In the high-stakes world of private equity, where the pressure to deliver exceptional returns is relentless, the playbook is evolving. Gone are the days when financial engineering—relying heavily on leveraged buyouts and cost-cutting—was the silver bullet for value creation. Today, the narrative is shifting toward a more sustainable, operationally driven approach, with treasury and finance optimization emerging as pivotal levers in this transformation.  

In this article, we blend fictional examples, use cases and other real-world examples to vividly illustrate key concepts and drive our points home.  

The Disconnect Between Promised and Delivered Operational Value 

Limited Partners (LPs) are becoming more discerning in their investment decisions, increasingly demanding more than just financial returns. They expect General Partners (GPs) to deliver on promises of operational improvements that go beyond mere financial engineering. However, there is often a significant disconnect between the operational value creation promised by GPs and the reality, which frequently relies too heavily on short-term financial tactics. 

A report by McKinsey highlights that while 60% of GPs claim to focus on operational improvements, only 40% of LPs feel that these efforts significantly impact portfolio performance. This gap between intention and execution underscores the need for GPs to align their value creation strategies with LP expectations. LPs are particularly focused on consistent investment strategies, strong management teams, and robust operational processes that drive sustainable growth. They view genuine operational value creation as the cornerstone of a repeatable and sustainable investment strategy, offering reassurance that future fund generations will perform consistently. 

Treasury: The Unsung Hero of Value Creation 

Treasury functions, once seen as mere back-office operations, are increasingly recognized as crucial drivers of value in private equity. These functions—ranging from cash management to financial risk mitigation—are the lifeblood of any portfolio company.  

The evolution of treasury functions, now known as Treasury 4.x, has transformed them into pivotal drivers of value. These modernized treasury roles—encompassing advanced cash management and risk mitigation—now align financial operations with broader strategic goals, leveraging technology and data analytics to optimize performance. 

Yet, many firms struggleto appreciate just how much inefficiencies in these areas can erode value. Poor liquidity management, fragmented cash operations, and outdated financial processes can strangle a company's ability to invest in growth and hamstring its potential to capitalize on market opportunities. 

Consider the example of a mid-sized European manufacturing firm acquired by a private equity investor. Initially, the focus was solely on scaling revenue by entering new markets. However, it soon became apparent that fragmented treasury operations were hemorrhaging resources, particularly due to decentralized cash management systems across multiple jurisdictions.  

By centralizing these operations into a single source of truth, like a treasury management system (TMS), the company was able to cut down on redundant processes, improve visibility and central control on cash, reduce external borrowing cost and cash related operational costs by 20%. This freed up capital that was then reinvested into R&D and expansion efforts, positioning the firm to seize new growth opportunities with agility. 

Cash Flow Forecasting: The Financial Crystal Ball 

In the realm of private equity, where every dollar counts, cash flow forecasting is not just a routine exercise—it’s a strategic imperative. Accurate cash flow forecasting provides a clear window into a company's financial future, offering transparency that is invaluable for both internal decision-makers and external stakeholders, especially Limited Partners (LPs) who demand rigorous insights into their investments. 

Take, for example, a mid-market technology firm backed by private equity, poised to launch a groundbreaking product. Initially, the firm’s cash flow forecasts were rudimentary, lacking the sophistication needed to anticipate the working capital needs for the product launch phase. As a result, the company nearly ran into a liquidity crisis that could have delayed the launch.  

By overhauling its cash flow forecasting processes and incorporating scenario analysis, the company was able to better anticipate cash needs, secure bridge financing, and ensure a successful product rollout, which ultimately boosted investor confidence. 

Navigating Financial Risks in a Volatile World 

In today’s unpredictable economic landscape, managing financial risks such as currency fluctuations and interest rate spikes is more critical than ever. As private equity firms increasingly engage in cross-border acquisitions, the exposure to foreign exchange risk has become a significant concern. Similarly, the current high-interest-rate environment complicates debt management, adding layers of complexity to financial operations. 

Consider a global consumer goods company within a private equity portfolio, operating in regions with volatile currencies like Brazil or South Africa. Without a robust FX hedging strategy, the company was previously exposed to unpredictable swings in cash flows due to exchange rate fluctuations, which affected its ability to meet debt obligations denominated in foreign currencies.  

By implementing a comprehensive FX hedging strategy, including the use of natural hedges, the firm was able to lock in favorable exchange rates, stabilize its cash flows, and protect its margins. This not only ensured financial stability but also allowed the company to reinvest profits into expanding its footprint in emerging markets. 

Treasury in M&A: A Crucial Integration Component 

Treasury management is often the linchpin in the success or failure of mergers and acquisitions (M&A). The ability to seamlessly integrate treasury operations is essential for realizing the synergies promised by a merger. Failure to do so can lead to significant financial inefficiencies, eroding the anticipated value. 

A cautionary tale can be seen in General Electric’s acquisition of Alstom Power, where unforeseen integration challenges led to substantial restructuring costs. The treasury teams faced difficulties in aligning the cash management systems and integrating different financial cultures, which delayed synergies realization and led to missed financial targets.  

Conversely, in another M&A scenario involving the merger of two mid-sized logistics firms, a pre-emptive focus on treasury integration—such as harmonizing cash pooling arrangements and consolidating banking relationships—enabled the new entity to achieve cost synergies ahead of schedule, saving millions in operational expenses and improving free cash flow. 

Streamlined Treasury and Finance: Driving Strategic Value and Returns in Private Equity 

 Streamlined treasury and finance operations are crucial for maximizing value in private equity. These enhancements go beyond cost savings, improving a company's agility and resilience by ensuring financial resources are available precisely when needed. This empowers portfolio companies to seize growth opportunities while driving cost savings and better resource utilization through operational efficiency. Optimizing cash management and liquidity also enables companies to better navigate market volatility, reducing risks such as poor cash flow forecasting. 

Enhanced transparency and real-time data visibility lead to more informed decision-making, aligning with long-term value creation strategies. This not only strengthens investor confidence but also prepares companies for successful exits by making them more attractive to potential buyers. Improved free cash flow directly boosts the money-on-money multiple, enhancing financial outcomes for private equity investors. 

Conclusion 

In today’s private equity landscape, the strategic importance of treasury and finance optimization is undeniable. The era of relying solely on financial engineering is over. A comprehensive approach that includes robust treasury management and operational efficiency is now essential for driving sustainable growth and maximizing value. By addressing treasury inefficiencies, private equity firms can unlock significant value, ensuring portfolio companies have the financial health to thrive. This approach meets the rising expectations of Limited Partners, setting the stage for long-term success and profitable exits. 

If you're interested in delving deeper into the benefits of strategic treasury management for private equity firms, you can contact Job Wolters.

Zanders Transfer Pricing Suite is an innovative, cloud-based solution designed for companies looking to automate the Transfer Pricing compliance of financial transactions. With over five years of experience and trusted by more than 60 multinational corporations, the platform is the market-leading solution for financial transactions Transfer Pricing. On March 31, 2023, Zanders and Royal Philips jointly presented the conference "How Philips Automated Its Transfer Pricing Process for Group Financing" at the DACT (Dutch Association of Corporate Treasurers) Treasury Fair 2023.

Context
The publication of Chapter X of Financial Transactions by the OECD, as well as its incorporation into the 2022 OECD Transfer Pricing Guidelines, has led to an increased scrutiny by tax authorities. Consequently, transfer pricing for financial transactions, such as intra-group loans, guarantees, cash pools, and in-house banks, has become a critical focus for treasury and tax departments.

ZANDERS TRANSFER PRICING SOLUTION

As compliance with Transfer Pricing regulations gains greater significance, many companies find that the associated analyses consume excessive time and resources from their in-house tax and treasury departments. Several struggle to automate the end-to-end process, from initiating intercompany loans to determining the arm's length interest, recording the loans in their Treasury Management System (TMS), and storing the Transfer Pricing documentation.

Since 2018, Zanders Transfer Pricing Solution has supported multinational corporations in automating their Transfer Pricing compliance processes for financial transactions.

ROYAL PHILIPS CASE STUDY

Managing over 80 intercompany loans annually and with a wide geographical scope, Royal Philips faced the challenge of complying with their Transfer Pricing obligations. During the conference, Joris Van Mierlo, Corporate Finance Manager at Philips, detailed how Royal Philips implemented a fully integrated solution to determine and record the arm's length interest rates applicable to its intra-group loans.

This paper offers a straightforward analysis of the Basel Committee on Banking Supervision's standards on crypto asset exposures and their adoption by 2025. It critically assesses infrastructure risks, categorizes crypto assets for regulatory purposes, and proposes a flexible approach to managing these risks based on the blockchain network's stability. Through expert interviews, key risk drivers are identified, leading to a framework for quantifying infrastructure risks. This concise overview provides essential insights for financial institutions navigating the complex regulatory and technological landscape of crypto assets.

follow this link to download the full paper as pdf

In recent years, consumers’ and investors’ interest in sustainability has been growing. Since 2015, assets under management in ESG funds have nearly tripled, the outstanding value of green bonds issued by residents of the euro area has surged eightfold, and emission-related derivatives have seen a more than sevenfold increase¹. 

The global push for sustainable and environmentally responsible practices has led to an increased focus on the role of financial institutions in supporting green initiatives. One of the ways financial institutions use to incentivise sustainable investments, is by designing new products, such as blue bonds to protect marine areas and other sustainability-linked bonds², or by transitioning to funding sectors with positive sustainability impact.

However, amidst the growing wave of environmental consciousness, the credibility of "green" claims made by some financial institutions is a point of concern. This phenomenon, known as greenwashing, is gaining attention, not only within financial institutions, but also with regulators. Financial regulators, including the European Supervisory Authorities (ESAs) and UK’s Financial Conduct Authority (FCA) have taken action against potentially misleading green statements made by institutions. Despite these regulatory interventions, the persistent risk of greenwashing persists, primarily due to the absence of consistent standards governing sustainability claims and disclosures. The lack of uniform criteria poses an ongoing challenge to effectively combatting greenwashing practices within the financial landscape.

Defining Greenwashing

The ESAs describe greenwashing as “a practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This practice may be misleading to consumers, investors, or other market participants” ³.

Financial institutions, as key players in the global economy, play a crucial role in fostering sustainability. However, some have been accused of using deceptive practices to push their green image without making substantial changes. This practice may be misleading to consumers, investors, and other market participants.

In practice, greenwashing can take different forms depending on the institution. For insurance companies, the European Insurance and Occupational Pensions Authority (EIOPA) found in their Advise to the European Commission on Greenwashing⁴ various examples where insurers misleadingly claimed to be transitioning their underwriting activities to net zero by 2050 without any credible plans to do so. Other examples include insurance companies falsely claiming to plant trees for each life insurance policy sold but failing to fulfil this promise, or products being marketed as sustainable merely because of a positive "ESG rating," despite the rating not taking into account any actual sustainability factors and focusing solely on financial risks.

Withing the banking sector, the EBA reported⁵ that the most common misleading claims relate to the current approach to integrating sustainability into the business strategy, claims on the sustainability results and the real-world impact, and claims on future commitments on medium and long-term plans.

Finally, for investment companies and pension funds, the European Securities and Markets Authority (ESMA) reported⁶ that most the common greenwashing practices result from exaggerated claims without any proven link between and ESG metric and the real-world impact.

Key Indicators of Greenwashing:

1. Vague and Ambiguous Language: Financial institutions engaging in greenwashing often use vague terms and ambiguous language in their marketing materials. This lack of clarity makes it challenging for consumers to discern the actual environmental impact of their investments.
2. Lack of Transparency: Genuine commitment to sustainability involves transparency about investment choices and the environmental impact of financial products. Institutions that are less forthcoming about their practices may be concealing less-than-green investments.
3. Inconsistent Policies: Greenwashing is also evident when there is a misalignment between a financial institution's sustainability claims and its actual policies and practices. Actions, or lack thereof, can speak louder than words.

The Role of Regulatory Bodies

Greenwashing poses potential reputational and financial risks for the institutions involved. Addressing greenwashing might not only improve consumer’s trust in the products and services offered by financial institutions, but also will allow customers to make informed decisions that are align with their sustainability preferences and increase the capital into products that genuinely represent a more sustainable choice and drive a positive change. Tackling greenwashing should therefore be a priority for regulatory supervisors.

The introduction of the EU’s Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR) addresses the initial concerns of greenwashing within the financial sector. The Taxonomy determines which economic activities are environmentally sustainable and addresses greenwashing by enabling market participants to identify and invest in sustainable assets with more confidence. SFDR promotes openness and transparency in sustainable finance transactions and requires Financial Market Participants to share the environmental and social impact of their transactions with stakeholders. In May 2023, the ESA published their progress report on greenwashing monitoring and supervision⁷. The report aims to provide insights into an understanding of greenwashing and identify the specific forms it can take within banking. It also evaluates greenwashing risk within the EU banking sector and determines the extend to which it might be and issue from a regulatory perspective.

In the UK, the FCA published in November 2023 a guidance consultation on the Anti-Greenwashing Rule⁸. The anti-greenwashing rule is one part of a package of measures introduced through the Sustainability Disclosure Requirements (SDR). The anti-greenwashing rule requires FCA-authorised firms to ensure that any claims they make to the sustainability characteristics of their financial products and services are consistent with the actual sustainability characteristics of the product or service and are fair, clear and not misleading, and have evidence to back them up. The propose rule will come into force on 31 May 2024.

While the existing and planned regulation contributes to addressing aspects of greenwashing, several measures have not yet fully entered into application, making the impact of the frameworks not visible yet. Beyond disclosures, regulators should also focus on tightening requirements on sustainability data and ratings, and creating mandates to prevent misleading statements and unfair commercial practices.

Going forward, as regulators gain more experience to comprehensively address greenwashing, financial institutions should expect increased supervision and enforcement of sustainable finance policies aimed at preventing misleading sustainability claims.

Actions to mitigate greenwashing risk

One of the biggest challenges financial institutions faced in relation to sustainability is that scientific progress, policy development and social values are in constant evolution. What was a well-supported green initiative two years ago can potentially be considered as greenwashing today.

In the meantime that stricter regulations and guidance is in place, financial institutions should take a broad view on how to develop and communicate sustainability strategies to mitigate greenwashing risk.

Here are three ways on how to prevent greenwashing:

1. Promote disclosure: financial institutions should publish comprehensive sustainability reports and disclose ESG information as part of their financial reports.
2. Commit to transparency: claims about environmental aspects or performance of their products should be justified with science-based and verifiable methods. Financial institutions should be transparent about their ambitions, status, and be open about any shortcomings they identified.
3. Align business practices with purpose:  financial institutions should determine which climate-related and environmental risks impact business strategy in the short, medium and long term. They should reflect climate-related and environmental risks in business strategies and its implementation. In addition, they should balance sustainability ambitions with the reality of real transformation.

