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GLOBAL TREASURY BRIEFINGJanuary/February 2015Expert Insight on Global Treasury and Finance

Any sense of new year optimism that Europeans might have felt over

prospects for the economy of the continent was soon tidied away with the Christmas decorations,

reports Peter Williams. Would the pall of gloom that sits over the continent be blown away by the

actions of central bankers or Greek voters?

Report from London: Continental Drift

Out of the European economic crisis comes a call for greater European financial integration. The ink was hardly dry on the deal to launch some serious quantitative easing into the eurozone at the end of January 2015 before European Central Bank policy-maker Yves Mersch was calling for a capital market union in the eurozone (not the European Union) that would allow a company based in one country to issue a bond in another.

The idea was floated after the ECB’s governing council met on January 22 and approved a plan to buy more than €1 trillion (US$1.12 trillion) of debt securities, including government bonds, with newly created money. Don’t worry, it won’t happen in one go: ECB president Mario Draghi announced that €60bn a month will go into financial markets through

2 | GLOBAL TREASURY BRIEFING | January/February 2015 Copyright © 2015 gtnews. All Rights Reserved www.gtnews.com

September 2016. The idea is to avoid the unknowns surrounding deflation.

Draghi was reported as saying that the majority on the governing council was so large that no vote was nec-essary. But there were some notable dissenters. German central-bank pres-ident Jens Weidmann didn’t vote in favour, according to the German press. While Bank of England Governor Mark Carney (not on the council of course as the UK still uses its own currency) did back the plan he warned at the World Economic Forum in Davos that excessive risk taking has the potential to disrupt financial markets.

promised even more. It is hard to think of any election in one European country in recent times which has been so closely followed across the whole continent. The result was just the one that the European technocrats and bureaucrats really didn’t want.

Democracy eh? Greece - which many Europeans like to see as the birth of democracy - told the rest of Europe what it could do with its austerity programme as a condition of the debt bailout. The far-left Syriza party won the general election on ‘an end to austerity now’ ticket and falling two short of an outright majority formed an anti-austerity governing coalition with the right-wing Greek Independents. Syriza leader Alexis Tsipras is set to renegotiate Greece’s €240bn (US$268bn) bailout.

The election results will dominate European politics for months and were top of the agenda at the January 26 meeting of European finance minis-ters. Germany has made it clear that it expects much-needed Greek structural reforms to continue. Both currency markets and stock markets seem to have taken the news from Greece - hardly a surprise - in their stride so far.

The troika of lenders that bailed out Greece - the EU, ECB, and International Monetary Fund - imposed big budgetary cuts and restructuring in return for the bailout money. The result for Greece has been a shrinking economy; high unemploy-ment, especially among the young; and genuine hardship. While a period of renegotiation is inevitable, bond default or Greece exiting the eurozone aren’t seen as high probabilities.

Whatever happens in Greece, Mersch says capital market integration would help spread risk across the currency union ensuring an efficient and location-independent allocation of financial resources. Economic shocks would be better absorbed because countries receive a certain amount of

protection from the private sectors. Large European corporates will surely applaud his idea. He claims that a cross-border securities transaction costs at least 10 times as much in Europe as in the US. Perhaps at the moment though, it is hard to imagine many German corporates deciding that the Greek corporate bond market is the place to be.

While corporates wait for easy access to bond markets of their choosing across Europe, who says there is no good news? How could we overlook the fact that on the 1 January 2015, the Baltic state of Lithuania and its 3m citizens became the 19th EU member state to adopt the euro? How’s that for an act of faith? The collapsing cost of oil

pulled eurozone consumer prices down by 0.2% in December 2014; a figure slightly worse than the 0.1% decline that was the consensus among economists.

While Germany has influence in Europe, the economic data was press-ing the central bankers to try some-thing. Eurozone prices were falling for the first time in more than five years. The collapsing cost of oil pulled euro-zone consumer prices down by 0.2% in December 2014; a figure slightly worse than the 0.1% decline that was the consensus among economists. The drop was even further in January; consumer prices fell 0.6% - the largest decline since July 2009. The deflation is expected to continue. But European QE plus the Swiss removing the franc’s cap against the euro sent the single currency plunging.

However, the ECB’s QE measure wasn’t the only game in Europe which threatened disruption. The outcome of the Greek election on January 25

“On behalf of the ECB’s governing council, I welcome this further enlargement of the euro area. Lithuania has taken exceptional measures in difficult times to reach its goal of joining the single currency.”

Yet even the official announcement could not hide the pall of gloom hanging over Europe this month. Draghi stated: “On behalf of the ECB’s governing council, I welcome this further enlargement of the euro area. Lithuania has taken exceptional measures in difficult times to reach its goal of joining the single currency.”

Thus there will be an additional seat at the table contributing to what is next for QE and Greek bailouts. The upshot is, with 2015 barely started, Europe has set off on two courses - QE and Greek bailout talks - and in both cases the outcome is entirely unpredictable and uncertain.


GLOBAL TREASURY [email protected]

EDITORAndrew Deichler | [email protected]

MANAGING DIRECTORElizabeth Johns | [email protected]

PUBLICATIONS MANAGERAmy Cooley | [email protected]

EDITORIAL ADVISORY BOARDASIA PACIFICCraig Busch, Group Treasurer, Worley ParsonsSue Lee, Assistant Treasurer, Danfoss A/S Jason Wang, Regional Treasurer Asia-Pacific

LATIN AMERICACarlos Negrao, Manager Corporate Treasury and Contract Management, BT Global Services

MIDDLE EASTDaniele Vecchi, Senior Vice President, Head of Group Treasury, Majid Al Futtaim Group

NORTH AMERICAMichael Connolly, Vice President, Treasurer,Tiffany & CoRuud Roggekamp, Assistant Treasurer Corporate Finance & Banking, The Boeing CompanyRey Semonia, Financial AdvisorLen Thompson, Cash Manager, Fike CorporationBrad Gilbert, Treasury Manager, Vista Print

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From the EditorAre Europe’s Economic Stars Fading?Welcome to the first 2015 edition of Global Treasury Briefing. As always, our remit over the next year is to provide insights into the top issues affecting financial professionals around the world. There will be a particular emphasis on Europe however, which has already provided plenty of excitement in the first weeks of the new year. The European Union (EU) is in a state of upheaval, what with the European Central Bank (ECB) launching its €60bn-per-month bond-buying programme, and talk resurfacing of Greece leaving the eurozone as its take-no-prisoners new leader takes office. As Peter Williams explores in this issue of GTB, the outlook appears fairly bleak right now - so much so that even the positive announcement of Lithuania joining the EU this month was met with a sombre reaction from ECB President Mario Draghi.

Of course, it’s not all “doom and gloom” in Europe - as evidenced by this issue’s story on the continent’s twin economic powerhouses of Germany and Switzerland. Still, the slowdown in growth Germany experienced in 2014 and Switzerland’s curious decision to abandon its cap against the euro have fuelled speculation that these two nations’ days of leading the pack could be numbered. In GTB’s central focus this month, multiple contributors look at the trials and tribulations that could cause Europe’s economic stars to fall from grace, and how that could impact corporate treasurers operating in both regions. Focuses later in the year include how corporates in the eurozone’s more vulnerable members have come through tough times and a review of France, where reigniting economic growth is proving a challenge.

