HSBC s Guide to Cash, Supply Chain and Treasury Management in Asia-Pacific 2014 Liquidity Management Edition

Transcription

1 HSBC s Guide to Cash, Supply Chain and Treasury Management in Asia-Pacific 2014 Liquidity Management Edition

2 Foreword Contents HSBC s Guide to Cash, Supply Chain and Treasury Management in Asia-Pacific 2014: Liquidity Management Edition Welcome to the latest edition of HSBC s Guide to Cash, Supply Chain and Treasury Management in Asia-Pacific, which brings readers a range of valuable insights and informed opinions from some of the region s leading banking and business professionals. This edition focuses primarily on liquidity management and the specific mechanisms that organisations can put in place to help ensure the flow of working capital around the world. In recent years, corporates all over the world have made significant inroads towards improving the efficiency of their liquidity structures by centralising the function and automating a wide range of mechanisms in order to improve visibility, control and centralisation. When combined with appropriately configured liquidity management techniques, particularly those supporting self-funding activities, companies can now achieve a high degree of optimisation in the efficiency of their liquidity structures, significantly reducing costs while mitigating risk and improving controls over the redistribution of liquidity across their organisations. Optimising efficiencies in liquidity management Perpetual liquidity A global reality Future Electronics Implementing a regional liquidity structure in Asia-Pacific Future-proofing the treasury function The impact of regulatory changes on liquidity management in Asia However, the world is moving quickly and as such, liquidity solutions are continuously extending, as a consequence of market liberalisation as well as changes in domestic practices. Furthermore, we have seen significant investment made by global banks in proprietary infrastructures, which has led to an expanded reach and a much greater level of integration and connectivity across markets. In today s reality it is now possible to operate global liquidity structures that function seamlessly 24 hours a day, 365 days a year, regardless of time zone or currency. Liquidity is truly becoming a perpetual asset in this sense. An excellent example of how to implement a solution that optimises efficiencies while delivering automated international connectivity, Future Electronics recently introduced a multi-currency notional pooling liquidity management structure in order to improve the management of their highly fragmented pools of liquidity originated by a decentralised model and overcome the operational challenges they faced. The company s new liquidity structure has improved visibility, cash flow utilisation and cost control, while also minimising the need for external funding and perfectly positioning the corporate treasury department to adapt to changing market requirements and regulations, in the future expansion of their structure. These regulations are constantly being updated, and with the new Basel III standards about to be phased in, many corporate treasurers are also concerned about whether today s liquidity techniques will continue to be valid going forward. And while the general consensus is that both physical and notional techniques will remain, it is essential that companies fully understand the implications of the new regime. I have every confidence that you will find this guide both interesting and insightful, and look forward to sharing future updates with you in third quarter. John Laurens Head of Global Payments and Cash Management, Asia-Pacific, HSBC Tel: (852) johnlaurens@hsbc.com

3 Optimising efficiencies in liquidity management Corporate treasurers in Asia-Pacific are seeking efficiency gains across the spectrum of liquidity management. Suraj Kalati and Ray Suvrodeep, respectively Senior Vice President of Liquidity and Investments, Asia-Pacific and Global Product Manager of Liquidity and Investments, Global Payments and Cash Management at HSBC, explore the latest solutions available on the market. Australia, New Zealand, Japan and the regional hubs of Hong Kong and Singapore are well established and therefore operate a fairly liberal system that makes it easy to manage working capital. Other markets such as India, Vietnam and to a certain degree China, are highly regulated and have restrictions that require a fair degree of intervention and monitoring to ensure compliance with government regulations, especially when consolidating internal liquidity. This makes regulatory compliance in these markets more resource intensive, even with a solid regional treasury infrastructure in place. Due in large part to globalisation, increasing international trade, strong domestic economic performance, and capital account liberalisation in the large emerging markets; Asia-Pacific is widely viewed as one of the world s most important markets today. However, the sheer size and complexity of the region poses a considerable challenge for organisations that are looking to grow. As such, corporate treasury departments are increasingly under pressure to efficiently manage their liquidity in order to support growth objectives. The next frontier in treasury automation In recent years, we ve seen many leading corporates make the move to a centralised treasury function that is designed to maximise the use of internal liquidity, improve internal controls, introduce best practices and increase visibility over the company s total cash position. Further, companies have aimed to achieve these goals through a significant degree of automation. While it has been relatively simple to achieve automation in the area of visibility and to a certain extent in the mobilisation of internal cash successful corporate treasuries aspire to also One of the most dynamic regions in the world, Asia-Pacific is made up of more than 20 markets, each with its own unique legal and regulatory framework. Markets such as Key insights Automated cash flow management across borders, bank accounts and currencies is complex Smart companies are exploring ways to leverage efficient mechanisms to handle their intercompany loans Integrated intercompany loan management solutions increase treasury efficiencies, enable limits to be set on lending and reduce administration time Enhanced sweeping structures allow corporates to automatically sweep funds across borders at any time of day New liquidity management solutions such as these provide a very real opportunity for treasuries to optimise efficiencies by automating control and risk management Regulatory spectrum Australia New Zealand Japan H ig h Taiwan India 2 at China Vietnam e South Korea er Philippines od Solutions traditionally available in the market are designed to address needs in a static regulatory environment w Thailand Lo Malaysia Indonesia M Hong Kong Singapore With the pace of deregulation increasing, it is important that solution design, and the infrastructure on which it is delivered, is flexible, and can also enforce the controls necessary to be applied to a dynamic situation 3

