Playing with risk

I received this rather intriguing email from Eurofinance, which organises conferences for corporate treasurers, regarding a new board game they are going to unleash at Eurofinance Miami 2008.

Called, 'Cash Flow at Risk', Eurofinance designed the game to teach treasurers how to come to grips with the cash flow, credit and liquidity uncertainties ahead. I do wonder though if they should be targeting it more at the banks, given that it was them that seemed to lose their way.

Apparently, HSBC uses the board game as part of its corporate training, although one wonders if a board game, let alone a major credit crunch, is really going to teach banks anything about risk.

You may think I am being a little harsh, but the other day a risk management consultant told me he had started a training company as a sideline for his consultancy business, as selling risk to banks was a bit of a difficult sell. No bank wanted to really think about risk too much as it might stem their financially motivated creative urges.

The board game requires participants to answer economic questions in order to progress, but one has a feeling for some participants it would be a case of "Do Not Pass Go, Do Not Collect $200".

Can a board game though really teach treasurers about the "dangers ahead"? Is a simple toss of the dice and answering a few economic questions going to resonate with financial managers sitting in boardrooms across the country, the very same managers who in the real world, and not one confined to a board game, perhaps saw the warning signs but chose to ignore them?

Giving up the phone

The stats indicating uptake of online trading of FX certainly look impressive. Despite a slow start back in the late 1990s when online trading portals first came online, recent estimates indicate that more than half of all corporates execute foreign exchange trades online, particularly those companies that are "cash rich" or have revenues in excess of $1 billion.

The online trading phenomenon has given rise to various online portals for trading FX and money market instruments; traditional multibank providers like FXall and Currenex have now been complemented by specialist providers such as Hotspot FX, which targeted hedge funds with its anonymous ECN model, 360T which covers a wider range of asset classes including money markets and derivatives, and Reuters and the Chicago Mercantile Exchange's recently launched FXMarketSpace, which provides an exchange central counterparty clearing model for FX trading.

Not a day goes by without some new platform or additional functionality for trading FX-related instruments online emerging. Bearing that in mind I was surprised to find the general lack of adoption of web-based trading tools by US corporates attending EuroFinance's international cash management conference in Miami.

While all other indicators appeared to suggest that corporates favoured the price discovery and aggregated liquidity provided by trading FX on multibank web portals such as FXall and 360T, US corporates appeared to be less progressive than their European counterparts when it came to giving up the old-fashioned telephone.

Some US corporates were not convinced of the business benefits of moving their FX business online when compared to the more 'personal touch' of speaking to a trader on the telephone and leveraging the long standing credit relationships corporates enjoyed with a particular bank.

However, Christoph Perger, managing partner, of Frankfurt-headquartered 360T, was at pains to explain to US companies that online trading did not mean they had to give up the phone or entrenched banking relationships altogether.

"Automation is not drying out relationships.It is more of a hybrid approach [telephone and online trading]."

In addition to obvious benefits such as price transparency and the ability to access liquidity from multiple providers, as well as in the case of 360T's online platform, the ability to access multi-bank liquidity across multiple asset classes (FX, money markets, interest rate swaps, derivatives ) via a single web interface, Perger pointed out that online trading could also help companies with their Sarbanes-Oxley compliance by providing an electronic audit trail of FX deals and confirmations.

It appears that European corporates may be slightly ahead of their US counterparts, when it comes to realising the benefits of web-based trading tools for FX and other instruments, which I found slightly satisfying given that on the flight over to Miami I was bombarded by comments from an American tourist that had recently visited the UK about the differences in plumbing between the two countries.

I asked him what he thought of London, and instead of commenting on the virtues or otherwise of the usual tourist hot spots, he proceeded to tell me that he could not understand why there were two different taps for hot and cold water in the UK, whilst in the US one tap dispensed both at the same time which made it easier to wash your hands in warm water.

While European plumbing may be slightly archaic to some, it appears Europe has the upper hand when it comes to appreciating the finer points of web-based or electronic trading platforms.