Zanders’ approach to managing reputational risk

Avoiding greenwashing should always be a priority for institutions. If a risk arises in this area, reputational risk management can help to limit negative effects. Due to the interdependencies between ESG, reputational, business and liquidity risk, the supervisory authorities are also increasingly focusing on this area.

In the context of reputational risk management, we recommend a holistic approach that includes both existing and new business in the analysis. In addition to identifying critical transactions from a reputational perspective, the focus is also on active stakeholder management. This requires cross-departmental cooperation between various units within the institution. In many cases, the establishment of a reputation risk management committee is key to manage that topic properly within the institution.

Conclusion

While many financial institutions genuinely strive for sustainability, the rise of greenwashing highlights the need for increased vigilance and scrutiny. Consumers, regulators, and industry stakeholders must work together to ensure that financial institutions align their actions with their environmental claims, fostering a truly sustainable and responsible financial sector.

Curious to learn more? Please contact: Elena Paniagua-Avila or Martin Ruf

In this report, biodiversity loss ranks as the fourth most pressing concern after climate change adaptation, mitigation failure, and natural disasters. For financial institutions (FIs), it is therefore a relevant risk that should be taken into account. So, how should FIs implement biodiversity risk in their risk management framework?

Despite an increasing awareness of the importance of biodiversity, human activities continue to significantly alter the ecosystems we depend on. The present rate of species going extinct is 10 to 100 times higher than the average observed over the past 10 million years, according to Partnership for Biodiversity Accounting Financials[i]. The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) reports that 75% of ecosystems have been modified by human actions, with 20% of terrestrial biomass lost, 25% under threat, and a projection of 1 million species facing extinction unless immediate action is taken. Resilience theory and planetary boundaries state that once a certain critical threshold is surpassed, the rate of change enters an exponential trajectory, leading to irreversible changes, and, as noted in a report by the Nederlandsche Bank (DNB), we are already close to that threshold[ii].

We will now explain biodiversity as a concept, why it is a significant risk for financial institutions (FIs), and how to start thinking about implementing biodiversity risk in a financial institutions’ risk management framework.

What is biodiversity?

The Convention on Biological Diversity (CBD) defines biodiversity as “the variability among living organisms from all sources including, i.a., terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part.”[iii] Humans rely on ecosystems directly and indirectly as they provide us with resources, protection and services such as cleaning our air and water.

Biodiversity both affects and is affected by climate change. For example, ecosystems such as tropical forests and peatlands consist of a diverse wildlife and act as carbon sinks that reduce the pace of climate change. At the same time, ecosystems are threatened by the accelerating change caused by human-induced global warming. The IPBES and Intergovernmental Panel on Climate Change (IPCC), in their first-ever collaboration, state that “biodiversity loss and climate change are both driven by human economic activities and mutually reinforce each other. Neither will be successfully resolved unless both are tackled together.”[iv]

Why is it relevant for financial institutions?

While financial institutions’ own operations do not materially impact biodiversity, they do have impact on biodiversity through their financing. ASN Bank, for instance, calculated that the net biodiversity impact of its financed exposure is equivalent to around 516 square kilometres of lost biodiversity – which is roughly equal to the size of the isle of Ibiza in Spain[v]. The FIs’ impact on biodiversity also leads to opportunities. The Institute Financing Nature (IFN) report estimates that the financing gap for biodiversity is close to $700 billion annually[vi]. This emphasizes the importance of directing substantial financial resources towards biodiversity-positive initiatives.

At the same time, biodiversity loss also poses risks to financial institutions.

The global economy highly depends on biodiversity as a result of the increasedglobalization and interconnectedness of the financial system. Due to these factors, the effects of biodiversity losses are magnified and exacerbated through the financial system, which can result in significant financial losses. For example, approximately USD 44 trillion of the global GDP is highly or moderately dependent on nature (World Economic Forum, 2020). Specifically for financial institutions, the DNB estimated that Dutch FIs alone have EUR 510 billionof exposure to companies that are highly or very highly dependent on one or more ecosystems services[vii]. Furthermore, in the 2010 World Economic Forum report worldwide economic damage from biodiversity loss is estimated to be around USD 2 to 4.5 trillion annually. This is remarkably high when compared to the negative global financial damage of USD 1.7 trillion per year from greenhouse gas emissions (based on 2008 data), which demonstrates that institutions should not focus their attention solely on the effects of climate change when assessing climate & environmental risks[viii].

Examples of financial impact

Similarly to climate risk, biodiversity risk is expected to materialize through the traditional risk types a financial institution faces. To illustrate how biodiversity loss can affect individual financial institutions, we provide an example of the potential impact of physical biodiversity risk on, respectively, the credit risk and market risk of an institution:

Credit risk:

Failing ecosystem services can lead to disruptions of production, reducing the profits of counterparties. As a result, there is an increase in credit risk of these counterparties. For example, these disruptions can materialize in the following ways:

• A total of 75% of the global food crop rely on animals for their pollination. For the agricultural sector, deterioration or loss of pollinating species may result in significant crop yield reduction.
• Marine ecosystems are a natural defence against natural hazards. Wetlands prevented USD 650 million worth of damages during the 2012 Superstorm Sandy [OECD, 2019), while the material damage of hurricane Katrina would have been USD 150 billion less if the wetlands had not been lost.

Market risk:

The market value of investments of a financial institution can suffer from the interconnectedness of the global economy and concentration of production when a climate event happens. For example:

• A 2011 flood in Thailand impacted an area where most of the world's hard drives are manufactured. This led to a 20%-40% rise in global prices of the product[ix]. The impact of the local ecosystems for these type of products expose the dependency for investors as well as society as a whole.

Core part of the European Green Deal

The examples above are physical biodiversity risk examples. In addition to physical risk, biodiversity loss can also lead to transition risk – changes in the regulatory environment could imply less viable business models and an increase in costs, which will potentially affect the profitability and risk profile of financial institutions. While physical risk can be argued to materialize in a more distant future, transition risk is a more pressing concern as new measures have been released, for example by the European Commission, to transition to more sustainable and biodiversity friendly practices. These measures are included in the EU biodiversity strategy for 2030 and the EU’s Nature restoration law.

The EU’s biodiversity strategy for 2030 is a core part of European Green Deal. It is a comprehensive, ambitious, and long-term plan that focuses on protecting valuable or vulnerable ecosystems, restoring damaged ecosystems, financing transformation projects, and introducing accountability for nature-damaging activities. The strategy aims to put Europe's biodiversity on a path to recovery by 2030, and contains specific actions and commitments. The EU biodiversity strategy covers various aspects such as:

• Legal protection of an additional 4% of land area (up to a total of 7%) and 19% of sea area (up to a total of 30%)
• Strict protection of 9% of sea and 7% of land area (up to a total of 10% for both)
• Reduction of fertilizer use by at least 20%
• Setting measures for sustainable harvesting of marine resources

A major step forwards towards enforcement of the strategy is the approval of the Nature restoration law by the EU in July 2023, which will become the first continent-wide comprehensive law on biodiversity and ecosystems. The law is likely to impact the agricultural sector, as the bill allows for 30% of all former peatlands that are currently exploited for agriculture to be restored or partially shifted to other uses by 2030. By 2050, this should be at least 70%. These regulatory actions are expected to have a positive impact on biodiversity in the EU. However, a swift implementation may increase transition risk for companies that are affected by the regulation.

The ECB Guide on climate-related and environmental risks explicitly states that biodiversity loss is one of the risk drivers for financial institutions[x]. Furthermore, the ECB Guide requires financial institutions to asses both physical and transition risks stemming from biodiversity loss. In addition, the EBA Report on the Management and Supervision of ESG Risk for Credit Institutions and Investment Firms repeatedly refers to biodiversity when discussing physical and transition risks[xi].

Moreover, the topic ‘biodiversity and ecosystems’ is also covered by the Corporate Sustainability Reporting Directive (CSRD), which requires companies within its scope to disclose on several sustainability related matters using a double materiality perspective.[1] Biodiversity and ecosystems is one of five environmental sustainability matters covered by CSRD. At a minimum, financial institutions in scope of CSRD must perform a materiality assessment of impacts, risks and opportunities stemming from biodiversity and ecosystems. Furthermore, when biodiversity is assessed to be material, either from financial or impact materiality perspective, the institution is subject to granular biodiversity-related disclosure requirements covering, among others, topics such as business strategy, policies, actions, targets, and metrics.

Where to start?

In line with regulatory requirements, financial institutions should already be integrating biodiversity into their risk management practices. Zanders recognizes the challenges associated with biodiversity-related risk management, such as data availability and multidimensionality. Therefore, Zanders suggests to initiate this process by starting with the following two steps. The complexity of the methodologies can increase over time as the institution’s, the regulator’s and the market’s knowledge on biodiversity-related risks becomes more mature.  

1. Perform materiality assessment using the double materiality concept. This means that financial institutions should measure and analyze biodiversity-related financial materiality through the identification of risks and opportunities. Institutions should also assess their impacts on biodiversity, for example, through calculation of their biodiversity footprint. This can start with classifying exposures’ impact and dependency on biodiversity based on a sector-level analysis.
2. Integrate biodiversity-related risks considerations into their business strategy and risk management frameworks. From a business perspective, if material, financial institutions are expected to integrate biodiversity in their business strategy, and set policies and targets to manage the risks. Such actions could be engagement with clients to promote their sustainability practices, allocation of financing to ‘biodiversity-friendly’ projects, and/or development of biodiversity specific products. Moreover, institutions are expected to adjust their risk appetites to account for biodiversity-related risks and opportunities, establish KRIs along with limits and thresholds. Embedding material ESG risks in the risk appetite frameworks should include a description on how risk indicators and limits are allocated within the banking group, business lines and branches.

Considering the potential impact of biodiversity loss on financial institutions, it is crucial for them to extend their focus beyond climate change and also start assessing and managing biodiversity risks. Zanders can support financial institutions in measuring biodiversity-related risks and taking first steps in integrating these risks into risk frameworks. Curious to hear more on this? Please reach out to Marije Wiersma, Iryna Fedenko, or Jaap Gerrits.

[1] CSRD applies to large EU companies, including banks and insurance firms. The first companies subject to CSRD must disclose according to the requirements in the European Sustainability Reporting Standards (ESRS) from 2025 (over financial year 2024), and by the reporting year 2029, the majority of European companies will be subject to publishing the CSRD reports. The sustainability report should be a publicly available statement with information on the sustainability-matters that the company considers material. This statement needs to be audited with limited assurance.

[i] PBAF. (2023). Dependencies - Pertnership for Biodiversity Acccounting Financials (PBAF)

[ii] De Nederlandche Bank. (2020). Indepted to nature - Exploring biodiversity risks for the Dutch Financial Sector.

[iii] CBD. (2005). Handbook of the convention on biological diversity

[iv] IPBES. (2021). Tackling Biodiversity & Climate Crises Together & Their Combined Social Impacts

[v] ASN Bank (2022). ASN Bank Biodiversity Footprint

[vi] Paulson Institute. (2021). Financing nature: Closing the Global Biodiversity

[vii] De Nederlandche Bank. (2020). Indepted to nature - Exploring biodiversity risks for the Dutch Financial Sector

[viii] PwC for World Economic Forum. (2010). Biodiversity and business risk

[ix] All the examples related to credit and market risk are presented in the report by De Nederlandsche Bank. (2020). Biodiversity Opportunities and Risks for the Financial Sector

[x] ECB. (2020). Guide on climate-related and environmental risks.

[xi] EBA. (2021). EBA Report on Management and Supervision of ESG Risk for Credit Institutions and Investment Firms

Carbon offset processes are currently dominated by private actors providing legitimacy for the market. The two largest of these, Verra and Gold Standard, provide auditing services, carbon registries and a marketplace to sell carbon offsets, making them ubiquitous in the whole process. Due to this opacity and centralisation, the business models of the existing companies was criticised regarding its validity and the actual benefit for climate action. By buying an offset in the traditional manner, the buyer must place trust in these players and their business models. Alternative solutions that would enhance the transparency of the process as well as provide decentralised marketplaces are thus called for.

The conventional process

Carbon offsets are certificates or credits that represent a reduction or removal of greenhouse gas emissions from the atmosphere. Offset markets work by having companies and organizations voluntarily pay for carbon offsetting projects. Reasons for partaking in voluntary carbon markets vary from increased awareness of corporate responsibility to a belief that emissions legislation is inevitable, and it is thus better to partake earlier.

Some industries also suffer prohibitively expensive barriers for lowering their emissions, or simply can’t reduce them because of the nature of their business. These industries can instead benefit from carbon offsets, as they manage to lower overall carbon emissions while still staying in business. Environmental organisations run climate-friendly projects and offer certificate-based investments for companies or individuals who therefore can reduce their own carbon footprint. By purchasing such certificates, they invest in these projects and their actual or future reduction of emissions. However, on a global scale, it is not enough to simply lower our carbon footprint to negate the effects of climate change. Emissions would in practice have to be negative, so that even a target of 1,5-degree Celsius warming could be met. This is also remedied by carbon credits, as they offer us a chance of removing carbon from the atmosphere. In the current process, companies looking to take part in the offsetting market will at some point run into the aforementioned behemoths and therefore an opaque form of purchasing carbon offsets.

The blockchain approach

A blockchain is a secure and decentralised database or ledger which is shared among the nodes of a computer network. Therefore, this technology can offer a valid contribution addressing the opacity and centralisation of the traditional procedure. The intention of the first blockchain approaches were the distribution of digital information in a shared ledger that is agreed on jointly and updated in a transparent manner. The information is recorded in blocks and added to the chain irreversibly, thus preventing the alteration, deletion and irregular inclusion of data.

In the recent years, tokenization of (physical) assets and the creation of a digital version that is stored on the blockchain gained more interest. By utilizing blockchain technology, asset ownership can be tokenized, which enables fractional ownership, reduces intermediaries, and provides a secure and transparent ledger. This not only increases liquidity but also expands access to previously illiquid assets (like carbon offsets). The blockchain ledger allows for real-time settlement of transactions, increasing efficiency and reducing the risk of fraud. Additionally, tokens can be programmed to include certain rules and restrictions, such as limiting the number of tokens that can be issued or specifying how they can be traded, which can provide greater transparency and control over the asset.

Blockchain-based carbon offset process

The tokenisation process for carbon credits begins with the identification of a project that either captures or helps to avoid carbon creation. In this example, the focus is on carbon avoidance through solar panels. The generation of solar electricity is considered an offset, as alternative energy use would emit carbon dioxide, whereas solar power does not.

