International Treasurer - January 2012 - Europe Outlook; FATCA and FBAR

8/13/2019 International Treasurer - January 2012 - Europe Outlook; FATCA and FBAR

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Outlook 2012

Europe in the Drivers Seat

By Ted HowardMuch as global markets want to forget about Europe, it will continue to drive markets in 2012.Add to this continued regulation pressures and more searching for returns.

Like most years of the financial crisis, the new yearcontinues to be challenged by issues of the pre-

ceding one. In fact the 2011 to 2012 transition is,sadly, almost exactly like that of the 2010 to 2011transition: sovereign debt worries, regulations

and the US economy.But for 2012, we get a slight variation. Thats

because with the US economy now seeminglyon the mend, its now down to the euros survival

along with regulation (and its impact on banking).And as per usual, lingering in the backgroundsince the beginning of the crisis is the now peren-

nial challenge of where to put company cash.And if those main drivers arent enough, there

are also the issues of the banking business in gen-eral (see related story p. 2) and new tax policies

(see related story pp. 14-15).

OH! EUROPA

During the final months of 2011, world financialmarkets were daily roiled by events in Europe.

And by the end of the year, there almost was col-lective panic attack among corporates and others

that some sort of breakup of the eurozone or atleast one country exitingnamely Greecewasnot only possible but all but certain. Suddenly

treasurers and other risk managers wanted to

know what would happen to things like financialand business contracts, legal jurisdictions, supply

chains and bank accounts if the euro suddenly dis-appeared or the drachma suddenly reappeared.

Although the scary coverage has died down,

in 2012 Europe finds itself in exactly the sameposition as late 2011; that is, in an uncertain state

with the possibility of a breakup or that a countryexits, still high.

Already in January the euro is slipping, Italianbond yields are skulking around 7 percent (andFitch Ratings thinks Italy is the biggest threat to

the eurozone); S&P is in downgrade mode, recentlycutting France a notch with other eurozone coun-

tries also in its sights; Germany is auctioning bondswith negative yields and even Hungary threatens

to roil financial markets. Of course Greece is themain antagonist, where the economy continuesto deteriorate, so much so that it could eventually

sink the 130bn euro ($165.2 billion) bailout thatEuropean leaders agreed to in October.

So for 2012? MNC Treasurers concerned withtheir liquidity and currency exposures to Europe

should continue the risk-mitigating strategiesbegun in late 2011. These include a detailed riskassessment and an exploration of other ideas as

to how to best mitigate eurozone risk. As gleaned

Featured Meeting Summa

Asia Treasurers Peer Grou

continued on page 3

JANUARY 2012

Outlook 2012:Europe in theDrivers SeatBy Ted Howard

Europe will continue tdrive markets in 2012Add to this continuedregulation pressuresand more searching

for returns.page

Keeping Tabson InvestmentBankingBy Joseph Neu

Banks may ditch pastpractice for profitgrowth and a focus onwhat works in currentreg environment.

page

Best of

iTreasurer.comCapital Flow Vol Set toBalloon; China Looksto West on Regs; More

pages 4

ImpairmentAccounting MeasurInches ForwardBy Dwight Cass

FASB and IASB slowlyrefining the standard,but this more realisticaccounting approach

will hit bank capital.pages 12-

Complying withFBAR and FATCABy Geralyn Frances

Get treasury staff readand provide corporatesupport via tax, legalor human resources toease the confusion.

pages 14-

IF EUROPE CAN J UST MAKE IT THROUGH 2012

Source: Bloomberg and Citi Investment Research and Analysis

0%

5%

10%

15%

20%

25%

30%

35%

Finland

Austria

Ireland

Germany

Netherlands

Portugal

France

Spain

Belgium

Italy

Cyprus

Greece

2012 2013 2014

General Government Gross Financing Requirements (% of GDP), 2012 2014


2/16

Founding Editor & PublisherJoseph Neu

Managing Editor

Ted Howard

Contributing Editors

Anne Friberg, CTP

Bryan Richardson, CTP

Advisory BoardAndy Nash

SVP, TreasurerAhold Finance Group

James HaddadCorporate Vice PresidentCadence Design Systems

Chris GrowneyPrincipal, Director of Sales & Marketing

Clearwater Analytics

Susan StalneckerVP & TreasurerE. I. DuPont Co.

Peter MarshallPartner

Ernst & Young LLP

Adam FriemanPartner

Etico Capital LLC

David RusateDeputy Treasurer

General Electric Company

Martin TruebSenior VP & Treasurer

Hasbro, Inc.

David WagstaffManaging Director, Head of US Tech, Media & Telecom

HSBC Securities (USA) Inc.

Michael IrgangSenior Director, Financial Risk Management

McDonalds Corporation

Arto SirvioDirector, Treasury Center Americas

Nokia

Peter ConnorsPartner

Orrick, Herrington & Sutcliffe LLP

Robert VettorettiDirector, Treasury and Financial Management Services

PricewaterhouseCoopers LLPDoug Gerstle

Assistant TreasurerProcter & Gamble

Susan A. HillmanPartner

Treasury Alliance Group LLC

Michael CollinsManaging Director, Head of Corporate Equity Derivatives

Wells Fargo Securities, LLC

Academic AdvisorsGunter Dufey

University of Michigan

Donald LessardMassachusetts Institute of Technology

Richard LevichNew York University

The company and organizational affiliationslisted above are for identification purposes only.Advisors to International Treasurer are not

responsible for the information and opinionsthat appear in this or related publications and websites. Responsibility is solely that of the publisher.

ISSN:1075-5691 Vol. 18, No. 11 2012 The NeuGroup, Inc.

135 Katonah Avenue Katonah, NY 10536(914) 232-4068 Fax (914) [email protected]

www.iTreasurer.com

SUBSCRIPTION INFORMATION

Published Monthly. Annual subscription ratesare $295. International Treasurer is a publication

of The NeuGroup, Inc.

EDITORS NOTES

In November we noted the messagecoming from banks that the euro crisis washelping to ensure that all major global banks

would find it necessary to implement Basel

III, by and large, over the course of 2012

i.e., this year rather than 2015. In the rush,

they will also be ditching much of what they

have done in the past to drive profit growth

and become more focused on what works

under new regulatory capital requirements.

Each week since then, we have seen signs

that this message was for real. Treasurers not

yet on top of how the rush to adapt banking

business models, investment banking espe-

cially, to a post-Basel III and crisis-ravaged

world had best do so quick.

LOOK AT THE SWISSTreasurers wanting to get up to speed swiftly

should start with a look at the two big Swiss

banks. Troubled by efforts to boost invest-

ment banking, almost from the start, both

Credit Suisse and UBS announced substan-

tial changes to their business focus on that

side of the house even before the 2008 crisis,

and did so again with their third quarter

earnings announcements.

Helping them to make these decisions

are Swiss banking regulators, who have been

the most forceful in applying new capitaland liquidity requirements, going beyond

even the Basel international standards.

I would have preferred it if the regulators

had just told us to get out of the investment

banking business, one former Swiss bank

treasurer told us last year. Instead, they have

turned the screws on capital and liquidity

requirements to such an extent that it has

become clear that Swiss banks cannot earn

high enough returns to offset the risks of

business conducted regularly in the past.

As a result, the Swiss banks are well

ahead of their peers in shifting their businessmodels to become more capital efficient and

de-leveraging in response to new regulatory

norms. UBS shed 44 percent of its risk-

weighted assets (RWA) from the end of 2007

through last September and Credit Suisse

shed 33 percent, according to Bloomberg.

