.

The environment remains volatile. Risks abound.

#2 Prepare for Investment Changes

• How are you monitoring the situation?
• What are your plans…
  • To handle these changes?
  • To monitor and calibrate risk levels in your banks?
  • To manage the risks in your funds (credit risks, other fund participant’s actions)?