The solar panels provide information regarding their electricity generation, from which a figure is derived that represents the amount of carbon avoided and fed into a smart contract. A smart contract is a self-executing application that exist on the blockchain and performs actions based on its underlying code. In the blockchain-based carbon offset process, smart contracts convert the different tokens and send them to the owner’s wallet. The tokens used within the process are compliant with the ERC-721 Non-Fungible Token (NFT) standard, which represents a unique token that is distinguishable from others and cannot be exchanged for other units of the same asset. A practical example is a work of art that, even if replicated, is always slightly different.

In the first stage of the process, the owner claims a carbon receipt, based on the amount of carbon avoided by the solar panel. Thereby the aggregated amount of carbon avoided (also stored in a database just for replication purposes) is sent to the smart contract, which issues a carbon receipt of the corresponding figure to the owner. Carbon receipts can further be exchanged for a uniform amount of carbon credits (e.g. 5 kg, 10 kg, 15 kg) by interacting with the second smart contract. Carbon credits are designed to be traded on the decentralised marketplace, where the price is determined by the supply and demand of its participants. Ultimately, carbon credits can be exchanged for carbon certificates indicating the certificate owner and the amount of carbon offset. Comparable with a university diploma, carbon certificates are tied to the address of the owner that initiated the exchange and are therefore non-tradable. Figure 1 illustrates the process of the described blockchain-based carbon offset solution:

Figure 1: Process flow of a blockchain-based carbon offset solution

Conclusion

The outlined blockchain-based carbon offset process was developed by Zanders’ blockchain team in a proof of concept. It was designed as an approach to reduce dependence on central players and a transparent method of issuing carbon credits. The smart contracts that the platform interacts with are implemented on the Mumbai test network of the public Polygon blockchain, which allows for fast transaction processing and minimal fees. The PoC is up and running, tokenizing the carbon savings generated by one of our colleagues photovoltaic system, and can be showcased in a demo. However, there are some clear optimisations to the process that should be considered for a larger scale (commercial) setup.

If you're interested in exploring the concept and benefits of a blockchain-based carbon offset process involving decentralised issuance and exchange of digital assets, or if you would like to see a demo, you can contact Robert Richter or Justus Schleicher.

Early October, the Basel Committee on Banking Supervision (BCBS) published a report[1] on the 2023 banking turmoil that involved the failure of several US banks as well as Credit Suisse. The report draws lessons for banking regulation and supervision which may ultimately lead to changes in banking regulation as well as supervisory practices. In this article we summarize the main findings of the report[2]. Based on the report’s assessment, the most material consequences for banks, in our view, could be in the following areas:

• Reparameterization of the LCR calculation and/or introduction of additional liquidity metrics
• Inclusion of assets accounted for at amortized cost at their fair value in the determination of regulatory capital
• Implementation of extended disclosure requirements for a bank's interest rate exposure and liquidity position
• More intensive supervision of smaller banks, especially those experiencing fast growth and concentration in specific client segments
• Application of the full Basel III Accord and the Basel IRRBB framework to a larger group of banks

Bank failures and underlying causes

The BCBS report first describes in some detail the events that led to the failure of each of the following banks in the spring of 2023:

• Silicon Valley Bank (SVB)
• Signature Bank of New York (SBNY)
• First Republic Bank (FRB)
• Credit Suisse (CS)

While each failure involved various bank-specific factors, the BCBS report highlights common features (with the relevant banks indicated in brackets).

• Long-term unsustainable business models (all), in part due to remuneration incentives for short-term profits
• Governance and risk management did not keep up with fast growth in recent years (SVB, SBNY, FRC)
• Ineffective oversight of risks by the board and management (all)
• Overreliance on uninsured customer deposits, which are more likely to be withdrawn in a stress situation (SVB, SBNY, FRC)
• Unprecedented speed of deposit withdrawals through online banking (all)
• Investment of short-term deposits in long-term assets without adequate interest-rate hedges (SVB, FRC)
• Failure to assess whether designated assets qualified as eligible collateral for borrowing at the central bank (SVB, SBNY)
• Client concentration risk in specific sectors and on both asset and liability side of the balance sheet (SVB, SBNY, FRC)
• Too much leniency by supervisors to address supervisory findings (SVB, SBNY, CS)
• Incomplete implementation of the Basel Framework: SVB, SBNY and FRB were not subject to the liquidity coverage ratio (LCR) of the Basel III Accord and the BCBS standard on interest rate risk in the banking book (IRRBB)

Of the four failed banks, only Credit Suisse was subject to the LCR requirements of the Basel III Accord, in relation to which the BCBS report includes the following observations:

• A substantial part of the available high quality liquid assets (HQLA) at CS was needed for purposes other than covering deposit outflows under stress, in contrast to the assumptions made in the LCR calculation
• The bank hesitated to make use of the LCR buffer and to access emergency liquidity so as to avoid negative signalling to the market

Although not part of the BCBS report, these observations could lead to modifications to the LCR regulation in the future.

Lessons for supervision

With respect to supervisory practices, the BCBS report identifies various lessons learned and raises a few questions, divided into four main areas:

1. Bank’s business models

• Importance of forward-looking assessment of a bank’s capital and liquidity adequacy because accounting measures (on which regulatory capital and liquidity measures are based) mostly are not forward-looking in nature
• A focus on a bank’s risk-adjusted profitability
• Proactive engagement with ‘outlier banks’, e.g., banks that experienced fast growth and have concentrated funding sources or exposures
• Consideration of the impact of changes in the external environment, such as market conditions (including interest rates) and regulatory changes (including implementation of Basel III)

2. Bank’s governance and risk management

• Board composition, relevant experience and independent challenge of management
• Independence and empowerment of risk management and internal audit functions
• Establishment of an enterprise-wide risk culture and its embedding in corporate and business processes.
• Senior management remuneration incentives

3.Liquidity supervision

• Do the existing metrics (LCR, NSFR) and supervisory review suffice to identify start of material liquidity outflows?
• Should the monitoring frequency of metrics be increased (e.g., weekly for business as usual and daily or even intra-day in times of stress)?
• Monitoring of concentration risks (clients as well as funding sources)
• Are sources of liquidity transferable within the legal entity structure and freely available in times of stress?
• Testing of contingency funding plans

4. Supervisory judgment

• Supplement rules-based regulation with supervisory judgment in order to intervene pro-actively when identifying risks that could threaten the bank’s safety and soundness. However, the report acknowledges that a supervisor may not be able to enforce (pre-emptive) action as long as an institution satisfies all minimum requirements. This will also depend on local legislative and regulatory frameworks

Lessons for regulation

In addition, the BCBS report identifies various potential enhancement to the design and implementation of bank regulation in four main areas:

1. Liquidity standards

• Consideration of daily operational and intra-day liquidity requirements in the LCR, based on the observation that a material part of the HQLA of CS was used for this purpose but this is not taken into account in the determination of the LCR
• Recalibration of deposit outflows in the calculation of LCR and NSFR, based on the observation that actual outflow rates at the failed banks significantly exceeded assumed outflows in the LCR and NSFR calculations
• Introduction of additional liquidity metrics such as a 5-day forward liquidity position, survival period and/or non-risk based liquidity metrics that do not rely on run-off assumptions (similar to the role of the leverage ratio in the capital framework)

2. IRRBB

• Implementation of the Basel standard on IRRBB, which did not apply to the US banks, could have made the interest rate risk exposures transparent and initiated timely action by management or regulatory intervention.
• More granular disclosure, covering for example positions with and without hedging, contractual maturities of banking book positions and modelling assumptions 

3. Definition of regulatory capital

• Reflect unrealised gains and losses on assets that are accounted for at amortised cost (AC) in regulatory capital, analogous to the treatment of assets that are classified as available-for-sale (AFS). This is supported by the observation that unrealised losses on fixed-income assets held at amortised cost, resulting from to the sharp rise in interest rates, was an important driver of the failure of several US banks when these assets were sold to create liquidity and unrealised losses turned into realised losses. The BCBS report includes the following considerations in this respect:
  • If AC assets can be repo-ed to create liquidity instead of being sold, then there is no negative impact on the financial statement
  • Treating unrealised gains and losses on AC assets in the same way as AFS assets will create additional volatility in earnings and capital
  • The determination of HQLA in the LCR regulation requires that assets are measured at no more than market value. However, this does not prevent the negative capital impact described above
• Reconsideration of the role, definition and transparency of additional Tier-1 (AT1) instruments, considering the discussion following the write-off of AT1 instruments as part of the take-over of CS by UBS

4. Application of the Basel framework

• Broadening the application of the full Basel III framework beyond internationally active banks and/or developing complementary approaches to identify risks at domestic banks that could pose a threat to cross-border financial stability. The events in the spring of this year have demonstrated that distress at relatively small banks that are not subject to the (full) Basel III regulation can trigger broader and cross-border systemic concerns and contagion effects.
• Prudent application of the ‘proportionality’ principle to domestic banks, based on the observation that financial distress at such banks can have cross-border financial stability effects
• Harmonization of approaches that aim to ensure that sufficient capital and liquidity is available at individual legal entity level within banking groups

Conclusion

The BCBS report identifies common shortcomings in bank risk management practices and governance at the four banks that failed during the 2023 banking turmoil and summarizes key take-aways for bank supervision and regulation.

The identified shortcomings in bank risk management include gaps in the management of traditional banking risks (interest rate, liquidity and concentration risks), failure to appreciate the interrelation between individual risks, unsustainable business models driven by short-term incentives at the expense of appropriate risk management, poor risk culture, ineffective senior management and board oversight as well as a failure to adequately respond to supervisory feedback and recommendations.

Key take-aways for effective supervision include enforcing prompt action by banks in response to supervisory findings, actively monitoring and assessing potential implications of structural changes to the banking system, and maintaining effective cross-border supervisory cooperation.

Key lessons for regulatory standards include the importance of full and consistent implementation of Basel standards as well as potential enhancements of the Basel III liquidity standards, the regulatory treatment of interest rate risk in the banking book, the treatment of assets that are accounted for at amortised cost within regulatory capital and the role of additional Tier-1 capital instruments.

The BCBS report is intended as a starting point for discussion among banking regulators and supervisors about possible changes to banking regulation and supervisory practices. For those interested in engaging in discussions related to the insights and recommendations in the BCBS report, please feel free to contact Pieter Klaassen.

[1] Report on the 2023 banking turmoil (bis.org) (accessed on October 19, 2023)

[2] Although recognized as relevant in relation to the banking turmoil, the BCBS report explicitly excludes from its consideration the role and design of deposit guarantee schemes, the effectiveness of resolution arrangements, the use and design of central bank lending facilities and FX swap lines, and public support measures in banking crises.

The SAP Business Technology Platform (BTP) is not just a standalone product or a conventional module within SAP's suite of ERP systems; rather, it serves as a strategic platform from SAP, serving as the foundational underpinning for all company-wide innovations. In this article, we will delve deeper into some of the key offerings of SAP BTP for treasury and explore how it can contribute to driving innovation within treasury. 

The platform is designed to offer a versatile array of tools and services, aiming to enhance, extend, and seamlessly integrate with your existing SAP systems and other applications. Ultimately enabling a more efficient realization of your business objectives, delivering enhanced operational efficacy and flexibility. 

Analytics and AI 

One of the standout features of SAP BTP for treasury is its analytics and planning solution, SAP Analytics Cloud (SAC). This feature seamlessly connects with different data sources and other SAP applications. It supports Extended Planning & Analysis and Predictive Planning using machine learning models.  

At the core of SAC, various planning areas – like finance, supply chain, and workforce – are combined into a cloud-based interconnected plan. This plan is based on a single version of the truth, bringing planning content together. Enhanced by predictive AI and ML models, the plan achieves more accurate forecasting and supports near-real-time planning. Users can also compare different scenarios and perform what-if analysis to evaluate the impact of changes on the plan equipping organizations to prepare for uncertainties effectively. 

Application Development and Integration 

An organization's treasury architecture landscape often involves numerous systems, custom applications, and enhancements. However, this complexity can result in challenges related to maintenance, technical debt, and operational efficiency. 

Addressing these challenges, SAP BTP offers a solution known as the SAP Build apps tool. The tool enables users to adapt standard functionalities and create custom business applications through intuitive no-code/low-code tools. This allows that all custom development takes place outside your SAP ERP system, thereby preserving a ‘clean core’ of your SAP system. This will allow for a simpler, more streamlined maintenance process and a reduced risk of compatibility issues when upgrading to newer versions of SAP. 

In addition, SAP BTP facilitates seamless connectivity through a range of connectors and APIs integrated within the SAP Integration Suite. Enabling a harmonious integration of data and processes across diverse systems and applications, whether they are on-premise or cloud-based. 

Process Automation and Workflow Management 

Efficient process automation and workflow management play a pivotal role in enhancing treasury operations. SAP BTP offers an efficient solution named SAP Build Process Automation which enables users to design and oversee business processes using either low-code or no-code methods. It combines workflow management, robotic process automation, decision management, process visibility, and AI capabilities, all consolidated within a user-friendly interface.  

A significant advantage of SAP BTP's  workflow approach over conventional SAP workflows is the unification of workflows across diverse systems, including non-SAP systems and increased flexibility, enabling smoother interaction between processes and systems. 

The integration of SAP BTP for workflow with different SAP modules such as TRM, IHC, BAM is facilitated through the SAP Workflow Management APIs within your SAP S/4 HANA system. 

In the context of treasury functions, SAP Build Process Automation proves invaluable for automating and refining diverse processes such as cash management, risk management, liquidity planning, payment processing, and reporting. For instance, users can leverage the integrated AI functionalities for tasks like collecting bank statements/account balance information from different systems, consolidating information, saving and/or distributing the cash position information to the appropriate people and systems. Furthermore, the automation recorder can be employed to mechanize the extraction and input of data from diverse systems. Finally, the SAP Build Process Automation can also be utilized to create workflows for complex payment approval scenarios, including exceptions and escalations. 

Extensions to the Treasury Ecosystem 

SAP BTP extends the treasury ecosystem with multiple treasury-specific developed solutions, seamlessly enhancing your treasury SAP S/4 HANA system functionality. These extensions include: Multi-Bank Connectivity for simplified and secure banking interactions, SAP  Digital Payment Add-On for efficiently connecting to payment service providers. Trading Platform Integration for streamlined financial instrument trading, SAP Cloud for Credit Integration to assess business partner credit risk, SAP Taulia for Working Capital Management, Cash Application for automatic bank statement processing and cash application, and lastly, SAP Market Rates Management for the reliable retrieving of market data. 

Empowering organizations with extensive treasury needs by enabling them to selectively adopt these value-added capabilities and solutions offered by SAP. 

Alternatives to SAP BTP 

The primary driving factor to consider integrating SAP BTP as an addon to your SAP ERP is when there is an integrated company-wide approach towards adopting BTP. Furthermore, if the standard SAP functionalities fall short of meeting the specific demands of the treasury department, or if the need for seamless integration with other systems arises. 