4 automate control and risk management. This final leg of the journey has historically been an expensive path to navigate, due in large to the bespoke nature of treasury processes and the relative cost of automating controls, compounded by a dynamic regulatory environment. Providing an example, China s liberalisation has afforded companies increased access to liquidity for wider use in the organisation, however they must continue to comply with strict regulatory limits and reporting requirements. Finding efficiencies in the areas of control and risk management, specifically when consolidating cash and managing intercompany loans, requires treasury functions to partner with a bank that provides a flexible and scalable infrastructure that automates the enforcement of controls previously handled manually by the treasury. Intercompany loans: A new era in automation Groups all over the world self-fund, in other words they access internal sources of funding rather than raising capital in the external market, and this has been a well-established treasury practice for years. In cases where external funding is required, many treasuries try to aggregate the needs of the operating entities, raise financing centrally and distribute internally as required. As cash generates through the operating cycles, it is then used to self-fund the group and repay external financing. While this sounds simple in theory, managing these flows across borders, bank accounts and currencies with a high degree of automation is complex, and can lead to significant tax implications in several markets in Asia. This complexity presents itself in various ways, primarily because these transfers create intercompany loans that have regulatory, tax efficiency and risk management implications. They should therefore be considered carefully before they are originated. Intercompany loans are subject to interest terms and record-keeping requirements in line with local accounting principles and tax requirements, both for local and parental jurisdictions, and are under heightened scrutiny over transfer pricing principles and substance of their application. They can also make it more difficult to control excessive lending and borrowing between entities, and increase the group s overall risk exposure. Where lending is cross-border or cross-jurisdictional, the extent of lending can be restricted by regulation, quantitatively or otherwise. And there are also cost implications in terms of ongoing investment required to support the necessary systems and people to manage intercompany loans, and developing additional buffers to create or manage exposure can be an extremely expensive exercise. While organisations favour rationalising banking relationships, reality dictates they often also require local institutions to help manage certain aspects of their business such as receivables and payroll. This adds an extra layer of complexity, especially in terms of lack of availability of information that is captured in the cash consolidation process, which creates an additional burden to reconcile intercompany positions. While these complexities do exist, opportunities to expand self-funding possibilities are ever increasing, given the deregulation of key markets in Asia. As such, smart companies are now exploring new ways to leverage efficient mechanisms to handle their intercompany loans, while managing risk and cost. They are achieving this by working with leading global financial institutions such as HSBC to take advantage of cutting edge Inter-Company Solutions (ICS). Managing complexity needs intercompany loan management solutions that are integrated across multiple dimensions, which includes active transfers e.g. the distribution of centralised financing; passive transfers e.g. cash concentration (sweeps); and both term funding and overnight/revolving funding. In the regulatory and risk environment in which companies operate, integrated solutions offer the ability to manage and control intra-group positions in order to ensure compliance with local regulatory, tax and capital considerations. Integrated intercompany loan management solutions available today increase treasury department efficiencies in several ways, but perhaps most importantly by allowing the company to set limits over the level of lending or borrowing that can take place between group entities. These limits can be set at different levels (bilateral and multilateral) and across all flows (active and passive, term and overnight), preventing excessive borrowing and enabling greater control over risks. For example, in more regulated countries, intercompany loans issued without the enforcement of limits may create a situation where the organisation can borrow excessively, leading to greater interest compensation and ultimately creating tax inefficiencies. In addition to intercompany limits, solutions available today also allow companies to establish flexible interest rate rules in order to accommodate the organisation s transfer pricing guidelines. Further, by automating the tracking and settlement of interest payments, the calculation of withholding tax on intercompany interest payments and the production of automatic reports that can be used to meet internal and external reporting requirements, substantially reduce the administrative burden required to manage each loan. An added benefit, this also improves transactional visibility and control for the corporate treasury department. 4 5

5 Flexibility of solutions is key where markets are deregulating at a varied pace and in different directions. Cross-border structures are hard to implement in first place, and therefore cannot be materially altered every time a regulatory change occurs. As such, finding the right banking partner who can deliver a flexible, geographically scalable, future-proof solution is imperative. Enhanced sweeping structures Traditionally, companies have used cross-border cash sweep structures to move surplus funds (or cover deficit positions) between a number of operating accounts to designated concentration account before a certain cut-off time during the day, or wait until the end of the day for the cash consolidation to happen. While both options help manage company liquidity, an element of risk can still remain. Cross-border sweep structures can potentially leave unfunded exposure in operating accounts, while waiting for the end of the day can result in residual currency exposure in the cash pool. Therefore, an increasing number of companies are now turning to banks such as HSBC, keen to take advantage of a way to automatically sweep funds at any time of day on a cross-border basis, thereby mitigating both currency and funding exposures. This also obviates the need to make