Bracing for Volatility mBracing changE - The Asset · 2016-10-08 · Asian corporate treasury...

Bracing for Volatility, EmBracing changEAsian corporate treasury functions assume new responsibilities in a volatile market environment

Asset Benchmark Research

Asset Benchmark Research conducts in-depth, product-specific surveys on Asia’s financial markets.

Part of the group that publishes The Asset, the research team specializes in accessing senior cor-

porate decision-makers and institutional investors to provide accurate quantitative and qualitative

data to assist in management decisions.

Co-published by Asset Publishing and Research Limited and Thomson Reuters Corporation.

Asset Publishing and Research Limited

Suite 1203-05, 12th Floor

Chinachem Exchange Square

1 Hoi Wan Street, Quarry Bay

Hong Kong SAR, PR China

Tel: +852 2573 6078

Thomson Reuters Corporation

One Raffles Quay (North Tower) #28-01

Singapore 048583

Tel: +65 6403 5555

All photos by Thomson Reuters

© Asset Publishing and Research Limited, 2016

Preface

As a part of our commitment to delivering optimal solu-tions specific to corporate treasury issues in Asia, Thomson Reuters, in association with Asset Benchmark Research is proud to present “Bracing for Volatility, Embracing Change,” an in depth analysis of trends and challenges for treasury functions in Asia.

The findings explore many key issues facing corporate treasury in Asia, from managing foreign exchange fluctua-tions which is viewed as the most important financial risk negatively affecting income, to the difficulties of local tax compliance, to the need for greater operational efficiency which continues to spur interest in regional treasury cen-tres. This is a particular impetus for Chinese corporations many of whom are eyeing expansion of treasury operations outside the mainland to support their move to go global.

The report also brings to life the innovative and proactive stance of corporations in Asia to navigate these challenges, embracing technology to efficiently manage financial risk and regulatory issues so that treasury becomes a greater enabler of business performance as businesses evolve across the region.

Thomson Reuters is dedicated to enabling CFOs and treasury decision makers; providing the hu-man intelligence, industry expertise, and innovative technology to find trusted answers. Our solu-tions support financial risk management with news and analytics encompassing over 10000+ of the most trusted news sources including our own IFR and Reuters News, comprehensive cross-asset pricing and analytics, and access to deep FX liquidity from over 140 providers spanning 500 cur-rency pairs, all easily integrated into treasury workflows supporting trade settlement and reporting. Incorporating Thomson Reuters’ Risk solutions provides treasurers with powerful tools to support regulatory compliance and risk mitigation from KYC to supply chain management.

In our experience working with corporate treasury professionals across Asian markets, we find that progressive corporations are not just reacting to the changes and disruptions around them, but are leading them. Thomson Reuters is committed to being a partner in that journey.

Sanjeev ChatrathManaging Director, Financial & Risk, Asia Pacific, Thomson Reuters

BRACINg FOR VOLATILITY, EmBRACINg CHANgEAsian corporate treasury functions assume new responsibilities in a volatile market environment

1

Table of conTenTs

I. About the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

At a glance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

About the respondents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

II. The Ambitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Exhibit 1: Self-perception of treasury departments . . . . . . . . . . . . . . . . . . . . 6

Exhibit 2: Number of finance and treasury staff in respondent companies . . . . 7

Exhibit 3: Treasury and finance department budgets in 2016 vs 2015 . . . . . . 7

III. The Reality Today: Treasury Setup. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Exhibit 4: Treasury and liquidity management tools in use. . . . . . . . . . . . . . . 9

Exhibit 5: most important factors when choosing a location for treasury

centralization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Exhibit 6: most prominent location choices for treasury centralization

in Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Exhibit 7: Treasury centralization – Hong Kong vs Singapore . . . . . . . . . . . . 12

IV. The Reality Today: Treasury Risk Management . . . . . . . . . . . . . . . . . . . . 13

Exhibit 8: most important financial risks to treasurers and CFOs . . . . . . . . 14

Exhibit 9: Negative P/L impact in 2015 due to FX exposure?. . . . . . . . . . . . 14

Exhibit 10: Analyst questions on business areas over past 2 years . . . . . . . 15

Exhibit 11: Hedging of FX exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Exhibit 12: Steps taken during credit risk assessment. . . . . . . . . . . . . . . . . 17

Exhibit 13: most pressing finance/treasury pain points . . . . . . . . . . . . . . . . 17

Exhibit 14: Keeping track of regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

V. The Reality Today: Use of Technology. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Exhibit 15: Use of universal ERP systems and TmS in Asia . . . . . . . . . . . . . 19

Exhibit 16: most common methods to trade FX . . . . . . . . . . . . . . . . . . . . . 20

Exhibit 17: Use of multi-dealer platforms (mDPs) . . . . . . . . . . . . . . . . . . . . 21

Exhibit 18: Utility of external data providers for various data types . . . . . . . 21

VI. Internationalization of Chinese Treasury Units . . . . . . . . . . . . . . . . . . . . 22

Exhibit 19: Use of cross-border RmB cash pooling structures among

China-based corporates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

Exhibit 20: Plans among China-based corporates to set up overseas

Finance/treasury entity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

Exhibit 21: Reasons to consider setting up a finance/treasury entity . . . . . 24


2

i. aBout thE rEport

At a glance:In their continuing quest to

become value-adding partners to other business units, corporate treasury

functions are finding the bar rising even higher as traditional challenges to profitability and

growth intensify and new risks emerge. Some face a rockier road than others. Centralization of cash, liquidity and risk management coupled with the

adoption of best practice technology solutions are considered the key stepping stones in the evolution

of treasury functions. Corporate treasurers and CFOs of more than 1,000 businesses in Asia

share their objectives, roadblocks and successes of the past 12 months in this

report by Thomson Reuters and Asset Benchmark Research.