In the dark about SEPA

As the International Payments Conference in London heard from Jean-Michel Godeffroy, director-general, payment systems, European Central Bank, that banks needed to ensure their systems were SEPA (Single Euro Payment Area) compliant in time for the launch date of 1 January, 2008, on the other side of the Atlantic, US multinationals attending EuroFinance's cash management conference in Miami were somewhat confused as to what SEPA meant for them.

It appears that the banks have not done a very good job of explaining to US headquartered multinationals what SEPA means for them in terms of payments they make within the euro zone and the real opportunities it presents to rationalise the number of accounts they hold with banks in Europe, dependent on the liquidity and tax implications.

A common refrain at the EuroFinance conference in Miami was that SEPA will create one of the "most innovative economies" in the world. But it seems no one, has really bothered to tell corporates outside of Europe what this "innovative economy" really means for them when transacting or doing business within the eurozone.

Treasury consultants at the Miami conference were eager to impart to corporates that SEPA would eventually mean they could clear all eurozone payments through a single operating account, as well as encouraging the use of centralised payment factories and collection points. Yet, survey findings indicated that SEPA was a relatively low priority for US multinationals.

While European corporates have been vociferous about the lack of communication from their banks as to the business benefits of SEPA, it appears US corporates are even more in the dark.

The general lack of education on the banks' part around SEPA only serves to fuel cynical comments that perhaps it is intentional, given that SEPA will dramatically reduce banks' revenue streams, perhaps ignorance on the part of customers is bliss, some suggest.

This is particularly pertinent in the case of US-based companies sending payments to eurozone countries in formats that are not SEPA-compliant - for example euro credit transfers may not contain the correct BIC (Bank Identifier Code) or International Bank Account Number (IBAN) for straight-through processing (STP) of that payment.

As Stephen Wojciechowicz, regional solutions manager, North America, banking industry division, SWIFT, pointed out, non-compliant SEPA payments could either be rejected, held or there could be additional charges if they are non-STP.

There also appeared to be some confusion amongst US corporates about what payment transfers would be impacted by SEPA. Wojciechowicz pointed out that whilst SEPA in theory only applied to euro payments of up to EUR 50,000, that it made more sense for US corporates to ensure all euro payments were SEPA compliant. (The European Payments Council's rule books for SEPA Credit Transfers and SEPA Direct Debits do not impose a cap and the belief is that the EUR 50,000 cap will be relaxed).

Wojciechowicz said that US companies should also apply SEPA formatting for euro payments to non-euro countries which still maintained their local currency, but had signed up to the principles of SEPA as members of the EU or European Economic Area.

Some US corporates in the audience appeared bemused as to how SEPA could proceed from 1 January 2008 without the SEPA framework for direct debits in place. SEPA Direct Debits were delayed due to the EU's failure to pass the legal framework for SEPA, otherwise known as the Payment Services Directive, in time for their implementation by 1 January, 2008.

Good old BICs and IBANs, also appear to be creating confusion outside of Europe. Wojciechowicz said how one US bank had mistakenly removed the alpha numeric character within the IBAN which meant that additional repair charges were imposed on the corporate in question.

While banks may be gearing up for SEPA implementation, preparing their back end systems to offer SEPA compliant payment instruments from 1 January next year, there is no questions that more could be done to better educate end customers on both sides of the Atlantic as to what SEPA really means for them.

US corporates unsure about SWIFT

At EuroFinance's International Treasury Management conference in Miami, Florida, one of the most advanced corporations, General Electric (GE), was eager to share its experience of how it had used SWIFTNet to rationalise the 'hotch potch' of electronic banking connections most corporations maintain with their banks.

Seth Marlowe, director, strategic initiatives, corporate treasury, operations services, GE, told conference goers it had already established 57 connections with banks via SWIFTNet and that it had another 75 to go. No other multinational corporation has invested as heavily in SWIFTNet as GE, however, Marlowe said it did so without conducting a strategic cost/benefit analysis.

Given the scale of its global operations, Marlowe said GE "had no choice but to go down this path [SWIFTNet]."However,it has not all been plain sailing. Marlowe says setting up multiple SWIFTNet Member Administered Closed User Groups (CUGs) is time consuming, but that the new SWIFT SCORE (Standardised Corporate Environment) Model made things easier in terms of the implementation process.