demanding changes in business processes, both in terms of accounts payable and receivable, and within the treasury itself e.g. changes to in-house bank processes, or having to rely on the accuracy of cash forecasting models and spending time re-calibrating. Traditionally, banks have been more focused on the operating mechanics of the cash sweep structure, rather than looking at it in the broader context of intercompany funding arrangements. Traditional zero balance accounts offered very little flexibility around optimising inter-company positions, and are therefore often more expensive to operate, resulting in an unfavourable tax position for the overall group. Banks are increasingly addressing this fundamental issue by embedding intelligent sweep logic that addresses many of these deficiencies. A many-to-one, hierarchical zero balance account sweep structure is no longer the only option, and today, one-to-many or many-to-many sweep structures are now possible. Also, sweeping amounts are now informed not just by the company bank account balance but also inter-company positions. Such flexibilities expand the realm of possibilities to take control over cash in joint ventures for example, where the subsidiary has two parents. Optimising efficiencies in liquidity management Corporates all over world have made significant inroads towards improving efficiency of their treasury departments in recent years. With these new developments, optimisation which was previously considered unrealistic is becoming possible. When applied in the changing regulatory environment in Asia-Pacific, this represents a significant shift in the way companies manage their liquidity in the region. Banks are now responding to this changing environment, offering global solutions that are relevant at a regional and country level, materially improving corporate treasury s value creation by reducing costs, mitigating risk and improving controls in one strategic move. Smart companies Asia-wide are already looking to incorporate next-generation solutions such as these into their operation. Streamlining operations and improving efficiencies are also key objectives for treasuries all over the world, however some of Asia s more restricted markets don t easily lend themselves to integrating regional treasury structures. And while this might still be true, banking partners are expected to provide a consistency in services across every market, irrespective of the level to which a local country is integrated into the regional structure. Banks therefore now offer liquidity management solutions on global platforms that are more easily configurable to accommodate local requirements than in the past, which also applies when cash consolidation occurs across banks. For example, solutions around customised statement narratives for sweep transactions obviate the need for corporates, who usually have more than one banking relationship, to create bespoke rules to auto-reconcile postings and updating inter-company journals. 6 7

6 Perpetual liquidity A global reality Mario Tombazzi and Paul van Sint Fiet, respectively Regional Head and Senior Vice President of Liquidity and Investments, Payment and Cash Management, Asia-Pacific, explain how perpetual liquidity management is no longer just a pipe dream it is now a very real opportunity. In the global economy, companies have increasingly large international supply value chains, resulting in more complex trading and distribution networks to manage. Hence, the main challenge faced by corporate treasury departments has been to support and finance the commercial expansion of the business while increasing the level of control over the working capital needs of the organisation. While typically many companies have achieved positive results on the whole, others still face limitations in the execution of their plans. As a result, further process centralisation, consolidation and standardisation are required in order to establish an adequate level of efficiency and at the same time to completely mitigate the risks associated with commercial globalisation. This symptom is particularly acute in the area of liquidity management. Many companies perceive there are limitations and restrictions that impede the realisation of the corporate goals. And given only a handful of organisations can claim they have crossed the finish line in terms of introducing a seamless global liquidity management process, the question over what companies require and how the industry is meeting their needs remains. The liquidity management panacea is represented by a state where working capital is continuously redistributed and regenerated from centrally controlled liquidity pools or storage points, meeting funding needs on 8 demand, aggregating cash surpluses in real time, and efficiently connecting sources and needs of working capital. This can only be achieved by solving the effect and impact of physical remoteness, differing time zones, multiple currency denominations, and last but not least timing mismatches between surpluses and deficits. However, this is a no longer simply a fantasy. The world of liquidity management has gone through several significant developments in the past few years, and today a seamless state of liquidity is achievable by releasing the perpetual motion that is its most important attribute. A brave new world The modern economy moves at an accelerated pace, recognising neither time nor geographical boundaries. Similarly, multinational corporations have established business models and functional structures that are able to cope with the globalisation of their businesses. Companies in which sub-optimal and fragmented processes exist are more exposed to the risk of being less efficient in managing liquidity and funding needs. Despite the clear benefits received from optimised cash flows, enhanced control and increased risk mitigation with significant inroads made in creating centralised structures and automated treasury processes it is still not a common reality to manage liquidity on a truly continual 24-hour global basis. As a result, several global financial institutions have responded to the challenge by investing in proprietary systems and establishing a resilient infrastructure capable of accelerating the mobilisation and circulation of liquidity. This enables them to offer liquidity management services that operate seamlessly 24/7, 365 days a year, regardless of time zones and Key insights Companies today operate larger international supply value chains, resulting in more complex trading and distribution networks to manage The aim of managing liquidity on a global basis is to activate its perpetual motion Global financial institutions are now able to offer liquidity management services that operate seamlessly 24/7, 365 days a year, regardless of time zones and cut-off times Perpetual liquidity is almost timeless, which is a necessity when it comes to managing cash positions and funding requirements Reach is important, given that international connectivity to multiple markets is necessary to claim to be a global liquidity management player Only banks with a consistent range of services across a global footprint can help companies capitalise on every last dollar, and can take advantage of changes in regulatory restrictions Perpetual liquidity also significantly simplifies the treasury tasks associated with the management of cash positions While perpetual liquidity is now within reach, not all banks are capable of delivering it, proper due diligence is critical 9

