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Over the past six months, legislative bodies around the globe have debated, rewritten, signed and passed what will surely be remembered as one of the largest reforms of private ﬁnancial activities to protect consumers. For corporate treasurers and their bank counterparts, the work has just begun. Understanding, planning, and ﬁnally implementing the myriad of requirements now mandated by federal governments will only increase the level of responsibility and scrutiny by which corporate treasurers manage their business. To provide guidance and foresight, the Journal of Corporate Treasury Management recently asked corporate treasurers what they were doing in response to the ﬁnancial reform environment:
1. How is your company preparing for the government ﬁnancial reforms that have passed recently? Do you expect your bank’s help in addressing the impacts on treasury? 2. What is the top treasury priority for 2011?
the optimal level of funds between capital requirements and running an eﬃcient treasury operation will increase in complexity and importance. Finally, changes to the relationship between corporate treasurers and their bank counterparts may take years to adjust, with corporates searching for innovative sources of funding and banks developing new solutions to meet client demands. The coming year will be a volatile one, with new products and pricing structures hitting the market. As the dust settles, there is no doubt that corporate treasurers will be looking to their banks for assistance in meeting government requirements, picking the ideal bank solutions, and planning out corporate liquidity and risk strategies. The question is: will the banks have the answers corporates are looking for? Marika Pappas, Consultant Treasury Strategies, Inc
The responses from the panel, composed of those dealing daily with corporate treasury, all highlight the need for liquidity, security, and risk assessment and management. Balancing
PANEL DISCUSSION SEPTEMBER 2010
1. How is your company preparing for the government ﬁnancial reforms that have passed recently? Do you
# Henry Stewart Publications 1753-2574 (2010)
Vol. 4, 1 5–8
Journal of Corporate Treasury Management
. Here is why non-ﬁnancial corporations should be worried: . clearing charges. Customised. Costs to enter into derivatives are going up: Swap dealers will face higher costs to stay in the OTC derivative business through additional capital charges. and they would have to clear the trades if the amount by which they exceed the information threshold is above the clearing threshold. following something along the lines of FAS 133/IAS 39 in terms of documentation and linking exposures to derivatives. . End-users will have the burden of proof that they are hedging. . so it will be up to the end-user to show that it is hedging risk. which is a vital part of the derivative food chain. swap data repository fees and general regulatory compliance costs. These costs will most likely be passed onto their counterparties through higher bid oﬀers or add-on fees. The calculation involves netting out positions that hedge risk. Reval CEO and Cofounder Many non-ﬁnancial corporations across the globe are seeing the headline news on exemptions from major aspects of the legislation that have been passed in the USA and drafted by the EC and are breathing a sigh of relief under the misconception that there will be little impact. The number of swap dealers may shrink: No doubt some banks will exit the swap business. corporations would have to track adherence to the thresholds and demonstrate the linkage to the exposure or potentially face clearing and margin requirements.Editorial expect your bank’s help in addressing the impacts on treasury? Jiro Okochi. Swaps will be priced according to the proper risk: Ultimately. 1 5–8 # Henry Stewart Publications 1753-2574 (2010) . The Dodd– Frank bill does not have a notion of thresholds. European companies face additional burdens under the threshold requirements: Non-ﬁnancial companies that fall under the EC or similar legislation will need to provide information on derivative use if their activity goes above an information threshold. not speculating: Both the Dodd–Frank bill and the EC require that any exemptions or net position calculations require that the derivatives used were to oﬀset true commercial risk. Swap dealers will not be able to conﬁrm what the enduser is using the swap for. which for decades had been given away by swap dealers. some may be reluctant to oﬀer nonﬁnancial corporations derivatives as the return on the instrument will be lower 6 (ie why not sell to a hedge fund which will be required to clear and cost less to sell the same product to?). and ironically the larger banks will continue to get more of the business. . 4. uncleared products may not be oﬀered: Since swap dealers will face higher costs to sell derivatives that do not trade on an exchange or clear. Fewer dealers mean less liquidity and higher costs. the correct price for uncollateralised swaps or swaps that do not clear will now include the proper credit charge. So again. but if a non-ﬁnancial Journal of Corporate Treasury Management Vol. The compliance and cost burden may become too much for the local regional bank or foreign bank branch. .
