A changing regulatory environment, evolving marketplace demands and emerging technology trends are having a significant impact on treasury operating models and the traditional role of a treasurer

Since the 2008 financial crisis, regulators have become much more vigilant about liquidity and risk management. Prior to the financial crisis, excess liquidity and weak risk assessment led to catastrophe. The new banking regulations driven by the Basel Committee on Banking Supervision’s Basel Accords, have stipulated that exposure to market and counterparty risk will be added to the risk-weighted assets and attract a higher capital allocation.

The liquidity coverage ratio and net stable fund ratio are now part of boardroom vocabulary, and quite naturally, the cost of liquidity – both long-term capital and short-term funding – are much more expensive than before. Managing liquidity and minimising volatility, even while complying with prudential standards, have therefore become critical for every bank and the role of the treasurer has never been more strategic.

A treasurer’s role is therefore no longer about just managing cashflows or investments; it has evolved to be a very strategic pillar to driving the long-term strategy of a bank, be it in planning balance sheet growth, managing financial resources or in ensuring compliance with an increasing number of regulations. How has the world of treasury responded to this call and what are the emerging trends? We explore what this means from the three dimensions of process, people and technology.

Process – building an integrated platform

With a treasurer’s role becoming more dynamic, it is imperative that they have integrated applications that cover global operations with better risk controls. The overarching theme is to help build an integrated platform that allows for better forecasts, reduced errors and that facilitates automated reconciliations with straight-through processing (STP) capabilities.

Treasury trading desks include a money market desk that manages short-term liquidity risk, a swap desk that manages interest rate risk, and a forex desk that manages currency risk. Collectively termed as ‘market-risk’, the management of these risks are a primary responsibility of a treasurer. The degree to which a treasury has integrated global desks and has implemented automated dashboards that allow for dynamic risk assessment clearly demarcates leading banks from the others.

Managing the balance sheet implies not just planning the asset, liability and off-balance sheet exposure, but also determining the trading and investment books, and balancing between capital allocation, fund management and most importantly, ensuring liquidity. Given the sensitivity around liquidity, a plethora of new measures including liquidity reserve, funding concentration, regulatory and economic capital and high-quality liquid asset holdings are finding central space in the treasury function of the bank. Similarly, fund transfer pricing, which was more a tool for effective cost allocation across units, has evolved to become a science of predicting actual versus contractual maturities, the resultant liquidity, the related marginal costs and management of interest rate risk. As a natural corollary to the above, another emerging trend is to run the asset and liability management (ALM) function as a profit centre.

People – taking a more strategic role

Historically, treasury was considered a cost centre that reported into the finance function. However, with an increasing need to be engaged across strategic decisions related to capital allocation, liquidity management, investment and hedging and to meet regulatory compliance obligations, the role of treasury has become more strategic.

Treasury departments now regularly liaise with the lines of business across countries. Separation of retail and commercial banking from investment banking has also heightened the degree of supervision. The global scale of operations has also necessitated dynamic netting of positions, with treasury playing a key role in optimising enterprisewide collateral.It is common to have 400-500 staff in the centralised treasury functions of global banks, where the focus is on funding, liquidity, investment, ALM, hedging and regulatory interaction. A centralised treasury implies centralised execution of transactions, settlements and payments. By centralising treasury functions in low-cost locations, organisations can gain 30-40% reductions in operating costs.

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The role of a treasury trader has also moved away from that of a tactical executor of deals, to one that includes identifying opportunities against defined exposures and trading along the lines of the financial supply chain using sophisticated analytical tools. The implications of treasury decisions are not limited to the trading desk, but also to that of enterprise-wide balance sheet and risk management. The attributes of any successful treasurer include the ability to deal with cross-functional teams, effectively leveraging digital analytical tools and aligning the strategic imperatives of the bank with operational decisions.

Technology – a new age of treasury systems

The historical approach to dealing with front, middle and back office functions across global money markets, securities, investments, forex and derivatives desks has been the deployment of disparate, disjointed legacy applications. However, new age treasury functions demand a much higher degree of granularity in the quality of data. Such data includes intraday cash and collateral positions across on and off balance sheet exposures, contractual and behavioural cashflow projections. Data has to be aggregated across legal entities and consolidated across risk, finance and treasury, in line with Basel recommendations on risk data aggregation and risk reporting.

The regulatory framework of the banking sector is increasingly global, albeit often with regional nuances. Be it the Dodd Frank Act, the Markets in Financial Instruments Directive or the Basel Accords, the demand for additional information and the theme of proactive risk management is palpable. This has permeated the governance principles of most central banks around the world. To address these regulatory requirements, leading banks are focused on building data dictionaries for the treasury function that are aligned to the enterprise data dictionary. Advanced treasury applications allow for effective stress testing and scenario analysis, facilitating dynamic decision making.

It would be rare to see back office operations of any leading bank that are yet to be automated with STP functionality, which significantly mitigates the operational risk driven by manual intervention. Key areas for automation include trade confirmation, documentation validation, transaction reconciliation, limit controls, trade settlement and exception management. Risk alerts, timely regulatory compliance reporting and real-time updates to downstream applications are highly dependent on dynamic updates and automation plays a critical role.

The heightened interest in financial technology and the development of digital technologies have created opportunities in the treasury area. Interesting examples of new applications include:

  • Artificial intelligence – cashflow and scenario forecasting
  • Blockchain – transaction settlement
  • Machine learning – know your customer and black/white listing
  • Robotic process automation – ledger posting and reporting
  • Analytics – behavioural projections of maturities
  • Application programming interfaces – interfaces with third-party systems
  • Cloud – access to hosted systems and global data

The above is illustrative of the future for treasury operations. Just as robotic advisors play an integral role in wealth management, digital adoption in the treasury is inevitable. That being said, technology is ultimately a means to a larger end. And that, from a treasurer’s point of view, is in becoming a true ‘value added’ service provider. Be it in optimising liquidity costs, minimising market risk or improving profitability through effective balance sheet management, the role of treasury has moved eons away from a cost centre to one that can make a real impact.

Success will be a treasury that can drive a bank’s financial and balance sheet structure, help improve cost efficiencies even while managing the liquidity, optimise the risk exposure and help ensure regulatory compliance.

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