Treasury Best Practices:

Lessons from the crisis

IATA Treasury Conference
Geneva, 26/27 October 2009
Sebastian di Paola, Leader Corporate Treasury Solutions,
PricewaterhouseCoopers

Contents
Current state of treasury
Best practices in the crisis:

Funding and Liquidity Risk

Credit and Counterparty Risk Management
Financial Risk Management
Accounting
Treasury Management and Control
Technology

Project Case Study

Conclusion

Contents
Current state of treasury
Best practices in the crisis:

Funding and Liquidity Risk

Credit and Counterparty Risk Management
Financial Risk Management
Accounting
Treasury Management and Control
Technology

Project Case Study

Conclusion

Current state of treasury

Challenges in Treasury before the crisis

Value
Demonstrate value
added

Costs
Low cost, support
function

TREASURY
FUNCTION

Regulation
ICS, SOX, IFRS 7, FAS
157, Basel 2, tax, etc

Control
Tight controls, efficient, scalable, integrated with the
entitys business processes
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October 2009
Slide 4

Current state of treasury

Selective

Common

What are typical activities of treasury?

Foreign Exchange Risk
Management

Liquidity Risk
Management

Interest Rate
Risk Management

Cash Management

Funding and Investment

Bank Relations

Corporate Finance
Capital Structure
WACC
M&A and Post Deal integration

Accounting
For own activities
Signing the accounts

Working Capital Mgmt

Evaluation of projects
Monitoring KPIs

Credit Risk
Counterparty limits
Country limits
Terms of trade
Commercial credit
Credit insurance
Trade finance/ LCs

Insurance
Credit insurance
Insurance of goods shipments
General insurance

Commodity Risk
Purchase/sale contracts
Commodity futures and
options

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EWRM
Quantitative/qualitative
Risk Management framework
Reporting

Pension Funds Mgmt

Risk Management
ALM
Selection process
October 2009
Slide 5

Current state of treasury

Treasury before the crisis

Isolated from the business

Misunderstood by the Board and Senior Management
Considered to expensive and not sufficiently value added
Struggling to implement new technologies
Operationally: a mixture of manual / spreadsheet-based processes
and automated but poorly integrated functionalities
Technology a major drain on resource, but not a core skill-set
Under pressure from management and auditors to improve controls /
segregation
Personnel: Short of skills and career prospects

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October 2009
Slide 6

Current state of treasury

Treasury before the crisis

and of course
Fed up with IAS 39
Sick of SOX

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October 2009
Slide 7

Current state of treasury

Impact of financial and economic turmoil on Treasury

Credit crunch has been a major distraction for treasurers
Has changed the credit landscape
Focus on liquidity risk management and CASH
Impact on bank relationships
Immediate impact on the asset side for many
FX, credit risk and commodity risks very much in focus
Ongoing debate and changes to treasury accounting
Treasury control also back on Board agenda
Opportunity for treasurers to show their added value, but has also
highlighted cracks in many treasury policies.

PricewaterhouseCoopers

October 2009
Slide 8

Contents
Current state of treasury
Best practices in the crisis:

Funding and Liquidity Risk

Credit and Counterparty Risk Management
Financial Risk Management
Accounting
Treasury Management and Control
Technology

Project Case Study

Conclusion

Best practices

Best practices: Funding and Liquidity (1)

Need new strategies to manage funding risk, including:

diversification of sources and counterparties

spreading maturities
immunisation strategies (matching debt maturities with assets and
cashflows)
establishing appropriate levels of headroom and excess cash, etc

Need new strategies to invest excess cash, including:

determining optimal cash levels

analysis of investment alternatives and related risk/return profiles

Reassessing bank relationships in light of market consolidation, changes in

creditworthiness and other changes in bank counterparties

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October 2009
Slide 10

Best practices

Best practices: Funding and Liquidity (2)

Strengthening negotiation power of debtor versus debt providers

Improving understanding of effective funding requirements under

different economic scenarios and with different sensitivities

Ensuring real-time visibility of group-wide cash balances
Ensuring central availability of cash through design, tax optimisation,

selection and implementation of appropriate cash centralisation structures

(including pooling)
Increasing predictability of cash through cash flow forecasting and

reporting techniques
Working Capital optimisation to ensure efficient use of capital

