Are treasurers seizing the compliance opportunities in SEPA, IFRS9, OTC changes?

Regulatory compliance is a headache for every treasurer and chief financial officer (CFO), says Bob Stark, vice president of market strategy at Kyriba, in this blog examining the regs facing finance professionals. The single euro payments area (SEPA) is imminent; the hedge accounting rules under the International Financial Reporting Standards (IFRS) 9 stipulations have caused …

October 25, 2013 | Kyriba

Regulatory compliance is a headache for every treasurer and chief financial officer (CFO), says Bob Stark, vice president of market strategy at Kyriba, in this blog examining the regs facing finance professionals. The single euro payments area (SEPA) is imminent; the hedge accounting rules under the International Financial Reporting Standards (IFRS) 9 stipulations have caused controversy; and the move towards centralised clearing and repositories in over-the-counter (OTC) derivatives trading under the US Dodd-Frank and European EMIR rules will all have consequences. Navigating this raft of regulation requires technology but also skills and management to ensure that business and efficiency benefits result – not just a compliance tick.

The ‘Financial Times’ newspaper reported earlier this year that there is a new financial regulation every 22 days. Thomson Reuters more recently cited 60 new financial rules every business day across the globe. While not every rule or regulation affects treasurers – for instance, there is a corporate exception for non-profit seeking hedges under Dodd-Frank – there is unquestionably a lot to pay attention to at the moment. As a result, treasurers often focus on the compliance process itself, rather than the opportunities that meeting such regulations may offer. I intend to provide a brief overview of some of these impending regs and go on to describe how you can gain efficiency benefits from them.

With the 1 February 2014 migration end date for the single euro payments area (SEPA) now not far away, this is now the most urgent regulatory compliance issue facing treasurers and finance professionals. There is no shortage of warnings about the work required to meet the deadline and presumably good understanding as to the consequences of not being SEPA-compliant with one’s payment programmes (i.e. fines, returned payments, broken financial supply chains and irate customers). Yet, for all this, SEPA compliance has barely been achieved by 50% of organisations so far in regard to credit transfers (SCTs) and SEPA direct debits (SDDs) usage is still barely into double figures. These numbers, from the Eurosystem SEPA indicators, that are regularly updated, are not good but they shouldn’t necessarily be taken as an indication of procrastination – suggestions that a third of corporates may not meet the deadline tells that story. Instead, these numbers should be interpreted as an indication that only minority of organisations are in a position to grasp the efficiency benefits opportunities offered by SEPA. That is the real cost of non-compliance.

The largest opportunity SEPA provides is an excuse to standardise and centralise payment processes. The steps to harmonise formats, such as international bank account numbers (IBANs), bank identifier codes (BICs) and DD mandates, suggest that a single repository of information – rather than multiple systems – yields the best efficiency benefits for initial compliance and on-going maintenance of payment data.

Centralising internal workflows so that treasury and accounting departments collaborate on the touchpoints, approvals, and procedures to initiate, approve, and transmit payments, improves operational risk management at corporates by delivering greater visibility and improved control of payments. This increases responsiveness, reduces fraud, and improves cash and liquidity planning across the organisation. While these benefits are well understood, they remain a missed opportunity for the majority of treasurers and CFOs.

Missed Opportunities: SDDs Can Help Control of Cash Collection
Another significant opportunity clearly overlooked by treasurers during the SEPA compliance process so far is the use of direct debits. While two-thirds of corporates are eventually expected to meet the 1 February 2014 deadline for SCTs, many fewer will meet that same deadline for SDDs. There are two reasonable explanations for this:

  1. Direct debits are less of a priority than outgoing payments.
  2. There may be work required to comply. Both of these statements are true, of course, to an extent. But it is the reason why direct debits are a lower priority that presents the opportunity that is being missed.

Direct debits offer an opportunity to improve control of cash collections. Once set up, they are an inexpensive way to improve the speed of and visibility into customer receipts. ‘Once set up’, that is, which is the key phrase here. There is effort to collaborate internally, generate the appropriate documentation, track information internally, coordinate with customers to receive permission (i.e. mandates), and of course partner with one’s banking partners to execute the actual debit transactions. And, yes, all this work must be re-done to comply with the SDD initiative anyway. Especially for those organisations that already have direct debits in place, whatever technology solution and business process is used to achieve compliance for existing direct debit scenarios can be employed for customers that do not currently participate. Doing this now is an opportunity to decrease average costs to on-board customers on direct debit and simultaneously improve cash management and working capital. For those not there yet, it clearly is a missed opportunity.

EMIR and Dodd-Frank
The European Market Infrastructure Regulation (EMIR) and its American cousin, Dodd-Frank, both emanating from the post-crash Pittsburgh G20 meeting back in 2009, are proving to be a compliance headache for banks and for corporate CFOs. While full appreciation of all the requirements is still evolving some key elements are already active, and it is clear that there is a multitude of information reporting needs that must be satisfied. Meeting such requirements will tick the compliance box, so to speak. Stopping there, however, is another missed opportunity.

For example, if one looks at a relatively minor requirement of Dodd-Frank in the US where corporates are asked to report the mid-point pricing of the trade, in addition to the actual contracted rate – the treasurer is given a valuable tool by this requirement. They now have a benchmark to compare with their peers to understand how effective their foreign exchange (FX) pricing is.

Another example is around assessing one’s own trading policies, as a result of better financial reporting. EMIR reporting requirements mandate more detailed reporting, retention of longer transaction histories and, in some cases, demand for risk mitigation, especially for non-clearing trades. This offers valuable information for the treasurer and CFO to evaluate their own risk position, benchmark trades against peers and industry norms, and evaluate the effectiveness of internal trading policies. While not required in every case, requests for pre-trade scenario analysis may be made by the counterparty – offering yet another opportunity to formalise pre-trade analysis procedures that are rarely employed by the majority of corporate finance teams.

IFRS: Hedge Accounting
Regulations to support hedge accounting – formerly FAS133 and IAS39 – are not new and although migration to the International Financial Reporting Standards (IFRS) 9 stipulations offer some differences, the main objective of these regulations is not new. And nor is the opportunity. Yet, in many cases, corporate hedging programmes remain unsophisticated and focused on meeting the reporting and accounting requirements.

Those corporates that have seized the chance to introduce new technology to take advantage of new regulatory and marketplace environments and managed to adapt the exposures they hedge are benefiting. More importantly, utilising the tools and analysis used to economically hedge such exposures and protect the organisation’s financial assets is key. Those that have managed to work their financial and intellectual capital in this way, helping both the company’s bottom line as well as their own star within the organisation or industry, will feel the benefit the most.

For the majority of firms hedge accounting has successfully pushed organisations away from over-hedging, but the pendulum swung a bit too far in the other direction previously where many CFOs will under-hedge their exposures, putting corporate assets at risk. With all the data required by IFRS/FAS/IAS, both now and in prior cycles, there is ample information to assess the true effectiveness of a firm’s hedging programmes and to meet the original objective of primary corporate objective of hedging, which is to protect shareholder value.

In summary, there are many regulations out there at the moment that can keep CFOs and treasurers awake at night worrying about regulatory compliance. The sheer number of responsibilities does make it difficult to see the forest instead of just the trees. But every significant regulation that affects corporate finance and treasury has offered an opportunity to improve the effectiveness of treasury operations and programmes. It may be difficult to see the opportunity sometimes, but it is worth it – for the company and for your own career path.



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