By comparison, Bloomberg indicates that

the 15 largest European banks on average

increased RWA by 12 percent over the same

period. Theyve also been leading in slashing

investment banking staff, which is notable

given recent news of banks like SocGen and

RBS slashing investment banking positions.

With their peers scrambling to catch up,

the Swiss banks are even pitching their early

response (which they at first forcefully

resisted) as a competitive advantage in

todays environment.

Our status as a first mover in adapting

our business model puts Credit Suisse in a

position of financial strength, was the first

major point CEO Brady Dougan made on the

banks third quarter earnings call in Novem-

ber. Adding that this is a differentiator clients,

counterparties and investors recognize.

UBS CEO Sergio Ermotti delivered a

similar message at an investment day later

that same month: We believe our industry-

leading core capital position gives us a

significant competitive advantage and puts

UBS ahead of our global banking peers.

NOT ALL ABOUT YOU

Another consistent theme with the Swiss

bank CEOs is how important the term client-

focused is to their strategies. As a client,

however, before getting too big-headed

about banks being all about you, note the

other bit about being capital efficient. Banks

will indeed be all about you so long as they

can earn consistent profits on business thatisnt as capital intensivetoday, that means

something around a 15 percent ROE. After

all, they are no longer going to be making

up the difference by trading both with and

against you, along with what they do on

your behalf.

Digging into the Swiss banks earnings

presentations as their client-focused

capital-efficient strategies continue to

evolve will also be instructive.

From whats been presented so far, the

fixed-income divisions will be the hardest

hit, and anything involving long-datedunsecured trades or CMBS origination is

gone. All credit products will evolve and any

corporate lending will focus increasingly on

core strategic bank franchises. Advisory work

will grow and be aligned along more global

coverage interfaces. Client flow business,

including FX, derivatives and equity trading

will also continue (but with ever greater em-

phasis on electronic platforms). Both Swiss

banks will favor their asset management

businesses heavily, too.

Bank relationships

Keeping Tabs on Investment BankingBy Joseph Neu


3/16

from several conference calls with

NeuGroup peer group members at theend of 2011, these strategies include:

n Reviewing redenomination risksof existing contracts, including currency

repayment.

n Reviewing legal language of allfinancial contracts to see if local or inter-

national law presides.n Revising contract language, where

possible, to address revaluations andinclude transition language in all new

documentation.n Reviewing with CFO your com-

mercial relationships and considering

possible alternative supply sources and/or changing your invoice currency.

nUsing natural hedges where possible;while this does not eliminate devaluation

risk, it can reduce it and there would befewer financial contracts to deal with.

n Limiting durations of financial con-

tracts so no significant positions exist.n Reviewing counterparty risk, moni-

toring CDS spreads; diversifying partners.nRepatriating in-country cash balanc-

es to less volatile regions.n Checking treasury/accounting sys-

tems for ability to handle valuation chang-

es, dual currencies and the reporting.Given that this is all new territory

both from a legal, contractual and marketperspectivethe challenges are not easy.

The companys relationship banks can beadvisors in this regard, as no doubt theyalso are preparing for the prospect of

a breakup.Despite all the consternation and

wondering whether Europe will or wont

collapse, most observers feel a breakupor even an exit is unlikely. Currently eu-

rozone leaders are hammering out a newtreaty to tighten up the financials of the

European Union. They feel they are mak-

ing progress but given the seeming lackof urgency, its best for treasurers to forge

ahead with their contingency plans.

REGULATORY BURDENS

While Europe probably takes the prize

as 2011s Theme of the Year award,another theme could be Dodd-FrankDelay. According to law firm Davis Polk,

by the end of 2011, 200 deadlines hadcome and gone and regulators have only

been able to meet 51 of them.Concerning the derivatives portion of

Dodd-Frank, the CFTC, the SEC and otherregulators have missed 67 deadlines andfinalized only 26 rules in 2011, according

to Davis Polk (see chart page 6).Meeting deadlines for central clearing

also looks doubtful. A 2009 G-20 man-date was for all standardized OTC deriva-

tive contracts to be traded on exchangesor e-trading platforms as well as clearedthrough central counterparties by end-

2012 at the latest. Observers like ISDAhave hinted that this might not happen.

Regulators progress hasnt beenhelped by politics. For instance, the CFTCs

has severe budget woes. Earlier in 2011,the White House requested $308mn forthe CFTC in its fiscal 2012 budgeta big

increase from its previous $202mn bud-get. But Congress effectively froze the

agencys budget in December, giving it

just $205mn. However, in a deal struck inmid-December, the CFTC reportedly wil

get an additional $10mn for staffing.So whats in store for 2012? Dodd-Frank

and Basel III, the two 800 pound gorillas

of the regulatory world, will continue tohold sway.

In the US, there will definitely be somerule finalizations from US regulators, but

the slow pace is expected to continueWe expect to see several key final rules

in the first quarter, including the all-important entity definitions and the end-user exemption from mandatory centra

clearing, said Sam Peterson, SeniorAdvisor, Derivatives Regulatory Advisory

Services at Chatham Financial. Werestill waiting on the final rule for margin

requirements for non-cleared derivativesalthough its now expected that this wontbe released until after the G-20 has come

to agreement on standards for them. TheG-20 meets in Mexico in June.

Mr. Peterson said that treasurersshould keep an eye on the US Treasury

Department, which has yet to finalizeits proposed determination exemptingFX forwards and FX swaps from most of

the regulatory requirements. Anotherimportant issue, he said, concerns the

treatment of inter-affiliate or intra-grouptransactions and what regulatory require-

ments will apply. The timing for this isnot clear, he said.

The CFTC also proposed phasing in

the implementation and the enforce-ment of four regulatory requirements

OUTLOOK 2012

Outlook, continued from page 1

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4/16

Capital markets

Capital Flow VolSet to Balloon

Economists like to view the evapora-

tion of international capital flowsduring the 2008 nancial crisis as a

symptom, not a cause, of the distress.Prior to the crisis, capital flows had grown

steadily, from 5 percent of world GDPin 2002 to 17 percent in 2007, before

collapsing to 1 percent in 2008.The authors of a Bank of England pa-

per argue that projected changes in the

size and nature of capital flows betweennow and 2050 will, in fact, challenge poli-

cymakers and could create more crises.This underlying instability in the global

financial system needs to be consideredcarefully by treasurers and strategicbusiness decision makers at MNCs.

The paper, The future of internationalcapital flows by William Speller, Michelle

Wright and Gregory Thwaites, containssimulations derived from GDP conver-

gences and demographics. The simu-lations suggest a number of possibleoutcomes over the next four decades:

nThe overall size of external balancesheets relative to GDP of the G20 coun-

tries in aggregate increases from a ratioof around 1.3 to 2.2.

nThe distribution of external assetsshifts to emerging markets. By 2050,more than 40 percent of all external

assets are held by the BRICs (Brazil,Russia, India, and China), up from the

current 10 percent.

nNon-G7 annual capital outflows

are simulated to be more than twice thesize of G7 outflows by 2050. By this time,

India and China would represent almosthalf of all annual gross capital outflows.

nIndias national saving ratealready

highincreases from 38 percent to50 percent in 2050. In Germany, France,

the UK, and the US, the saving rate isbelow 10 percent in 2050.

nGlobal current-account imbalances(the sum of deficits and surpluses) rise

from around 4percent of world GDP toaround 8 percent at their peak.