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October 2009
Slide 11

Best practices

Best practices: Funding and Liquidity (3)

Objectives
Maximise
Groups
return

Optimised
use of cash

Control
lost
opportunity
costs

Manage
Manage
Cash
Cash&&Bank
Bank
Infrastructure
Infrastructure

Manage
Manage
Liquidity
Liquidity
Cash
Cash
Projection
Projection
Effectiveness
Effectiveness

Integrated
Finance SSC &
Treasury IHB
Centralised MNC

Manage
Manage
Bank
Bank
Relationships
Relationships

Control

Link WCM to
performance

Manage
Manage
Commercial
Commercial
Payments
Payments

Majority of
corporates

Ensure
liquidity

Manage
Manage
Working
Working
Capital
Capital

Typical Large Corporate

Decentralised MNC
Sophistication

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October 2009
Slide 12

Best practices

Best practices: Credit and Counterparty Risk Management

Enhancing counterparty risk management to better understand and monitor

exposures to financial counterparties (incl. complexities on derivatives,

structured products, notional cash pools, guarantees and investments)
Revisiting policies for managing credit risks on accounts receivable,

including risk mitigation techniques (securitisation, factoring, credit

derivatives, etc)
Developing supply-chain credit risk policies and tools by reformulating terms,

putting in place supplier rating schedules and establishing early warning

indicators
Acting on Supply Chain Financing, including reverse factoring, supplier

financing and securitisation

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October 2009
Slide 13

Best practices

Best practices: Financial Risk Management

Reviewing and re-engineering of policies for FX risk management (incl.

transaction, translation and economic), taking account of trending markets

and increased volatility
Reviewing of policies and benchmarks for interest rate risk

management, including appropriate debt portfolio duration or fixed/floating

mix with optimal risk / return
Maintaining a balanced liquidity risk profile, balancing between cost of

funding and refinancing risk, while focusing on ROE maximisation and

funding cost savings
Reviewing and re-engineering of policies for managing exposures to

increasingly volatile energy and commodity markets

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October 2009
Slide 14

Best practices

Objectives of FX Transaction Risk Hedging

Common objectives

Implications

To protect the business at

budget rate or better

Protects the business within a defined time horizon where

it cannot react to the changing environment (eg by

changing price list)
Hedging typically 12 to 18 months forward linked to budget

process and budget rate

To reduce P&L volatility

Possible only over the medium term, beyond this, exposure

is economic
Hedging typically 1 to 2 years forward on a rolling basis,

To reduce uncertainty of
cash flow

with layered hedge ratios

Focus is on predictability of short to medium term cash flow
Often implies a short hedging horizon (e.g. committed

exposures only or 3 months forward)

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October 2009
Slide 15

Best practices

Centralised FX Hedging Structure

BANK A
FX Forward: purchase of
USD 30 mio against CHF

Group
Treasury
I/C FX FWD 50 mio
USD/CHF sale, M+6

Sub A

USD -50 mio forecast

settlement M+6
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I/C FX FWD 30 mio

USD/CHF purchase,
M+6

Sub B

USD +30 mio forecast

settlement M+6

I/C FX FWD 10
mio USD/CHF
sale, M+6

Sub C

USD -10 mio forecast

M+6
October 2009
Slide 16

Best practices

Best practices: Accounting

Revisiting processes and systems for fair valueing financial instruments

in accordance with accounting standards, including issues of market liquidity

and counterparty credit risk.
Need for transparent reporting, leading to increased emphasis on hedge

accounting solutions, effectiveness tests and risk designations including

portions of risk
Dealing with complex accounting issues associated with hedge

discontinuance, for example due to hedge effectiveness failure, eg as a

result of counterparty financial difficulty
Gaining understanding of new accounting disclosure rules (including IFRS

7, FAS 157 etc)

Considering implications of the latest changes in accounting standards,

including rules on reclassifications between categories of financial asset.