2 out of 3The number of treasury

teams from large corporates (sales of

>US$1,000 million per annum) that must sustain

flat or contracting budgets in 2016

1 in 4The number of corporates

that hedge FX exposure using options contracts

50%The percentage of

South and Southeast Asian corporates whose

unfavourable FX exposurenegatively impacted

2015 P/L statements

52%The percentage of

corporates in Asia that hedge 40% or less of

their FX exposures

27%The percentage of large China-based corporates

that want to set up or expand an overseas

corporate treasury function within the next two years

25%The percentage of corporate treasury

functions in Asia that use multi-dealer FX

platforms, 47% of which use Thomson Reuters’

FXall

7%The percentage of corporatesin Asia that want to set up a notional regional cash pool in the coming six months, despite Basel III casting doubt on this structure

42%The percentage of corporates in Asia without a formal policy on hedging currency risks

8%The percentage of corporates in Asia that want to set up a regional treasury centre in the coming six months

1,002The number of respondents that participated in the survey

25%The percentage of large corporates that want their treasury department to be a profit centre within three years

1 to 5The headcount in finance and treasury units in nearly half of corporates surveyed


3

abouT The resPondenTs

The survey was conducted in the first quarter of this year to better understand the corporate risks and finance issues treasury functions face today. It obtained responses digitally as well as from direct and phone interviews with 1,002 vetted corporates across the Asia-Pacific region.

The respondents were primarily company representatives working in the treasury, finance, tax or a synonymous department of corporates in Asia-Pacific. The survey counted only one response per incorporated entity.

Survey participants provided input on questions related to their field (cash and liquidity management, funding, risk management, tax and regulatory issues). most exhibits include a regional breakdown of responses.

mainland Chinese corporates account for a relatively high proportion of overall re-spondents (48%) on purpose. This allows a detailed look at this special market in the last section of the report.


33%North Asia ex China

19%South and

Southeast Asia

Respondent profile: by entity location

48%China

Respondent profile: by company sales (US$ pa) Respondent Profile. By Industry

Util

ities

Tele

com

mun

icat

ion

serv

ices

Rea

l est

ate

Mat

eria

ls

Info

rmat

ion

tech

nolo

gy

Indu

stria

ls &

man

ufac

turin

g

Hea

lthca

re

Food

& b

ever

age

Fina

ncia

l ser

vice

s

Ene

rgy

& m

inin

g

Con

sum

er s

tapl

es

Con

sum

er d

iscr

etio

nary

Con

glom

erat

e

Avia

tion

& tr

ansp

orta

tion

2% 3%

12%

5%6%

8%

33%

4% 3% 2% 3%5% 4% 3% 3%

Agr

icul

ture

20% 250-1,000mil

Mid-cap

59% <250mil

SME

21% >1,000mil

Large

Respondent profile

By company sales (US$ pa)

By industry By entity location

4

ii. thE amBitions Asia’s corporate treasurers have the formidable challenge of achieving what might well be an impossible trinity: automating core cash management functions while managing complex risks and coping with shrinking budgets.

Automation of core cash management functions frees up time and other resources for treasurers to focus on risk management, but that also requires investments into electronic platforms and human capital. And unless corporate treasury departments manage to generate profit by speculating with unhedged positions, they will require budgetary support from the rest of the business.

The list of financial risks faced by corporates in Asia is growing: foreign exchange (FX) and interest rate exposure, creeping expropriation, wild swings in commodity prices, to cite a few. Those risks are not new phenomena, but they have dealt serious blows to profitability and stability of corporates in recent months. In Asia, compliance risks stemming from upcoming global taxation frameworks threaten to catch some of the corporates off guard.

Financial risks cannot be managed ex post facto when a decision has been made or worse, when the damage is done. Corporate treasury functions in Asia thus pursue two objectives. They aim to become value-adding business units that advise other parts of the business on how to avoid company risks. They also want to lower costs by deploying technology solutions to automate menial tasks and focus on emerging threats.

Group Treasurer For

MNC Based IN HoNG KoNG

(CoNsuMer dIsCreTIoNary)

It is very important that our treasury becomes a key contributor to the business in terms of working capital, cash management and financial risk management. Those are very crucial to our operations, especially during this time because of market uncertainty


Treasury functions fulfil important advisory roles. Some companies encourage the treasury department to work closely with the sales and procurement teams in drafting contracts with clients, paying close attention to the potential impact of FX fluctuations that could threaten profit margin. Others have found that the expertise of treasury units in managing counterparty risk is useful to credit risk departments in assessing suppliers and buyers.

Half of corporate treasury functions in Asia see themselves becoming value-adding partners to other departments of the business within three years, compared to 38% that assume the role currently. Twenty-eight percent of them aspire to be-come strategic partners capable of contributing to the bottom line in three years, compared to 18% of them that are already profit centres. By 2019, the number of treasury units that act as mere enablers will fall correspondingly.