With the good times evidently not rolling in much of the world, the economic upturn in the US provides some cause for optimism in 2015. Its displacement as the world’s single largest economy might not occur quite as early as some analysts expect. As outlined on page 22, the most recent survey of US corporate treasurers by the Association for Financial Professionals (parent of gtnews) and Capital One Bank confirms that the US economy continues to enjoy a healthy rate of growth.

Elsewhere in this issue, we look at some corporate treasury predictions for 2015, explore the road ahead for Islamic finance, and look back on the Russian rouble’s rollercoaster year. Whatever the year ahead brings, you can count on both GTB and gtnews to bring you all the key insights for treasury and finance.

Kind regards,Andrew DeichlerEditor, Global Treasury [email protected]

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IN T

HIS

ISSU

E

1 Report from London: Continental Drift

4 Germany and Switzerland: Currency Challenges for Treasurers

7 Europe’s Economic Powerhouses: In for a Bumpy Ride

10 Growth Tails Off for Germany’s Payment Card Business

12 Focus on Switzerland: Harmonising Payment Formats

14 What’s in Store for Corporate Treasury in 2015?

16 The Path Ahead for Islamic Finance in Treasury

19 Why Corporates Can’t Afford to Sleep on the Rouble Crisis

22 Survey: US Business Plan to Spend Cash, Treasurers Say


> FOCUS ON EUROPE

While the rest of the world has been a hotbed of financial and economic volatility in recent years, Germany and Switzerland have been rare outposts of stability. Secure governments have nurtured strong economies - the envy of most other European neighbours - and business-friendly policies have seen multinationals happy to make their home in either location, with Switzerland a particular favourite. As a result the treasury profession in the two countries quietly got on with providing good work and good advice to their corporates, enjoying a greater profile and fulfilling an important professional role.

However, clouds have been gathering on the horizon: Germany’s struggles with both the eurozone’s more distressed member countries and the euro have been well documented. What was less visible to the rest of the world was a hidden shadow over Switzerland: the strength of its currency. Without prior warning, on January 15 the Swiss National Bank gave up the Canute-like struggle of trying to hold down the Swiss franc (CHF) against the euro, via a three year cap holding it at €0.83. Almost immediately the currency soared to Alpine-like peaks.

Even before the crisis broke, the CHF was often the underlying theme. Global Treasury Briefing spoke with Pascal Frey, just as the news on the newly-feisty franc was reaching the press. Frey is head of group treasury of Landis+Gyr AG, a Swiss-based world leader in smart meters with a US$1.5bn annual turnover and operations in 30 countries.

“FX is quite volatile,” he notes. “Landis+Gyr set up a FX hedging policy, which we are in the process of implementing. What hap-pened [on January 15] showed how important the role of treasury is within the company to ensure that we don’t get caught in this type of action. Nevertheless a company should anticipate anything such as volatility on the FX market - this is our role, particularly in hedging strategy.”

Aniket Kulkani, director in treasury and commodity trading at PwC, agrees that FX hedging has increasingly become important for Swiss companies, as trade with the eurozone area is so key their com-mercial fortunes. “In the past treasurers were always hedging their currency risk but it was reactive,” says Kulkani. “They used to get currency forecast and exposure from the business and then treasury used to go out and hedge in the market.

Germany and Switzerland: Currency Challenges for TreasurersAlthough the economies of Germany and Switzerland have been far steadier than many of their European counterparts, treasurers for enterprises operating in both nations could be in for serious struggles this year, notes Peter Williams.


“In the past year treasury has been playing a more active role in currency risk management. Treasurers are actively looking out for exposure in the business. By looking at forecast and the business flows, the payables and the receivables and going out in the market and hedging them they are taking more control of the exposures.” That strategy should feed through to the corporate bottom line fairly quickly.

With so much at stake, FX volatility will keep the spotlight trained on the treasury function. Markus Bieri, head of corpo-rate finance at Zurich-based banking software specialist Avaloq Evolution AG, says: “The board nowadays is very much aware of the treasury function. It wants to receive regular updates in the field of cash and financing. These are the hot topics that board members are very much interested in - not only in the short term run but in the mid- to long-term run, which means three to five years. They want to have some comfort that the company is well financed over a period of time.”

Avaloq’s products go out to financial institutions around the world. Bieri says that the board’s cash awareness can be traced back to the 2008-09 global crisis, when boards were asking where the cash was and could they access it? “All corporates started to build up cash pooling facilities just to get access to the group cash,” he adds. “The aim was always to keep the trapped cash on the level as low as possible, especially for those entering a market like China. That was always the hot topic: how do you get the cash out of China. Can it be done - even if the cash is in China, can we get access to at least some of it?”

Liquidity to the ForeThat focus on cash within Switzerland and Germany com-

panies is a strong, common theme. Kulkani expects 2015 to be the year of liquidity forecasting, noting that while the topic had been steadily moving up the corporate agenda since the crisis it has recently become even more important: “Companies are looking at options to generate liquidity. In the past the options were going to the debt market and so on. Now treasury is optimising working capital in order to generate liquidity. But that goes back to the fact that treasury is becoming more active and getting integrated with the business.”

Frey’s company offers an example of the thought and the sophistication that is being applied. “For cash flow, Landis+Gyr uses a 12 month rolling forecast by currency, giving a global overview by entity and by currency,” he reports. “This enables us to have an idea on what action should be taken, especially what action on FX hedging that needs to be taken.”

The forecast for the 15 currencies that Landis+Gyr deals in is produced using a treasury management system (TMS) - the company is one of a growing number to have abandoned note spreadsheets. It is made available to the business entity, as well as treasury, and can be viewed by region.

With such an approach it would be easy to think treasury has always been as it is today, but not so. Mike Tucker of MR

Recruitment, who is based south of Tolouse in France near the Pyrenees, has worked in the treasury recruitment market, especially Switzerland, for the past 10 years and witnessed significant changes within the market over that time.

He reports: “Just before the new millennium, Swiss treasury operations were small functions at the back of headquarters. With the government incentivising corporates to relocate their head office functions to the country, the demand for treasury professionals grew. The home-grown supply and existing talent pool could not cope and, in response, treasurers were recruited from the US, the UK and elsewhere.”

The market cooled between 2005 and 2010, partly as a result of a slowing economy, changing government policy on immigration and treasurers remaining in their post. The past five years has seen activity revive as more treasurers move on and Tucker says the treasury department role has changed and its profile has risen. “While there is still a focus on day-to-day risk management and a prudent approach, more doors are opening and treasurers are becoming part of project and transformation teams,” he reports. “Treasury is in the fabric of the business.”

Germany and ‘Industry 4.0’As external events have an impact the transition is likely to

continue. Darioush Zirakzadeh, a director in PwC’s Lausanne-based advisory practice, says: “There has certainly been a reduction in the number of companies coming into Switzerland since July 2011 because of the strength of the CHF against the US dollar and the euro.” For those companies already, there has been “a lot activity around acquisitions, mergers and expansion of bases in Switzerland,” he adds.