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October 2009
Slide 17

Best practices

Best practices: Treasury Management and Control

Realigning treasury policies for more flexibility to allow for pro-active risk

management; where there is a need for more focus on preservation of capital

Ensuring quality of reporting / KPI definition to reflect the changing profile of

treasury, enabling meaningful reporting on treasury performance

If needed due to changing business needs, properly planning for

reorganising treasury structures, processes and systems

Increasing the understanding of financial and commodity risks in the

organisation, including communication using relevant risk control matrices

and methods
Enhancing internal control frameworks to align processes with good

practice, including segregation of duties, other critical controls and

appropriate governance surrounding the treasury function

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October 2009
Slide 18

Best practices

Best practices: Technology

Impact of the Crisis may change requirements to Treasury Management

System, with the need to reduce operational risk, maximise efficiency and
enable real-time management of risks and cash.
As a minimum, crisis provides the opportunity to re-emphasise the need for

investment in robust treasury and cash management technology

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October 2009
Slide 19

Contents
Current state of treasury
Best practices in the crisis:

Funding and Liquidity Risk

Credit and Counterparty Risk Management
Financial Risk Management
Accounting
Treasury Management and Control
Technology

Project Case Study

Conclusion

Project Case Study

The Treasury Project Creating a Best Practice Treasury

Phase 1
Develop Blueprint

Phase 2
Design And Select

Phase 3
Implement

Elapsed
Duration

1 to 3 months

2 to 4 months

4 to 6 months

Approach

PwC lead

PwC lead

Joint effort

Client input and key decision

making

Client input and key decision making

Treasury Blueprint setting out:

1. Governance and key treasury
policy standards by activity
2. Treasury organisation framework
3. Systems operational standards
and architecture,
4. Banking and cash management
design
5. Management information,
reporting and KPI standards,
6. Process and control standards,
Summary of Quick wins,
7. Costs and benefits from change,
8. Project plan for Phase 2

Treasury framework to be implemented

1. Selection of preferred banking
partner,
2. Selection of preferred treasury
management system / banking
system,
3. Draft treasury policy / process
guidelines, reporting and forecasting
formats, organisation plans, control
documentation.
4. Detailed implementation plans for
Phase 3.

Outputs

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New Treasury fully operational:

1. Banking structure in place,
2. Treasury Management System(s)
in place and fully operational,
3. Treasury actively managing all
cash and liquidity and treasury
risks under new framework,
4. Full visibility of Group cash, FX and
commodity risks, bank credit
exposures,
5. Banking and systems in place to
support treasury management
activities.

October 2009
Slide 21

Project Case Study

Estimated high-level work plan and time line

Planning/ Selection

Vision/ Design / Roadmap

Implementation

Project Management Office

Vision
Workshops

Define
Policies

Treasury Strategy &

Organisational Design

Bank & Cash

Management
Restructuring

Organ. & Funct.

Requirements

Construct
Organisation

Data
Business
Gathering
Case
Design

Selection
Implementation

Treasury & Cash

Management Systems

Systems
Selection
Implement

PricewaterhouseCoopers

October 2009
Slide 22

Contents
Current state of treasury
Best practices in the crisis:

Funding and Liquidity Risk

Credit and Counterparty Risk Management
Financial Risk Management
Accounting
Treasury Management and Control
Technology

Project Case Study

Conclusion

Conclusion

In summary what have we learnt?

Traditional bank to corporate relationships have changed forever

Liquidity risk is very real, and needs to be managed systematically
Cash visibility is no luxury, but requires investment in banking and
systems infrastructure
Sophisticated counterparty risk management is no longer a nice
to have
FX and commodity risk management policies and tools need to
be revisited and upgraded in many companies
Supply chain financing techniques are as much about risk
management as reducing funding costs
Treasury accounting still has a sting in the tail
Robust treasury governance, reporting and controls are a must

PricewaterhouseCoopers

October 2009
Slide 24

Conclusion

How could Treasury look in the future

Centralised, yet close to the business

Highly specialised, yet well understood and supported by the
Board and Senior Management
Tightly controlled, yet low cost
Highly automated, yet responsive to changing business
circumstances
Compliant with regulations and standards, but intolerant of nonvalue-added processes
Excellent in day-to-day processing, yet highly project driven
Integrated with financial SSCs and financial reporting processes
Broader in scope than traditional treasury
Banking connectivity: plug and play flexibility / not linked to one
bank / minimal interfaces

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October 2009
Slide 25

Thank you

PricewaterhouseCoopers SA
Avenue Giuseppe-Motta 50
1211 Genve
Switzerland

Sebastian di Paola
Treasury Solutions Group

Telephone
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Email

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+41 79 596 72 11
sebastian.di.paola
@ch.pwc.com