% of respondent

China SME

Business enabler 44%

23%

Value-adding partnerto business

38%

50%

Profit centre18%

28%

Business enabler


Profit centre

Business enabler


Profit centre

Mid-cap

Business enabler


Profit centre

% of respondent % of respondent

Large

Business enabler


Profit centre

South and Southeast Asia

Business enabler


Profit centre

North Asia ex China

Business enabler


Profit centre

48%21%

36%51%

17%28%

46%22%

32%47%

22%

47%22%

30%

47%

23%31%

33%28%

57%51%

10%22%

30%

45%23%

44%55%

11%22%

38%24%

53%52%

10%25%

Today Key: In 3 years

reGIoNal Treasurer For

MNC Based IN CHINa

(TeleCoMMuNICaTIoNs)

Treasury is not just doing hedging. Treasury

is doing FX risk advisory work for the business. So we need to know how to

price FX risk for the pricing manager to put inside

their contracts and calculations


MNC Based IN HoNG KoNG

(Food & BeveraGe)

There’s a bit of a disconnect here between

how the business monitors credit risk and how treasury

does it. I think treasury could add value to how the

business assesses credit risk but we are not

involved yet


EXHIBIT 1: Self-perception of treasury departments

6

The ambition to be more than a purely enabling function of a business is particu-larly strong among corporations in mainland China and elsewhere in North Asia as well as among small and medium-sized enterprises (SmEs) with annual turnover of <US$250 million. meanwhile, one in four large corporates with annual turnover of >US$1,000 million aim to turn their treasury departments into profit centres compared to the 10% that already contribute to the company’s bottom line. That is notable given that many companies will need to adapt their statutes and allow for a less secure but potentially more profitable risk framework. In Taiwan, Korea, Japan and Hong Kong, the percentage of corporates striving to turn their treasury units into profit centres are even higher at 31%.

The challenges confronting corporates to live up to their own ambitions are appar-ent when staff and financial resources are considered. Nearly half of the respond-ents (47%) across Asia employ one to five individuals in their finance and treasury departments. A third of large companies have teams with fewer than six full-time professionals. Treasury units of SmEs are generally smaller.

Budget constraints pose an additional roadblock to effective treasury transforma-tion for many corporates. Just 32% of respondents among large companies state that they will receive a budget increase in 2016. The situation looks brightest for treasury functions in South and Southeast Asia and among mid-caps as 46% and 45% of them, respectively, expect an increase in their budgets this year.

1 to 5 6 to 10 11 to 15 16 to 20 21 to 25 More than 25

Number of Treasury Staff in Responding Companies

47%

54%

32%

34% 24%

30%

31%

30% 11%

7%

7% 3%

3%

3%

5%

4%

2%

1%

17%

21% 13%

14%

Overall

SME

Mid-cap

Large

4% 2%

Decrease / cost cutsNo changeIncrease / investment

33%

29%

China 38%

38% SME

39%

38%

24% Mid-cap

45% 25%

30% Large

32%

35%

32%

South andSoutheast Asia

19%

34% 46%

North Asia ex China

21%

44%

35%

Key:


CouNTry Treasurer For sMe

Based IN INdoNesIa

(INdusTrIals)

Treasury is a profit centre. In order to increase the value of the company, first of all, you must become a profit centre

reGIoNal Treasurer For MNC

Based IN HoNG KoNG

(INdusTrIals)

At the moment I would rather say the pressure is on the budget decreasing, which is completely wrong because the volatility is growing now

EXHIBIT 2: Number of finance and treasury staff in respondent companies

EXHIBIT 3: Treasury and finance department budgets in 2016 vs 2015

7

After Hong Kong had announced tax incentives last year for corporate treasury functions that choose the territory as a hub, Singapore followed suit and lowered the tax on treasury related income by an additional 2% in June 2016. Both juris-dictions want to capitalize on the trend of treasury centralization across Asia. Al-though the diversity of market infrastructures and complex FX regimes across the region pose challenges to the centralization of cash and risk management, many corporates believe that the benefits make a compelling case.

Lower transaction costs with service providers including banks, better visibility of cash positions across entities and lower funding requirements from external sources are some of the benefits of setting up regional treasury and finance units. Centralization is not a panacea that turns a back-office function into a value-adding business unit. But it can be an important stepping stone towards that goal. That explains the significant number of companies that plan to implement centralized treasury structures in the coming six months.

Centralized treasury structures come in the form of independent legal entities or special business units with separate management reporting. In rare cases, these centralized entities operate with a banking licence, enabling them to tap the inter-bank market to further lower funding costs.

iii. thE rEality today:trEasury sEtup


Companies adopt different business models to centralize their treasury operations. For some, centralization is simply a matter of streamlining the operating aspects of payments and receivables. For those companies, a shared service centre (SSC) might do the trick. Others authorize a regional team of treasury and finance profes-sionals to perform certain treasury functions on behalf of local operating entities in Asia. The team can make payments, manage funding through cash pools and intercompany loans, and bundle the FX and interest rate exposures of the group. Those can be done through a single global treasury centre (gTC) or a hub-and-spoke model.

Among respondents, 24% rely on their internal or external SSCs, while the same percentage of corporates operate, respectively, a regional treasury centre (RTC) and gTC or an in-house bank (IHB). In the next six months, more corporates will be operating centralized treasury structures with 7% of them planning to set up an SSC and 8% planning to establish an RTC. Eight percent aim to create a global treasury unit. For all models, South and Southeast Asian corporates display the highest adoption rates while China lags the rest of Asia. Only 15% of Chinese

By geographic location

Overall

By company size

0%

10%

20%

30%

40%

50%

60%

70%

49%

9%

25%

8%

19%

7%

24%

7%

24%

8%

24%

8%

21%

6%

Domestic cash pool

Regional cashpool (physical)

Regional cash pool (notional)