Switzerland’s neighbour, Germany, could be forgiven for feel-ing relief that the spotlight in the opening weeks of 2015 has been as much on the CHF as the euro, the currency used by Germany and 18 other member of the European Union (EU).

Yet even with issues such as meagre growth (predicted by the Bundesbank in 2014 to be 1.9% but looking like ending up at 1.4%) and ongoing euro tribulations, Germany remains dominant in Europe so in many ways. Thomas Schrader, head of the corporate treasury solutions business unit at PwC says that there has been a turnaround in the German economy since the start of the century. A contributory factor was


> FOCUS ON EUROPE

companies strengthening their capital base, enabling them to reboot quickly from the 2008-09 crisis.

Speaking to GTB in late December, Schrader commented: “2015 is uncertain but we are still in a good shape and further growth is anticipated by all the economists. As a result of that confidence German companies are not facing any difficulties in raising capital.”

There are some challenges nonetheless: “We are more concerned about the uncertainties in Asia. We are an export nation, so we need stable economies across the world. Therefore we look more to Asia and the economic situation there and in other European countries.”

Schrader adds Germany continues to look to the future with Industry 4.0, the government’s hi-tech strategy that first saw light in 2011 and which officially launched two years ago. Industry 4.0 has the ambition of being Germany’s next industrial revolution - nothing less than the digitisation of the whole value chain of the corporate, an idea which is already underway in sectors such as automotive.

Schrader identifies the hot topics within German treasury as global transaction banking, cashflow forecasting, treasury reporting and regulation. In the case of the last item, he notes the trial unique to German corporates of facing a mandatory European Market Infrastructure Regulation (EMIR) compliance audit. He adds that Industry 4.0 is a

prime example of why treasurers should be good at taking the long view and not be easily swayed or dismayed by newspaper headlines.

Magnus Lind, co-founder of the Treasury Peer Network, which has strong membership in both Germany and Switzerland, said: “In a low-tax, business-friendly environ-ment, of course both countries do well.” That situation is unlikely to change in the near term. He also offers praise for the attitude of the treasury profession.

“Treasurers in Germany and Switzerland are open to input from the global community,” says Lind. “They don’t just rely on their national peers; they also want international peer input and are very interested in elements such as bench-marking.” He points in particular to strengths over organising and processes, which have become so important for corpo-rates in the post-crisis period. Both he and Schrader cite in particular treasurers’ contribution to the Twist standard on electronic payment standards and their efforts to progress the issues of automating and reconciling bank billings.

The problems should not be exaggerated as both Germany and Switzerland enjoy an advantageous position in comparison to other eurozone member states. Nonetheless, troubling questions over the future persist and with so much uncertainty for their corporates it seems certain that in the region treasur-ers and their skills are set to remain in high demand.

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Although Germany is accepted as Europe’s economic powerhouse, those days may be coming to an end notes Edith Rigler. Similarly, Switzerland also suddenly finds itself on a tough road. Corporate treasurers operating in these nations must consider the risks.

> GERMANY AND SWITZERLAND OUTLOOK

GERMANYThere is no shortage of reasons that support the idea that Germany’s economy will continue to enjoy a smooth passage in 2015 and beyond. Firstly, the German budget will be slightly in surplus. Unlike some other eurozone countries, such as Greece, there is little threat that there will be major cutbacks to impact on social services and state pensions. Additionally, German interest rates are likely to remain extremely low, thus stimulating invest-ment as a result of the low cost of borrowing.

Germany’s economy benefits from a well-trained and highly productive labour force. Through the country’s dual education system (Berufsschulsystem) youth unem-ployment is kept in check. Couple that with good labour

Europe´s Economic Powerhouses: In for a Bumpy Ride?

relations (Mitbestimmung) and the result is a stable social climate.

While other European countries have lost jobs since the 2008 global financial crisis and are challenged by their unemployment rates, employment in Germany is at an all-time high: according to Bundesbank statistics, the German unemployment rate remained stable in 2014, fluctuating between 6.6 and 6.8%. As of January 2015 the rate stands at 6.4%, the lowest since 1991 and a figure that is the envy of many other countries within the European Union (EU).

Despite these positive features, there are clouds on the horizon that threaten to put an end to the German economy’s smooth sailing.


> GERMANY AND SWITZERLAND OUTLOOK

• Firstly, both the stability of the euro and the EU itself are uncertain. Following the recent elections in Greece, the question of whether the country should or could remain in the eurozone arises anew. In addition, the UK government

plans to hold a referendum on whether the country should leave the EU entirely.

• Secondly, we are likely to see continued weaknesses in several key export markets, not only among Germany’s EU trading partners, but especially in Russia and the Ukraine. A potential collapse of the Russian economy threatens to have a significantly negative impact on the financial services and industrial sectors in Germany. Additionally, after many years of double-digit growth, the economy in China has been slowing down. Again, this is not good news for Germany’s exporters.

• An economy depends critically the availability of labour. As mentioned above, Germany thrives based on its skilled labour force, but the country is faced with demographic challenges as well. The population is ageing, early retirement is popular, and unless migration policies stimu-late the influx of skilled workers from outside Germany, there will be a labour shortage in the years to come.

2015: Another Difficult Year?This time last year, forecasts were

predicting that Germany would enjoy growth of 2% in 2014. The end result fell short - indeed industrial output actually fell in both the second and third quarters. Nonetheless, Germany did not fall into recession and overall, the economy grew by 1.3% in 2014.

This bumpy ride over the past year has shaped consumer, corporate and investor expectations for 2015. Consumers ended 2014 in confident mood, thanks to Germany’s strong employment market (91% of those surveyed said they felt secure in their job). When asked, consumers

expressed confidence that the German economy would continue to expand. More concretely, consumers spent more at Christmas: retail sales surged in the final weeks of the year, giving a strong impetus to 2015.

Corporates are cautiously optimistic for the year ahead. Large firms such as Deutsche Post, SAP, Siemens and Merck expect moderate growth, led by strong export performance particularly to the US. The automotive industry - Germany´s premier industry which boasts handling one-third of global automotive research and development - is even more upbeat. This confidence should lead to further increases in employment.

According to the Ifo-Institut, an economic research institute which publishes a periodic employment barometer, German companies intend to recruit more staff in 2015. These plans even extend to mid-sized companies: although they are not as optimistic as larger companies, about one in three of the mid-sized companies surveyed expects to recruit staff and increase investment in 2015 and beyond.

Investors continue to find Germany attractive, especially relative to other eurozone countries. The investor confidence index ended 2014 on a high note. Close to half of the investors sur-veyed expect that Germany will become an even more attractive business location, while only 13% expect it to deteriorate. However, nearly one in five survey respondents said that in order to keep attracting investors, Germany needs to focus on research, develop-ment, technology and innovation. This is the overriding priority, followed by education and training.

So what are the forecasts for 2015 and beyond? In numeric terms, official estimates of growth range from 1% by the German government´s expert council (Sachverständigenrat) to 1.5% by the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD). Some private consultancies are a shade more bullish and forecast growth of 1.6%.