While such massive macroeconomic

shifts will have profound strategicconsequences for corporate business

plans, they will also require treasury to benimble enough to deal with whipsawing

currency flows. The two are, of course,related, and the problem illustrates theimportance of having treasury at the

strategic decision-making table.

Regulatory watch

China Looks toWest on Regs

W

hile China may be looking doubt-

fully at some of the Wests financialregulations and lawslike Fatca, for

instance: You want us to do what?thecountry appears to be enthusiastic aboutthe prospect of adopting Basel III and

other regulations.At the October meeting of the recently

launched NeuGroup Asia Treasurers PeerGroup, several members and guests

noted that China is beginning to adoptWestern standards when it comes toregulation. One attendee who presented

on Chinas regulatory environment said

that not only is China looking at theregulatory initiatives of the West but isalso attempting to influence their shape.

China is almost too keen on Basel III,he said.

For example, the capital cushion

for top international institutions waspromoted actively by China, and the

country has plans to accelerate itsadoption of Basel III (though few Chinese

financial institutions are yet consideredinternationally significant).

The same holds true for derivatives

reform, especially concern surround-ing credit derivatives. Amid the Basel

III, Dodd-Frank creation process, manyobservers speculated that banks and

financial companies would move their

derivative trading operations to lessrestrictive parts of the worldsome

suggested Asia would be the destinationHowever, the last year has shown

otherwise. For instance, just about allof the major trading centers in Asia are

implementing, or planning to imple-ment, OTC derivative-clearing initiativesin an effort to make the market more

transparent. China, India, Hong Kong,Singapore, South Korea and Japan are

looking to create central clearing entitiesfor derivatives trading.

Another development concerningChina is the increasingly less directapproach of its State Administration

of Foreign Exchange (SAFE) in ensuringcompliance and even guiding adherence

to its rules.Increasingly, SAFE is relying on banks

to act as its intermediary and gatekeeperwith severe penalties for those that failto do so. This frees up regulators to work

with banks and even some corporatesto better shape and understand the

practical ramifications of regulations,which should be good news for corpo-

rate players in the Chinese market.In this way, SAFE is also starting to

take more of a backseat to the PBOC,

including on issues related to the useof dim sum bond proceeds in mainland

China. The central bank will also bewatching closely how the growth of the

CNH market will impact its liquidity man-agement and monetary policies onshore

Compliance with rules and regs will

continue to be a major challenge in

emerging markets in the coming yearand beyond, especially in the largereconomies that have multiple govern-

ment agencies and ministries in chargeof various aspects of the businessplaying field. It is therefore important

to navigate the different bodies in waysthat will maximize the chances of a

positive outcome and never assume thatjust because a particular infraction has

been met with look-the-other-way en-forcement in the past, this will continue

BEST OF ITREASURER.COM

4 International Treasurer / January 2012 n For additional information visit iTreasurer.com

For more valuable articles published

on our web site visit iTreasurer.com.

Latest postings include:

nDealing with Lingering Euro-

Disintegration Fears: Deloitte and

ACT publish treasury guide to euro

breakup contingency planning.

nFat Chance for Fatca? The world

wakes to the burden of coming Fatca

requirements; the IRS stands firm.

nChina-Japan FX Deal One More Step

for Yuan. China and Japan FX deal

will help globalize RMB and help MNCs

better manage currency risks.

More iTreasurer Online!


5/16

BEST OF ITREASURER.COM

to be the case. Political winds change

and targets do too.

Banking relations

EMEA LendingTrends HighlightBank Relationships

Europe, Middle East and Africa lendingvolumes in 2011 were the highestsince 2007, topping $1tn, according to

Thomson Reuters. But retrenchmentin the syndicated loan market during

the second half of the year showed thewisdom of sourcing overseas financing

locally, wherever possibleThe first half drove the volumes,

before the eurozone crisis flared upin August and bank regulators beganreleasing details of their proposed

capital requirements.Companies in general were not look-

ing for acquisition or growth financing.Rather, some $753bn of loans were

renanced, 28 percent more than in2010, Thomson noted.

Market conditions deteriorated

sharply in the second half, as banks be-gan selling portfolios to raise regulatory

capital. But their distribution of busi-ness changed also: there was a marked

decline in loans made to developing

economies, especially the Middle East

and Africa, in favor of lending to entitiesin banks home jurisdictions.

This provides yet more proof thatMNCs should be seeking to finance

their overseas initiatives in local markets,

wherever possible.While the top tier banks say they will

be there for their clients even in theworst of times, their retrenchment in

the fourth quarter indicates otherwise.

Risk management

Spreading theCollateral Load

Back in the good old days Euro-

pean sovereigns were premiercounterpartiesthe ones able to callthe shots when it came to collateral

agreements. Because of their sizeand status, European sovereigns (ES)

demanded collateral from dealers in aone-way credit support annex (CSA)

but never had to post it themselves.But with ESs in crisis these agree-

ments need to be two-waythat is,

sovereigns should now put up collateraltoo, according to a group of financial

trade groups. In a recently publishedpaper, the groupsthe Association for

Financial Markets in Europe (AFME), the

International Capital Market Association

(ICMA) and the International Swaps andDerivatives Association (ISDA)write

that with the one-way structure, dealersare on the hook for billions of dollars;

and with proposed Basel III requirements

on capital, liquidity and a coming creditvalue adjustment surcharge, one-way

agreements will drain even more liquid-ity from an already thin market (see

related story The Collateral Shortageand Corporations at iTreasurer.com).

The groups recommendations fortwo-way CSAs come at a time whenbanks face increasing pressure to hold

more cash to buffer against anotherfinancial crisis. But banks maintain that

holding these bigger cushions wouldforce them to pass on costs to their

clients and otherwise raise prices oncertain transactions.

The Associations believe the use of

one-way CSAs by ES has created mean-ingful credit risks in the financial system

and has also drained liquidity from thebanking system, the groups said. And

because dealers usually hedge expectedpotential exposure risk with interestrate and FX products, they will attract

significant capital charges underproposed Basel III rules.

Two-way CSAs would not only solveall of these issues, the groups said, they

would also increase transparency.

For additional information visit iTreasurer.com n International Treasurer / January 2012 5

Source: NeuGroup Peer Research; ATPG, Fall 2011

COMPANIES PUT IN PLACE FINANCING INITIATIVES IN CHINA

DISTRIBUTOR FINANCING POPULARNearly 70 percent of members ofthe NeuGroups recently launchedAsia Treasurers Peer Group are pur-suing customer finance initiatives.

Most are offering distributor financ-ing. The overall push for increasedcustomer financing comes as Chinaopens up more sectors to foreigninvestment. According to theChinese Government, the goal isto encourage investment in strate-gic emerging industries.20%

20%

30%

30%

60%

A/R Discounting

L/C Discounting

N/A

Bankers AcceptanceBill Discounting

Distributor Financing


6/16

OUTLOOK 2012

central clearing, trading, and documen-tation of and margining requirements for

non-cleared trades. Based upon the typeof entities entering into the derivative

transactions, these requirements will like-ly be phased in over the course of the first

half of 2012 (see IT, October 2011).

Basel III is the other big ape. Its liquid-ity and capital requirements will start to

really sting banks in 2012. Thats becausealthough the rules dont start to kick in

until 2015, banks dealing with the crisishave been encouraged to begin comply-

ing nowif they hadnt already in 2011.One bit of good news is that the Bank forInternational Settlements, the entity writ-

ing the Basel rules, recently said banks willbe able to dip into the liquidity buffers

during times of stress.For treasurers, the new buffer require-

ments will surely raise the cost of doingbusiness as banks pass on the cost totheir corporate clients. Thats because all

of the necessary reengineering of bankbalance sheets will likely create credit

scarcity; thus corporates can expect topay more for bank credit. This will eventu-

ally force treasurers toward disintermedi-ation and down more attractive fundingpaths. These will include tapping capital

markets and squeezing all they can out ofworking capital enhancement projects.