Shared servicecentre

Regional treasury centre

In-house bank / Global treasury

centre

Swift for corporates

0%

10%

20%

30%

40%

50%

60%

70%

80%

Yes Next 6 months

China

N.Asia

ex C

ina

S. & S

E.Asia

China

N.Asia

ex C

hina

S. & S

E.Asia

China

N.Asia

ex C

hina

S. & S

E.Asia

China

N.Asia

ex C

hina

S. & S

E.Asia

China

N.Asia

ex C

hina

S. & S

E.Asia

China

N.Asia

ex C

hina

S. & S

E.Asia

China

N.Asia

ex C

hina

S. & S

E.Asia

SME

Mid-

capLa

rge

SME

Mid-

capLa

rge

SME

Larg

e

Mid-

cap

SME

Larg

e

Mid-

cap

SME

Mid-

capLa

rge

SME

Larg

e

Mid-

cap

SME

Mid-

capLa

rge

Key :


EXHIBIT 4: Treasury and liquidity management tools in use

9

corporates employ an SSC, for instance. Interestingly, 19% of the SmEs already have a regional treasury setup and another 9% will be establishing one in the next six months.

Respondents also discussed their use of various cash pooling structures. Nota-bly, 7% of respondents plan on implementing a notional regional cash pool in six months despite the tool’s declining popularity among banks in view of Basel III. Under Basel III rules, the liquidity coverage ratios of banks are based on gross amounts of individual accounts not the netted pool header.

Hong Kong versus Singapore

Hong Kong is not alone in Asia in its desire to become a hub for treasury centres. Thailand and malaysia also offer tax benefits to corporates choosing to locate their finance and treasury units there. Hong Kong’s biggest competitor, by far, is Sin-gapore. An estimated 3,000 treasury departments, both regional and global, have chosen Singapore as their domicile, employing over 16,000 people.

Because treasury centres typically fulfil regional funding tasks, taxes on interest income and withholding duties are important considerations when deciding which jurisdiction is suited best for an RTC (or gTC) in Asia. But the tax regime is not the only factor that matters to corporates based on the survey’s findings. Indeed, among the respondents, tax rates on treasury-related income only ranked fifth in the list of considerations that corporates review. most respondents (53%) cite the

53%

39%

23% 21%

18% 18% 17%

6% 4%

% of respondent

24% 24%

23%

12%

9%

5% 3%

Other

s

Double ta

xatio

n agre

emen

ts

Human

capita

l

Proxim

ity to

oth

er cr

itica

l busin

ess f

unctions

Tax r

ate o

n trea

sury

relat

ed in

com

e

Advance

d mar

ket i

nfrastr

ucture

Free

trad

e agre

emen

ts

Mar

ket l

iquid

ity

Proxim

ity to

(reg

ional)

hea

dquarte

rs

Bangko

k / T

hailan

d

Kuala Lu

mpur /

Mala

ysia

Outside A

sia

Shanghai

Hong Kong

Singap

ore

Elsewher

e in A

sia

BRACINg FOR VOLATILITY, EmBRACINg CHANgEAsian corporate treasury functions assume new responsibilities in volatile market environment

EXHIBIT 5: Most important factors when choosing a

location for treasury centralization

10

EXHIBIT 6: Most prominent locationchoices for treasury

centralization in Asia66 responses (only large companies with annual turnover of US$1,000

million and above and functioning RTC/IHB considered)


larGe loCal CorporaTe

Based IN sINGapore

(MaTerIals)

[We prefer Singapore] because of the tax. Free trade agreements are also one of the reasons. Singapore’s funding costs are relatively low compared to Hong Kong’s

proximity of the hub to their global or regional headquarters as the most impor-tant factor, followed by market liquidity (39%) and free trade agreements (23%). Thus, any incentive-based policy that primarily rests on tax concessions may not be enough to lure corporates and their RTCs. Apart from a review of the tax regime, jurisdictions that are keen on seeing more RTCs settle within their boundaries will need a broader incentive policy, one that is designed to attract regional headquar-ters to the city.

The actual locations of treasury units in Asia corroborate this finding. Despite common perception that most Asian treasury units are located in Singapore and Hong Kong, the survey finds that the majority of large companies have chosen to centralize their treasury outside these cities. In fact, Singapore and Hong Kong make up less than half of the responses. One in four companies host their RTCs “elsewhere in Asia”, typically in the location of their headquarters even as market liquidity and infrastructure may be far from ideal in those locations. Notably, 12% of respondents have chosen Shanghai as the location of their treasury. Among them are not just mainland Chinese firms, but also Korean, Taiwanese and multi-national corporations.

The survey also finds differences in the roles performed by treasury units based in Singapore and Hong Kong. In Singapore, treasury units focus mainly on obtaining funding for the group, both from external and intra-group sources. They are also tasked with the management of bank relations. In Hong Kong, the three most im-portant tasks of treasury units are cash management of payables, bank relations, and management of financial risks (including FX, interest rates and commodity prices). moreover, treasury teams in Singapore seem to be getting less support from their group than their peers in Hong Kong. more than half of treasury units in Singapore (55%) expect budget cuts in 2016 compared to just 41% in Hong Kong. meanwhile, only 29% of them expect an increase in their budgets this year com-pared to 38% of their counterparts in Hong Kong.

Shanghai as a hub

Through its pilot free trade zone, Shanghai has some of the qualities necessary for effective treasury centralization such as the ability to create a cross-border cash pool and access to offshore funding. But a recent regulatory setback restricting cross-border renminbi business is a cause for concern for some corporates. To stem capital outflow, China’s central bank in January implemented restrictions on certain cross-border transactions, limiting the outflow in renminbi-denominated cross-border cash pool arrangements. Treasurers who have centralized their re-gional cash management in China have also noted challenges in dealing with tax authorities in the mainland, driving some companies to create or expand finance and treasury units overseas (see Section VI).