7 physical distance. Perpetual liquidity has become a reality. Perpetual liquidity offers a timeless approach to cash management, addressing the key concerns multinational companies face today, extending a host of additional benefits over a the typical regional or global approach. As timing is critical when it comes to managing cash positions and particularly funding requirements, the fragmentation of cash positions resulting from multiple banking relationships and an unnecessarily high number of accounts used for payments and collections create complexities that often cannot be optimally addressed. Having to make use of a traditional form of payment transfer to move funds between different banks in a domestic environment or across jurisdictions is subject to time limits both in terms of the execution of the transfer and its receipt, often leading to residual balances remaining left behind or to loss of value date. By managing the full process within a global bank, these inefficiencies can be overcome and the mobilisation of the liquidity can bypass the domestic or international clearing channels. The result is a full mobilisation, with liquidity flowing across regions following the direction of the sun (i.e. from east to west) or against it, as need dictates, completely independent from cut-off times and operational time constraints. If time independency is the first requirement to perpetual liquidity, reach is the second, and only a global bank can claim to offer perpetual liquidity services by offering a suitably extensive geographical footprint and supporting all the new and emerging liquidity corridors. International connectivity to multiple markets in large numbers is necessary to capture the majority of the liquidity available within a multinational organisation at any one given time. By partnering with a bank that has a global footprint and offers a broad and consistent range of services across multiple geographies, companies can capitalise on every last dollar in every market, even if they are subject to some regulatory restrictions. There are many examples of moderately and even highly regulated markets that still allow the cross-border mobilisation of liquidity, subject to approval and market specific conditions. More importantly, some of these markets (China being the largest and the best example) are undergoing significant liberalisation. Close proximity to local practices and the local authorities allows these markets to be integrated into the global structure, and become part of the perpetual liquidity pool. And finally, perpetual liquidity also significantly simplifies the treasury tasks associated with the management of cash positions. With perpetual liquidity, companies know exactly how the global structure operates and the mechanical events that lead to the mobilisation and aggregation of the liquidity. Enabling them to operate and make funding or investment decisions in real time based on the cash position information across the whole structure, without having to wait for the execution of the liquidity mobilisation via a physical sweep. Their activities can be based on the intra-day real time actual cash position information before any consolidation and the certainty that the liquidity structure design will later automatically effect the mechanical consolidation for them. While the benefits of perpetual liquidity are abundantly clear, not all companies are ready to assume such an advanced structure at this stage in time and partnering with an institution capable of delivering the model is critical to success. Liquidity mechanisms that work Implementing an effective liquidity structure comes with inherent challenges, and corporates are faced with varying standards of country infrastructure, regulations and market practices across jurisdictions when conducting business on a global or regional level. These challenges result in reduced visibility and control, and ultimately limited access to their liquidity. Some organisations have already made significant inroads in conquering these challenges by introducing a range of liquidity management solutions and structures that speak directly to their organisational requirements and objectives. Typical solutions include techniques such as cash concentration (also known as sweeping/ zero balancing), notional pooling, interest enhancement schemes and investment sweeping, all of which help increase efficiencies, and all of which constitute important components in the delivery of a perpetual liquidity solution. Choosing a perpetual liquidity partner In order to properly implement a perpetual liquidity structure, it is essential that the treasury departments of global companies properly assess the level of expertise their banking partner has on the ground in each market. Not only must they have an in-depth understanding of local practices; they must also be abreast of the regulatory landscape which is constantly changing around the world and be able to operate easily across multiple industries. Without this knowledge, it will be extremely difficult to maximise the efficient mobilisation of the funds. However it is also critical that the bank properly understands the client s business, their processes and their objectives. These corporations are investing significant amounts of time and money in system integration at their end, which means the structure introduced must be tailored to fit to their unique needs and requirements. Perpetual liquidity is not a one-size-fits-all solution, rather a complementing mechanism that should work in unison with existing protocols to centralise and streamline liquidity management processes around the world. As such, it needs to be custom designed to ensure maximum benefits. In addition, perpetual liquidity must be sufficiently flexible to fit comfortably into the stage of sophistication of the treasury organisation. As no treasury organisation is the same, they can all benefit by optimising liquidity efficiencies and leveraging market opportunities. Perpetual liquidity gives the treasury organisation enough flexibility to create benefits during the entire journey of transformation. But not all banking partners are able to offer perpetual liquidity. Due to the way in which banks are structured makes achieving perpetual liquidity a difficult goal to achieve. And while many banks claim to be global, in