This is already happening in Europewhere banks are weakest. There, com-

panies are bypassing banks altogether,

according to the Financial Times, andraising cash via the bond market.

CASH AND INVESTING

For several years now corporate cashand investment managers have been

straining to find suitable places to put

company cash. In 2011 corporates startedto break out of their risk-averse stances

and in 2012, this will continue.I think much of the put the money

under the mattress strategy has abated,said Chris Growney, director of sales and

marketing at Clearwater Analytics. Hesaid this was basically because compa-nies cannot sit on low return accounts

forever and interest-rate levels are likelyto remain low for some time.

As a result, Mr. Growney said manycompanies are outsourcing money in

separate accounts and taking risks on themargin but not at the core. This is particu-larly true of companies that are cash-flow

positive. For them it is important thatthe investments are diversified because

current assets plus the forecast free cashflow ensure a lot of money will be tied up

in extremely low-yielding investments.In general Mr. Growney said, com-

panies are exiting mutual funds and

going into separate accounts, which canhave a range of product types, but are

generally the traditional corporate cashinvestments such as short-term govern-

ment, corporate and some asset-backed

products. Rotation to separate accountsis both a focus on better control and

visibility, and on transparency of the in-vestments, he said.

At several NeuGroup peer groupmeetings in late 2011, treasurers were

told they might improve returns by using

non-MMF mutual funds and exchangetraded funds. Nonetheless, the focus will

remain on not losing money.People hate getting zero returns, but

its still better than negative returns, saida treasurer at US MNC. Despite this view,

his company was exploring new assets, in-cluding euro commercial paperA1, P1and F1 only. This provides liquidity and a

few basis points, he said. And every basispoint is precious in this (low) rate environ-

ment. The treasurer was also looking intoseasoned bonds, for instance, a 10-year

note with 18 months to maturity.These explorations will continue, with

the overall goal, as the above treasurer

noted, to be able to get your moneyback from wherever its been put.

* * *

So just like last year, 2012 will be achallenge to treasurers, as they continueto navigate the choppy waters churned

up by the chaos of the financial crisis.Regulation and finding yield will occu-

py much of their time while a teeteringEurope will a remain a looming presence

in the background.

Outlook, continued from page 3

6International Treasurer / January 2012 n For additional information visit iTreasurer.com

TITLE VII PROGRESS ON REQUIRED RULEMAKINGS

Source: Davis Polk

Title VII Progress CFTC Progress SEC Progress

As of December 1, 2011

Future Deadline: Not Proposed FinalizedMissed Deadline: Not ProposedMissed Deadline: Proposed

2

59

25

17

3

23

4

22

12

3

1

1

Values Refer to Number of Rulemaking Requirements


7/16

As a result of the continuing internationaliza-tion of the RMB, there is now an opportunityto raise funds via CNH bonds or dimsum bondsoffshore for foreign companiesneeding funds in China (where they are not

allowed to issue onshore RMB bonds).Further, the offshore RMB market and theincreasing use of the currency in internationaltrade will have a dramatic impact on regionaland even global liquidity management andother treasury activities. One member compa-ny walked the group through his companysdim sum activities.

KEY TAKEAWAYS1) Checklists help. The presenting companyhad the experience of testing the marketbefore. The companys representative noted

that the process of issuing dim sum bondsis getting easier but despite this, learningfrom prior issuers can save headaches.Documentation, process and the right partnerare important, he said. His lessons learnedinclude:Plan and start early;Understand your funding requirements well(as you will want to match these to the SAFEdiscussion at the earliest stage);Good partners (banks, legal) make adifference;

Program documentation (get these rightfrom the start);Understand regulatory aspects vis-a-visinternal requirements/policies (the issueshould be tailored to the market requirements

and internal adjustments may be needed);Teamwork (members should have the rightfunctional expertise);Take a project management approach(assign someone to work through all elementsof the task, which can take about 4.5 months).

2) Hurdles to use proceeds on- and offshoreare decreasing. The member presenting on thistopic noted that the process for issuing dimsum bonds isnt significantly different fromissuing in any other market but the regulatory-approval process is somewhat different, espe-cially if you want to use the funds onshore.

Regarding the use of proceeds, there are anumber of ways that bank partners can behelpful, both in clearing the regulatory hurdlesfor use onshore and through account struc-tures to ease the transfer of funds (e.g., usingnostro accounts). Going forward there maybe more uses for RMB offshore as Chinesepartners become more open to acceptingpayment offshore and the currency gainsacceptance in international trade.

3) Look for greater flexibility in re-invoicing.With re-invoicing platforms on the ascendancy

China is almost too

keen on Basel III.

ATPG presenteron how China is

adopting Westernregulatory standards.

The pilot meeting of the Asia Treasurers PeerGroup, sponsored by BNP Paribas, brought

together thirteen companies across a variety ofindustriespharma, consumer goods, manu-facturing and tech. Topics discussed included:

1) Offshore RMB Market and Opportuni-ties. One member discussed his companysdim sum bond issue.

Key Takeaway: The process of issuing off-shore bonds is becoming more streamlined; bankscan help clear hurdles for use-of-proceeds onshoreas well as the transfer of funds.

2) Capital and Liquidity Management. Adiscussion of member companies approachesand a market overview by the BNPs C.G. Lai.

Key Takeaway: As cash builds up in theregion, a concern is the lack of available investment

options. MMFs are developing but the smallsizes mean MNCs run up against policy limits.

3) Dealing with Asias Rules and Regs.Two reps from Clifford Chance shared theirinsights on India and China.

Key Takeaway: Both countries have amultitude of governing bodies with sometimesoverlapping jurisdictions. Its important tounderstand their motivations and their powers.

4) Implementing eBAM in Asia.JanDewaele from SWIFT and Pole Yu from IT2talked about the status of SWIFT-enabledsolutions for eBAM.

Key Takeaway: Paperless account manage-ment (including for the account-opening process)

is still a ways away, but some progress is beingmade.

ASIA TREASURERS PEER GROUP

2011 Pilot meeting briefing

Asia Treasury Challenges

The NeuGroup Launches Treasury Peer Group in Asia

Offshore RMB Market and Opportunities

Sponsored by:

Facilitated by

2012 The NeuGroup. Thisinformation is sourced fromthe Asia Treasurers Peer Grou

For more information:www.NeuGroup.com


8/16


in Asia, MNC treasuries can switch currencyof billing for China affiliates to the offshoreRMB and then re-invoice to better manageFX risk and move it offshore where itis cheaper.

4) More flexible terms are possible.

Switching to offshore RMB to transactbetween Chinese affiliates onshore and thoseoffshore also allows treasury to extend termswith fewer restrictions and use the widerwindow to lead and lag. While traditionallyinterco terms were set at 90 days, in the off-shore currency they can push past 210 daysand only need to register with PBOC viatheir website when they reach 160-day terms.