11

1%

8%

13%

16%

28%

27%

38%

57%

45%

7%

8%

23%

27%

28%

33%

17%

48%

48%

Treasury centralisation

Singapore

Proximity to (regional) headquarters

Market liquidity

Free trade agreements

Advanced market infrastructure

Tax rate on treasury related income

Proximity to other critical business functions

Human capital

Double taxation agreements

Others

Hong Kong Most important reasons for choice of location

21%

41%

38%

16%

29%

55%

Budget in 2016

Increase / Investments

Decrease / cost cuts

No change

17%

13%

19%

23%

19%

19%

26%

43%

28%

26%

40%

43%

8%

18%

16%

18%

32%

34%

29%

29%

47%

55%

42%

53%

Financial risk management

Funding

Intercompany netting & lending

Payments

Cashflow forecasting

Surplus cash investment

Bank communication

Receivables

Credit management

Payment & journal entry routing

Tax

Bank relations

Most important tasks of RTC/GTC and IHB

% of respondent


Based IN HoNG KoNG

(INdusTrIals)

There would be good reasons to choose Hong

Kong. First of all, you get the talent and human capital. Second, it’s a

strong financial hub in Asia. Third, Hong Kong

is probably key because China remains the world’s second largest economy.

You have to be close to China, that’s why.


EXHIBIT 7: Treasury centralization – Hong Kong vs Singapore

12

As basic cash management processes are increasingly automated, corporate treasury functions can devote more resources to dealing with financial risks. Tra-ditionally, the core concern for treasury units was to manage liquidity risk. That means ensuring that their companies meet day-to-day obligations.

But while that remains a priority, FX risk now tops the list of financial risks treasur-ers and CFOs are most concerned about. Nearly 60% of respondents cite risks stemming from FX markets among the top three financial risks, compared to 54% that state liquidity among the main challenges. Fifty-two percent pick financing risk among the top threats.

Indeed, 40% of corporates confirm their FX exposure negatively affected 2015 in-come statements. The number is highest in South and Southeast Asia where half of respondents note negative FX impacts on their income in the reporting currency.

Treasurers’ preoccupation with currency movements is not surprising. Corporate profitability hit by FX headwinds is a recurring theme. A negative translation impact into a company’s reporting currency could potentially cloud investors’ perception even as a company generates strong revenue.

iV. thE rEality today: trEasury risk managEmEnt


The theme is troubling for many equity analysts as well, the report finds. Over a third of respondents note that they faced an increased number of queries from analysts on their FX exposure over the past 24 months. Operational enterprise risks also drew strong attention from analysts for 29% of respondents and corpo-rate governance for 28% of corporates.

many companies are reviewing their hedging policies in the wake of global market turmoil and investor scrutiny. Interestingly, only one in ten corporates hedge 81% or more of their FX exposure despite increasing market volatility. Thirty-nine per-cent of them hedge 40% or less of their exposure, while 13% do not hedge any of it at all.

Whether or not to hedge has often been the subject of academic literature, but respondents cite none of the theoretical arguments against hedging as the reason for keeping their FX exposure unhedged. Instead, their reasons are much more pragmatic. Of corporates that chose not to hedge their exposure (through external markets and/or internal means), 42% note their companies simply do not have any corporate policy in place that gives guidance on what or how much of their ex-posure to hedge. As a result, treasury functions avoid it altogether. Twenty-seven percent of them believe their exposure is too small to warrant any hedging, while 8% of them say hedging instruments are just too costly.

Foreign exchange risk

Liquidity risk

Financing risk

Interest rate risk

Counterparty risk

Commodity risk

Compliance risk

Equity risk

Foreign exchange risk

Liquidity risk

Financing risk

Interest rate risk

Counterparty risk

Commodity risk

Compliance risk

Equity risk

0% 10% 20% 30% 40% 50% 60%

Second most important Third most important The most important Key:

50%

40%

49%

39% 13%

10%

45%

50% 5%36% 10%

54%


North Asiaex China

ChinaOverall

YesNoDon’t know

Key:


EXHIBIT 8: Most important financial risks to treasurers and CFOs

EXHIBIT 9: Negative P/L impact in 2015 due to FX exposure?

14

Among the respondents that hedge their FX exposure, plain vanilla forward con-tracts and swaps dominate the list of instruments they commonly employ. Over 70% of companies hedge their risk with these over-the-counter contracts. On the other hand, natural hedging strategies lag by some distance as a choice for respondents in hedging FX exposure. Only a third of corporates reduce risk by

34% 5% FX exposure

29% 6% Operational enterprise risks

28% 5% Corporate governance

24% 4% Tax compliance

24% 5% Internal audit

% of respondent

Analysts remarks on Respondents' Business. Overall

More Fewer

Key:

Hedging of FX exposure

Percentage of FX exposure hedged

42%

27%

8%

8%

4%

2%

No corporate policy

Exposure too small

Instruments too complex

Instruments too costly

Others

Lack of manpower

Reasons for not hedgingMost common hedging strategies

72% Forward contracts/swaps

33% Natural hedging

31% Money market hedge

26% Currency options

24% Risk shifting

8% Currency risk sharing

2% Currency collars

1% Others

Overall

China

North Asia ex China


SME

Mid-cap

13% 39% 19% 11% 18%

8% 45% 17% 6% 23%

19% 36% 15% 11% 20%

16% 26% 21% 5%

20% 40% 10% 6% 23%

7% 42% 29% 7% 15%

7% 34% 25% 24% 9%

13% 39% 19% 11% 18%

8% 45% 17% 6% 23%

19% 36% 15% 11% 20%

16% 32% 26% 21% 5%

20% 40% 10% 6% 23%

7% 42% 29% 7% 15%

7% 34% 25% 24% 9% Large

% of respondent

None 40% or less 41 to 80% 81% or more Does not apply

25%


FINaNCe dIreCTor For

a larGe loCal CorporaTe

Based IN INdoNesIa

(INdusTrIals)

We use forwards. I would also like to combine it with options, but there are not much options in Indonesia

EXHIBIT 10: Analyst questions on business areas over past 2 years

EXHIBIT 11: Hedging of FX exposure

15

aligning payments with receivables in tenor and currency. The same percentage of corporates use money market hedges (borrowing and investing cash to repli-cate forward contracts). Only one in four companies buy or sell currency option contracts.

Another source of risk originates from a company’s relations with buyers and suppliers. As supplier credit increasingly becomes an important financing tool for many cash-strapped companies in Asia, the risk of non-payment also increases. Companies therefore are taking a multi-pronged approach to credit risk manage-ment. At the moment, 67% of corporates review the financial statements of their business partners, while over half check their partners’ legal documents. Less than half assess the banks of their buyers and suppliers. That practice applies even though the issuing bank of the buyer is the entity responsible for payment to the supplier in the most common forms of trade finance. Sanctions and known-party lists are screened by 46% of corporates in their credit due diligence.

Volatility in FX markets is not the only risk corporates face. Indeed, emerging threats that no chart can visualize require new approaches to risk management. Chief among these is the risk of failing to notice a change in regulations relevant to corporate treasury. Keeping up with changes in regulations is one of the most pressing finance pain points for majority of respondents. global tax compliance and the OECD’s base erosion and profit shifting (BEPS) initiative cause headaches for corporates in the region. Currently, 63% of respondents rely on external con-sultants, auditors and/or law firms to track tax and regulatory developments. Near-ly half of them actively follow official announcements from regulatory bodies, and 44% update themselves through the press and networking events. Even if larger corporates have their own tax departments, treasury and finance staff still devote significant resources to gain a better understanding of taxation and accounting developments. Nearly 30% of treasury and finance units attend at least four tax or accounting seminars or webinars yearly.

more respondents are turning to technology, such as database solutions tailored to their entity’s location and industry, as a way to keep track of new regulations that affect their business. For instance, 49% of respondents are currently considering the use of technology to help them deal with BEPS and transfer pricing issues.


avp FINaNCe For a larGe

loCal CorporaTe Based IN

INdoNesIa

(Food & BeveraGe)

I get tax information from [our internal tax specialist and] I also subscribe to [an external provider]. It’s basically a question of my enthusiasm whether I want to read it

or not

16

46%

49%

54%

67%

Credit Risk Management. Overall Respondents

% of respondent

Financial statement analysis of business partner

Legal entity documentation checksof business partner

Assessment of business partner's banks

Screening of business partner details againstsanctions and known-party lists

Yes No Maybe

31% Global tax governance

& visibility

10% High volume of

invoice correction

80% Local tax compliance / Keeping up-to-date with tax regulations

38% Optimising supply chain management

23%

31%

10%

80%

38%

23% BEPS & transfer pricing

23% 41% 36% 23% 41% 36%

36% 16% 50% 35% 15% 50% 35%

40% 49% 11% 49% 40%

42% 41% 17% 42% 41% 17%

42% 41% 17% 45% 38% 17%

Yes Maybe No

% of respondent


EXHIBIT 12: Steps taken during credit risk assessment

EXHIBIT 13: Most pressing finance/treasury pain points

Use of technology in dealing with these issuesMost pressing finance/treasury pain points

EXHIBIT 14: Keeping track of regulations

63%

48%

44%

38%

26%

63%

48%

44%

38%

26%

4%

Receive updates from external consultants/auditors/law firms

Track announcements of regulatory bodies

Press reports & networking events

Receive updates from headquarter

Engage external database

Other

% of respondent

% of respondent

Keeping Track of Regulations. Overall

Q:

How does your team track tax and regulatory developments?

59% 1 to 3 times

a year

9% More than

7 times a year

19% 4 to 6 times

a year

13%Never

How many times a year do you attend seminars/webinars on tax oraccounting developments?

17

Some cynics associate corporates in Asia with processes that are largely manual and paper-intensive. In jest, sceptics describe Asian corporates as “STP” champi-ons – “straight-to-paper” corporations – instead of advocates of straight-through processing. In reality, just as retail payment systems in many Asian countries are arguably more advanced than in the West, corporate treasury functions have made great strides in the use of technology. Overall, nearly half (46%) of respondents have implemented a uniform enterprise resource planning (ERP) system across all their entities. ERP adoption is highest among large companies (65%) and those located in Taiwan, Hong Kong, Korea and Japan (59%). Seven percent have plans to introduce, standardize or link ERP systems across their group entities in the next six months.

Asian treasury functions are becoming increasingly sophisticated. As menial cash management tasks are automated, more time can be devoted on risk manage-ment. meanwhile, systems such as multi-dealer FX platforms (mDPs) can help treasury functions lower transaction costs.