reality they do not always have a physical presence in all of the markets required by their customers. Hence, it is critical for companies to find a global banking partner that operates with a consistent business model and market presence across multiple geographies. Perpetual liquidity is within reach At the end of the day, traditional liquidity management structures are constantly being redesigned and redeployed to maximise efficiencies and mitigate risk. Perpetual liquidity is perhaps the best example of this. Not only is this ambition achievable today, a number of the world s leading companies have already implemented the approach, benefitting from the results it delivers. To achieve this ultimate goal, organisations must be willing to implement a fully integrated global liquidity structure operated by a single bank with the necessary geographical reach. Such bank needs to prove to be capable of delivering a large global solution with the highest degree of resiliency and with the required balance sheet commitment to provide the associated intra-day and overnight credit facilities, so it is essential that appropriate due diligence is performed prior to choosing your banking partner. By capitalising on this opportunity today, companies have the ability to improve their competitiveness, directly delivering towards the bottom line

8 Future Electronics Implementing a regional liquidity structure in Asia-Pacific Before 2013, Future Electronics Corporate Treasury department managed highly fragmented pools of liquidity in Asia-Pacific through a decentralised model, which caused significant cash management challenges for the company. Mario Pizzolongo, Vice President - Finance and Treasurer, explains how the introduction of a new centralised notional pooling liquidity management structure optimised efficiencies throughout the region. Future Electronics was founded in Montreal, Canada in Since then, the company has grown into a global leader in the distribution of electronic components, earning an impressive reputation for providing outstanding service and developing efficient, comprehensive global supply chain solutions. Today, it operates in 43 countries around the world. In Asia-Pacific, Future Electronics has a geographical footprint that spans across the entire region, operating through entities in 13 key markets, including a regional head office in Singapore. Given that a significant percentage of the company s global revenue comes from within the region, Asia-Pacific is a very important market for the company. Future Electronics success has largely been built on its commitment to maintaining close business partnerships with suppliers and customers, coupled with the strength of its commercial and technical competencies through all stages of the design-production cycle. However, the industry features a highly diversified product base, cyclical business patterns and higher-than-average volatility in terms of business flows, all of which can create challenges in terms of liquidity management. Further complicating the situation, Corporate Treasury oversaw cash that was extremely fragmented in Asia-Pacific due to the fact the organisation has legal entities operating in several countries throughout the region. Historically, Future Electronics did not benefit from a centralised structure of funds in Asia-Pacific. There were isolated pockets of cash held across different banks and the domestic funding process was not optimal. The lack of visibility over cash positions was so acute that Corporate Treasury was not able to prepare the global cash position without the assistance of the regional office in Singapore. Reporting cash positions and the funding of domestic businesses was managed through manual processes. 12 In 2012, Future Electronics decided to completely revamp its treasury processes, including its financing strategy. Once the external sources of funding were reorganised and centralised under a structured arrangement, the focus shifted towards optimising the company s internal liquidity. Future Electronics invited various banks to become a strong cash management partner after the company reviewed its key objectives for the project. In particular, Corporate Treasury wanted to: Centralise funds Reduce excess cash in the region Improve visibility over the cash position Reduce the cost of float Facilitate the repatriation of excess funds to North America Minimise external borrowing Reduce the number of banking partners Automate critical processes Centralise foreign exchange trading Reduce transactional costs In order to achieve all of these objectives, it was essential that Future Electronics choose the right banking partner, capable of delivering a streamlined solution that was sufficiently flexible to adapt to the changing landscape in Asia-Pacific. Introducing a new liquidity management structure Future Electronics decided to issue a request for proposals (RFP) to a limited number of potential bank candidates. The company invested almost two months of work analysing the replies, evaluating the tax implications and ensuring that the replies were being compared objectively. The company chose HSBC not only because the bank could deliver an effective liquidity centralisation solution, but also because of the bank s extensive footprint within the region. This enabled Future Electronics to maintain the same banking 13

9 relationship centrally and locally as much as possible and paved the way for potential future expansion into new markets in Asia-Pacific. Together, HSBC and Future Electronics developed a regional liquidity structure involving several participants from many countries in the region, as well as several different currencies. The liquidity structure facilitates the consolidation of surplus funds across multiple currencies and markets into a multicurrency, multi-national notional pool domiciled in Singapore. Funds are consolidated into the regional pool through automated cash sweeping arrangements that accelerate the centralisation of funds collected in various countries on the same value date without leaving behind any residual cash balances. Through this structure, Future Electronics is able to consolidate its liquidity in Asia-Pacific in its preferred currency (USD) and to repatriate these excess funds to North America within one business day, which allows the organisation to improve visibility over its cash balances and enhances access to internal funding. On the disbursement side, funds are transferred directly from the regional pool of funds to the local disbursement accounts based on the daily funding requirements of the domestic markets. The funding requirements are approved by the regional office in Singapore on a regular basis. Funds are available to the local team in a timely manner to meet the local commercial obligations. This flexible solution allows the company to keep a minimum level of funds in its banking network. An uphill challenge