5) Change to RMB as invoice currency not

as straightforward as you think. Exportersbenefit from tax rebates and use the SAFEapproval to support their claims. With a

switch from USD to RMB as invoice currency,the SAFE process would go away and theywould have to claim their rebates using adifferent process. This partly explains theslow adoption of RMB as invoice currencyon behalf of Chinese exporters. However,experience with the alternative process willprobably ease this reluctance. Another reasonis the ability to cushion the pricing to protectagainst FX losses. On the flip-side, thiscushion is a reason for many US importersto want to switch: to reduce the cushion and

take control of the FX risk management.OUTLOOK: Offshore RMB opportunitieslook ready for real growth and treasurers

should be prepared to take advantage. WithAussie commodity exporters seriously consid-ering switching to RMB invoicing, the marketcould really take off; its growing rapidlyalready. BNP Paribas said that two-way flowsfrom Chinese exporters and importers will

become the norm soon. The list of eligibleenterprises that can settle merchandise exportsin offshore RMB has already expanded from365 to 67,359. This expands the range of usein L/C guarantees and discounting. With aSingapore clearing license expected soon thiswill expand the alternatives for trading andsettlement and further grow liquidity depth.

INCENTIVESCHEMES FOR

TREASURY CTRSA session on treasuryincentive schemesconfirmed that

Singapore has activelysought to maintainits lead in incentivematters. A regionaltreasury centercoupled with theheadcount of amanufacturing orR&D facility providesunbeatable taxincentives. Penang/Malaysia and to someextent Indonesia havesought to importSingapores ideas

but there are otherdisadvantages. Onetrend to watch is whatincentive regimesPRC companiesavail themselves of,starting with the PRCtreasury vehicles.

OUTLOOK:Participants particu-larly noted the taxadvantages that can

be negotiated withSingapore if compa-nies not only locatea treasury center andother white-collarwork like R&D there,

but also provide blue-collar opportunitieslike manufacturing.As MNCs increasing-ly look for cost reduc-tion, significant taxsavings become animportant factor.

PEER INSIGHT: ATPG

AFTER A TWOMONTHS DECLINE, RMB VOLUMES TURN HIGHER

Source: SWIFT. Customer initiated and institutional payments, sent and received, based on value1

Other Countries

China

Hong Kong

29 %

15 %10 %

De c2010

81 %12 % 7%

No v2010

77 %

16 %7%

Oc t2010

68%

81 %

6%

11%

Ju n2011

81 %

6%

13 %

Ma y2011

78 %

7%15 %

Ap r2011

79 %3%

5%

14 %

Se p2011

82 %

5%

13 %

Au g2011

85 %

4%

11 %

Ju l2011

83%7%14 %

Ma r2011

78%

7%15%

Fe b2011

74 %

11 %15 %

Ja n2011

75 %

Oc t2011

80%

6%

14%

No v2011

+1,028%

BNP Paribas has a 150-year history inthe region, and has the local presence,capabilities (including corporate finance,

equities, fixed income and commodities,along with day-to-day banking) andlicenses needed to serve most of theneeds of its clients.

With a long history of client-focusedgrowth approach in Asia and relation-ships with several member companiesalreadyin Asia or other regionsBNPParibas has plenty of scope to win morebusiness going forward. A believer instandard processes and leveragingSWIFT, the bank stands to benefit from

corporates desire to be bank-agnosticon the processing side.

BNP Paribas: Long Presence in Asia


9/16


The participating companies represent a sliceof the MNC market that has advanced fromits establishment phase, is growing rapidlyand has begun to generate significant cash

piles in certain places. The question forthese companies is what to do with the cash.Unlike Europe, pooling is not widely avail-able and much of the cash is building up incountries with restrictions on cross-bordermovement. Moreover, western MNCs arelong USD, while many Asian firms are shortUSD as liquidity in the regions chief tradecurrency is becoming more restricted. Thissets the stage for MNCs to consider provid-ing liquidity to suppliers and customers.However, they must also have a keen eye ondevelopment of the offshore RMB market

and its emerging role as a currency of billingin conjunction with cross-border trade.

KEY TAKEAWAYS

1) Look closely at working capital improve-ment opportunities. Several participantsnoted their companies emphasis on improv-ing cash flow through working-capital initia-tives. The pre-meeting survey revealed thatmany more participants are involved on thecustomer financing side than the supplierside, but new opportunities are emerging

that should change this trend. The challengeon the supply side is getting people on boardinternally, which often means treasury needsto get procurement to see things its way.

2) Assess the impact of bank balance-sheet and liquidity constraints. An increas-ingly inhibiting factor on working capitalfinancing is that banks are finding them-selves needing to pull back from offeringtheir balance sheets. While it is importantfor them to have skin in the game (this helpswith the quality of their credit risk evalua-tions), corporates should be prepared to step

in when banks pull back. This could be a usefor excess cash in the region, for example.Going forward, as BNP Paribas MathewHarvey, Managing Director and Global Headof Technology Coverage, pointed out, thereare several creative ways to push forwardwith supply-chain and other working-capitalfinancing initiatives despite banks need tobe stingier with their balance sheets. Tradeinsurance is another starting point.

3) Countries with higher funding costs/

yields are unfortunately the more restrictive.

Fueling desires for cash-recycling innovationin Asia is the fact that countries with thehighest Libor ratesChina and Indiaarehighly restrictive in terms of cross-border

cash movements. As BNP Paribas C.G. Laipointed out, opportunities are therefore morelikely in the middle-tier rate countries suchas Taiwan. Singapore and even Hong Kongwill also benefit as liquidity gets attractedand this will likely be met with lendinggrowth as well. Banks can try to serve asintermediaries for settlement across theirbooks, but country regulators are catchingon and making it more difficult to exploitbranch vs. local subsidiary structures, withincreasing requirements for the latter.

4) Where to find investment or deposit

vehicles that meet your comfort level. Thisseemed to be a universal challenge with thegroup. On the one hand, concern with bankrisk has more and more treasurers lookingfor alternative places to put excess cash. Thelevel of desperation has risen to the point ofcorporates considering banking licenses togive them access to the deposit windows atcentral banks. And on the money marketfront the relatively small size of funds leavestreasury concerned about the percentage ofassets their investments would make up,

which in most every case runs counter topolicies. All would like to see larger fundsemerge and more of their peers take theplunge, perhaps all at once, to help rectifythis situation in Asia. Its a classic chicken-versus-egg problem. J.P. Morgan was report-ed to be particularly aggressive in promotingitself as a place to park excess cash.

OUTLOOK: Excess funds or lack of funds isnot an either-or situation for most compa-nies. Rather, most have excess funds in someplaces and would like to deploy it in others

but cash might be trapped because of regula-tory restrictions on transfers. Where it istrapped, meanwhile, the local market usual-ly offers few acceptable investment options,and opportunities to use cash in other ways,like through tax-arbitraged intercompanyfunding, are lost. While the pre-meetingsurvey revealed that only a minority of par-ticipants were pursuing tax-driven affiliatefinancing, the success of some companies inthis area suggests that more MNCs shouldexplore these options.

EBAM IN ASIASWIFTs Jan Dewaelegave an overview ofwhere SWIFT-enabledsolutions for eBAMstand, while Pole Yufrom IT2 shed light onhow the TMS side ofan eBAM solutioncould look.

KEY TAKEAWAYS1) Paper documents

are still a fact of life.Paperless accountmanagement (includ-ing for the account-opening process) isstill a ways away,

but some progress isbeing made.

2) Not for makingnew friends. For theforeseeable future,eBAM may be asolution for accountmaintenance, oropening or closingan account with arelationship bank, butit is unlikely that it will

become a vehicle forestablishing accountswith new relation-ships, largely for

know-your-customerrule reasons.