Treasury management Systems (TmS) that are designed to manage FX and other market risks also are becoming more common in Asia. Twenty-eight percent of

V. thE rEality today: usE of tEchnology


respondents in Asia already use such systems while a further 8% plan to do so in the coming six months. Larger corporates, which typically face greater exposure to FX markets, display a higher propensity to invest in TmS.

FX trade and MDPs

With more than US$1.2 trillion in daily turnover, Asia-Pacific accounts for nearly a quarter of the global FX market according to the Bank of International Settlement’s latest triennial central bank survey. Assuming Asian corporates account for even 10% of that volume, the region’s treasury functions are initiating substantial flows each day to hedge payables and receivables, often over long tenors and in lightly-traded currencies. Looking at the methods respondents use to trade currencies, the survey finds that the majority (55%) rely on phone-based direct broking to initi-ate trades. Bank-proprietary online platforms are also popular for 48% of respond-ents. Voice broking is the method of choice for 67% of large corporates whose needs are more complex and therefore may require tailored, over-the-counter in-struments rather than standardised futures contracts and plain vanilla forwards.

meanwhile, mDPs such as Thomson Reuters’ FXall are used by 25% of corporates. Across Asia, acceptance and application of mDPs are strongest among South and Southeast Asian companies while Chinese firms are least familiar with them.

46% 41%

59%

36%

7% 8%

5%

12%

Overall China N.Asia ex China

S. & SE.Asia

28% 27% 30%

25%

8% 8% 6%

14% 46% 41%

59%

36%

7% 8%

5%

12%

28% 27% 30% 25%

8% 8% 6% 14%

Overall China N.Asia ex China

S. & SE.Asia

Yes Next 6 months

Enterprise Resource Planning System Treasury Management System

46% 37%

55%

65% 7%

7%

11%

6%

46% 37%

55% 65%

7%

7%

11% 6%

28% 31%

48% 8%

8%

9%

9%

28% 31% 48%

8% 8%

9%

9%

Overall SME Mid-cap Large Overall SME Mid-cap Large


By company turnover

% o

f re

spo

nd

ent

% o

f re

spo

nd

ent

20%

Key:



Based IN HoNG KoNG

(INdusTrIals)

[We use Thomson Reuters’ FXall for] a variety of reasons. We have an established credit trading facility. We always get the best price; we have access to multiple sources, that’s why. And also [because of] the credibility

of the system


a larGe loCal CorporaTe

Based IN ausTralIa

(MedIa)

[We don’t use MDPs] mainly because we don’t need to. We only deal with 2 or 3 banks for FX, so there’s no point going into the system like FXall or

Currenex or anything

EXHIBIT 15: Use of universal ERP systems and TMS in Asia

19

Group Treasurer For a larGe

loCal CorporaTe Based IN

HoNG KoNG

(uTIlITIes)

[We don’t use MDPs amid] concern over existing bank relationships. We treasure our bilateral relationships with the

banks


Based IN sINGapore

(HealTH)

I love it [Thomson Reuters’ FXall]. It’s multi-bank; it’s straight-through connected to my TMS. I’m a long-term user

55% 52%

57% 58%

48% 56%

46%

38%

25% 17%

22%

38%

Overall China North Asia ex China South and Southeast Asia

% o

f re

spo

nd

en

t


55%

44%

62% 67%

48% 45% 46% 54%

25%

14%

26%

41%

Overall SME Mid-cap Large

% o

f re

spo

nd

en

t

By company size

Phone-based broking Bank-proprietary web-based systems

Multi-dealer electronic platforms Key:

Users of mDPs list a number of benefits over voice-based broking and single deal-er platforms including more transparency in various banks’ pricing, efficient execu-tion, and savings on bid-ask spreads. Among the 57 respondents using mDPs, 47% use Thomson Reuters’ FXall platform, followed by 30% that use Bloomberg’s FXgO, and 16% that rely on FX Connect (16%). Nearly one in five treasury units use more than one platform.

Among corporates that do not use mDPs, the predominant reason is lack of famili-arity. Some cite costs as a major deterrent, while integration difficulties with exist-ing systems as well as concerns over bank relationships also feature.

Data providers such as Thomson Reuters provide a wealth of data apart from FX rates. Asked about their use of data providers, respondents reveal how often they turn to external providers for information other than FX. Weighted based on the frequency (daily, weekly, monthly), the survey finds that treasury functions in Asia utilise external data providers most for FX rates, followed by interest rates and macro-economic data. They also tap external providers for regulatory updates as well as for customer due diligence purposes. Credit default swap (CDS) spreads, which indicate default risk of major counterparties including banking partners, are seldom tracked.


EXHIBIT 16: Most common methods to trade FX

20

14% 7%

12%

16%

30%

47%

Preferred MDPs for current users

Th

om

son

Reu

ters

’ FX

all

Blo

om

ber

g’s

FX

GO

FX C

on

nec

t

360T

ICA

P’s

EB

S

Oth

ers

64% Not familiar with them

Too costly to set up

Would not integrate with existing systems

Concern over existing bank relationships

Lacking market makers

Others

13%

64%

9%

7%

2%

18% % of respondent

Reservations towards MDPs

Usage of multi-dealer electronic platforms

Of whichOf which

Of whichBecause

25%Using

8%Planning

to use

67%Not using


EXHIBIT 17: Use of multi-dealer platforms (MDPs)

EXHIBIT 18: Utility of external data providers for various data types

FX rates

Interest rates

Macro-economic data

Regulatory updates

Customer due diligence

CDS spreads

66%

63%

61%

61%

60%

59%

% of respondent

21

The People’s Bank of China (PBoC) gave banks a window guidance in January 2016 to put a halt on cross-border flows from renminbi-denominated pools. It instructed banks that help corporates run cross-border cash pooling to limit outflows from such structures so as to avoid a net deficit position at any time. As of may, the PBoC has not said when unrestricted two-way flows will again be permitted. For now, those limits vastly reduce the utility of cross-border cash pools and diminish the competitiveness of Shanghai and China at large as locations for regional and global corporate treasury centres. Without the cash pool, treasury functions won’t have the flexibility to deploy surplus cash their China business generates toward cash-deficit operations of the group elsewhere in Asia or the world.