There were several key challenges Corporate Treasury needed to overcome before the new liquidity structure was put into place, the first of which was developing the RFP itself. In order to mitigate the risk of unexpected surprises further down the line, it was essential that the company produce a highly detailed RFP that clearly outlined its main challenges, concerns and objectives. This required a clear understanding of the banking requirements of the local legal entities, not only in terms of Corporate Treasury needs but also operational needs. The project also required extensive buy-in from internal partners. While many activities such as negotiating banking partners or evaluating tax implications can be completed at the treasury level, banking services must be implemented locally and it was important that company representatives recognise the efficiencies of the new structure. Therefore, the involvement of these representatives was critical and a key success factor. Geographically, the liquidity management overhaul was always going to be challenging because of the wide range of time zones spanned by the project. This was overcome with the efficient participation of the local teams. The extensive reach of the project also created challenges from legal and tax perspectives. The company needed to comply with a host of standard requirements associated with a basic notional pool of funds domiciled in Singapore. This had to be done without creating a potential tax issue for any of the pooling participants and had to be in line with the existing structured financing arrangements already in place. The implementation plan had to take into account the fact that banks are now required to comply with a wide range of legislation such as Know Your Client and money laundering regulations around the world. These requirements are quite time demanding to meet. Several individual markets in Asia-Pacific posed specific challenges, most notably India, which could not be added to the new structure due to current domestic legislation. Liquidity from markets such as Korea and China could not be added to the notional pool initially, but are now being included in the second phase after working closely with the respective national regulators to obtain the necessary approval and also due to recent relaxation in domestic legislation. Finally, the sheer size of the project posed a challenge. The restructuring came from a single idea at the start. However, the number of people involved grew exponentially over time, which meant project management was complex. Despite these key challenges, a suitable structure was designed by Mr Pizzolongo, who has orchestrated several similar projects in his career, and the implementation was run smoothly and efficiently without any impact on operations due to the new partnerships between the highly-dedicated teams at Future Electronics in Canada and Asia-Pacific and HSBC s highly-experienced global team, who worked around the clock on several continents in order to ensure the structure was implemented on time. Having been in place for several months now, Future Electronics is starting to see some very real benefits from the new structure. A successful implementation Thanks to the ongoing efforts of both the teams at Future Electronics and at HSBC, Future Electronics has now achieved all of, if not more than, the initial objectives identified at the start of the project. Visibility has been improved considerably, which has enabled Corporate Treasury to monitor and control the company s cash position. Because Future Electronics now supports a range of currencies through the notional pool, it has provided flexibility to meet the funding requirements of the business across different currencies, which has resulted in fewer foreign exchange transactions and the costs associated with these transactions have been reduced. The new structure has also helped to substantially minimise external borrowing. With full visibility of the banking network, Future Electronics can clearly see what funds have been collected on a daily basis in Asia-Pacific. This helps Future Electronics to better manage credit arrangements and to reduce the need for external funding, which saves extensive financing charges. Future Electronics also saved money by reducing the number of banking partners within the region. Working with a smaller number of banks means that Future Electronics can seamlessly integrate its domestic operating accounts with its centralisation structure, and automated processes related to controls and risk management within the treasury function are now harmonised across the region. Future Electronics centralised notional pool liquidity structure is more flexible and more appropriate to support the evolution of the company in introducing new markets, adding other currencies and adapting to the changing landscape in one of the world s most diverse regions

10 Future-proofing the treasury function The impact of regulatory changes on liquidity management in Asia Mario Tombazzi, Regional Head of Liquidity and Investments, Payment and Cash Management, Asia-Pacific, discusses how regulatory developments including Basel III affect global liquidity management practices. In recent years we have seen a significant number of international companies transition from a fragmented liquidity management approach to a more centralised, regional or even global structure that facilitates automated processes, enforces controls and standardisation, and realises the full value of the liquidity generated by the underlying business activities across several geographies. These structures have been proven to help companies strengthen and safeguard their cash holdings, properly deploy excess funds, increase self-funding and hedge against credit and liquidity risks. Looking forward, the centralisation trend will continue to extend to more organisations and a growing number of geographies, and as such will remain a high priority item for every treasury department. Together with the expanding availability of treasury services provided by global banks, external factors play a determinant role in influencing their commercial readiness and life cycles. In particular, the introduction of regulatory reforms and new banking standards has a significant bearing on liquidity and cash management practices on both a global and local scale. For example, since the Global Financial Crisis, governments and regulators all over the world have been developing a series of measures designed to help strengthen the global banking system and ensure financial institutions have sufficient capital and liquidity in reserve to prevent a future financial crisis. In parallel we have also seen significant market liberalisation in large economies such as China, which means that companies can now integrate their local liquidity pools into their international structures, both in Renminbi and other currencies. As such, corporate treasurers