3) How good is your

own eBAM process?Not all the onus foreffective bank accountadministration is on

banks or SWIFT. Onthe in-house side, themost natural place tokeep bank-accountrelated details is inthe TMS. Many TMSshave already achieved

integration withSWIFT and offerimportant tools likeaudit and controlfeatures in addition totheir workflow tools.

4) Dont standardizeto the fullest list of

requirements. TheeBAM Central Utilitythat SWIFT is piloting

(continued on p. 10)

Capital and Liquidity Management

PEER INSIGHT: ATPG


10/16


CONCLUSION & NEXT STEPS

Asia is the most significant driver of growth fora large group of multinationals and deserves all

the focus it is currently getting. Treasurys man-date is an extension of the needs that arise from

business expansion in the region, and coupledwith the rapidly changing business and regula-tory environment, this also makes Asia deserv-

ing of treasurys focus. The caliber of resourcesneeded to solve the regions many challenges

combined with its growth also speak to Asiatreasury centers taking on more than their initialshare of global treasury activities and increas-

ingly scaling up for global reach. It will be

interesting to monitor the balance of regionaland global topics on future meeting agendas.

Already, the ATPG pilot event covered a widerange of topics and it is likely that many of themwill be revisited over the coming meeting cycles.

The participants have decided to transitionthe ATPG from its pilot phase to a membership

peer group with two meetings per year consis-tent with The NeuGroups US and Europeanmodels. As group members, they would prefer

an April/October meeting schedule andcontinue to meet in Singapore. Planning for

the April event will begin in early 2012.

Rahul Guptan and Paul Landless of CliffordChances Singapore office shared some oftheir expertise on the regulatory ins and outsof India and China, and highlighted the dif-ferent regulatory agencies, the reach of their

powers and jurisdictions in the two countries.

KEY TAKEAWAYS

1) Beware Indias regulatory uncertainty.India has a large number of governmentagencies and sub-departments that exerciseinfluence over the environment in whichcompanies navigate their businesses.Unfortunately, some have overlapping juris-dictions and some agencies do not interpretthe law in the same way. Coupled with theagencies wide-ranging powers to investigatebusinesses for perceived infractions, India is

a country in which to tread carefully. It wasnoted that with some agencies, it is better toapproach on ones own behalfRBI, forexample, is business-friendly and wants topromote foreign investmentwhile withothers, it is better to go via legal counsel, abank or other expert advisor.

2) China is adopting Western standards.

China is looking at the regulatory initiativesof the West and is even attempting toinfluence their shape. China is almost tookeen on Basel III, Paul remarked. For exam-

ple, the capital cushion for top internationalinstitutions was promoted actively by Chinaand the country has plans to accelerate itsadoption of Basel III (though few Chinesefinancial institutions are yet consideredinternationally significant). The same holdstrue for derivatives reform, especiallyconcerning credit derivatives.

3) Chinas SAFE is working more through

partner banks. Another development con-cerning China is the increasingly less-directapproach of SAFE in ensuring complianceand even guiding adherence to its rules.

Increasingly, SAFE is relying on banks toact as its intermediary and gatekeeper, withsevere penalties for failure to do so. Thisfrees up regulators to work with banks andeven some corporates to better shape andunderstand the practical ramifications ofregulations, which should be good news forcorporate players in the Chinese market.

4) PBOC is more assertive. In this way,SAFE is also starting to take more of abackseat to the PBOC, including on issuesrelated to use of dim sum bond proceeds inmainland China. The central bank will also be

watching closely how the growth of the CNHmarket will impact its liquidity managementand monetary policies onshore.

OUTLOOK:Compliance with rules and regs will continueto be a major challenge in emerging markets,and especially in the larger economies thathave multiple government agencies andministries in charge of various aspects ofthe business playing field. It is important tonever assume that just because a particular

infraction has been met with look-the-other-way enforcement in the past this willcontinue to be the case. Political winds andtargets change. And places like India actuallydo have impartial justice systems that offerrecourse. It's also untrue that regulatorybodies are only looking to prevent reasonablebusiness conduct.

TO LEARN MORE

Contact:

Joseph Neu

914-232-4069

[email protected]

or

Anne Friberg

212-233-2628

[email protected]

(continued from p. 9)

is essentially a centraldatabase of all bank/country accountrequirements andvariants to XML stan-dards for electroniccommunication ofaccount-managementrelated information.But the big fear fromthe group was thatthis would push bankstoward adopting themost onerous banksrequirements in eachmarket, rather thanthe minimum require-ments of the central

bank. They wantsubstantial corporate

input on the pilot,and corporate voicesto be weighed equally.

OUTLOOK:

Perhaps the SWIFTCentral Utility will go

some way toward itsgoal of providing asource of truth

about central-bankrequirements so that

practitioners know

how to meet the mini-mum prerequisites.

MNCs are not waitingfor eBAM to make

progress. Many arecentralizing bankaccount administra-

tion and even creatingcenters of excellence

for such activitieswithin treasury

operations or sharedservices centers.

Dealing with Asias Rules and Regs Regimes

PEER INSIGHT: ATPG


11/16

2011 Fall Meeting

Treasurers Group of Thirty-2

Peer GroupOctober 26-27, 2011

We would like to thank the participants at the 2011 Fall

Meeting of The Treasurers Group of Thirty-2 Peer Groupfor their open dialogue and relevant contributions to ourdiscussions.

Your active involvement continues to make the T30 ahighly valued contributor to our network of forums forpeer knowledge exchange.

Thank you!

The T30-2 is a NeuGroup meeting alternative.SM

Facilitated by:Sponsored by:


12/16

ACCOUNTING & DISCLOSURE


The last time the International Account-

ing Standards Board (IASB) and the USFinancial Accounting Standards Board

(FASB) made reportable progress on theirfinancial asset impairment project was

before the August 2011 flare-up in theEuropean sovereign debt crisis. Revela-tions about the extent of European banks

exposure to dodgy PIIGS debt, and howthis has imperiled not only the banks but

the euro itself, have cooled some of theenthusiasm for an accounting move that,

while perhaps more realistic and usefulfor investors, will almost certainly squeezebank capital by requiring more loan-loss

provisioning at an earlier stage in anassets deterioration.

Given the sluggish pace of the im-pairment project (and most of the other

joint FASB-IASB initiatives) and growingdisillusionment among US accountantsand standards-setters regarding the

overall goal of accounting convergence,banks may not have too much to worry

about. The earliest a new standard couldbe implemented is in 2013. And more

refinement needs to be done before thestandards-setters issue the next exposuredraft on this subject, expected some time

in the first half of this year.

The existential threat to Europeanbanks last autumn from sovereign credit

risk that current accounting standards didnot require them to acknowledge shows

that getting impairment accounting rightis and should remain a priority. Nonethe-less, if banks squawk loudly enough, reg-

ulators on both sides of the Atlantic, whohave already proven themselves willing to

fudge stress tests and hide massive bankfunding programs, might cast a gimlet

eye on the project.Banks are concerned that the proposed

three-bucket impairment standard,

by recognizing expected losses beforethey have been incurred, will force them

to boost their loan loss reserves earlier,at the expense of capital, which will al-

ready be stretched by Basel III and relatedmeasures. Ernst & Young, in a survey of10 large European banks it conducted in

August 2011, stated:All respondents told us that the three-

bucket credit impairment approach will

have a significant impact on the level of

provisions held. Some organizations also

believe that provisions will often be greater-

than-expected loss calculations used for

capital adequacy tests and therefore wil

result in a reduction of the surplus of regu-

latory capital over required capital levels

under Basel III.