Even though cross-border cash pooling is relatively new in China, the concept has quickly caught on among multinational companies. Cash pooling was introduced in the Shanghai (Pilot) Free Trade Zone (SFTZ) in January 2014 and subsequently ex-panded nationwide in November that year. Among the China-based respondents, 11% state that they have implemented some type of cross-border solution. most of them (64% overall, 80% of large corporates) implemented an automated struc-ture with a pool header that was not necessarily located in the SFTZ. Others either conducted regular intercompany loans or distributed dividends to their overseas

Vi. intErnationalization of chinEsE trEasury units


parents. While these methods replicate a cash pool structure, they are in fact more costly and cumbersome from legal and tax perspectives. China imposes a 10% withholding on dividends, for example.

The popularity of cross-border cash pooling structures, on the one hand, juxtaposed with the central bank’s restrictions on renminbi pools, on the other, highlights the reality that mainland China is not yet an ideal location for treasury centralization. While ambitions to create financial centres as important as Singapore or Hong

11% Yes

Maybe in next 6 months

11%

78% 80%

64%

6%

13% 16%

14%

7%

Large

Overall

Automated cross-border cash pooling via pool header elsewhere in mainland China

Regular intracompany loans in RMB to overseas entity outside of China

Regular dividend payments in RMB to overseas entity outside of China

Other

No plans

6%

Key:

7% 8%

85%

14%

13%

72%

Plan to set up a team overseas

Plan to expand our existing function overseas

No plan

Hong Kong

Singapore

Other

Elsewhere in Asia Pacific

Europe

North America

Australia 15%

25%

27%

42%

45%

46%

% of respondent

Primary purpose of international treasury expansions of China-based corporates

Hedging markets exposure

Funding overseas operations

Provide overseas trading partners with more convenient payment account

Build reputation overseas

Manage credit risk of overseas trading partners

Invest foreign currency deposits

Preferred location of overseas entityamong China-based corporates

% of respondent

3%

3%

6%

6%

61%

32%

13%

Overall Large

Key:


Based IN BeIjING

(TeleCoMMuNICaTIoNs)

We don’t want to be caught off guard. We have been caught off guard by a few incidents already like POBO and ROBO. We wanted to collect on behalf of all entities, but then we got entangled with the tax bureau on RMB contracts. If you didn’t mention the additional parties [included in the structure], you can’t

do it

EXHIBIT 19: Use of cross-border RMB cash pooling structures among China-based corporates

EXHIBIT 20: Plans among China-based corporates to set up overseas finance/treasury entity

23


14%

21%

23%

23%

25%

53%

% of respondent

Reasons for reconsideration to set up an overseas finance and treasury department. China Respondents

More overseas business

Tax incentives in offshore locations for treasury entities

Complete capital account liberalization in China

Greater interest rate differential with onshore China interest rates

Better advice from banks and other service providers

Presence of our preferred banking partner

Kong run high in China, mainland regulations still prevent corporates from setting up advanced cash and liquidity management tools.

A number of Chinese companies therefore are looking to centralize regional treas-ury functions outside of mainland China. Seven percent of China-based respond-ents plan to set up a finance and treasury unit abroad, while 8% are looking to expand their existing teams overseas. The proportions are larger at 14% and 13%, respectively, based on the responses of large Chinese corporates.

Hong Kong is the preferred location of 61% of Chinese corporates looking to set up treasury units outside the mainland, while Singapore is the choice of 32%. These regional treasury departments are expected to perform various tasks, primary of which is to hedge financial market exposure, according to 46% of respondents. The other functions include funding overseas operations and becoming invoice centres for businesses abroad.

going forward, increased overseas business could compel Chinese corporates to centralize treasury functions outside of the mainland. more than half of them will consider setting up treasury functions abroad if they had more exposure to foreign buyers and sellers. As Chinese companies expand overseas, fewer of them will continue to manage transactions, funding and hedging from within China. Proxim-ity to their headquarters is not the most important factor in their choice of location for treasury centres. What matters to them are access to liquid FX markets and freedom to deploy advanced liquidity management instruments – conditions that are currently unavailable in China.


EXHIBIT 21: Reasons to consider setting up a finance/treasury entity

24

How do you navigate the financial risks your company faces?

Rely on trusted answers from Thomson Reuters to keep you ahead in Corporate Treasury.

As you strive to strengthen working capital, secure liquidity, manage risk and simplify processes, you have a lot of challenging decisions to make. From capital markets data to deep market analysis, from unique views of credit risk to direct access to FX liquidity, we can help you seize the opportunity and win.

Visit: financial.tr.com/corporate-treasury

© 2016 Thomson Reuters. S035090 05/16.

C

M

Y

CM

MY

CY

CMY

K

Corporate Treasury Ad resize_01.pdf 1 3/6/16 11:43 am

Bracing for Volatility mBracing changE - The Asset · 2016-10-08 · Asian corporate treasury...

Documents

Transcript of Bracing for Volatility mBracing changE - The Asset · 2016-10-08 · Asian corporate treasury...