It's important to prioritize the optimization of complex processes whenever feasible first, avoiding the pitfall of optimizing inherently flawed processes using advanced technologies such as SAP BTP. It is worth noting that the standard SAP functionality, which is already substantial, could very well suffice. Consequently, we recommend conducting an analysis of your processes first, utilizing the Zanders best practices process taxonomy, before deciding on possible technology solutions. 

Ultimately, while considering technology options, it's wise to explore offerings from best-of-breed  treasury solution providers as well – keeping in mind the potential need for integration with SAP. 

Getting Started 

The above highlights just a glimpse of SAP BTP's capabilities. SAP offers a free trial that allows users to explore its services. Instead of starting from scratch, you can leverage predefined business content such as intelligent RPA bots, workflow packages, predefined decision and business rules and over 170 open connectors with third-party products to get inspired. Some examples relevant for treasury include integration with Trading Brokers, S4HANA SAP Analytics Cloud, workflows designed for managing free-form payments and credit memos, as well as connectors linking to various accounting systems such as Netsuite Finance, Microsoft Dynamics, and Sage. 

Conclusion 

SAP BTP for Treasury is a powerful platform that can significantly enhance treasury. Its advanced analytics, app development and integration, and process automation capabilities enable organizations to gain valuable insights, automate tasks, and improve overall efficiency. If you are looking to revolutionize your treasury operations, SAP BTP is a compelling option to consider.  

Treasurers dealing with multiple jurisdictions, scattered banking landscape, and local requirements face many challenges in this regard. Japan is one of the markets where bank connectivity is indeed a challenge, especially when it comes to connecting with local banks.

Traditional options

The initial reaction from treasurers not familiar with local market conventions might be to seek connection through the SWIFT network. However, in Japan only a handful of banks offer SWIFT connectivity. Second natural choice is the Host-to-Host connection (H2H). This is the classic File Transfer Protocol (FTP), or preferably the secured version (sFTP) setup. Some will say old fashioned, rather than classic, since it is as old as the internet. Nonetheless, it is still popular, and frankly quite often the best fit for the purpose. However, if there are dozens of local banks to connect to, it can be difficult to be expected to connect to each of them with a direct H2H. While this could be technically feasible, it would be nothing short of a nightmare to maintain, with the initial setup being time-consuming in the first place.

Other solutions

There is an answer, or should we rather say ANSER, to this question. ANSER, an abbreviation of ‘Automatic answer Network System for Electrical Request’, is a data transfer system provided by NTT Data Corporation since 1981, which links banks with firms.[1] ANSER then is a way to connect a corporate client to the bank. The system has been around for a while, and together with Cash Management Service (CMS) centers it is a part of the so-called Firm Banking solution in Japan. Since its inception, ANSER offered a wider range of services, through which corporates could access their banking information. Among the offered channels are telephone, fax, firm banking terminal, and personal computer. With the ever-increasing need for speedy and accurate information exchange, the more traditional ways, such as telephone and fax, gave way to the more sophisticated and automated solution, namely eBAgent.

eBAgent making use of API

The said eBAgent is a proprietary middleware platform offered by NTT Data. The solution establishes an automated connection with banks through the above-mentioned ANSER network. In short, eBAgent offers a gateway to multiple local banking partners in Japan utilizing the ANSER network. The remaining part for the corporate is then to establish a connection between the TMS and eBAgent, and secure appropriate contracts with the eBAgent provider, NTT Data, as well as the banks.

As for the connection protocol, the choice is between the classic sFTP, or Application Programming Interface (API). The latter has the real-time advantage, with less lag between the pick-and-drop sFTP connection. API seems to be a choice for an increasing number of corporates these days in this area. What is also interesting, apart from the API connection, are the supported formats for transfers and bank statements. In addition to the local Japanese ZENGIN, the protocol also offers data transmission in a proprietary XML format. This XML format is actually quite simple, with a very limited amount of tags. In addition to this, unlike the ISO 20022 standard, it contains only one level of tags, without the nesting function. Depending on the exact ERP/TMS infrastructure, eBAgent can also provide conversion services from and to the IS 20022 standard. As for the connection to eBAgent, the whole setup seems easier said than done. However, some TMS providers, in response to the demand from the market, started offering off-the-shelf solutions for a plug-and-play connection to eBAgent. Kyriba and Reval already offer it, with SAP set to roll out its solution on the S/4HANA and Multi Bank Connectivity (MBC) platform in early 2024.

Various ways to connect TMS / ERP with banks in Japan

How to connect with local banks in Japan?

It all depends on the exact landscape of banks and systems. It may just as well turn out that a hybrid solution would be best suited. There is no one-size fits all, as each corporate is unique, thus careful consideration and design will be paramount for a stable and reliable connection with banks. One thing is certain, solutions that involve obtaining bank statement information and enact payments by telephone or fax are simply no longer sufficient. In this day and age, when much sensitive information is exchanged between corporates and banks, having a reliable, automated solution is indispensable.

If you would like to know more, do not hesitate to get in touch with Michal Zelazko via m.zelazko@zandersgroup.com or via + 81 (0) 8 3255 9966

[1] https://www.boj.or.jp/en/paym/outline/pay_boj/pss0305a.pdf

Seventy banks have been considered, which is an increase of twenty banks compared to the previous exercise.  The portfolios of the participating banks contain around three quarters of all EU banking assets (Euro and non-Euro).  

Interested in how the four Dutch banks participating in this EBA stress test exercise performed? In this short note we  compare them with the EU average as represented in the results published [1].   

General comments

The general conclusion from the EU wide stress test results is that EU banks seem sufficiently capitalized. We quote the main 5 points as highlighted in the EBA press release [1]: 

• The results of the 2023 EU-wide stress test show that European banks remain resilient under an adverse scenario which combines a severe EU and global recession, increasing interest rates and higher credit spreads. 
   
• This resilience of EU banks partly reflects a solid capital position at the start of the exercise, with an average fully-loaded CET1 ratio of 15% which allows banks to withstand the capital depletion under the adverse scenario. 
   

• The capital depletion under the adverse stress test scenario is 459 bps, resulting in a fully loaded CET1 ratio at the end of the scenario of 10.4%. Higher earnings and better asset quality at the beginning of the 2023 both help moderate capital depletion under the adverse scenario. 
   
• Despite combined losses of EUR 496bn, EU banks remain sufficiently apitalized to continue to support the economy also in times of severe stress. 
   
• The high current level of macroeconomic uncertainty shows however the importance of remaining vigilant and that both supervisors and banks should be prepared for a possible worsening of economic conditions. 

For further details we refer to the full EBA report [1]. 

Dutch banks

Making the case for transparency across the banking sector, the EBA has released a detailed breakdown of relevant figures for each individual bank. We use some of this data to gain further insight into the performance of the main Dutch banks versus the EU average.

CET1 ratios

Using the data presented by EBA [2], we display the evolution of the fully loaded CET1 ratio for the four banks versus the average over all EU banks in the figure below. The four Dutch banks are: ING, Rabobank, ABN AMRO and de Volksbank, ordered by size.

From the figure, we observe the following: 

• Compared to the average EU-wide CET1 ratio (indicated by the horizontal lines in the graph above), it can be observed that three out of four of the banks are very close to the EU average. 
• For the average EU wide CET1 ratio we observe a significant drop from year 1 to year 2, while for the Dutch banks the impact of the stress is more spread out over the full scenario horizon.  
• The impact after year 4 of the stress horizon is more severe than the EU average for three out of four of the Dutch banks.  

Evolution of retail mortgages during adverse scenario

The most important product the four Dutch banks have in common are the retail mortgages. We look at the evolution of the retail mortgage portfolios of the Dutch banks compared to the EU average. Using EBA data provided [2], we summarize this in the following chart:

Based on the analysis above , we observe: 

• There is a noticeable variation between the banks regarding the migrations between the IFRS stages. 
• Compared to the EU average there are much less mortgages with a significant increase in credit risk (migrations to IFRS stage 2) for the Dutch banks. For some banks the percentage of loans in stage 2 is stable or even decreases. 

Conclusion

This short note gives some indication of specifics of the 2023 EBA stress applied to the four main Dutch banks.

Should you wish to go deeper into this subject, Zanders has both the expertise and track record to assist financial organisations with all aspects of stress testing. Please get in touch.

References

1. EU-wide stress testing | European Banking Authority (europa.eu) 

2. https://www.eba.europa.eu/assets/st23/full_database/TRA_CRE_IRB.csv  
    

The CSP helps reinforce the controls protecting participants from cyberattack and ensures their effectivity and that they adhere to the current Swift security requirements.

*Swift does not certify, warrant, endorse or recommend any service provider listed in its directory and Swift customers are not required to use providers listed in the directory. 

Swift Customer Security Programme 

A new attestation must be submitted at least once a year between July and December, and also any time a change in architecture or compliance status occurs. Customer attestation and independent assessment of the CSCF v2023 version is now open and valid until 31 December 2023. July 2023 also marks the release of Swifts CSCF v2024 for early consultation, which is valid until 31 December 2024.   

Swift introduced the Customer Security Programme to promote cybersecurity amongst its customers with the core component of the CSP being the Customer Security Controls Framework (CSCF).​ Independent assessment has been introduced as a prerequisite for attestation to enhance the integrity, consistency, and accuracy of attestations. Each year, Swift releases an updated version of the CSCF that needs to be attested to with support of an independent assessment.  

The Attestation is a declaration of compliance with the Swift Customer Security Controls Policy and is submitted via the Swift KYC-SA tool. Dependent on the Swift Architecture used, the number of controls to be implemented vary; of which certain are mandatory, and others advisory.​ 

Further details on the Swift CSCF can be found on their website:

• https://www.swift.com/myswift/customer-security-programme-csp 
• https://www.swift.com/myswift/customer-security-programme-csp/find-external-support/directory-csp-assessment-providers

Our services 

Do you have arrangements in place to complete the independent assessment required to support the attestation?  

Zanders has experience with and can support the completion of an independent external assessment of your compliance to the Swift Customer Security Control Framework that can then be used to fully complete and sign-off the Swift attestation for this year.​  

With an extensive track record of designing and deploying bank integrations, our intricate knowledge of treasury systems across both IT architecture as well as business processes positions us well to be a trusted independent assessor. We draw on past projects and assessments to ask the right questions during the assessment phase, aligning our customers with the framework provided by Swift.  

The Swift attestation can also form part of a wider initiative to further optimise your banking landscape, whether that be increasing the use of Swift within your organisation, bank rationalization or improving your existing processes. The availability of your published attestation and its possible consultation with counterparties (upon request) helps equally in performing day-to-day risk management. 

Approach 

Planning 

We start with rigorous planning of the assessment project, developing a scope of work and planning resources accordingly. Our team of experts will work with clients to formulate an Impact Assessment based on the most recent version of the Swift Customer Security Controls Framework. 

Architecture Classification 

A key part of our support will be working with the client to formulate a comprehensive overview of the system architecture and identify the applicable controls dictated by the CSCF.  

Perform Assessment 

Using our wide-ranging experience, we will test the individual controls against specific scenarios designed to root out any weaknesses and document evidence of their compliance or where they can be improved.  

Independent Assessment Report 

Based on the evidence collected, we will prepare an Independent Assessment report which includes status of the compliance against individual controls, baselining them against the CSCF and recommendations for improvement areas within the system architecture.  

Post Assessment Activities 

Once completed, the Independent Assessment report will support you with the submission of the Attestation in line with the requirements of the CSCF version in force, which is required annually by Swift. In tandem, Zanders can deliver a plan for implementation of the recommendations within the report to ensure compliance with current and future years’ attestations. Swift expects controls compliance annually, together with the submission of the attestation by 31 December at the latest, in order to avoid being reported to your supervisor. Non-compliant status is visible to your counterparties. 

Do you need support with your Swift CSP Independent Assessment?  

We are thrilled to offer a Swift CSP Independent Assessment service and look forward to supporting our clients with their attestations, continuing their commitment to protecting the integrity of the Swift network, and in doing so supporting their businesses too. If you are interested in learning more about our services, please contact us directly below.  

As a result of the growing importance of this transformative technology and its applications, various regulatory initiatives and frameworks have emerged, such as Markets in Crypto-Assets Regulation (MiCAR), the Distributed Ledger Technology (DLT) Pilot Regime, and the Basel Committee on Banking Supervision (BCBS) crypto standard were launched, demonstrating the growing importance and adoption at both a global and national level. Given these trends, treasuries will be impacted by Blockchain one way or the other – if they aren’t already.

With the advent of cryptocurrencies and digital assets, it is important for treasurers to understand the issues at hand and have a strategy in place to deal with them. Based on our experience, typical questions that a treasurer faces are how to deal with the volatility of cryptocurrencies, how cryptocurrencies impact FX management, the accounting treatment for cryptocurrencies as well as KYC considerations. These developments are summarized in this article. 

FX Risk Management and Volatility

History has shown that cryptocurrencies such as Bitcoin and Ether are highly volatile assets, which implies that the Euro value of 1 BTC can fluctuate significantly. Based on our experience, treasurers opt to sell their cryptocurrencies as quickly as possible in order to convert them into fiat currency – the currencies that they are familiar and which their cost basis is typically in. However, other solutions exist such as hedging positions via derivatives traded on regulated financial markets or conversions into so-called stablecoins¹. 

Accounting Treatment and Regulatory Compliance 

Cryptocurrencies, including stablecoins, require careful accounting treatment and compliance with regulations. In most cases cryptocurrencies are classified as “intangible assets” under IFRS. For broker-traders they are, however, classified as inventory, depending on the circumstances. Inventory is measured at the lower of cost and net realizable value, while intangible assets are measured at cost or revaluation. Under GAAP, most cryptocurrencies are treated as indefinite-lived intangible assets and are impaired when the fair value falls below the carrying value. These impairments cannot be reversed. CBDCs, however, are not considered cryptocurrencies. Similarly, and the classification of stablecoins depends on their status as financial assets or instruments. 

KYC/KYT Considerations

The adoption of cryptocurrencies and Blockchain technology introduces challenges for corporate treasurers in verifying counterparties and tracking transactions. When it comes to B2C transactions, treasurers may need to implement KYC (Know Your Customer) processes to verify the age and identity of individuals, ensuring compliance with age restrictions and preventing under-aged purchases, among other regulatory requirements. Whilst the process differs for B2B (business-to-business) transactions, the need for KYC exists nevertheless. However in the B2B space, the KYC process is less likely to be made more complex by transactions done in cryptocurrencies, since the parties involved are typically well-established companies or organizations with known identities and reputations. 

Central Bank Digital Currencies

(CBDCs) are emerging as potential alternatives to privately issued stablecoins and other cryptocurrencies. Central banks, including the European Central Bank and the Peoples Banks of China, are actively exploring the development of CBDCs. These currencies, backed by central banks, introduce a new dimension to the financial landscape and will be another arrow in the quiver of end-customers – along with cash, credit and debit cards or PayPal. Corporate treasurers must prepare for the potential implications and opportunities that CBDCs may bring, such as changes in payment options, governance processes, and working capital management.