worldwide are looking for confirmation on whether their liquidity management structures will stand the test of time in the face of a rapidly changing environment. What is Basel III? One of the most important measures being introduced is Basel III, which includes several new guidelines on risk areas not explicitly addressed by the previous Basel Accords, with a phased implementation over the next six years. The updated regulatory standard was developed primarily to ensure a more robust set of criteria governing the capital adequacy and balance sheet structure of financial institutions, their leverage ratios, as well as their liquidity requirements, which also has several key implications for corporates, particularly in the area of liquidity management. Basel III brings a significant change to the liquidity framework in the form of two key ratios that have been introduced in order to strengthen the supervision of liquidity risk. Firstly, the Liquidity Coverage Ratio (LCR), which will be phased in from 2015, has been designed to ensure that banks have adequate short-term liquidity and high quality liquid assets to meet customer deposit outflows and other financial commitments for at least a period of 30 days under a pre-determined stress scenario. And secondly, the Net Stable Funding Ratio (NSFR) aims to limit maturity mismatches between the assets and liabilities on the balance sheet, thereby reducing funding risk, over a one-year period of extended stress. Financial institutions have until 2018 to meet this standard. In addition, the framework also introduces four metrics for liquidity monitoring, such as contractual maturity mismatch, funding concentration, available unencumbered assets and market-related monitoring tools. But what does all of this mean for multinationals and corporates around the world? The impact on corporates Basel III will impact corporates indirectly, most notably in terms of pricing and availability of certain services offered to them by banks. One impact largely discussed from the early days of the Basel III proposal paper is the increase in the cost of lending and the reduction in the credit capacity of banks, as a consequence of the raise in the capital adequacy requirements. Another significant impact is associated with the definition of operational deposits, which is important under the new LCR framework. As a result, it is essential that companies properly understand the implications of this, because they determine the most appropriate liquidity and cash management solution to suit their needs. According to Basel III, corporate deposits can be classified as operational if they relate to payment, clearing or similar transactional banking arrangements, and are directly generated from the working capital-related activities resulting from the day-to-day running of the company s business. As such, corporations are likely to continue to need these funds Key insights Basel III includes several new liquidity guidelines with a phased implementation that will impact corporate treasuries Basel III s definition of operational deposits will encourage companies to structure their cash management activities in order to build a foundation for liquidity management There will be an increasing reason for greater efficiency across the integration of cash and liquidity management services Corporates reviewing or planning the establishment of an in-house bank should properly evaluate their processes and structures to ensure they facilitate the control of cash and how liquidity is distributed and processed Recent regulatory changes may not necessarily have a drastic impact on the liquidity management techniques used as components of a global or regional structure Physical techniques will remain critical, if not grow in importance, both domestically and cross borders Notional techniques will also remain valid and effective, staying firmly at the heart of any cash management strategy These mechanisms must be flexible so they can be adapted quickly from market to market depending on regulatory changes and the opportunities they present 16 17

11 should another financial crisis hit, and the banks holding such deposits are required to simulate and prepare for pre-determined stress tests and deposit outflow scenarios. Any deposit that is not directly associated with operational requirements will be subject to larger outflow scenario assumptions, including a possible 100 per cent outflow under certain conditions. Depending on the nature of the cash holdings and particularly if they are associated with payment and clearing services such as operational deposits the outflow scenarios are more favourable. In these instances, deposits that are categorised as operational become more valuable to financial institutions, and consequently also to companies. The definition of operational deposit is now subject to broad guidelines laid out in the consultative documents and papers produced by the Basel Committee on Banking Supervision, and these guidelines are being used to inform the application of the approach by banks. However, the customer base and market orientation of any financial institution, resulting in differing balance sheet structure and composition between banks will drive the appetite and ability to source operational deposits across retail and wholesale customers, and is expected to generate deposit pricing and deposit product differentiation as a result. Under the new regime, while it is difficult to predict the changes in deposit sourcing dynamics across banks and markets, the one certainty is that the 18 segregation of liquidity management from transactional banking services that fall under the remit of operational deposits will result in a less beneficial treatment, and needs to be considered even more carefully than before. The fully integrated model in which the liquidity bank also provides the majority of cash management services will continue to offer optimal efficiencies, both under these criteria as well as from a purely operational process efficiency standpoint. What this means for the in-house bank and self-funding Given many of the world s leading corporates have already developed a centralised approach to liquidity management, consolidating their cash position and often establishing an in-house bank with a view to optimising self-funding, corporate treasurers are obviously keen to understand how this will be affected by the changing face of regulation. However Basel III is not the only change on the regulatory landscape that companies need to consider. As global markets continue to expand and develop, regulators have started to adopt other initiatives that safeguard the stability of the domestic financial market, limit the effect of a systemic market risk spreading, or establish greater global governance. Hence, there have been enhanced requirements for Know Your Customer (KYC), the Foreign Account Tax Compliance Act (FATCA) and the intra-day