However, the ride ahead may well be bumpy and the relatively smooth sailing of recent years could be over. Yet on balance, the strengths of the German economy will allow it to weather any storms that the dark clouds might contain.

SWITZERLANDOn January 15 the Swiss National Bank (SNB) abandoned the link to the euro and let the Swiss franc (CHF) float freely. On foreign exchange markets, the currency promptly rocketed upwards.

Whether the SNB´s decision was the right measure or not is being debated widely in the markets and will certainly be on the agenda of the 2015 meeting of the World Economic Forum (WEF) in the Swiss resort of Davos, which starts on January 21. The SNB’s currency intervention has stunned market partic-ipants and led to significant losses, not only in the Swiss stock market but for banks and brokers.

What happened? In 2011 the SNB had introduced a cap on the exchange rate of the CHF to the euro (EUR), so that one euro cost at least CHF 1.20. In effect, the SNB had pegged the CHF to the EUR. However, on January 15

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the SNB removed the peg, offering only a limited explanation for its decision.

At the time of writing, one euro costs CHF 0.99. From the Swiss perspective, a franc now buys 20% more than it did a month ago. Conversely, from a euro (or US dollar) perspective that Swiss holiday, or Swiss watch, now costs 20% more. Suddenly, the cost everything in an already very expensive country has risen even further.

The Immediate Impact of a Drastic Measure

The stronger franc is already hurting tourism: while the past few years have already seen a drop in visitors, Switzerland has now become unaffordable for many. Although the Swiss Alps are spectacular, so are the scenery and the skiing in Austria, Italy, France and Germany. Over recent weeks, holidaymakers have already cancelled planned trips to Switzerland and chosen other ski resorts outside Switzerland. In addi-tion, the Swiss themselves are likely to book their winter holidays abroad.

Retail sales will certainly feel the pinch. A significant share of the Swiss population lives close to the borders with neighbouring countries. Not surprisingly, many Swiss are taking short trips into the eurozone to shop: parking lots at German, French, Italian or Austrian border towns are full with Swiss cars and the Swiss rail service had to add extra trains to cater to the increased “border tourism”. In addi-tion, Swiss banks reported that their cash machines ran out of euros the day after the SNB´s announcement.

The industrial sector is starting to feel the impact: although Swiss pharmaceuticals, speciality chemicals, machinery, chocolates and luxury goods such as watches are all top of the line, it is clear to customers that these goods have not suddenly become 20% better. The share prices of Swiss companies have fallen sharply, partic-ularly for those firms whose production costs are in Swiss francs, but whose revenues are in EUR or USD.

Banks have also seen their share prices drop. Some have already incurred sizable losses on their FX positions; all will potentially suffer higher credit losses if the appre-ciation of the franc undercuts the ability of borrowers to meet their loan payments. Even private banks may suffer: will customers readily accept a price increase of 20% to continue having their assets managed from Switzerland, if a comparable service is available in another financial centre such as Singapore or Hong Kong? Some banks fear that their wealthiest clients will be attracted to USD.

the Swiss have been coping with an appreciating currency for decades. To do so, Switzerland has been able to rely on multiple positive factors: a stable political environment, low inflation, low interest rates, low budget deficits, low government debt, low tax rates, a highly trained labour force, excellent transport and communications infrastructure and an open attitude toward new ideas and new people.

All these factors have contributed to a steady growth in productivity as well as to a growth in employment. That, in turn, has made Switzerland an attractive location for many

So in the short run, thanks to the stronger franc, fewer tourists will come to Switzerland, fewer exports will go out of Switzerland and fewer assets will be managed from Switzerland. All this will adversely affect growth in 2015 and 2016. Early estimates are that the coun-try’s economic growth in 2015 will now come in at 0.5% - previously, economists had expected growth to be as high as 2%. For 2016, growth predictions have been trimmed to 1.1%, down from 1.7%.

The Longer-term OutlookHowever, the stronger franc need not

lead to long-term stagnation; indeed,

international firms in industry and finance - many large multinationals have moved their global or European headquarters to Switzerland. When countries are compared for compet-itiveness, Switzerland consistently ranks at or very near the top of the list. Indeed, the country ranked first in the WEF’s ‘Global Competitiveness Survey’ for 2014-15.

The stronger franc is unlikely to eliminate these success factors. However, whether these factors will be strong enough to outweigh the adverse effects of the unpegged currency remains to be seen.

Swiss National Bank, Zurich


Frankfurt-based PaySys Consultancy, the German member of the European Payments Consulting Association (EPCA), reports that for 2013 the sales transaction volume gener-ated by payment cards in Germany increased by €15.6bn to €292bn, a rise of 5.6%, and almost certainly surpassed the €300bn level last year.

However, the increases for 2013 and 2014 are down on the double-digit rises of previous years.

Card market statistics for Germany covering the period 2004 to 2013 issued by PaySys show the main driver of growth to be the German domestic debit card system, aka

> PAYMENTS – GERMANY

the ‘ec-card’, with a 9.2% increase, while the three major credit cards of MasterCard, Visa and Amex recorded a 3.4% increase. Credit card transactions now represent 23% of all card transactions in Germany.

In 2013 debit card transactions with the ELV (Elektronisches Lastschriftverfahren) system - an elec-tronic direct debit payment method supported by German banks - were flat, with annual volume of €63.5bn after a lengthy period of growth. In some retail sectors, this signature-based method has been replaced by personal identification number (PIN)-based electronic cash.

Growth Tails Off for Germany’s Payment Card Business

Sales transaction volumes for payment cards in Germany have doubled over 10 years, from €150bn annually to over €300bn, but growth momentum now appears to be flagging, explains Graham Buck.


Early figures for 2014 suggest that this growth plateau for ELV may only have been a temporary blip. “The future of the ELV depends in particular on the long-term price developments in the electronic cash system,” comments PaySys.

“As required by the Bundeskartellamt (Germany’s com-petition authority) the abolition of the uniform merchant service charge for ec cash (from November 2014 onwards) has already led to price reductions for merchants.”

The firm expects the debit card interchange fee cap of 0.2% proposed by the EU Commission and soon to be adopted to result in a further reduction of the ec cash merchant fees over the next few years.

“Despite the resistance of the German banking industry, the German ec cash system will fall according to the Commission under the new interchange fee regulation [IFR],” says PaySys. “Thus, the popular German ELV will lose its appeal.”

The firm adds that the IFR will have a much greater impact on Germany’s credit card market, with the proposed fee cap of 0.3% resulting in a significant shift of the overall system cost from the acceptance to the card issuer side.

Shifting CostsReducing the interchange revenues of German credit

institutions, which issue MasterCard and Visa will amount to an annual loss of revenue of €340m based on 2013 figures, equivalent to about €11 per card. Banks are likely to compensate for these losses by introducing additional cardholder fees.

“It is an interesting question how this overall cost shifting

from the merchant to the cardholder side will affect the entire credit card business,” the firm comments. “Until now, experience in other countries show that such a re-adjustment of the cost burden on both sides of the market has no negative impact on the card sales volumes.

“The active card users have a lower price elasticity than expected. They are willing to pay, where appropriate, a higher price for their much-used credit card.”