If so, banks will have to raise even more

capital than currently projected undeBasel III and national finishes, further gutting their returns on equity and making

it more difficult to lure in shareholders.

The three-bucket credit impairment

approach will have a significant impact

The fear is that banks, with their risktaking nails soon to be clipped further by

regulators, will become extremely leery othe sort of capital-intensive activities fo

which corporate treasurers regularly turnto them.

ALONE TOGETHER

The impairment project is picking up

steam just as US regulators are becomingleery of further convergence. The quality

they say in private, of IFRS standards is amajor concern, and they would prefer to

keep US GAAP than peremptorily hitchthe US accounting standards to IASB ruleswhen the benefits of such a move are

Financial instruments accounting

Impairment Accounting Measure Inches ForwardBy Dwight Cass

FASB and the IASB are slowly refining the standard, but this more realistic accounting approach will hit bank capitaland could cause lenders to pull in their horns even more.

Sources: FASB, IASB web sites

PROGRESSIVE I MPAIRMENT

NOVEMBER 2009 JANUARY 2011 JULY 2011 DECEMBER 2011

Exposure Draft on Loan

Impairment

Supplementary

Document on Asset

Categories

Deliberations Begin on

Three Buckets Approach

More Agreements

Elaborating Bucket

Approach

IASB addresses impairment

of financial instruments

carried at amortized cost.

Proposes provisioning

based on lifetime of

expected losses.

IASB and FASB proposed

dividing loans into a

good book and a bad

book depending on their

credit risk.

Based on comments on

the SD, boards begin con-

sidering a three-bucket

bad book, with each

bucket holding progres-

sively impaired assets.

Boards decide trigger for

moving out of first bucket

will be deterioration in

12-month forecast of

expected losses.


13/16

FASB FIGHTS TOPROTECT ITS TURFThe US accounting standard

setter responded inNovember to the SECs

condorsement approach tothe convergence of US GAAP

and IFRS, saying it needed tobe amended to avoid the loss

of regulatory authority.

The condorsementproposal, floated by the SEC

in May 2011 in a staff paper,essentially would:

1.Incorporate IASB standards

into US GAAP

2.Transfer oversight authority

from single regulators(such as the SEC) to a

multinational regulator

3. Cede much of the designof accounting standards to

the IASB, with FASB giventhe chance to endorse

rules once theyre completeand before they are applied

in the US (hence condorse-

ment from convergence+ endorsement)

The trouble with this is FASB

would be forced to make a

yes-or-no decision at the endof the process, rather than

having control all along, and

would therefore be some-what railroaded into endors-

ing rules it might not beentirely comfortable with.

Condorsement also reducesFASB and the SEC oversight

authority. And the planwould rapidly set up interna-

tional governance, which

given the IASBs mixed recordon timely rule design, seems

unwise.In its November com-

ment letter, FASB argued for

more authority for nationalstandard setters, more in-

dependence for rulemakersin generala reference to

the IASBs politically charged

decision making, and moreinfluence for FASB staff within

the IASB.

ACCOUNTING & DISCLOSURE


beginning to seem increasingly theoretical.

But this project is of particular importance,given the difficulty investors and counterpar-

ties had during the financial crisis when theyattempted to glean the true health of the banks.

So even if overall FASB/IASB convergence gets

back-burnered, coordinating the handling offinancial asset impairment will remain a priority.

PricewaterhouseCoopers partner GregoryMcGahan and senior manager Jivka Batchvarova

wrote, in an update they issued after the Decem-ber meeting, Both boards continue to strive to

achieve convergence in this area as constituentsbelieve that achieving convergence on the im-pairment model is critical. The tentative decisions

made this week indicate that the boards may beone step closer to achieving this goal.

KICK THE BUCKET

Banks have a number of concerns about theimpairment approach, reflected both in theirresponses to the E&Y survey and in their com-

ment letters. A leading worry is ensuring thebucket approach can be coordinated with their

internal credit modeling and management. Thismeans they oppose a bright line approach,

which would decree some threshold trigger formoving an asset from one bucket to another.

The FASB and IASB have provisionally agreed to

allow banks latitude in this area.Another concern is the possibility that the

rule forces a move from Bucket One to BucketTwo too soon, in cases where the loan may re-

cover and be moved back into the first bucket.Banks told E&Y in its survey that this will createsignificant volatility in the income statement,

and that, Institutions are also concerned thatthis would lead to significant volatility in regu-

latory capital, which is likely to be pro-cyclicalrather than counter-cyclical.

Another bank concern is with the three-buck-et approach itself. Banks operations are oftenset up for a good-book, bad-book taxonomy,

and about half the respondents to E&Ys survey

last August said the cost of the switch to threebuckets was not justified by any benefit such anapproach might yield.

With IASB and FASB making notable progresson the impairment standard, despite the languidpace and the worries of the banks, it would be

well for corporate treasurers to keep a close eyeon the developments over the next six months,

to get a feel for how the standard will emerge,impact banks capital and therefore banks inter-

est in extending their balance sheets.

At their joint meeting in mid-December, the

IASB and FASB boards made the following

decisions regarding the joint impairment

accounting standard. The boards:

nDecided that the objective of the first bucketwould be to capture the losses on financial

assets expected in the next twelve months.

Previously, they had considered 12 and

24 months. The banks in Ernst & Youngs

survey unanimously backed the 12-month

option, saying the approach aligns better with

existing Basel II expected loss forecasts and

other forecasts they perform.

nAgreed to measure the lifetime expectedlosses on the portion of financial assets on

which a loss event is expected over the next

12 months.

nAgreed that the financial assets would moveout of Bucket One when there is a more than

insignificant deterioration in credit quality

since initial recognition and the likelihood of

default is such that it is at least reasonably

possible that the contractual cash flows may

not be recoverable.

nDecided that recognition of lifetime expectedcredit losses would be based on the likelihood

of not collecting all the cash flows, rather than

using a loss-given-default method.

nAgreed to offer examples of when recognitionof lifetime expected losses would be

appropriate.

nOne big problem with deciding when to moveassets out of Bucket On is how to bundle

small ones together in a rational manner. The

boards decided upon the following principles:

>Assets are to be grouped on the basis ofshared risk characteristics.

>An entity may not group financial assets ata more aggregated level if there are shared

risk characteristics for a sub-group that

would indicate that recognition of lifetime

losses is appropriate.

>If a financial asset cannot be includedin a group because the entity does not havea group of similar assets, or if a financial

asset is individually significant, an entity is

required to evaluate that asset individually.

>If a financial asset shares risk characteristicswith other assets held by an entity, the entity

is permitted to evaluate those assets indi-

vidually or within a group of financial assets

with shared risk characteristics.

BUCKET BUSINESS


14/16


TREASURY AND TAXATION

Complying with US tax regulations

continues to be a challenge for corporatetreasury. And with every new year comes

the inevitable task of tax return prepara-tion. But for treasurers and their staffs

who manage corporate foreign bankaccounts, the requirements for 2012 filingwill become downright onerous.

The new requirements, when com-bined with stricter IRS due diligence, are

increasing the personal financial risk oftreasury practitioners and need close

attention. For instance, closer scrutinyon FBAR compliance is expected and thenew IRS form 8938 needs to be prepared

along with 2011 income forms. Also,FATCA, which requires individuals to file a

statement with their income tax returnsreporting foreign financial assets, will have

implementation guidelines out soon.Here is a brief review of FBAR and the

new 8938 tax form, as well as ideas for

assisting your treasury staff to ensurethey are meeting their tax reporting

obligations.