Adapting to the Future

Corporate treasurers should proactively prepare for the impact of cryptocurrencies and Blockchain technology on their business operations. This includes educating themselves on the basics of cryptocurrencies, stablecoins, and CBDCs, and investigating how these assets can be integrated into their treasury functions. Understanding the infrastructure, processes, and potential hedging strategies is crucial for treasurers to make informed decisions regarding their balance sheets. Furthermore, treasurers must evaluate the impact of new payment options on working capital and adjust their strategies accordingly. 

Zanders understands the importance of keeping up with emerging technologies and trends, which is why we offer a comprehensive range of Blockchain services. Our Blockchain offering covers supporting our clients in developing their Blockchain strategy including developing proofs of concept, cryptocurrency integration into Corporate Treasury, support on vendor selection as well as regulatory advice. For decades Zanders has helped corporate treasurers navigate the choppy seas of change and disruption. We are ready to support you during this new era of disruption, so reach out to us today.  

Meet the team 

Zanders already has a well-positioned, diversified Blockchain team in place, consisting of Blockchain developers, Blockchain experts and business experts in their respective fields. In the following you will find a brief introduction of our lead Blockchain consultants. 

Over the past decades, banks significantly increased their efforts to implement adequate frameworks for managing interest rate risk in the banking book (IRRBB). These efforts typically focus on defining an IRRBB strategy and a corresponding Risk Appetite Statement (RAS), translating this into policies and procedures, defining the how of the selected risk metrics, and designing the required (behavioral) models. Aspects like data quality, governance and risk reporting are (further) improved to facilitate effective management of IRRBB.

Main causes of volatility in SOT outcomes

The severely changed market circumstances evidence that, despite all efforts, the impact on the IRRBB framework could not be fully foreseen. The challenge of certain banks to comply with one of the key regulatory metrics defined in the context of IRRBB, the SOT on EVE, illustrates this. Indeed, even if regularities are assumed, there are still several key model choices that turn out to materialize in today’s interest rate environment:

• Interest rate dependency in behavioral models: Behavioral models, in particular when these include interest rate-dependent relationships, typically exhibit a large amount of convexity. In some cases, convexity can be (significantly) overstated due to particular modeling choices, in turn contributing to a violation of the EVE SOT criterium. Some (small and mid-sized) banks, for example, apply the so-called ‘scenario multipliers’ and/or ‘scalar multipliers’ defined within the BCBS-standardized framework for incorporating interest rate-dependent relationships in their behavioral models. These multipliers assume a linear relationship between the modeled variable (e.g., prepayment rate) and the scenario, whereas in practice this relationship is not always linear. In other cases, the calibration approach of certain behavioral models is based on interest rates that have been decreasing for 10 to 15 years, and therefore may not be capable to handle a scenario in which a severe upward shock is added to a significantly increased base case yield curve.
• Level and shape of the yield curve: Related to the previous point, some behavioral models are based on the steepness (defined as the difference between a ‘long tenor’ rate and a ‘short tenor’ rate) of the yield curve. As can be seen in Figure 1, the steepness changed significantly over the past two years, potentially leading to a high impact associated with the behavioral models that are based on it. Further, as illustrated in Figure 2, the yield curve has flattened over time and recently even turned into an inverse yield curve. When calculating the respective forward rates that define the steepness within a particular behavioral model, the downward trend of this variable that results due to the inverse yield curve potentially aggravates this effect.

Figure 1: Development of 3M EURIBOR rate and 10Y swap rate (vs. 3M EURIBOR) and the corresponding 'Steepness'

Figure 2: Development of the yield curve over the period December 2021 to March 2023.

• Hidden vulnerability to ‘down’ scenarios: Previously, the interest rates were relatively close to, or even below, the EBA floor that is imposed on the SOT. Consequently, the ‘at-risk’ figures corresponding to scenarios in which (part of) the yield curve is shocked downward, were relatively small. Now that interest rates have moved away from the EBA floor, hidden vulnerability to ‘down’ scenarios become visible and likely the dominating scenario for the SOT on EVE.
• Including ‘margin’ cashflows: Some banks determine their SOT on EVE including the margin cashflows (i.e., the spread added to the swap rate), while discounting at risk-free rates. While this approach is regulatory compliant, the inclusion of margin cashflows leads to higher (shocked) EVE values, and potentially leads to, or at least contributes to, a violation of the EVE threshold.

What can banks do?

Having identified the above issues, the question arises as to what measures banks should consider. Roughly speaking, two categories of actions can be distinguished. The first category encompasses actions that resolve an inadequate reflection of the actual risk. Examples of such actions include:

• Identify and re-solve unintended effects in behavioral models: As mentioned above, behavioral models are key to determine appropriate EVE SOT figures. Next to revisiting the calibration approach, which typically is based on historical data, banks should assess to what extent there are unintended effects present in their behavioral models that adversely impact convexity and lead to unrepresentative sensitivities and unreliably shocked EVE values.
• Adopt a pure IRR approach: An obvious candidate action for banks that still include margins in their cashflows used for the EVE SOT, is to adopt a pure interest rate risk view. In other words, align the cashflows with its discounting. This requires an adequate approach to remove the margin components from the interest cashflows.

The second category of actions addresses the actual, i.e., economic, risk position of bank. One could think of the following aspects that contribute to steering the EVE SOT within regulatory thresholds:

• Evaluate target mismatch: As we wrote in our article ‘What can banks do to address the challenges posed by rising interest rates’, a bank’s EVE is most likely negatively affected by the rise in rates. The impact is dependent on the duration of equity taken by the bank: the higher the equity duration, the larger the decline in EVE when rates rise (and hence a higher EVE risk). In light of the challenges described above, a bank should consider re-evaluating the target mismatch (i.e. the duration of equity).
• Consider swaptions as an additional hedge instrument: Convexity, in essence, cannot be hedged with plain vanilla swaps. Therefore, several banks have entered into ‘far out of the money’ swaptions to manage negative convexity in the SOT on EVE. From a business perspective, these swaptions result in additional, but accepted costs and P&L volatility. In case of an upward-sloping yield curve, the costs can be partly offset since the bank can increase its linear risk position (increase duration), without exceeding the EVE SOT threshold. This being said, swaptions can be considered a complex instrument that presents certain challenges. First, it requires valuation models – and expertise on these models – to be embedded within the organization. Second, setting up a heuristic that adequately matches the sensitivities of the swaptions to those of the commercial products (e.g., mortgages) is not a straightforward task.

How can Zanders support?

Zanders is thought leader in supporting banks with IRRBB-related topics. We enable banks to achieve both regulatory compliance and strategic risk goals, by offering support from strategy to implementation. This includes risk identification, formulating a risk strategy, setting up an IRRBB governance and framework, policy or risk appetite statements. Moreover, we have an extensive track record in IRRBB and behavioral models, hedging strategies, and calculating risk metrics, both from a model development as well as a model validation perspective.

Are you interested in IRRBB related topics? Contact Jaap Karelse, Erik Vijlbrief (Netherlands, Belgium and Nordic countries) or Martijn Wycisk (DACH region) for more information.

This article is intended for finance, risk, and compliance professionals with business and system integration knowledge of SAP, but also includes contextual guidance for broader audiences.

1. Introduction

SAP Treasury and Risk Management (SAP TRM) provides a robust framework to meet the need for enhanced transparency, mitigate financial risks, and ensure regulatory compliance, but its effectiveness depends on the correct implementation of control mechanisms and automated checks. 

In Japan, the approach to financial and treasury management is influenced by principles of Kaizen (continuous improvement) and high-quality process control. The core emphasis is on minimizing errors, enhancing efficiency, and ensuring the reliability of Treasury management systems.  
The approach aligns with the necessity of seamless internal controls in SAP TRM, where even minor inconsistencies can lead to significant financial risks and losses. 

This article outlines key controls within SAP TRM, provides practical implementation steps, and explores AI-driven enhancements that improve compliance, security, and operational efficiency. 

2. SAP TRM: Key Areas Requiring Controls

SAP TRM covers a broad range of treasury functions, each requiring specific control mechanisms:

• Transaction Management: Handling financial instruments such as FX, money markets, securities, derivatives, etc.
• Risk Management: Identifying and mitigating market and credit risks.
• Cash and Liquidity Management: Real-time cash positioning and cash flow forecasting, and optimization.
• Hedge Management and Accounting: Compliance with IFRS 9 and other standards.

3. How SAP TRM Supports Real-Time Risk Control

A solid control framework requires detailed analysis, alignment, and structured implementation. Below are some key controls that should be assessed and implemented within transaction management of SAP TRM. In the picture, the areas where possible checks can be applied are highlighted:

Deal Release (Approval) Control

Ensuring proper authorization and validation before a deal is released (approved internally) is essential to prevent unauthorized or erroneous transactions from being booked, modified, and processed in SAP.

Proposed configuration objects to consider:

• Business Rule Framework Plus (BRFplus): Define validation checks, such as ensuring that only authorized users can release deals above a certain value.

Deal Settlement Control

Settlement is SAP term for the deal confirmation with counterparties. The deal status is changed to "Settlement" immediately after confirmation. 

Accurate deal confirmation is crucial to avoid financial mismatches or discrepancies in payment details. The settlement process is required for all external deals and may also be needed for intercompany deals. Settlement is required for every key lifecycle step of a deal: creation, NDF fixing, rollover, option exercise, etc. Settlement can be done manually or automatically upon counter-confirmation of the correspondence (MT300, MT320, MT305, or deal confirmation messages). 

Proposed configuration objects to consider:  

• Set up automated reports to track unsettled deals within a specific timeframe (as of today or as of the current week).    

• SAP Fiori app “Display Treasury alerts” is an effective solution for this. 

Ensuring Transaction Integrity: Key Checks in SAP 

Automating the matching process minimizes manual errors and improves operational efficiency, reducing the time required for this process. 

Proposed configuration objects to consider: 

• Define a report to show all pending unmatched correspondences. This is often proposed as a control over the matching process. It can be implemented using the Correspondence Monitor or the Fiori app "Display Treasury Alerts." 

Restricted Deal Modifications 

To prevent unauthorized modifications of the treasury transactions that could lead to fraudulent or erroneous results, deal changes should be strictly controlled. We do not recommend allowing deals in status Settlement (after confirmation matching process) to be changed—especially key matching fields such as amounts, value dates, and currencies. However, modifications may be required from time to time. In such cases, they need to be controlled and may require another round of verification and counter-confirmation matching. 

Proposed configuration objects to consider:  

• Enable Change Log Activation: Use SAP Audit Information System (AIS) to track modifications and maintain audit trails for TRM. 

• Implement SAP TRM Deal Approval Workflow: Require validation and approval for all deal amendments and reversals. 

• Restrict critical field modifications: Configure SAP field selection variant to lock key fields of the deals from being altered after deal approval/settlement. 

• Enforce Segregation of Duties (SoD): Ensure different users handle deal creation, approval, settlement processing, and modifications to prevent errors or fraud. 

Deal Payment Controls Using BCM Approvers 

Ensuring that deal payments go through the correct approval process reduces financial risk and enhances security. It is important to define unusual treasury payment scenarios, such as when cash flow processing occurs outside normal business hours. 

Proposed configuration objects to consider:  

• Implement a Payment Block Mechanism: Ensure that payments are blocked unless predefined criteria are met, or review and approval is done/granted. 

• Automated Exception Handling: Configure Bank Communication Management (BCM) rules to flag transactions that deviate from standard payment behavior, requiring manual review before processing (e.g., payments to a new business partner or deals posted outside normal business hours). 

4. AI-Driven Enhancements for Treasury Control

AI is transforming treasury processes by automating risk detection, optimizing forecasting, and enhancing decision-making. Key AI-powered enhancements in SAP TRM include:

• Fraud Detection: Machine learning models in SAP Business Technology Platform (BTP) to detect suspicious transactions.
• SAP Business Integrity Screening: AI-driven software from SAP that improves anomaly detection, risk identification, and compliance checks.
• Automated Matching: AI-powered bots in SAP Intelligent RPA match transactions (especially when non-SWIFT correspondence is used), helping eliminate manual errors.

5. Best Practices for SAP TRM Control Optimization

The following best practices are recommended as part of the business-as-usual process:

• Conduct regular Role & Authorization reviews: Update SAP GRC, Governance, Risk, and Compliance, settings to align with changes in Treasury team structure.
• Leverage SAP Fiori apps for real-time analytics and visibility into treasury processes, ensuring that no payments are stuck and that all back-to-back and mirroring deals are in place and processed on time.
• Create and integrate AI-powered tools: Deploy SAP AI solutions to enhance risk analysis, compliance monitoring and decision-making.
• Adopt a Kaizen approach: Continuously monitor and refine TRM controls to improve efficiency and accuracy, as technology is rapidly evolving and controls must remain valid and preventive.

6. Conclusion

Implementing strong controls in SAP TRM is critical for maintaining compliance, minimizing financial risks, and improving operational efficiency.

By leveraging SAP’s built-in functionalities—along with AI-driven enhancements—corporate treasurers can create a secure, transparent, and highly automated treasury management process. By integrating Kaizen principles and AI-driven automation, companies can transform their treasury operations into a continuously improving and highly efficient Treasury Management System.

Zanders consultants are deeply involved in this crucial topic, which can be addressed as a standalone initiative to improve controls, as part of ongoing treasury support, or within an SAP TMS implementation project. We are ready and eager to help your company enhance system controls and checks in SAP TRM.

For more information, please contact Aleksei Abakumov.

Case Study: SAP TRM in Practice

A multinational, multibillion-dollar company operating across the globe, with its HQ in Tokyo, Japan, implemented SAP TRM. By using J-SOX controls (both business and system) in SAP TRM, the company managed to build world-class, secure control mechanisms that are used and applied throughout the entire organization, across all markets.  The company regularly validates these controls and challenges them when they are obsolete or adds new controls if needed due to changing external conditions.

Our team at Zanders has been at the forefront of implementing BACS AUDDIS (Automated Direct Debit Instruction Service) with SAP S/4HANA, helping clients to streamline their direct debit management while ensuring regulatory compliance.

Why BACS AUDDIS Matters

BACS Direct Debit is the UK's electronic direct debit service, enabling organizations to collect payments directly from customers' bank accounts. This service offers numerous advantages, including predictable cash flow, reduced administrative overhead, and improved operational efficiency.

The implementation of AUDDIS enhances this process by allowing organizations to electronically send Direct Debit instructions to the banking system. This digitization eliminates paper-based processes, reduces operational costs, and improves overall processing speed.