The firm notes that more than a third (34.5%) of consumer spending in Germany is now represented by card payments, against a percentage of around 20% a decade ago. Nonetheless, there remains significant further potential. Card business related to gross domestic product (GDP) stood at 10.7% for Germany in 2013 - still well below the European average of 18.2%.

PaySys comments that comparing Germany’s card figures to those of its European neighbours is complicated by the fact that the European Central Bank (ECB) estimates annual card volume to be only €194bn, rather than the 2013 total of €292bn recorded by the firm.

The discrepancy of nearly €100bn is explained by the fact that the ECB’s figure for Germany is based on reports from the issuing banks. It omits turnover both from foreign cards and private label cards issued by high street and petrol retailers. In addition the ECB statistics only register ELV turnover partially, with the rest of these transactions added under direct debit.

Further information on PaySys Consultancy’s survey may be accessed at www.paysys.de.

plc (retail and petrol)

debit card (ELV)

debit card (ec cash, Maestro and V PAY)

credit card

card spending in the country

* Figures in €bn and represent domestic and foreign cardholders.

**plc = private label cards, including store cards and fuel cards.

Source: PaySys Consultancy GmbH

2005 2006 2007 2008 2009 2010 2011 2012 2013

150,3168,8

187,3205,5

210,9

233,0

258,2

276,6292,2

63,5

144,2

16,9

67,5

Card sales volumes in Germany 2005-2013:


> PAYMENTS – SWITZERLAND

Switzerland is soon to begin harmonising its national payment formats, which will bring with it some key issues that corporate treasurers should keep in mind, explain Thomas Keim and Daniel Neubauer.

In the coming years, Switzerland’s companies will have to switch to the internationally recognised ISO 20022 eXtensible markup language (XML) formats - even in case of national payments in Swiss francs (CHF). This article considers what the challenges will be and how companies can best approach this significant migration project.

Switzerland and European PaymentsSwitzerland is one of the 34 member

states of the single euro payments area (SEPA). Although Switzerland is

Harmonising Swiss Domestic Payments

Additionally, national payments within Switzerland will be harmonised in the future in order to ensure cost-efficient straight-through process-ing (STP) of domestic payments and to reduce manual processes. Currently, there are more than 10 different payment formats and standards and around seven different document types, which will be replaced by the standardised ISO 20022 XML format and a single new document type in the coming years.

neither part of the eurozone nor the European Economic Area (EEA), it is an equal member of SEPA and can therefore make full use of the stan-dardised SEPA formats.

As from 2016, Swiss companies that receive or make payments in euros will be obliged, under the SEPA regulation, to deploy the SEPA formats and provide international bank account numbers (IBAN) instead of legacy bank account numbers. Those companies that will be affected by it, will thus have to act to ensure they adapt their systems accordingly and in time.

Focus on Switzerland: Harmonising Payment Formats


With this harmonisation process, Switzerland will generate key requisites for a further automation of domestic payments once the European payments become available.

Need for ActionThose companies that already effect

payments in the SEPA XML format - or even the internationally recognised ISO 20022 XML format - are well prepared for the future migration of the Swiss payment formats to XML. They should, therefore, be able to adapt the formats comparatively quickly to meet the Swiss regulations.

Companies, however, that have so far focused mainly on the domestic market will probably have to acquaint them-selves for the first time with IBAN and XML. Similar to the SEPA migration it will be paramount for them to analyse which corporate departments will be affected by the changes. The task should not be underestimated, as such migration projects are often quite com-prehensive and time consuming - as evidenced by the Hanse Orga Group’s own experience in the numerous migra-tion projects it supported in the run-up to the SEPA deadline. It is therefore recommended that companies prepare in good time for such a migration project and start the necessary project steps as early as possible.

Some Key Steps for a Successful XML Migration:

• Analysis of the status quo:

- Which corporate departments will be affected by changing formats (accounting, sales and contract management for example.)

- When will my bank(s) provide the new formats?

- Is my software capable of process-ing the new formats and standards or might it be advisable to switch

to a new solution that already incorporates the new formats? Is there an opportunity to optimise my payments further, if the soft-ware can operate independently of banks and enterprise resource planning (ERP) systems and if it delivers features to help tap the full automation potential of ISO 20022 XML formats?

• Get in touch with your bank(s) and software vendors.

• Elaborate a catalogue of measures and milestones.

• Migrate the systems and carry out tests.

In contrast to SEPA, Switzerland set clear deadlines early on to allow for a longer transition period and to provide banks and companies with clear orientation right from the start. Around one or two years prior to the respective deadlines, the new formats can be used in parallel to legacy formats and systems. This is a highly sensible approach, as it will provide sufficient time for the migration and also for testing the new formats.

ConclusionThe harmonisation of payment

formats and standards delivers significant advantages, as real STP is enabled and as it also helps simplify the setting up of payment factories. As a great variety of payment formats still prevail in Switzerland, the migra-tion of these national formats to the internationally recognized ISO 20022 XML formats will deliver significant rises in terms of automation and efficiency. In order to conduct and complete the necessary migration projects, it is advisable for companies to resort to experienced consultants who can contribute best-practice expertise and thus help speed up the migration project.

Thomas Keim and Daniel Neubauer are senior consultants with Hanse Orga Group

For the migration to the new formats, deadlines were fixed at an early stage to allow sufficient preparation time for banks and companies. For example, for credit transfers a deadline has been fixed for the second quarter of 2018. The legacy direct debit schemes will no longer be supported as from the fourth quarter of 2018, and for docu-ment types the new type will become mandatory as of the third quarter of 2020. The currently-used payment slips Einzahlungsschein (ES) and Einzahlungsschein mit Referenznummer (ESR) will be replaced by this single new type. The new document will only process IBAN, and the new integrated data code will contain all relevant payment information.


> 2015 FORECAST

What’s in Store for Corporate Treasury in

From brand-crushing cyberattacks, to regulatory deadline slips, to age-old problems, 2014 was consistent in its inconsistency. Bob Stark selects what

will likely be the major headaches for CFOs and treasurers in 2015.

2015?Bitcoin

Is 2015 the year that bitcoin becomes a legitimate currency for treasury to manage? Probably not. However, 2015 is the year where virtual currencies become a larger part of the conversation for more retailers. This likely translates to the growth of online marketplaces and virtual exchanges to facilitate the exchange of bitcoins to traditional currencies. Greater liquidity will be needed for bitcoins and other virtual currencies to be more readily adopted by corporations looking to appeal to what is one of the more interesting trends. Expect bitcoins to be easier to acquire, transact and convert in 2015.


‘subjective’, suggesting the full impact of both regulations is still to be felt in 2015. In the US, the Foreign Account Tax Compliance Act (FATCA) was introduced, which could still significantly shape cash and payment management practices for American companies doing business in emerging markets - and increasing the attractiveness of shifting to the local payment delivery channels previously discussed. We also saw guidance delivered by the US Securities and Exchange Commission (SEC) on money market funds, introducing both floating net asset value (NAV) and the potential application of redemption fees and gates. Although we are already hearing the complaints by corporate cash managers who value liquidity more than increased cash returns, the impact of these changes will become more apparent when interest rates rise.

