Cash Management: What Lehman Brothers Wrought

When the venerable Lehman Brothers imploded in 2008, the unthinkable event sent shock waves to corporate treasuries everywhere. Suddenly, the trend of companies moving towards using one single global banking provider for cash and treasury management was stopped in its tracks.

“Now the trend is very much around one provider per region,” says Victor Penna, Head of Regional Solutions & Advisory Team, Asia Pacific, at J.P.Morgan Treasury Services. “I would say, in 80-85% of cases, treasurers are awarding their business to different banks in each region.”
In Part 1 of an interview he did with CFO Innovation’s Cesar Bacani, Penna outlines the post-crisis cash and treasury landscape in Asia, the impact on cash visibility and the dynamics between global and regional treasury centres, and other issues. Excerpts:
What are the trends in Asia that you are seeing in terms of the way treasurers are buying transactional banking services?
At a global level, treasurers are looking to diversify their counterparty risk. The way that’s actually expressing itself in the market is that they are tending to bundle their banking by region.
In the past, the trend was moving towards one single global provider. Now the trend is very much around one provider per region. I would say, in 80-85% of cases, treasurers are awarding their business to different banks in each region.
So they’ll use one bank for Asia, a different bank for Europe, a different bank for North America, and another bank in the Middle East, depending on how many regions they deal with.
Because if Lehman Brothers can fail . . .
That’s right. There were some companies that were with one bank and they felt very exposed [during the global financial crisis].
A smaller number of treasurers are actually breaking it up further, saying, ‘I’ll have different payments and receivables banks, or I might even use multiple banks within one region.’ But that’s less common. The most common model is really one bank per region.
That raises the question of inter-operability and visibility of cash positions. Is SWIFT for corporates the answer?
I think SWIFT for corporates is playing a role in the market, but it is probably most strong among the European corporates. Some of them use many banks around the world and they use SWIFT for corporates as their single pipe. What SWIFT for corporates gives them is a very efficient way of transacting on accounts, and getting account data for many banks.
But the more predominant model is that corporate treasurers will use one bank per region, and they’ll have one host-to-host link in Asia, for example, another host-to-host link in North America, another one in Europe. Those host-to-host links would tend to be proprietary links with each bank.

So how do treasurers get a global view of all the company’s bank accounts if each region is serviced by a separate bank?

It’s more important that the regional treasury center has the view around that region. If you’re using one bank in the region, the regional treasurer can see everything happening in that region.
The way companies construct the global view is through the treasury management system. It doesn’t matter that they’re using three or four different host-to-host links because all those links are feeding data into the same global treasury management system. The treasury management system is what’s giving them a global view through the data that each host-to-host link is feeding into the treasury management system.
Alternatively, they could be getting a single feed via one bank that aggregates all the statements for them via multi-bank reporting or they could be sourcing it via their own SWIFT terminal or host to host link at the head office level.
It doesn’t matter whether it’s a different format and codes in Asia, in North America?
You have your ERP system, and that’s where you do your accounting, your accounts payable, your accounts receivable. This is for the big corporates. Then you have your treasury management system where you manage your FX risk, your liquidity positions and your inter-company loans.
The big corporates will tend to have one treasury management system and they’ll make it available globally. Each region will be using the same treasury management system, so it doesn’t matter that you’re getting one feed of data from Asia and one different one from Europe, and a different one from the US. It’s all rolling up into the same global view of the world.
At the regional level, the treasurer can look at their region, and at the global level, the global treasurer can look at the global position through the treasury management system. The fact that it is based on connectivity to different banks doesn’t matter because the treasury management system is aggregating all of the data at the top.
So if there’s a surplus in Asia and a deficit in North America . . .
They can see it and so they can initiate a transfer to move it from one region to another.
But it’s also not uncommon for international firms to have a multi-currency pool in London, for example, where they aggregate all their excess cash from all over the world. This may cover fungible currencies from all the regions and can be linked to the individual pooling structures they have in each region.
There’s another big trend that’s happening. More organizations are now looking to manage their excess cash at the regional level. In the past, it wasn’t unusual to move everything back up to Europe or the US. But there’s so much growth happening in Asia now. Much of the cash is being generated in Asia, and there’s also a need to redeploy that in Asia to grow their businesses.
Haven’t MNCs always had regional treasury centres?
If you look at the Fortune 500 companies, most have had regional treasury centres in Asia now for ten to 15 years or longer. But there’s another wave of companies coming in – Fortune 1,000 companies and below that are now looking to set up regional treasury centres.

The challenge with managing a growing business from New York, London or Zurich is that you’ve got to stay on top of all the different regulations and what’s happening in each of the markets. It’s easy to manage some areas remotely, but not Asia, because the regulations in countries like China are changing regularly.

Even so, they can still have a global treasury centre in Dublin or in Switzerland or somewhere that could still have some control over the pooling structure in Asia and actually initiate the movements.
The regional treasurer will still manage Asia, but if at the end of the Asia day they have excess cash – for example they know that the regional treasury only needs $50 million but they have $100 million sitting there – then the Asia treasury would have the ability to move $50 million up to the global treasury centre, which can use it to pay down its debt, move it to another region or could use it in a country that needs funding.
There’s a lot of cooperation between the global and regional treasuries because you also need to be forecasting future positions, which look not just at how much cash there is at the end of the day but also how much cash you need tomorrow, the next week and the next month. There might be a tax payment coming up in Japan in two weeks’ time, or some other requirement to fund, say, the Philippines.
Is this all automated?
It can be highly automated, actually, subject to local regulatory controls. One of the key things that treasurers are looking for is automation because most treasuries have been shrinking over the years. There’s a smaller headcount, so they have to look for ways to be more efficient.
It’s normally the bank’s own systems that enable this automation. Let’s say you have accounts with J.P. Morgan in different countries. Our back-end system will automatically look at the balances at the end of the day, and move the excess cash to a central set of accounts maintained by the treasury. So it’s normally the bank’s systems that automate the sweeps.
But the reality is that only a small number of banks can do this, and the reason is you actually need to invest a lot in back-end infrastructure to make it work. Technically the corporate can actively manage the structure themselves, but it will require more effort on their part to manage this process. 
What about the shared service centre? Are you seeing SSCs being folded into RTCs – regional treasury centres?
There is definitely increasing interaction between RTCs and SSCs and in some cases the line between the two is becoming blurred. Payables and receivables are key determinants of working capital and therefore drive how much liquidity will be available to the treasurer. Some treasurers are therefore getting more involved in the SSC because the processes are interlinked.
For example, a good SSC that is doing the billing for a company and really has a solid handle on the typical collection cycle would be able to give a lot of useful information to the treasurer around cash flow forecasting. Likewise, if the treasurer can exert some control over when payments are released, this can help the treasurer manage the liquidity of the corporation.
What we’re seeing now is more interaction between the treasurer and the shared services function. In some cases, some of the end-to-end processes are beginning to merge.
When you’re looking at things like an in-house banking structure, it also becomes more important for the treasurer to exercise more control over the accounts payable function if the in-house bank is actively managing the funding of accounts payable activity.
The in-house bank may be funding different entities for their payments activity, and likewise it may be acting as an aggregator for all the collections. So the linkage to the shared services function, to payables and receivables, becomes more important. You’re now managing more of that cash flow from a central location.

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