liquidity buffers, to name but a few. These initiatives are enforced in the financial services industry, which play a key role in the enforcement and monitoring of these regulations. The adoption of more globally consistent governance standards is clearly a positive development, leading to a consolidation in the number of core banking relationships that any one company can sustain, due to the material increase in the cost of governance compliance to be incurred by all banks. The good news is that recent regulatory changes may not necessarily have a drastic impact on the traditional approach. Basel III s definition of operational deposits is consistent with the operating model of an in-house bank, and will actually encourage companies to structure their cash management activities in a way that will build the most appropriate foundation for the management of the resulting liquidity. In the Basel III compliant world, it is critical to establish the correct alignment of transactional services and of the optimal liquidity redistribution mechanism across the entities within the group. Structures that are well suited to this purpose include a fully centralised model such as those of an in-house bank, a financial shared services centre or an intra-group financing or trading centralisation vehicle (such as a finance company, a re-invoicing centre or a trading company). There will however be an increasing reason for greater efficiency across the integration of cash and liquidity management services, as well as for stronger controls over internal self-funding and liquidity consolidation, especially on the investment of any structural cash excess. Basel III s characterisation of excess and price sensitive deposits as non-operational deposits encourages companies to make the most efficient use of their internal liquidity first before looking to secure external funding or invest fragmented idle cash. The function and purpose of a sophisticated liquidity structure will therefore remain and provide the automated infrastructure or conduit for the dynamic redistribution and consolidation of liquidity across business entities, geographies and time zones. Just-in-time funding, cash mobilisation and concentration will continue to be supported by the liquidity solutions available in the market, and will also deliver the additional benefit of producing a more stable profile in the aggregated liquidity pools, which is another beneficial factor under Basel III. The added incentive for corporate treasurers already making use of an efficient liquidity structure will likely be to adopt a more active management approach, an automated investment solution or alternative deposit products to manage any large residual liquidity. Specifically however, there are three key areas that companies will need to revisit in order to make sure their liquidity management practices are evolving in line with the changes in the market and continue to deliver the optimal results. 19

12 Companies operating an overlay liquidity structure in which the liquidity bank is not their transactional banking provider need to reconsider their mechanism under the changing regulatory framework. In most cases, a fully integrated bank that delivers both liquidity and cash management services will remain the most efficient approach, and will also provide the corporate treasurer with greater control, which is necessary under the new standards. Operating in multiple currencies is a reality for the majority of corporate treasurers today, and partnering with a single global liquidity bank that is able to provide transaction services across multiple currencies as well as offer a multi-currency banking solution will work especially well under the new standards. And corporates that have already, or are in the process of establishing an in-house bank should also properly evaluate their processes and structures in order to ensure they facilitate the control of cash and how liquidity is distributed and processed. It is critical that the company introduce the necessary processes and liquidity management techniques to give full control and optimise efficiencies in deploying liquidity across their geographic reach. beneficial in achieving a direct netting effect on the balance sheets of both the company as well as of the bank providing the service. Notional techniques will also remain valid and effective, staying firmly at the heart of any cash management strategy, but will likely be offered more selectively due to the increasingly complex balance sheet implications they carry. But while the combination of physical and notional liquidity will continue to exist, these mechanisms will need to be sufficiently flexible to be rapidly adapted from market to market, especially given the fast pace at which markets such as China are liberalising and the way new global regulatory standards are being introduced. The liquidity corridors that are in use today to mobilise cash across markets are continuously expanding to allow for the consolidation of liquidity in one or a few of the established international financial hubs that are commonly used to domicile global and regional liquidity structures. Renminbi is probably the best example of this trend. The combined effect of market liberalisation and the expansion of the liquidity corridors, and of the currencies supported, will continue to augment the amount of the geographically dispersed liquidity that can effectively be included in a single, fully connected, global liquidity structure. The future of liquidity management As a result of the recent regulatory changes, many corporate treasurers are eager to learn whether today s liquidity techniques will remain valid going forward. Given the increasing demands these new standards and requirements have imposed on companies to better manage their cash, physical techniques such as cash sweeping will remain critical, if not grow in importance, both domestically and cross borders. This is because these tools allow companies to achieve full control over the physical mobilisation of cash in terms of timing, destination and methodology (e.g. one way, two-way, reverse, and multiple other variations) including the strict enforcement of internal lending policies. The physical aggregation of cash is Organisations that already partner with a global bank offering integrated liquidity and cash management solutions will be perfectly placed to adapt and adjust their techniques easily and quickly, responding to any changes that may arise. These institutions can help control how liquidity pools and flows are utilised, enforce governing limits and controls, and prevent the fragmentation of cash and liquidity to maximise financial efficiencies to the companies they service. They can also help corporate treasurers stay abreast of important industry and market changes such as Basel III, offering a host of and propositions designed specifically to future-proof treasury processes