Articles on corporate treasury, banking and finance.
This article contains a list of ten steps to transform a corporate treasury. The steps cover corporate SWIFT membership and secure bank connectivity, visibility to bank balances and cash forecasting, cash sweeping / in-house banking, a payment hub, ERP integration, FX management, funding and cash investments. The articles closes with a list of benefits, chief of which is the continued existence of the organisation given proper cash management.
This article explains how the repo rate, the prime rate, SAFEX overnight, SABOR, treasury bills, government bonds, NCDs, JIBAR, swaps and FRAs all inter-relate in the South African market. In summary, the Monetary Policy Committee sets the repo rate which influences all the interest rates in the South African market. Banks raise money in the money market in large part through NCDs. The banks publish tradeable NCD rates which are used to determine the mid JIBAR rate. The 3 month JIBAR rate is the primary reference rate used for many corporate loans, interest rate futures, swaps and FRAs. Swaps can be used to switch variable / floating rate loans to fixed rate loans. Bank lending is commonly linked to the prime rate which is set 3.5% above the repo rate. By analysing the swap curve you obtain an understanding of the market view of interest rates into the future.
In this article I compare money market unit trusts with direct bank deposits and explain that it is possible to match and even exceed money market unit trust returns with direct fixed term bank deposits. Money market unit trusts returns are higher than bank call deposit interest rates as money market unit trusts take on term risk, liquidity risk and often corporate credit risk. A corporate should weigh up the risks and expected returns when investing their cash.
This article provides advice on how to structure and negotiate facility letters. It is important for corporates to have working capital facilities at multiple banks and it is important to be able to increase these facilities quickly when needed. It is also important to have the ability to decrease committed facilities to avoid commitment fees with some assurance that it is quick and painless to increase the facilities when needed. The goal is cost effective working capital flexibility and resilience.
Netting / pooling and cash sweeping can be used to offset negative cash balances with positive cash balances so that interest is only payable (or receivable) on the net balance. This reduces the interest cost as deposit interest rates are less than interest rates for debt / overdraft. Netting does not reduce bank exposure to the negative balances / debt / overdraft across different legal entities and so the bank is required to allocate capital to these exposures and price in the cost of this capital. A cash sweeping solution will thus result in a more favourable economic outcome for the corporate (and the bank) than a netting solution. It is preferable for a corporate treasury management system to perform the cash sweeping (instead of an individual bank) as you are then able to sweep cash balances across bank accounts at different banks.
A decent treasury management system is a necessity in the modern corporate application landscape. Treasury is the heart and cashflow is the lifeblood of an organisation. In this article I mention a few TMS systems and describe the functionality that a treasury management system (TMS) should provide. The article provides information that can be used by a corporate to assist in the selection of a TMS that meets their needs.
Banking via an app or web portal requires human intervention. Automation requires a network connection between a corporate's ERP / accounting system and/or TMS and the corporate's bank/s without human intervention. The article discusses the pros and cons of the various bank connectivity options. SWIFT corporate membership is affordable for large corporates and allows secure connectivity to multiple banks throughout the world using standard message formats. The alternative is direct host to host connections with the corporate's banks.
The use of general ledger accounts allows the automation of the bank reconciliation within an ERP such as SAP. This method of reconciling the bank general ledger account to the bank statement is far more efficient that the traditional methods of performing the bank reconciliation outside the ERP using a spreadsheet or external tool. This article explains the mechanics of an automated bank reconciliation and the allocation of deposits to customer accounts.
Cross border payments can be automated with the ERP or TMS sending the payment file to the bank for processing without human intervention. It is important to either pre-negotiate the FX conversion margin with the bank or decouple the payment of the foreign exchange from the funding of the foreign exchange with a foreign currency account. This allows for funding via spot transactions, micro hedging or macro hedging. Standard settlement instructions should be used for inward transfers of foreign currency amounts so that USD is automatically deposited into the USD foreign currency account, EUR into the EUR foreign currency account, etc. Negotiate FX rates as close to the mid-market rate as possible. Live mid-market rates are available for free on websites such as Bloomberg, XE and Oanda.
Many global organisations optimise the location of their treasury based on various factors such as the sophistication and liquidity of the banking market, the tax regime, country risk, laws and regulations and the proximity to their head office and operations. For South African groups a Domestic Treasury Management Company domiciled in South Africa is likely the most sensible and practical route for their central treasury.
This article discusses financial message formats, particularly the formats for payment instructions and bank statements. Worldwide the trend is towards the use of ISO20022 financial message formats. Swift is increasingly mandating that the ISO20022 standards, also referred to as the "MX" standards, replace the "MT" standards.