CybercrimeUnfortunately, it is far too likely that cybercrime and

fraud will continue to increase in 2015. Fraudsters will come up with more creative attempts to access sensitive data and exploit exposures in poorly designed workflows. Implementation of strong password controls, including mul-tiple layering of dual-factor authentication and IP filtering or VPN tunnels will move from best practice to standard practice to increase defences. It is quite possible in 2015 that cybercrime is the straw that breaks Excel’s back as a treasury workflow tool, due to spreadsheets’ inherent lack of controls and absence of audit trails.

ChinaIn 2014 we saw one of the largest treasury advancements

for enterprises doing business in China since the easing of ren-minbi (RMB) trading restrictions through the late 2000s. The Shanghai Free Trade Zone (FTZ) was technically introduced in September 2013, but the key details were made available this past spring which allowed banks and corporates to begin planning for onshore and offshore RMB pooling. The increase in RMB liquidity will allow corporates to access excess RMB cash reserves, which increases the attractiveness of investing further in China. Although much work remains, 2015 is likely to see an expansion of the Shanghai FTZ as well as increased implementation of cross-border RMB pooling as corporate treasurers get comfortable with the new opportunities to deploy and repatriate cash in China.

While this list may not be exhaustive, I do feel that it aligns well with what keeps treasurers up at night - how to be on the front foot with the CFO, CEO and the board, rather than the back foot - being able to confidently state “we should do this” rather than “we should have done this.”

All the best for the New Year and here’s to hoping that 2015 is the year of the treasurer.

Local PaymentsWe saw two different catalysts in 2014 that drove treasur-

ers to consider different payment strategies to support global cash deployment. One was the single euro payment area (SEPA), which standardised the format for credit transfers and direct debit within the EU. The other is what one could call the ‘sharing economy effect’, which is when compa-nies (particularly those who offer online ride-sharing and room-sharing services) who grow significantly strive to find new methods to make cost effective low value, high volume payments. As these brands continue to grow, their margins are impacted by how cost effectively payments can be made to partner drivers. What we expect to see in 2015 is not only more companies reorganising payment resources and infrastructure to make inexpensive locally-based payments, but also organisations evaluating non-bank payment methods as an alternative to traditional bank delivery channels.

eBAMThe wish of complete electronic bank account manage-

ment (eBAM) will not be fulfilled in 2015. But we may well get closer, building on small steps that were made in 2014. This past year saw a few select banks implement partial electronic management of bank account changes in their proprietary bank portals. In 2015, we expect rollout of further workflows and - hopefully - strong statements on how banks plan to interact with third-party systems such as treasury management systems (TMS), enterprise resource planning (ERP) and service bureaus. This interactivity is actually the critical point for an eBAM success because what good is electronic bank management if you are stuck logging into each of your dozens of bank portals. Centralised communication is the innovation we all seek, and hopefully we get just a little bit closer in 2015.

Higher interest ratesThe US economy is, by many measures, recovering well,

which means that an increase in interest rates to counteract inflation is almost a certainty in 2015. While a change to fiscal policy will have a multitude of effects, corporate treasurers should expect to incur higher borrowing costs while at the same time seeing the opportunity to earn higher returns on excess cash. What will be most interesting on the investment side is how corporates will deploy cash, given the impending regulatory changes to money market funds and the decreasing attractiveness of earnings credit rates (especially in light of changes banks need to make to prepare for Basel III compliance).

RegulationThe past year has seen a variety of regulations that have

relevant impact to corporates both within Europe and America. The introduction of the European Market Infrastructure Regulation (EMIR) and the supposed deadline for the SEPA occurred in 2014 - yet the deadlines for both were Bob Stark is vice-president of strategy for Kyriba


> ISLAMIC FINANCE

The Path Ahead for Islamic Finance in Treasury

Islamic finance has attracted growing interest since the 2008 global financial crisis, which shook well-known financial institutions and the housing markets

of major developed economies, explains Graham Jarvis.


Sharing and Mitigating RisksHead of direct investment and

trading at Saudi Kuwaiti Finance House, Yousef ‘Joe’ M. Alsufiani details how Islamic finance works in practice within treasury operations: “For a product to be sold to you that is sharia compliant, you would have to take a certain amount of the risk as a customer. So you have to be exposed to risk, and demonstrate that you are making an effort to generate revenue.”

The financial institution (FI) shoulders some of this risk, which is often mitigated through a process of profit-sharing. So if a customer ‘loses’, the FI can’t make money. Conversely if he ‘wins’, the bank can share the profits with its customer. However, sharia forbids the charging of interest.

Daud Vicary Abdullah, president and chief executive (CEO) of the Kuala Lumpur, Malaysia-based International Centre for Education in Islamic Finance (INCEIF), adds that Islamic liquidity management (ILM) is no different from conventional liquidity management in terms of purpose and reasoning – except as regards the instruments used within treasury operations.

Malaysia has been foremost in creating an enabling environment for Islamic financial Institutions (IFIs) to manage their liquidity. In 1994 the Islamic Interbank Money Market (IIMM) was created to help IFIs with this task. The three components to the IIMM are: a mudarabah-based inter-bank market for deposits, a platform for issuing and trading short-term Islamic financial instruments, and an Islamic cheque clearing system.

Interbank deposits:Interbank deposits are a key compo-nent of IIMM. By using the Mudarabah Interbank Investment Scheme (MIIS), Islamic banks and FIs can lend and borrow between themselves. A muda-rabah contract involves negotiating a profit-sharing ratio rather than the charging of interest. “To avoid any moral hazards within the IIMM, Bank Negara Malaysia the central bank

has a minimum benchmark rate for Mudarabah Interbank Investment (MII), equal to the prevailing rate of the Malaysian government investment certificate (GIC) plus a spread.

Cheque clearing:Another key component has been the creation of a separate cheque clearing system from the conventional one - as Bank Negara Malaysia has done. It requires Islamic banks to have an Al Wadiah current account with the bank. Al Wadiah is defined by Bank Muamalat as: “a concluded contract between the owner (the depositor) of the goods or money and the custodian (the banks) for safekeeping (under which) the depositor grants the bank their permission to utilise the money for whatever is permitted by [sharia]”. To avoid any questions over liquidity, it requires Islamic banks to “automatically offset the funding position based on the Wakala concept”, says Abdullah.

Agency contracts:Wakala is an agency contract for brokerage services when a client seeks finance for an asset or activity deemed as ethical under the princi-ples of sharia. It requires the client to act as the agent of the bank to acquire the asset before it is sold to him by the bank in interest-free credit instalments. Agents can be compensated with a fixed, variable or performance-based payment model, which is utilised to establish the cash flows and payouts as part of the financial engineering process.

Leasing agreements:Ijara is an alternative transaction model, requiring an exchange based on a specified asset in return for a payment, but in this case ownership is not transferred - much like an instalment leasing agreement in conventional finance.

“Under an Ijara structure, an FI acquires a specific asset based on mudarabah or istisna’a - the latter of which funds the construction of a

The post-crisis period has seen huge scrutiny of bank solvency, the sale of toxic debt, corporate governance and risk management inadequacies as well as the lack of accountability and ethics that triggered it. Regulators could have prevented the crisis, but didn’t properly supervise the market. They failed to forestall excessive borrowing, ensure a high level of transparency or stop credit agencies from incorrectly pricing risk.