The Advantage

Our approach for AUDDIS implementation with SAP S/4HANA provides a bespoke solution that supports AUDDIS requirements, built on top of the standard SAP S/4HANA functionality. What sets our approach apart is our deep expertise in complex, mission-critical financial system implementations specifically tailored for market leading organizations.

The solution development leverages the full range of SAP's Direct Debit (DD) capabilities supplemented by our extensive experience in Treasury and Payment systems. This creates a seamless integration with existing SAP finance processes while ensuring full compliance with BACS standards.

The Solution

The solution developed supports the full cycle of BACS Direct Debit (DD) mandate management in SAP, from new mandate registration to mandate amendments, cancellation, and dormancy assessment.

Mandate information and amendments are automatically interfaced in XML format (PAIN.008) in compliance with BACS requirements, transmitting from the SAP Payment Hub to BACS through a BACSTEL-IP service provider.

Furthermore, to ensure a smooth and streamlined direct debit collection process, the custom solution enhances SAP’s automatic payment program with additional features.

These include verifying the validity of the customer or alternative payee’s mandate status at the payment proposal stage, considering DD collection lead periods.

This ensures that only customers with an active mandate status are included in the payment run. In addition, SAP’s Data Medium Exchange (DME) engine has been extended to include the mandatory mandate reference attributes in the bank interface.

Our Four-Phase Implementation Approach

 Every AUDDIS implementation follows four key stages:

1 - Application: The corporate entity applies to its sponsoring payment service provider for AUDDIS approval.

2 - Preparation: After approval, the corporate prepares its internal systems, ensuring software, processes, and infrastructure are in place for AUDDIS integration.

3 - Testing: The corporate submits test files to BACS to validate both compliance and successful transmission.

4 - Go-Live: The corporate transitions to using the AUDDIS service either as a ‘live’ user from the start or by migrating first before going live. This is the final stage of the AUDDIS implementation process, and exactly what this entails depends on whether the corporate is joining AUDDIS with a new Service User Number or with an existing one, and therefore, has a migration (to onboard existing customer mandates to AUDDIS) to complete.

AUDDIS implementation projects require ongoing coordination with Banking Partners, System Integrators and Business Process Teams. This includes the process of creating BACS Service User Numbers, extensively testing bank interfaces for AUDDIS and Direct Debit Instruction files. At go-live, detailed coordination is required to support penny testing.

The results after implementation

Our clients report significant benefits from implementing BACS AUDDIS with our support, including:

• Enhanced management of Direct Debit (DD) mandates
• Reduced processing costs and improved operational efficiency
• Ensured compliance with banking and regulatory requirements
• Accelerated payment cycles through streamlined processes

By partnering with Zanders, organizations gain a trusted advisor in BACS AUDDIS implementations. Our expertise ensures smooth transitions while maintaining business continuity throughout the process.

For more information on how we can support your organization's transition to BACS AUDDIS with SAP S/4HANA, please contact Eliane Eysackers or Nadezda Zanevskaja.

Thailand's e-Withholding Tax (e-WHT) system officially launched on October 27, 2020, in collaboration with 11 banks, marking a significant digital transformation with far-reaching benefits for corporate treasurers. This system was introduced to streamline the process of withholding tax by allowing taxpayers to remit taxes electronically through participating banks. The initiative aimed to enhance convenience for taxpayers and reduce the administrative burden associated with traditional tax filing methods. To encourage adoption, the government implemented measures such as reducing withholding tax rates for those utilizing the e-WHT system.

Thailand's Digital Tax Evolution

The e-WHT system aligns with Thailand's digital transformation strategy, offering corporate treasurers an opportunity to modernize tax processes and enhance cash flow management. This initiative reflects Thailand's commitment to creating a more efficient business environment through technology.

What Corporates Need to Know

Companies conducting business in Thailand are required to withhold tax on certain payments including:

• Service fees
• Professional fees
• Royalties
• Interest
• Dividends
• Rent/Lease

Once the tax is withheld, businesses must submit the amount to The Revenue Department, part of the Thai Ministry of Finance. This requirement applies to both domestic and foreign companies conducting business in Thailand. 

e-WHT only applies to domestic electronic payments. Paper cheques must continue to follow the traditional paper WHT model.

Key Benefits for Treasury Departments

The adoption of e-WHT offers multiple strategic advantages:

• Improved cash flow visibility – provides real-time status of tax-related movements, enabling more efficient WHT monitoring
• Simplified documentation – reduces the risk of human error in tax calculations and documentation procedures
• Accelerated processing times – shortens the tax filing and refund cycles
• Enhanced compliance – reduces the risk of non-compliance
• Better reconciliation – enables real-time verification of taxes withheld and credits

Implementation Insights

Our treasury technology specialists have assisted companies operating in Thailand with the successful implementation of  e-WHT submissions, covering domestic payment types such as ACH and RTGS via Standard Chartered Bank (SCB).

Key insights from these implementations include the importance of establishing dedicated interfaces from ERP S/4 HANA systems to the banking file gateway linked to Thailand's Revenue Department for seamless e-WHT processing.

Impact on Corporate Operations and User Experience

The introduction of e-WHT has streamlined tax filing for companies in Thailand, marking a significant shift toward digital transformation and compliance.

From a user experience perspective, companies can expect the following:

• No need to issue or store paper-based withholding tax certificates
• No manual month-end tax submissions to the Revenue Department
• Reduced document handling and storage costs
• Verification of withholding tax records by beneficiaries via the Revenue Department’s website
• Reduced withholding tax rates for eligible businesses

Looking Ahead: Strategic Implementation Considerations

When planning for e-WHT implementation, treasurers should keep the following in mind:

• Errors in tax rates cannot be corrected once submitted
• Faster tax payment cycles may require adjustments in cash flow planning
• Managing both paper and electronic WHT processes requires additional oversight and potential training for finance teams

For corporate treasurers, e-WHT represents an opportunity to modernize tax procedures, improve processing efficiency, and embrace digital transformation. Companies that properly plan the adoption of this initiative will align with Thailand's digital tax strategy while gaining operational benefits.

For more information on navigating Thailand's e-WHT implementation for your organization, please contact our Treasury Technology specialists.

In today’s rapidly evolving financial landscape, fortifying the Financial Risk Management (FRM) function remains a top priority for CFOs. Zanders has identified a growing trend among corporations striving to modernize their current FRM practices to achieve comprehensive risk visibility, advanced risk quantification, and a holistic, proactive and integrated approach to risk management. These efforts aim ultimately to boost shareholder value. The Zanders Financial Risk Management Framework offers multinational corporations a tested and structured methodology to meet these objectives. In this article, we delve into this approach and explore the benefits it can bring to your organization. 

Financial Risks as a Collateral Effect: 

To better understand the role of FRM in a corporate setting, it's helpful to define its scope. FRM involves identifying, measuring, and managing financial risks such as market risk (including foreign exchange, interest rate, and commodity risk), liquidity risk, and credit risk. These risks often arise as side effects of inherent business risks. Business risks originate from core activities like international trade, working capital investments, capital expenditures, and supply chain design. Shareholders typically invest in companies to gain exposure to and be compensated for these specific business risks, while often viewing financial risks as unfavorable side effects. Therefore, aligning a company’s FRM practices with shareholders’ expectations is crucial. 

Increased market volatility often triggers FRM initiatives. Additionally, several internal and external factors prompt companies to reevaluate their FRM frameworks, including: 

• Geopolitical instability 

• MADS events (Mergers, Acquisitions, Divestitures, Spin-offs) 

• Organic growth, especially expansion into emerging markets 

• Changes in the regulatory landscape 

• Aspirations to adopt innovative, best-in-class practices 
   

A well-defined FRM framework is important for any organization, as it provides clarity on how financial risks are managed. By maintaining an up-to-date and well-structured FRM framework, companies can respond more proactively to changing market conditions and ensure better alignment with shareholder goals. 

Holistic vs. Integrated Financial Risk Management 

The landscape of FRM is evolving, with multinational corporations (MNCs) shifting from a silo-based approach to a more holistic strategy. In this modernized approach, various market risks, along with their connections to liquidity risk and the company's credit profile, are analyzed comprehensively. The new standard for treasurers increasingly involves quantitative methodologies to measure the potential impact of financial risks on key financial metrics—such as earnings, net income, and financial covenants—using "at-risk" quantification measures like earnings-at-risk (EaR). These "at-risk" methodologies are increasingly utilized to inform strategic decisions or reduce hedging costs. An illustration of this is the utilization of efficient frontier analysis to achieve optimal hedging costs for a particular "at-risk" level. 

In addition to adopting a holistic FRM approach, Zanders has observed a growing trend towards greater business integration. Effective FRM requires seamless integration between the treasury function and the broader business organization. By embedding treasury within the business processes, companies can add significant value through the early identification of financial exposures and by anticipating the financial risk implications of business decisions at their inception. Tools such as Risk Adjusted Return on Sales (RAROS) exemplify this integrated approach. With RAROS, FRM becomes an integral part of the commercial process, where the financial risks of specific transactions are quantified to determine their true economic value-add. 

The shift towards holistic and integrated FRM empowers organizations to not only manage risks more effectively but also to drive value creation and enhance financial resilience. 

Zander’s Risk Management Framework  

As financial risk managers, it's important to take a holistic approach to FRM. At Zanders, we suggest that our clients use a structured 5-step FRM framework. 

The framework is applied as follows:

1- Identification: Establish the risk exposure profile by identifying all potential sources of financial exposure, classifying their likelihood and impact on the organization, and prioritizing them accordingly.

2- Measurement: Risk quantification involves a detailed quantitative analysis of the exposure profile. This includes assessing the probability of market events and quantifying their potential impact on financial parameters using techniques such as sensitivity analysis, scenario analysis, and simulation analysis (for example, cash flow at risk, value at risk).

3- Strategy & Policy: With a clear understanding of the existing risk profile, the objectives of the risk management framework are defined, considering the specific goals of various departments such as finance, operations, and procurement. A hedging strategy is then developed in alignment with these established financial risk management objectives.

4- Process & Execution: This phase follows the development of the hedging strategy, where the toolbox for hedging is defined, and roles and responsibilities are clearly allocated within the organization.

5- Monitoring & Reporting: All activities should be supported by consistent monitoring and reporting, with exception handling capabilities and risk assessments shared across departments.

Conclusion

Amid today's unpredictable financial markets, organizations are placing greater emphasis on FRM. Establishing a future-proof FRM framework is necessary not only for safeguarding key financial parameters and enhancing risk visibility but also to support long-term business sustainability. A robust FRM framework empowers companies to communicate more effectively with debt and equity investors, as well as other stakeholders, about their financial risks. Additionally, effective financial risk control can lead to better credit ratings, thereby improving access to liquidity under more favorable conditions.

To achieve a comprehensive and successful transformation of all key areas in FRM, a structured and proven project approach is indispensable.

Why Choose Zanders?

• Comprehensive, Integrated, and Strategic Approach: Our focus is on managing financial risk to enhance shareholder value.
• Advanced Tools: We utilize extensive proprietary benchmarking and advanced risk modeling tools.
• Expertise and Experience: With over 500 treasury and risk professionals, we cover the full spectrum of FRM with deep subject matter expertise.
• Proven Track Record: Excellent references and client testimonials underscore our extensive knowledge base and successful track record in Financial Risk Management.
• Strategic Insight and Implementation Capability: We combine strategic knowledge of treasury and risk best practices with the ability to implement these solutions effectively.

In an ever-changing financial landscape, Zanders provides the expertise and structured approach necessary to build a resilient FRM framework, ensuring your organization is well-equipped to navigate future challenges while enhancing financial stability and shareholder value. To learn more, contact us.

Emergence of Artificial Intelligence and Machine Learning 

The rise of ChatGPT has brought generative artificial intelligence (GenAI) into the mainstream, accelerating adoption across industries ranging from healthcare to banking. The pace at which (Gen)AI is being used is outpacing prior technological advances, putting pressure on individuals and companies to adapt their ways of working to this new technology. While GenAI uses data to create new content, traditional AI is typically designed to perform specific tasks such as making predictions or classifications. Both approaches are built on complex machine learning (ML) models which, when applied correctly, can be highly effective even on a stand-alone basis.  

Figure 1: Model development steps

Though ML techniques are known for their accuracy, a major challenge lies in their complexity and limited interpretability. Unlocking the full potential of ML requires not only technical expertise, but also deep domain knowledge. Asset and Liability Management (ALM) departments can benefit from ML, for example in the area of behavioral modelling. In this article, we explore the application of ML in prepayment modelling (data processing, segmentation, estimation) based on research conducted at a Dutch bank. The findings demonstrate how ML can improve the accuracy of prepayment models, leading to better cashflow forecasts and, consequently, a more accurate hedge. By building ML capabilities in this context, ALM teams can play a key role in shaping the future of behavioral modelling throughout the whole model development process.

Prepayment Modelling and Machine Learning

Prepayment risk is a critical concern for financial institutions, particularly in the mortgage sector, where borrowers have the option to repay (a part of) their loans earlier than contractually agreed. While prepayments can be beneficial for borrowers (allowing them to refinance at lower interest rates or reduce their debt obligations) they present several challenges for financial institutions. Uncertainty in prepayment behaviour makes it harder to predict the duration mismatch and the corresponding interest rate hedge.

Effective prepayment modelling by accurately forecasting borrower behaviour is crucial for financial institutions seeking to manage interest rate risks. Improved forecasting enables institutions to better anticipate cash flow fluctuations and implement more robust hedging strategies. To facilitate the modelling, data is segmented based on similar prepayment characteristics. This segmentation is often based on expert judgment and extensive data analysis, accounting for factors like loan age, interest rate, type, and borrower characteristics. Each segment is then analyzed through tailored prepayment models, such as a logistic regression or survival models.¹

ML techniques offer significant potential to enhance segmentation and estimation in prepayment modelling. In rapidly changing interest rate environments, traditional models often struggle to accurately capture borrower behaviour that deviates from conventional financial logic. In contrast, ML models can detect complex, non-linear patterns and adapt to changing behaviour, improving predictive accuracy by uncovering hidden relationships. Investigating such relationships becomes particularly relevant when borrower actions undermine traditional assumptions, as was the case in early 2021, when interest rates began to rise but prepayment rates did not decline immediately.

Real-world application

In collaboration with a Dutch bank, we conducted research on the application of ML in prepayment modelling within the Dutch mortgage market. The applications include data processing, segmentation, and estimation followed by an interpretation of the results with the use of ML specific interpretability metrics. Despite being constrained by limited computational power, the ML-based approaches outperformed the traditional methods, demonstrating superior predictive accuracy and stronger ability to capture complex patterns in the data. The specific applications are highlighted below.