So are other North American corporates likely to follow GE's lead? Whilst IBM and Microsoft have announced their move to SWIFTNet, there were no show of hands by attendees at EuroFinance's conference in Miami when asked if GE's example had encouraged them to think about moving onto SWIFTNet. Over lunch one banker from Royal Bank of Scotland in the US said the cost of SWIFT was still too high for a number of companies.

It seems SWIFT still has its work cut out for it if it wants to penetrate the North American corporate market.

Are we there yet?

Having jetted into Miami Florida to attend EuroFinance's international treasury management conference for North American multinationals, little did I know that an anecdote a passenger shared with me on the flight from London to Miami would have some resonance on the first day of the conference.

As the conference was on cash management trends amongst large US multinationals, one of the key focuses on day one was to what extent companies were looking to obtain a single view of their cash enterprise-wide on a global basis, or what Ron Chakravarti, liquidity and investments, global transaction services, Citi, termed "strategic treasury".

Unsurprisingly "strategic treasury" is not as easily obtainable as the 'perfect body' is perhaps for some Miami South Beach regulars. Both require significant investment in terms of time and money; with corporates having to standardise fragmented technology platforms and systems, integrate business processes, streamline banking account structures and affect cultural change at the corporate level.

Yet, unlike the 'perfect body', "strategic treasury" is not just reliant on what effort and investment companies make, but also how committed their banks are at doing the same, and it soon became apparent that the banks also have a lot of work to do. Chakravarti stressed the importance of real-time information in helping companies obtain a 'single view' of their cash, but there are still huge disparities between banks and the payments clearing infrastructure in general in terms of its ability to provide up-to-the-minute high quality transaction information to companies.

Companies also need to move away from what Chakravarti described as a "hotch potch" of electronic banking systems, which large US multinationals such as General Electric (GE) has done rationalising its more than 40 proprietary EDI connections with banks using SWIFTNet Member Administered Closed User Groups (MA-CUGS) and standardising communications with its banks using SWIFT standards such as FileAct for bulk payment transfers.

Yet, despite its unprecedented investment in SWIFT, Seth Marlowe, director, strategic initiatives, corporate treasury, operations services, General Electric said SWIFTNet was not a 'panacea'. More importantly, Marlowe said, its experience of setting up the 57 SWIFTNet connections it maintains with banks, was less than consistent.

"What we found is a mixed bag. There are some banks that have the technology available, and all it takes to establish a connection with them via SWIFT is three months. But some don't have the technology in place and it can take two years to negotiate how the bank should deploy the technology on SWIFT."

According to Marlowe, whilst companies are being asked to standardise their business processes, it is anything but standardised within the banks in terms of account validation which often differs within the same bank on a country-by-country basis.

"Probably the most standardised thing is that there are exceptions to standards and a lot of that has to do with the banks. They need to get rid of the exceptions and do things the [same] way even if the branch of a bank may operate differently."

Even in the case of BICs and IBANs, which are mandatory in Europe as a means of increasing straight-through processing of payments, Marlowe said whilst banks insisted on companies including the correct IBAN in transactions, when it came to balance reporting, as a different system was used within the bank, the banks used BBANs (Basic Bank Account Numbers), which meant companies had to support two account numbers, IBANS and BBANS.

In a roundabout way this brings me back to the anecdote I mentioned at the beginning that a fellow passenger shared with me on the plane to Miami, which demonstrates how business practices within subsidiaries of the same bank are anything but standardised.

The passenger was recently visiting London and wanted to know if they could use their credit card from their US bank in a Royal Bank of Scotland ATM machine in London without being charged as RBS owned the US bank they banked with. Needless to say whilst both banks belonged to the same parent company, neither staff at the bank in the US or RBS in the UK seemed to know about the other or whether there had been any attempt at standardising processes between the two banks when it came to credit cards.

So when it comes to "strategic treasury" it appears that the banks as well as corporates need to get their own house in order.