RAISING THE BAR WITH FBAR

The Report of Foreign Bank and Finan-cial Accounts, or FBAR, is a by product

of the Bank Secrecy Act of 1970 andlater the US Patriot ACT of 2001, and was

first introduced as a device to assist incracking down on tax evaders as well as

exposing criminal activity such as terroristfunding.

In 2004 the penalties were increased

to their current levels; a maximum civil

penalty for a FBAR violation the greater of$100,000 or 50 percent of the balance ina foreign account at the time of the viola-

tion. Penalties can be as high as $10,000for each violation and criminal activitycan result in additional fines and/or five

years in prison.The account filing requirements are

individual in nature, so where there existmultiple owners of one account, each

one is required to report the account sepa-

rately on their individual tax form 90-22.1.

FBAR is not an income tax return and isnot mailed with any income tax return; the

deadline for filing is June 30, 2012. Also,the form must be received on or before

June 30 to be considered filed, not justpostmarked on that date, and requestsfor time extensions to file your FBAR will

not permitted.

Current FBAR rules will impose a

significant reporting burden

on financial professionals. Salome Tinker, AFP

However, if you find yourself missingthe filing deadline it is best to file as soon

as possible and include an explanationas to your tardiness in order to present

yourself in the best light. Penalties arestiff and a proactive approach to breach-es, past and present, is your best bet to

limit, or possibly waive, your costs of non-compliance. Remember that besides civil

penalties, there may be criminal penal-ties for non-filing. Consulting with your

tax advisorcorporate tax departmentscan also be helpfulis the best way toapproach any voluntary disclosure.

NEW 8938 TAX FORM

For year-ending 2011 tax reporting, theIRS has introduced form 8938. The form is

far more extensive than the original draftand US individual taxpayers must nowattach it to their Form 1040 individual in-

come tax return if they have foreign finan-

cial assets that exceed a specific threshold.This threshold varies depending uponfiling status, but the IRS has the authority

to set the threshold as low as $50,000.For the new Form 8938, the minimum

failure to file penalty is $10,000 plus a

penalty of up to $50,000 for continuedfailures after IRS notification. For a US

individual who is required, but fails, tole both an FBAR and a new Form 8938,

the penalties can be imposed for both

omissions; that creates very real persona

liability. And there are additional penalties for non-disclosure on income related

to these accounts as well.Because individuals in the treasury and

other parts of finance deal extensivelywith foreign banks accountsoften aregular part of their jobsome voices

in the industry are speaking up againstthe excessive personal risk these require

ments place on those groups.A September 2011 Association o

Financial Professionals comment letter tothe Financial Crime Enforcement Networkand the IRS expresses this concern, and

requests that the US Treasury reconsideits current guidance and exempt, or pro-

vide filing relief, from the FBAR reportingrequirements to those US persons with

signature or other authority over, but nofinancial interest in the foreign bank ofinancial account of their employers.

Current FBAR rules will impose asignificant reporting burden on finan

cial professionals who are not the intended focus, said Salome Tinker, AFPs

director of governance, accounting andcompliance. Treasury should also adoptretroactive filing relief, she added.

GUILTY UNTIL PROVEN INNOCENT

The question is will the IRS back down andconsider revising some of the new tax reg-

ulation as it pertains to foreign activity?The increased work entailed in managingtax exposures for foreign banks and finan

cial institutions is expected to be oner-

ous, so much so that the Canadian PrimeMinister met recently with representatives of the US Department of Treasury to

discuss the detrimental impact and costsFATCA will have on Canadian banks. Andthere are rumblings from China that it

plans to ignore the initiative altogether.But, despite the outcry by Canada and

other countries concerned with the overly burdensome nature of the new FATCA

requirements, the IRS is forging ahead.

Global taxes

Complying with FBAR and FATCABy Geralyn Frances

Getting treasury staff ready for new tax laws and providing support via tax, legal or human resources can ease the chaos

and confusion these new laws will bring.


15/16

TREASURY AND TAXATION


Source: American Institute of CPAs, as of December 1, 2011

THE HUNT FOR US TAXPAYERS GOES GLOBAL

Some believe there is just too much at

stake for them to not pursue tax evaders,even if unpopular means are employed.

By some counts, about $8bn in outstand-ing tax revenue could be collected via

FATCA compliance over the next decade.

So, until proven innocent, financial insti-tution clients are assumed guilty with a

30 percent withholding penalty imposedfor non-compliance.

On a brighter note, FATCA has beenpushed back from the original imple-

mentation date and is now scheduled totake effect in June 2013. In addition, theIRS commissioner has noted recently that

two main issues remain 1) other coun-tries laws that may preclude reporting of

certain information to foreign countriesand 2) differences in implementation and

administration of withholding require-

ments. As such, new implementation

guidelines have been promised in thenext few months.

EASING THE CONFUSION

Meeting either requirement has caused

considerable havoc and lots of confusionwithin treasury departments, particularly

FBAR; and the concern of treasury staffsis justified; personal financial risk and

criminal penalties are at stake. Therefore:n Be sure to communicate early in

the year any personal disclosure require-ments, including all tax forms, deadlinesand implications for non-compliance.

n Delivering information to employ-ees early will help avoid revisions to their

personal tax returns.n Pay special attention to new staff

members or those with new roles and

responsibilities that may be facing FBAR

requirements for the first time, as well asany temporary or contracted workers.

nHuman resources departments maybe of assistance ensuring past employees

are also provided with required docu-

mentation to complete forms.Individuals will start to prepare 2012

tax forms soon. Communicating withthose treasury staff it will impact, pro-

viding corporate support, via tax, legaor human resources, will go a long way

in easing some of the confusion createdby FBAR and the new tax requirementsand one would hope result in 100 percent

compliance. As for FATCA, there are somewrinkles for the IRS to iron out; however

this will be the year that financial institu-tions and corporates will start preparing

for 2013 compliance.

FATCA FORM 8938 FBAR FORM TD F 90-22.1

Filing Deadline April due date (extension allowed),

with tax return

June 30, to special unit of

Treasury Department

Minimum Filing Threshold $50,000* $10,000

Who Must File Individuals Individuals, estates, trusts, U.S.

business entities

Penalty For Not Filing Civil: Up to $10,000 for each 30

days of non-filing, plus others;

criminal penalties may also apply

Civil: Up to the greater of $100,000

or 50% of account balance in year

of violation, plus others; criminal

penalties may also apply

Accounts at a foreign financial institution,

owned directly

Yes Yes

Accounts at a foreign financial institution,

signature authority but no financial interest

No Yes

Direct ownership of stock in foreign

corporation

Yes No

Foreign partnership interest, such as off-

shore hedge fund or private equity fund

Yes No

Interests in foreign financial assets with

joint ownership

Yes, and each joint owner must

report separately

Yes, and each joint owner must

report separately

Interest in foreign financial assets,

constructively owned

Yes for some Yes, if ownership is greater than

50% of the entity

The federal governments two latest tax initiatives to increase compliance among US taxpayers with overseas assets is seen

as onerous by many treasury practitioners. Heres how the two laws compare, according to the American Institute of CPAs.

*Threshold applies to aggregate value of all affected assets, as of 12/31/2011. Range is from $50,000 for a single taxpayer living in the US to $400,000for couples filing jointly who live overseas. There are higher thresholds for intra-year asset values.

TYPE OF ASSETS TO DISCLOSE


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Documents

International Treasurer - January 2012 - Europe Outlook; FATCA and FBAR