Data processing

One of the first steps in model development is ensuring that the data is fit for use. An ML technique that can be commonly applied for outlier detection is the DBSCAN algorithm. This clustering method relies on the concept of distance to identify groups of observations, flagging those that do not fit well into any cluster as potential outliers. Since DBSCAN requires the user to define specific parameters, it offers flexibility and robustness in detecting outliers across a wide range of datasets.

Another example is an isolation forest algorithm. It detects outliers by randomly splitting the data and measuring how quickly a point becomes isolated. Outliers tend to be separated faster, since they share fewer similarities with the rest of the data. The model assigns an anomaly score based on how few splits were needed to isolate each point, where fewer splits suggest a higher likelihood of being an outlier. The isolation forest method is computationally efficient, performs well with large datasets, and does not require labelled data.

Segmentation

Following the data processing step, where outliers are identified, evaluated, and treated appropriately, the next phase in model development involves analyzing the dataset to define economically meaningful segments. ML-based clustering techniques are well-suited for deriving segments from data. It is important to note that mortgage data is generally high-dimensional and contains a large number of observations. As a result, clustering techniques must be carefully selected to ensure they can handle high-volume data efficiently within reasonable timelines. Two effective techniques for this purpose are K-means clustering and decision trees.  

K-means clustering is an ML algorithm used to partition data into distinct segments based on similarity. Data points that are close to each other in a multi-dimensional space are grouped together, as illustrated in Figure 2. In the context of mortgage portfolio segmentation, K-means enables the grouping of loans with similar characteristics, making the segmentation process data-driven rather than based on predefined rules.  

Figure 2: K-Means concept in a 2-dimensional space. Before, the dataset is seen as a whole unstructured dataset while K-means reveals three different segments in the data

Another ML technique useful for segmentation is the decision tree. This method involves splitting the dataset based on certain variables in a way that optimizes a predefined objective. A key advantage of tree-based methods is their interpretability: it is easy to see which variables drive the splits and to assess whether those splits make economic sense. Variable importance measures, like Information Gain, help interpret the decision tree by showing how much each split reduces the entropy (uncertainty). Lower entropy means the data is more organized, allowing for clearer and more meaningful segments to be created.    

Estimation

Once the segments are defined, the final step involves applying prediction models to each segment. While the segments resulting from ML models can be used in traditional estimation models such as a logistic regression or a survival model, ML-based estimation models can also be used. An example of such an ML estimation technique is XGBoost. The method combines multiple small decision trees, learning from previous errors, and continuously improving its predictions. It was observed that applying this estimation method in combination with ML-based segments outperformed traditional methods on the used dataset. 

Interpretability

Though the techniques show added value, a significant drawback of using ML models for both segmentation and estimation is their tendency to be perceived as black-boxes. A lack of transparency can be problematic for financial institutions, where interpretability is crucial to ensure compliance with regulatory and internal requirements. The SHapley Additive exPlanations (SHAP) method provides an insightful way for explaining predictions made by ML models. The method provides an understanding of a prediction model by showing the average contribution of features across many predictions. SHAP values highlight which features are most important for the model and how they affect the model outcome. This makes it a powerful tool for explaining complex models, by enhancing interpretability and enabling practical use in regulated industries and decision-making processes.

Figure 3 presents an illustrative SHAP plot, showing how different features (variables) influence the ML model’s prepayment rate predictions on a per-observation basis. These features are given on the y-axis, in this case 8 features. Each dot represents a prepayment observation, with its position on the x-axis indicating the SHAP value. This value indicates the impact of that feature on the predicted prepayment rate. Positive values on the x-axis indicate that the feature increased the prediction, while negative values show a decreasing effect.  For example, the feature on the bottom indicates that high feature values have a positive effect on the prepayment prediction. This type of plot helps identify the key drivers of prepayment estimates within the model as it can be seen that the bottom two features have the smallest impact on the model output. It also supports stakeholder communication of model results, offering an additional layer of evaluation beyond the conventional in-sample and out-of-sample performance metrics.

Figure 3: Illustrative SHAP plot

Conclusion

ML techniques can improve prepayment modelling throughout various stages of the model development process, specifically in data processing, segmentation and estimation. By enabling the full potential of ML in these facets, future cashflows can be estimated more precisely, resulting in a more accurate hedge. However, the trade-off between interpretability and accuracy remains an important consideration. Traditional methods offer high transparency and ease of implementation, which is particularly valuable in a heavily regulated financial sector whereas ML models can be considered a black-box. The introduction of explainability techniques such as SHAP help bridge this gap, providing financial institutions with insights into ML model decisions and ensuring compliance with internal and regulatory expectations for model transparency.

In the coming years, (Gen)AI and ML are expected to continue expanding their presence across the financial industry. This creates a growing need to explore opportunities for enhancing model performance, interpretability, and decision-making using these technologies. Beyond prepayment modelling, (Gen)AI and ML techniques are increasingly being applied in areas such as credit risk modelling, fraud detection, stress testing, and treasury analytics.

Zanders has extensive experience in applying advanced analytics across a wide range of financial domains, e.g.:

• Development of a standardized GenAI validation policy for foundational models (i.e., large, general-purpose AI models), ensuring responsible, explainable, and compliant use of GenAI technologies across the organization.
• Application of ML to distinguish between stable and non-stable portions of deposit balances, supporting improved behavioural assumptions for liquidity and interest rate risk management.
• Use of ML in credit risk to monitor the performance and stability of the production Probability of Default (PD) model, enabling early detection of model drift or degradation.
• Deployment of ML to enhance the efficiency and effectiveness of Financial Crime Prevention, including anomaly detection, transaction monitoring, and prioritization of investigative efforts.  

Please contact Erik Vijlbrief or Siska van Hees for more information.

FINMA states the following aims for publishing the circular:  

• Clarify expectations about the management of nature-related financial (NRF) risks by supervised institutions, based on existing laws and regulations. 

• Support supervised institutions to adequately identify, assess, limit and monitor these risks. 

• Be lean, principle-based, proportional, technology-neutral, and internationally aligned¹. 

The circular applies to both banks and insurance companies in Switzerland, including branches of foreign institutions.  

The scope of application depends on the bank category: 

• Category 4 and 5 banks that are very well capitalized and very liquid (‘Kleinbankenregime’) are exempted from implementation of the circular. 

• Other category 4 and 5 banks are exempted from quantitative scenario analysis, whereas category 3 banks only need to perform quantitative scenario analysis for portfolios with heightened exposure to NRF risks. 

• Category 3, 4 and 5 banks are exempted from consideration of material NRF risks in stress tests. 

The circular has to be implemented in full by January 1, 2028, for all banks in scope. However, implementation for climate-related risks needs to be completed earlier, as outlined in the table below, reflecting the greater maturity in the assessment of climate-related risks:  

FINMA emphasizes that banks will need to have completed their risk identification & materiality assessment well before the overall implementation timeline to allow sufficient time to embed material NRF risks in the overall risk management framework in line with the other parts of the circular.  

Definitions

FINMA distinguishes the following types and examples of NRF risks: 

The circular does not adopt a ‘double materiality’ perspective but focuses on the potential financial impact of NRF risks on a financial institution. However, FINMA emphasizes that the impact of an institution on its environment (e.g., through the lending and investment activities) can influence the relevance of NRF risks for the institution. 

General expectations 

The circular emphasizes that all banks need to perform a risk identification and materiality assessment of NRF risks, independent of size and bank category. Implementation of the other parts of the circular depends on whether and which material NRF risks have been identified. 

Governance

As all banks need to perform a risk identification and materiality assessment of NRF risks, all banks also need to set up an appropriate governance under which this takes place, including definition and documentation of tasks, competencies and responsibilities. This needs to cover the management and supervisory boards as well as the independent control functions. For management and supervisory boards, it is specifically important to reflect material NRF risks in the business and risk strategy. The nature of the governance arrangements can reflect the size and complexity of the institution (proportionality). 

Risk identification and materiality assessment 

Each bank needs to identify all NRF risks that may impact the institution’s risk profile and assess the potential financial materiality. This should include 

• the potential strategic impact, driven by changing expectations from the public and authorities and consequential changes in markets and technologies, as well as  

• potential legal and reputational risks through lawsuits against the bank’s counterparties or the bank itself as well as through increasing regulation 

The risk identification needs to be performed on a gross (inherent) basis. A net (residual) risk can be considered in addition if the effectiveness of risk mitigation measures can be substantiated. 

FINMA emphasizes that NRF risks need to be considered as risk drivers of existing risk types, rather than as new stand-alone risks. For the existing risk types, at least credit, market, liquidity, operational, compliance, legal and reputational risk need to be considered. Moreover, concentration risks driven by NRF risks need to be considered both within and across the existing risk types. For example, transition risks can simultaneously lower the creditworthiness of counterparties (credit risk), decrease the value of investment positions (market risk) and affect the reputation of the institution (reputation risk). Hence, significant exposure to sectors that are sensitive to transition risk, such as fossil fuel and transport, can lead to additional concentration risk. 

To assess the financial materiality, institutions are expected to understand the transmission channels through which NRF risks can materialize in financial risks. The following chart provides an illustration of possible transmission channels.  

Source: Adapted from Figure 2 in NGFS, Nature-related Financial Risks: a Conceptual Framework to guide Action by Central Banks and Supervisors, July 2024.

In performing the materiality assessment, the institution should consider all relevant internal and external information, consider the indirect impact of NRF risks through clients and related third parties and pay attention to its exposure to sectors, regions and jurisdictions with heightened NRF risks.  

The process and results of the risk identification and materiality assessment need to be clearly documented, including: 

• Criteria and assumptions used, such as scenarios and time horizons considered 

• Physical and transition risks considered and their impact on traditional risk types 

• The applicable time horizon for the financial materiality 

• NRF risks that were assessed as non-material 

The risk identification and materiality assessment needs to be updated regularly, for which FINMA suggests linking it to the annual business planning process. 

FINMA emphasizes the central role that scenario analysis plays in the materiality assessment. In this respect it expects banks to 

• Use at least qualitative considerations how adverse scenarios could impact the business model 

• Consider multiple scenarios, including those with a low probability and possibly large impact 

• Consider direct impacts and indirect impacts (e.g., on clients and suppliers and their supply chains) from NRF risks 

• Use multiple relevant time horizons (short, medium and long term) 

In the additional guidance, FINMA indicates that publicly available scenarios can be used (such as those from the NGFS) but they may need to be tailored to the characteristics of the institution.  

FINMA expects all banks to perform qualitative scenario analyses, but expects quantitative scenario analysis only at larger institutions, as summarized in the following table. 

In addition to scenario analysis, FINMA expects banks to use other quantitative approaches (such as sector exposures) to substantiate the materiality assessment. 

Risk Management

Material NRF risks need to be integrated in the existing processes for the management, monitoring, controlling and reporting of existing risk types. Risk tolerances for exposure to material NRF risks need to be reflected in risk indicators with warning levels and limits and include forward-looking indicators. For example, risk tolerance for transition risk can be expressed in terms of the nominal exposure and/or financed CO₂ emissions in sectors that are sensitive to transition risks, including targets for a reduction in the exposure over time.  

To account for the large uncertainty in existing methods and data, institutions are expected to apply a margin of conservatism in the risk tolerances (“Vorsichtsprinzip”). Furthermore, they are expected to regularly evaluate, and when necessary, amend, the data, methods and processes needed to manage material NRF risks. This evaluation needs to take national and international developments into account. In the additional guidance, FINMA emphasizes the importance of describing in the existing documentation of the risk management and control processes how material NRF risks are managed, including required data such as transition plans and physical locations of counterparties as well as assumptions, approximations and estimates used when proper data is still lacking.  

In addition, firms are expected to verify regularly whether their publicly disclosed sustainability objectives are aligned with their business strategy, risk tolerance, risk management and legal requirements, such as national or international commitments to reduce emissions and protect biodiversity. Any such misalignments would increase legal and reputational risks. To reduce the risk of such misalignments, FINMA suggests to include the publicly stated objectives in the annual targets for business lines and employees and embed them in the internal control reviews. 

Stress testing 

Category 1 and 2 banks with material NRF risks need to integrate these in their stress test and the internal capital adequacy assessment. To define stress tests, scenarios that have been used for the materiality assessment can be used as basis, but they may need to be broadened in scope and made more severe. 

Expectations per risk type 

The FINMA expectations per risk type below apply to material NRF risks only. 

Credit risk 

NRF risks that are assessed as material in relation to a bank’s credit risk need to be monitored throughout the full lifecycle of credit risk positions. The bank is expected to consider measures to control or reduce the exposure to these NRF risks, for example by 

• Adjusting the lending criteria and, if applicable, acceptable collateral. As part of this, the bank can consider providing incentives to counterparties to reduce exposure to NRF risks. 

• Adjusting client or transaction ratings. 

• Lending restrictions, such as shorter maturities, lower lending limits and discounted asset values for clients materially exposed to NRF risks. 

• Client engagement, encouraging sustainable business practices and enhanced external disclosures about exposures to NRF risks and transition plans. 

• Setting thresholds or other risk mitigation techniques for activities, counterparties, sectors and regions which are not in line with the risk tolerance. For example, in highly sensitive sectors, the bank may restrict exposures to those counterparties with credible transition plans. 

Market risk 

Institutions with material NRF risk exposure in their market risk positions need to assess the loss potential and the impact of increased volatility in relation to the potential materialization of NRF risks. Category 1 to 3 banks with material NRF risks need to do so regularly. The market risk positions cover both trading book positions (bonds, equities, FX, commodities) and banking book investments.  

The loss potential can be assessed using scenario analyses and stress tests that 

• Are forward looking and also cover medium and long-term horizons 

• Consider the impact of a sudden shock on the value of financial instruments 

• Reflect dependencies between market variables 

• Embed forward-looking assumptions rather than historical distributions 

• Take into account the prices and availability of hedges under different scenarios (e.g., in a ‘disorderly transition’ scenario) 

FINMA notes that the impact of NRF risks on managed investments can lead to business risk (lower revenues) when other institutions are better managing them for their clients. 

Liquidity risk 

Examples of the potential impact of NRF risks on a bank’s liquidity position are clients hoarding cash ahead of, or withdrawing funds for repairs after, a natural disaster. FINMA stipulates that banks with material exposure to NRF risks need to evaluate the impact in normal and adverse situations. Material impacts need to be controlled or mitigated.  

To assess the potential impact, FINMA suggests that banks can consider a combined market-wide and idiosyncratic stress situation in combination with the occurrence of a natural disaster (e.g., a flooding). Not only cash outflows need to considered, but also the impact on the value of financial instruments that are part of the stock of high-quality liquid assets (HQLA). Any material impact needs to be considered in the calibration of the necessary amount of HQLA and the management of liquidity risks. 

Operational risk 

Banks with material NRF risks in relation to operational risks need to consider these in risk and control assessments (RCA) for operational risk and in the management of operational risks, where appropriate. This is aligned with the expectations in the FINMA Circular 2023/1 “Operational risks and resilience – Banks”. 