Ethical Attraction and Financial Performance

For these reasons both Muslims and non-Muslims began seeking more ethical ways of banking, buying and selling loans, and for investing. “After the financial crisis they started to look at Islamic finance because of its ethical nature, whereby you can only do business according to the worth of the underlying security - such as an asset - and you cannot exceed its value”, says Mirza Baig, chief execu-tive (CEO) and chief investment officer (CIO) of Unites Arab Emirates (UAE)-based investment holding company MKB Global Holdings. Conventional non-Islamic financial models allow for a loan to be made to a person, company or an institution in multiples of the actual value of an asset, but this is prevented by sharia law.

Investors also found financial incentives in Islamic finance. Dr. Hatim El Tahir, director of Deloitte’s Bahrain-based Islamic Knowledge Center (IFKC), says there was a general shift in attitude away from traditional asset classes, such as equities and real estate funds that were badly affected by the post-2008 downturn. This led to the development of several new asset classes in Islamic finance - including sharia-compliant exchange traded funds (ETFs), structure funds and hedge funds. These often outperformed their conventional counterparts while offering reasonable liquidity and - security buffers to investors as well as sukuk issues (Islamic bonds) - worth a record US$140bn in 2013.


particular asset, which it immediately leases to a customer for an agreed period of time as a lease or rental pay-ments by either using a predetermined rate or by referencing it to an underlying rate (such as the London Interbank Offered Rate [LIBOR]) plus an agreed profit margin”, explains Mirza Baig.

Enforced Transparency and Regulation

As mentioned, inadequate trans-parency was cited as a key failure of conventional banks and FIs. Sharia compliant contracts require transpar-ency from the outset of any negotiation - including in a sharia-compliant treasury. “It is part of the contract with regards to charges, fair terms of agreements, clarity, avoidance of uncertainty and ambiguity and it must detail the type of investment”, says Samir Alamad, head of sharia compliance and product development at Al Rayan Bank.

as some countries have no mechanism in place for regulating the Islamic finance market - so Islamic finance should not be viewed as an escape from regulation for conventional banks, but as a rather exciting and new opportunity for them.” Yet they will still be affected by market trends - not even Islamic FIs can totally avoid them although they were less impacted by the crisis.

Baig also underlines the fact that sharia is not a codified law, but a set of provisions derived from different sources, and as such subject to differ-ent interpretations. “Islamic products and structures must be therefore be developed in co-operation with Islamic scholars - the sharia compliance boards”, he says. Even so some stan-dards of practice are being developed. For example, the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions

nevertheless makes compliance with Basel III a challenge.

Growth ProspectsThe key Islamic finance markets

are the Middle East, North Africa and Asia. Yet investors and financial intermediaries in North America and Europe - particularly the UK - would like to understand, use and benefit from Islamic finance’s structures and products. The liquidity of Islamic finance is among the attractions and interested parties include Goldman Sachs and Société Générale. Baig mentions that in 2008 the market wanted to gain a share of the Islamic funds liquidity pool of US$2 trillion, which will grow to US$2.6 trillion by 2017. The UK’s issue of a £200m sukuk bond last July attracted £2.3bn in investments.

Abdullah predicts further strong growth over the next decade: “The Islamic finance industry will continue to grow at an outstanding pace - in 2015 by nearly 19% (US$2.5trn) according to the AlHuda Centre of Islamic Banking and Economics (CIBE), based on the same CAGR of 16.4% of 2009 to 2013, and its total assets are expected to expand further to above US$4trn by 2020.” However, the industry must innovate to grow by developing new products and instruments that offer an alternative to, for example, derivatives and futures options.

Bryan Foss, an independent director and visiting professor at Bristol Business School, agrees that the growth prospects for Islamic finance are good - from a small base at least. Conventional banks are nevertheless “upgrading their systems and capabilities to meet its challenges and opportunities, but they will still need to have a mixture of sharia and non-sharia compliant products because Islamic finance doesn’t as yet offer a full range of the required services.” He supports the widening product choice that the ongoing growth of Islamic finance offers, and agrees that a positive future lies ahead.

> ISLAMIC FINANCE

“The Islamic finance principle and the risks involved

should be made clear to the other party, and the

agreement should show that is has been approved

from a sharia compliance perspective.”

“The Islamic finance principle and the risks involved should be made clear to the other party, and the agreement should show that is has been approved from a sharia compliance perspective.” Compliance approval usually comes from a Sharia compliance board, although this is complicated by opinions often diverging on whether an investment is or isn’t sharia compliant.

Since 2008, conventional banks and other traditional FIs have faced increasing levels of regulation, designed to prevent a reoccurrence. By comparison Sameh Fouad, Middle East and North Africa director at SunGard, suggests there is a need for “properly defined regulations in Islamic banking

(AAOIFI) has launched a programme to harmonise practice of Islamic finance and aims to offer independent assess-ment of sharia compliance.

There is also the International Islamic Financial Market (IIFM), which has drafted master agreements intended to provide a basis on which transactions may be negotiated. Furthermore Islamic treasuries are often set up - even in conventional FIs - to ensure that sharia compli-ance is upheld. At the same time Islamic finance already complies with international regulations, such as the Markets in financial Instruments Directive (MiFID). The religious element of Islamic Finance, absent from conventional finance,


> CURRENCY FOCUS: THE ROUBLE

The fall of the Russian rouble portends rough seas ahead for multinational corporates and the challenge of dealing with its consequences will undoubtedly be felt the most in Europe, explains Wolfgang Koester.

Why Corporates Can’t Afford to Sleep on the Rouble Crisis

20 | GLOBAL TREASURY BRIEFING | September/October 2014 Copyright © 2014 gtnews. All Rights Reserved www.gtnews.com

The rouble crisis is the kind of event that will separate the effective risk managers from the rest. Corporates that can navigate their way through intense volatility will reap the rewards - and those that can’t will undoubtedly suffer the consequences.

When we combine these sharp directional movements with the results we saw in Q3, we expect to see a major jump in the number and size of reported impacts in Q4.

While the challenge created by the rouble for Europe-based corporates is relatively larger than their North American counterparts, that does not mean that North American corporates are going to dodge this storm entirely.

On 16 December we witnessed, Apple, a North American corporation, taking extreme measures to “stem the bleeding” by halting all online sales in Russia (this comes a month after it implemented a 25% price increase on its flagship product, the iPhone 6, in response to the weakening rouble). And by 18 December, another member of the top 10 fortune 500 companies, General Motors, had suspended all deliveries to Russia for the time being.

Looking at the potential North American corporate impact of the rouble movement through the same lens as Europe, we found a 400% jump in the number of North American corporates reporting rouble impact from Q2 to Q3. At the same time, the rouble fell 16.39% relative to the greenback.

> CURRENCY FOCUS: THE ROUBLE

Since the first quarter of 2014, the

number of European companies

reporting impacts from the rouble has

been consistently 50% higher than the

number of U.S. companies.