. having system solutions that allow for daily valuations and risk management procedures. While it might have been a priority for 2010. Collateralised swaps will be the way of the future: Despite all the eﬀort by end-users to get the clearing exemption to avoid margining costs. Spreadsheets will no longer cut it. FCT. but treasurers have more or less assumed that banks would always be there for them. companies have to show that they have in place the proper means to ensure they can measure. Education. 2. Many are taking advantage of low longer-term interest rates by issuing long-term debt. it is now time for them to think about the long-term issue of funding their ﬁrm. The clock is ticking: US companies should have the rules released by July 2011 and EC-based companies should see their rules by June 2012. EC end-user costs increase for uncleared trades: For any trade that does not clear. it could be deemed a major swap participant and face similar requirements that swap dealers will face. Changes in the regulatory and accounting space will be ﬁnalised in 2011 and the impact of more fair value measurement proposed by FASB and IASB will have to be planned for. . Association of Corporate Treasurers The top priority for treasurers for 2011 is to put liquidity risk at the top of their agenda. treasury is back to more business as usual. monitor and mitigate operational and credit risk by ensuring timely electronic conﬁrmations. The company is preparing to become a swap data repository and can help companies document their derivative activities as hedging commercial risk as well as provide any necessary daily marks. 4.Editorial company is active enough to pose systemic risk. In the past we have seen that all sorts of credit markets have phases of liquidity and illiquidity. so unless there is a double-dip recession. 1 5–8 Journal of Corporate Treasury Management . That is why they spend time 7 # Henry Stewart Publications 1753-2574 (2010) Vol. What is the top treasury priority for 2011? Jiro Okochi. . participating in panel sessions with the CFTC and sitting on the Global Markets Advisory Committee to the CFTC. Will Spinney. both during the entire legislative process — including testifying before the US Senate — and now as the rules are being written. especially as the commercial paper market is still pretty tight and as companies witnessed ﬁrst-hand the impact of having too much short-term debt. Reval has been very active in the OTC derivative reform. Better risk management continues to be at the forefront with volatility in the foreign exchange markets and commodities markets wreaking havoc on multinational corporations and manufacturers. it is hard to see swap dealers not requiring their counterparties to enter into collateralised swap agreements to help them lower their costs and to reduce their credit risk. as well as preparation for any impact under the rules of the ﬁnancial reform. Reval CEO and Co-founder Most large companies have been able to shore up their cash and working capital post-global ﬁnancial crisis.
There are several sources of non-bank ﬁnance. only paid for when needed. 1 5–8 # Henry Stewart Publications 1753-2574 (2010) . Treasurers should therefore use the diversity of lending markets to ensure that they are not over-dependent on any one type of lender for their funding. Such a change will be a large one for many ﬁrms. Equity. This could leave cash on the balance sheet at the same time as debt. encompassing other factors such as leverage targets. 8 Journal of Corporate Treasury Management Vol. thus exposing the business to the cost of carry. if indeed they ever do. 4. of course. This strategy for liquidity is part of an overall ﬁnancial strategy. It seems that that age is now past and banks will need several years of settling down before they resume the role that treasurers want of them.Editorial courting them and establishing strong relationships. corporate structure design. Such facilities are almost the golden egg of ﬁnance. lower ticket sizes on private placements and moves to extend direct contact between non-bank investors and borrowers. but we may come to see this as a small price to pay for the certainty it will give to the business. dividend policy. favouring access to liquidity from standby lines or revolving credit facilities. the rewards are liquidity and security for the ﬁrm. But there are some friendly forces around. they will probably become the scarcest type of bank credit. However. Many treasurers have been reluctant to carry cash on the balance sheet. So funding early and funding heavily when markets are open may become the wisest way forward. is always an alternative to debt. especially those medium-sized ﬁrms who have depended entirely on bank ﬁnance. rating targets. but as they are only available from banks. foreign exchange and interest rate policies and so on. from bond markets to private placements and commercial paper to asset ﬁnance. including the hybrids of convertibles. such as the UK government’s initiative to promote nonbank ﬁnance. all in the anticipation of their support when the chief executive has the deal of a lifetime or a major reﬁnancing is required.
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