What’s in a Treasurer’s Head?

I presented a keynote at the Association of Corporate Treasurers (ACT) conference in London the other day ...

... and it was interesting.

Various discussions about all sorts of things you would expect – FX Hedging, Eurozone exposures, Basel III, counterparty risks, liquidity, leverage, etc – and a few you don’t hear about so often –collateralisation of OTC derivatives, margin thresholds, CVAs, CSAs and private placements.

The latter were all about the regulatory regime requiring corporates to provide collateral against derivatives and, dependent upon the size of the corporate, a margin of collateral based upon value at risk.

CVAs is all about Credit Valuation Adjustments, and CSAs are Credit Support Annexes.

CVAs are related to measuring counterparty risks, while CSAs are the legal documents that regulate the collateral required for derivative transactions.

There was also a lot of dialogue about financing and the use of private placements, a funding round of securities which are sold without an initial public offering (IPO).

All interesting, technical stuff, and I’m going to spend some time discussing these areas this week.

To begin with, I was really interested in the interactive voting.

As with most conferences, the ACT had given everyone electronic voting counters, and they had several votes about issues in treasury operations today.

Here’s how the voting went …

How many staff are there in your treasury team?

46%    1 to 4 full time employees

21%    5-8

8%      9-12

25%    More than 13

The majority of firms are therefore small to medium size (SMEs), with 1 in 4 being larger corporates.

Is it easier to raise funds now, compared with last year?

3%     Much easier

20%   Somewhat easier

23%   Unchanged        

54%   Harder  

Yep, this year is going to be tougher than last, something we all seem to feel right now.

For your surplus cash, which of these policies do you favour:

41%  Keep it on bank deposit     

5%    Direct investment in government securities     

53%  Use the money markets

2%     Other

I was surprised so many corporates just leave surplus cash in the bank, especially as some of these firms are talking multimillion dollar balances.  No wonder working capital is so lax and slack.

Which is more important:

92%  Stability of the bank sector (77% voted for this last year)

5%    Increased bank competition        

3%    Increased bank regulation              

Forget competition and regulation, treasurers just want to know their bank partner will still be around in a few years.

How important are the large, mega-global banks to your business?

25%   Very important (compared to 47% in 2011)

11%   Quite important

39%   Somewhat important

25%   Irrelevant

This kinda bears out the previous question’s point: stability is far more important than globality right now.  Nevertheless, a global bank should be more stable, as risk is diversified rather than concentrated surely?

Is your board’s risk appetite:

16%   Too cautious     

78%   Balanced            

6%     Not cautious enough      

This vote was consistent with last year’s voting, and shows that a balanced risk portfolio is what everyone wants of course.  What was more interesting is the next question.

Has your board’s risk appetite increased over the last year?

15%  Yes (34% voted ‘yes’ last year)

85%  No (66% voted ‘no’ last year)

Everyone is consolidating approach and trying pull back from over risky portfolio investing.  This is not surprising in light of a second credit crisis erupting from the Eurozone.

Should non-financial entities be required to provide cash collateral in respect of financial derivatives?

0%      Yes        

100%  No (73% voted ‘no’ last year)

This is a huge point: treasury operations and corporates believe that they should have no duty of providing cash collateral to cover their trading positions, even though regulators have placed margin thresholds and collateralisation requirements against these derivate trades in the future.

All fascinating stuff and, in context of the last point, here’s the big issue: according to the International Swaps & Derivatives Association (ISDA), over 90% of Fortune 500 companies use customised OTC derivatives today; and over half of midsized firms and thousands of smaller companies use such products to manage specific financial risks.

According to proposals from the US administration, standardised derivatives must now be traded through regulated central counterparties (CCPs), with strict and challenging collateral requirements to ensure their integrity.  Furthermore, Senator Harkin proposed that all derivatives contracts should be made on exchange, effectively banning all OTC derivatives trading (the Derivatives Trading Integrity Act, Section 272).

Big changes and big implications.

You can read a lot more about the issue in this PwC white paper: OTC Derivatives: Should all customized derivatives be standardized?

And if you’re interested in more treasury stuff, the Financial Services Club have further events coming up in the future that are relevant to this space:

Wednesday, 29th February 2012
Launch of the Clearing & Settlement Working Group (CAS-WG)

Tuesday, 6th March 2012
The Future of Cash – is there one? 
A debate between Adam Lawrence, Chief Executive of the Royal Mint and John Howells
CEO of the LINK Scheme in support of cash, versus David Birch, Director of Consult Hyperion and Francesco Burrelli of the Value Partnership against

Wednesday, 21st March 2012, Keynote Dinner
The Future of SWIFT
Lazaro Campos, Chief Executive, SWIFT

Thursday, 19th April 2012, Keynote Dinner
The future of investing and getting the right returns
Elizabeth Corley, Chief Executive, Allianz Global Investors

Wednesday, 25th April 2012
The changing relationship between banks and their corporate clients
Carole Berndt, Head of Global Treasury Solutions, EMEA, Bank of America

Wednesday, 16th May 2012
Government and banks: a relationship that has changed
Mark Hoban MP, Financial Secretary to the Treasury

Wednesday, 23rd May 2012, Keynote Dinner
Creating a stable financial system
Andy Haldane, Executive Director, Financial Stability, Bank of England

Join any of these meetings by registering with the Financial Services Club at www.fsclub.net.

The ACT has a couple of good conference meetings too:

ACT Annual Cash Management Conference: 28-29 February, London

This two-day conference focuses on techniques and strategies to optimise your cash and liquidity management – from gaining greater visibility over cash to streamlining processes through effective us of the latest technology. Hear from companies including Atlas Copco, Dyson, Kwik-Fit, QIAGEN, SABMiller, Smith & Nephew, Specsavers, Superfos and Virgin Media.

ACT Annual Conference: 16-18 April, Liverpool

Book your place by 17 February and save up to £300.