What are we seeing and expecting to see?To set the stage, let’s start with a few facts gleaned

from FiREapps’ Quarterly Currency Impact Research: Since the first quarter of 2014, the number of European companies reporting impacts from the rouble has been consistently 50% higher than the number of U.S. compa-nies. This should come as no surprise for European chief financial officers and treasurers as European corporates engage in significantly more cross-border trade due to proximity to the Russian market. To substantiate this fact: according to data from the Observatory of Economic Complexity, Europe represents nearly 59% of Russian imports while North America represents roughly 5% of Russian imports.

Starting in the second week of September, the rouble began its precipitous decline against a broad basket of currencies.

Two weeks later, by the end of the third quarter, we saw an overall decline of 8.1% of the value of the rouble against the euro. And in hindsight, that now seems like a relatively modest move.

As a result of the 8.1% drop, FiREapps research shows a 120% increase from Q2 to Q3 in the number of European companies reporting negative impact from the rouble. Of particular interest is the fact that 50% of the European companies that reported negative rouble impacts in Q3 were “first time offenders” with respect to this calendar year.

Now, looking at the current quarter: Since the begin-ning of Q4 through 17 December 2014, the euro has strengthened 70.3% against the rouble; the three major Nordic currencies of Sweden, Norway and Denmark (SEK, NOK, DKK) strengthened more than 60% on average against it; and the pound is up more than 50%.

We expect to see a major jump in the

number and size of reported impacts

in Q4 and some spillover into Q1 2015.

Combine that statistic with the fact that the dollar strengthened 72.6% (1 October - 17 December) against the rouble since the beginning of Q4 - and the same story emerges in North America as Europe: We expect to see a major jump in the number and size of reported impacts in Q4 and some spillover into Q1 2015.

All that said about the rouble, what we are really seeing now is the currency war taken to a new level. Consider what has happened just in the first three weeks of December. The price of oil hit a five-year low. Japan’s “Abenomics” was given renewed support, indicating more yen volatility is likely in the near- to mid-term. Janet Yellen, in her ever-subtle and obfuscated language, indicated that a hike in US interest rates is likely within the next three Fed meetings. Cracks in the eurozone resurfaced with the recent Greek election news and other structural factors coming back in the spotlight. The Indonesian central bank intervened in the currency markets to bring stability back to the rupiah after a slide. During all of this, South American currencies have not


calmed down, more volatile markets have just been getting more attention.

The key message here is: do not fixate on just the rouble. This is a highly complex, geometric problem, especially when you take into consideration all of the currency crosses which have and will be affected by the aforementioned December movement(s). If you have not done so already, use this crisis as a rallying cry to modernise your programme and begin to leverage the power of your financial data using big data analytics.

So what can be done?There is a big differentiator between effective

risk management programs and ineffective ones, especially during a crisis like this. Effective pro-grammes have the tools and the ability to manage and report on the economic impact of any currency movement, in real time (or close to it). This insight empowers fact-based risk management and equips teams with the information critical to making the right business decisions.

Coming up on the crisis, a quarterly hedge on the rouble would have cost roughly 2% of the notional amount, proving once again the importance of having on-demand access to a complete picture of exposure, and the cost to manage it.

In my recent conversations with quite a few anxious CFOs (mostly European), the recent rouble movement served to highlight their need for timely exposure data–as it was painful for many who did not have the visibility into the risk/reward of managing underlying exposures, and were conse-quently surprised.

In the aftermath of a crisis, people tend to scrutinise the effectiveness (or lack thereof) of risk management controls that corporates had in place. While currency risk is just one of many risks a corpo-rate must manage (though likely the largest financial risk), analysts and investors often interpret the lack of a modern currency risk management program as symptomatic of a lack of effective risk management in other areas as well. So one of the further reaching consequences/reactions of this current crisis could be a sudden mandate among boards and executives to update their risk management programs and controls, and revisit policy.

FP&A Leadership Summit19-20 MAY 2015 SOFITEL LEGEND THE GRAND AMSTERDAM

Become part of this new community of FP&A leaders, as we exchange ideas and address:

– How can FP&A enhance value creation?

– What big data techniques can we leverage within FP&A?

– What makes for effective rolling forecasts?

VIEW PROGRAMME AGENDA.www.AFPonline.org/Leadership

Collaboration. Networking. Inspired Thinking.

FPAE-15_GTB_VertAD_Feb.indd 1 2/2/15 4:28 PM

Wolfgang Koester is CEO and co-founder of FiREapps.


Survey: US Businesses Plan to Spend Cash, Treasurers SayAmid an expectation of further US economic growth, corporate treasurers overwhelmingly expect their companies to deploy their cash in the coming quarter, according to the AFP Corporate Cash Indicators® (AFP CCI).

> US OUTLOOK 2015

The AFP CCI, published each quarter by the Association for Financial Professionals (AFP), measures changes in corporate cash holdings quarter-to-quarter and year-over-year, as well as the expected change in short-term investment and cash accumulation in the coming quarter. The indicators are underwritten by Capital One Bank.

The forward-looking indicator mea-suring expectations in the change of cash holdings is at -14, down 11 points from the previous quarter and down 13 points from a year ago, indicating that companies plan to spend their cash. This is the lowest reading of anticipated future cash since AFP began tracking the indicators 17 quarters ago.

During the fourth quarter, corporate treasurers did pick up the pace of cash accumulation, a trend that typically takes place near year end. For the fourth quarter of 2014, the indicator measuring the quarterly change in cash holdings was +13, up from the October reading of +6. Meanwhile, the year-over-year indicator rose from -4 to +9, but both indicators were significantly below their fourth quarter 2013 values.

The indicator for short-term investment aggressiveness rose from zero to +5 indicating that companies are seeking greater yield from their cash holdings.

“Despite recent scares in Europe and Asia, US businesses will spend

cash this quarter,” said Jim Kaitz, AFP’s president and CEO. “Their growing confidence is also reflected in a new quest for yield.”

January 2015 AFP Corporate Cash Indicators®

Change in cash holdings: 4Q14 v.3Q14 = +13

Change in cash holdings: 4Q14 v. 4Q13 = +9

Expected change in cash holdings during 1Q15 = -14

Aggressiveness of short-term investments = +5

The indicators measure recent and anticipated changes in corporate cash balances by calculating increase per-centage minus decrease percentage.

Each quarter, AFP asks select members representing a broad cross section of US businesses the same questions: whether their company’s short-term holdings increased or decreased in the past year and past quarter; whether investment selections for those holdings changed; and whether they expect cash holdings to increase or decrease in the coming quarter. AFP member companies have agreed to participate in this ongoing study on a long-term basis.

Participants manage their compa-nies’ cash and short-term investment portfolios and are fully aware of their companies’ liquidity needs and business strategies. Since corporate decisions to grow/shrink the size of cash and short-term investment portfolios reflect their business outlook and direction, changes reported by this broad group of companies are indica-tors of economic activity.

AFP began collecting quarterly data in January 2011 and has now collected 17 data sets. The next set is scheduled to be published 27 April, 2015.

Net Percentage Expecting Organizations’ Cash and Short-Term Investments to Increase in Current Quarter

Four Quarter Moving Average

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