Category 1 to 3 institutions that perform a systematic collection and analysis of loss data according to FINMA Circular 2023/1 need to clearly show losses and events in relation to NRF risks in relevant reports. 

Furthermore, material NRF risks in relation to operational risks that may impair critical functions need to be documented and considered in the operational resilience of the institution as reflected in business-continuity plans and disaster-recovery plans. An example could be the unavailability of a data center due to a natural disaster such as a flooding or severe storm. 

Compliance, legal and reputational risk 

FINMA sees heightened compliance, legal and reputation risks in relation to NRF risks due to high expectations from society and the government for banks to contribute to achieving society’s sustainability goals. For example, the Swiss government is obliged by law to ensure that the Swiss Financial Sector contributes to a low-emission and climate-resilient development. FINMA expects banks to explicitly assess the potential impact of NRF risks on legal and compliance costs as well as the bank’s reputation. Any such material risks need to embedded in relevant processes and controls. 

As potential sources of reputation risks for banks, FINMA mentions the nature of investments and lending, the composition of investment portfolios, project financing, client advisory and marketing campaigns. Reputation risk will have a financial impact when clients and/or the public in general lose trust and stop doing business with the institution, leading to lower revenues. Reputation risk should therefore also be considered in new product development and go-to-market, new business initiatives and new marketing campaigns. FINMA also expects institutions to elaborate on the impact of NRF risks on reputation risk in their external disclosure.  

Implementation 

To prepare for the implementation of the new FINMA circular, we advise banks to take the steps as outlined below.  

1 - Design a process to perform a risk identification and materiality assessment of NRF risks, including the universe of NRF risks to be considered

2 - Execute the process and document the results. This needs to include:

• Identify possible transmission channels for each combination of NRF risk and existing risk type

• Assess potential financial materiality for all transmission channels, using internal and external expertise as well as scenario analysis. For this purpose, suitable scenarios need to be identified.

3 - Decide on metrics (KRIs) for the material NRF risks and identify sources of required data

4 - Agree on risk tolerances for exposure to NRF risks, including KRIs

5 - Embed material NRF risks in internal risk management, monitoring and reporting processes for all relevant risk types (credit, market, liquidity, operational, legal, compliance and reputation risk)

6 - Collect required data and include KRIs in relevant reports

7 - Prepare external disclosure

Based on our experience, completing the steps may well take up to a year, including the time needed for internal discussion and decision taking. Although this can be shortened if the bank has already taken initial steps, we advise banks to start timely with the implementation of the circular.  

If you would like to discuss our proposed approach or are looking for an experienced partner to support you in this process,  please reach out to Pieter Klaassen.  

As mid-sized corporations expand, enhancing their Treasury function becomes essential. International growth, exposure to multiple currencies, evolving regulatory requirements, and increased working capital demands are key indicators of the need for a well-structured Treasury function. These factors heighten the risk of challenges such as limited cash visibility, foreign exchange fluctuations, and a greater need for centralization and diverse financing sources—making a solid policy framework essential. A Treasury function built around a clear Target Operating Model (TOM) is critical for managing this complexity and enabling sustainable growth. 

Zanders has deep experience in helping companies of all sizes define and optimize their Treasury TOM—from small businesses to global multinationals. Across industries from pharmaceuticals to manufacturing, we support organizations at every stage of treasury maturity. A well-designed TOM gives you a roadmap to transform Treasury into a strategic, scalable capability. 

Benchmarking your Treasury Performance: Know Where You Stand 

A treasury benchmark study provides a clear and objective view of how your treasury function compares to peers and industry best practices. It helps to identify strengths, spot inefficiencies, and uncover opportunities to enhance performance and resilience. 

This kind of assessment is especially valuable during periods of rapid growth, when your treasury must adapt to increasing complexity. It also proves to be critical during major events such as mergers, acquisitions, or shifts in the market, where quick adaptation is key. 

Benchmarking is more than a comparison exercise. It delivers clarity on your current state and defines what’s needed to evolve. That insight becomes the foundation for targeted improvements, stronger risk management, and the development of a TOM that aligns with your organization’s goals. 

In the sections below, we outline two key areas to consider and how benchmarking provides the insights needed to build your optimal treasury roadmap. 

Strategic Alignment in Action: Optimizing Organizational Structures for Sustainable Growth 

As organizations grow, it becomes increasingly important to clearly define treasury responsibilities separately from those of the broader finance function. At the same time, integrating Treasury into the interconnected structure of the Office of the CFO helps build a stronger and more resilient finance organization. A common challenge in change management arises when legacy definitions of roles and responsibilities remain unaddressed. For example, certain processes—such as reconciliation—may continue to be performed within the ERP system simply because “that’s how it’s always been done,” even if it’s no longer the most efficient approach. In some cases, the accounting team may lack the capacity to take ownership of such tasks, resulting in inefficiencies and blurred accountability. 

A TOM review creates the opportunity to redefine treasury roles, policies, and processes. This should be revisited regularly to keep it aligned with the organization's structure and goals. 

Key Opportunities for Policy and Procedure Optimization: 

• Consolidation and Standardization: Implementing unified policies and procedures can enhance efficiency and consistency across the organization. This involves consolidating knowledge, standardizing processes, and ensuring that all departments operate in alignment with organizational goals. 

• Enhancing Segregation of Duties: Reviewing and refining the organizational structure can better support the segregation of duties, reducing risks and improving operational integrity. This involves defining clear roles and responsibilities to ensure effective internal controls. 

• Streamlining Operations: Centralizing certain activities currently performed locally can lead to streamlined operations, improved efficiency, and reduced costs. Centralization allows for standardized procedures, clearer decision-making processes, and improved resource utilization. 

• Strategic Resource Realignment: Redirecting treasury resources from routine operational tasks to strategic initiatives can significantly enhance the treasury's value proposition. By automating non-core activities, the treasury can focus on high-impact projects and internal consulting roles, driving business growth and strategic alignment 

Alongside a review and assessment of the organizational structure, a deep dive into the treasury technology landscape of an organization is another key aspect to consider when transforming a treasury. 

Technology as a tool 

While large organizations typically have an ERP or TMS in place, many small to mid-sized companies have not yet reached that level of maturity. In these organizations, treasury functions often rely heavily on spreadsheets, which can be cumbersome and prone to error. Additionally, treasurers must log into multiple bank portals to gather essential data for reconciliation and forecasting. As the company grows, the time spent on these manual processes increases, along with the risk of mistakes and inefficiencies. 

Recognizing the need for modernization, treasurers are increasingly focusing on upgrading treasury technology. As mid-sized corporations scale and face greater financial complexity, the reliance on outdated, custom-developed solutions and manual processes becomes more problematic. This makes the need for an enhanced treasury management system even more critical to efficiently manage financial operations and reduce operational risks. 

Key opportunities for a Treasury Technology Upgrade: 

• Enhanced Flexibility and Scalability: Upgrading to cloud-based treasury management systems (TMS) can provide greater flexibility, scalability, and cost efficiency compared to traditional onsite systems. This allows for easier access and management of treasury operations across different locations and teams. 

• Advanced Reporting Capabilities: Real-Time Financial Insights: Implementing a more advanced TMS can address reporting challenges by providing accurate, real-time financial insights. This capability enables treasurers to make timely and informed decisions, enhancing overall financial management and strategic planning. 

• Streamlined Operations: Upgrading to a system with seamless integration capabilities can automate processes, reduce operational delays, and minimize errors. This integration ensures that all systems communicate effectively, fostering a more efficient and cohesive treasury environment. 

• Efficient Cost Management and Regulatory Compliance: A modern TMS can help achieve significant cost savings and improve compliance by supporting segregation of duties and multi-level approval processes. This ensures adherence to regulatory requirements while optimizing operational expenses. 

• Improved Cash Management: Access to real-time data, such as global cash positions, is crucial for effective decision-making and cash management. Upgrading to a system that provides these insights can enhance treasury operations by allowing for proactive management of liquidity and financial risks. 

Organizations should carefully evaluate when and how to upgrade their TMS, recognizing signs of inadequacy, understanding the benefits, and identifying essential features. A suitable TMS will not only optimize treasury operations but also provide the necessary tools for effective financial management, maintaining a competitive edge in an evolving landscape.  

Build a Strategic Roadmap 

With the insights gained from benchmarking, organizations can define their long-term target state and build a tailored solution design. This becomes the foundation for a strategic roadmap that outlines the initiatives needed to elevate your treasury function. Whether the focus is on technology upgrades, process improvements, or resource realignment, each initiative should shape a treasury function that is agile, efficient, and growth ready. A fit-for-purpose treasury is not just a support function; it is a strategic asset that underpins long-term performance and resilience. 

If you wish to learn more about how we can support the growth of your organization through the treasury function, please contact Ernest Huizing or Vincent Casterman.

Industry surveys show that FRTB may lead to a 60% increase in regulatory market risk capital requirements, placing significant pressure on banks. As regulatory market risk capital requirements rise, it is imperative that banks employ robust techniques to effectively understand and manage the drivers of capital. However, isolating these drivers can be challenging and time-consuming, often relying on inefficient and manual techniques. Capital attribution techniques provide banks with a solution by automating the analysis and understanding of capital drivers, enhancing their efficiency and effectiveness in managing capital requirements.

In this article, we share our insights on capital attribution techniques and use a simulated example to compare the performance of several approaches.

The benefits of capital attribution

FRTB capital calculations require large amounts of data which can be difficult to verify. Banks often use manual processes to find the drivers of the capital, which can be inefficient and inaccurate. Capital attribution provides a quantification of risk drivers, attributing how each sub-portfolio contributes to the total capital charge. The ability to quantify capital to various sub-portfolios is important for several reasons:

An overview of approaches

There are several existing capital attribution approaches that can be used. For banks to select the best approach for their individual circumstances and requirements, the following factors should be considered:

• Full Allocation: The sum of individual capital attributions should equal the total capital requirements,
• Accounts for Diversification: The interactions with other sub-portfolios should be accounted for,
• Intuitive Results: The results should be easy to understand and explain.

In Table 1, we summarize the above factors for the most common attribution methodologies and provide our insights on each methodology.

Table 1: Comparison of common capital attribution methodologies.

Comparison of approaches: A simulated example

To demonstrate the different performance characteristics of each of the allocation methodologies, we present a simulated example using three sub-portfolios and VaR as a capital measure. In this example, although each of the sub-portfolios have the same distribution of P&Ls, they have different correlations:

• Sub-portfolio B has a low positive correlation with A and a low negative correlation with C,
• Sub-portfolios A and C are negatively correlated with each other.

These correlations can be seen in Figure 1, which shows the simulated P&Ls for the three sub-portfolios.

Figure 1: Simulated P&L for the three simulated sub-portfolios: A, B and C.

The capital allocation results are shown below in Figure 2. Each approach produces an estimate for the individual sub-portfolio capital allocations and the sum of the sub-portfolio capitals. The dotted line indicates the total capital requirement for the entire portfolio.

Figure 2: Comparison of capital allocation methodologies for the three simulated sub-portfolios: A, B and C. The total capital requirement for the entire portfolio is given by the dotted line.

Zanders’ verdict

From Figure 2, we see that several results do not show this attribution profile. For the Standalone and Scaled Standalone approaches, the capital is attributed approximately equally between the sub-portfolios. The Marginal and Scaled Marginal approaches include some estimates with negative capital attribution. In some cases, we also see that the estimate for the sum of the capital attributions does not equal the portfolio capital.

The Shapley method is the only method that attributes capital exactly as expected. The Euler method also generates results that are very similar to Shapley, however, it allocates almost identical capital in sub-portfolios A and C.  

In practice, the choice of methodology is dependent on the number of sub-portfolios. For a small number of sub-portfolios (e.g. attribution at the level of business areas) the Shapley method will result with the most intuitive and accurate results. For a large number of sub-portfolios (e.g. attribution at the trade level), the Shapley method may prove to be computationally expensive. As such, for FRTB calculations, we recommend using the Euler method as it is a good compromise between accuracy and cost of computation.

Conclusion

Understanding and implementing effective capital attribution methodologies is crucial for banks, particularly given the increased future capital requirements brought about by FRTB. Implementing a robust capital attribution methodology enhances a bank's overall risk management framework and supports both regulatory compliance and strategic planning. Using our simulated example, we have demonstrated that the Euler method is the most practical approach for FRTB calculations. Banks should anticipate capital attribution issues due to FRTB’s capital increases and develop reliable attribution engines to ensure future financial stability.

For banks looking to anticipate capital attribution issues and potentially mitigate FRTB’s capital increases, Zanders can help develop reliable attribution engines to ensure future financial stability. Please contact Dilbagh Kalsi (Partner) or Robert Pullman (Senior Manager) for more information.

First, these regions were analyzed independently such that common trends and differences could be noted within. These results were aggregated for each region such that these regions could be compared with each other. The results show that within European regions the year-on-year trends are similar between banks, but that across these regions the trends do differ across the years. Because the systemic macroeconomic trends the last years were similar between regions (Covid-19 and the war in Ukraine ), it shows that there are significant cultural differences in how ECLs are modelled. This shows that there is a need for alignment between European regions for which Zanders can assist. Namely, we have a presence in each of these regions and are actively monitoring development in the area of IFRS 9 (also see our previous research on IFRS 9).  

Nordics

The overall coverage ratios for most of the Danish, Swedish, Norwegian and Finnish banks¹ (Nordic region) showed a slightly decreasing trend from 2020 to 2023, except for OP, which had a significant absolute increment of 0.25% to 0.86% in 2023 compared with the previous three years due to an increase in the stage 2 coverage ratio and a higher Stage 1 to 2 ratio. OP also had the highest overall coverage ratio among the sampled banks. The decreasing trend in the overall coverage ratio was primarily attributed to the decline in the Stage 3 coverage ratio.  

On the other hand, the change in the Stage 1 coverage ratio was relatively stable over the years, with an absolute difference of less than 0.09% between the maximum and minimum values across the four-year period. The Stage 2 coverage ratio exhibited a similar trend across banks, except for Jyske Bank, which showed a volatile pattern, with an absolute difference of over 3% between the maximum and minimum values throughout the four years, peaking at 4.74% in 2023. In addition, the overall and the Stage 3 coverage ratios varied from 0.06% to 0.86% and 16.3% to 45.6% across banks in 2023. 

Netherlands 

There was a slight decrease in the overall ECL results for the Dutch market² over the four-year study period (also see the previous research on the Dutch market). This was primarily driven by an improved macroeconomic outlook and a further reversal of manual overlays that were applied during the COVID-19 period (e.g., ABN AMRO).  

Compared with 2022, larger banks (Rabobank and ABN AMRO) showed a decrease in the overall coverage ratio with a higher weight given to the up scenario. In contrast, smaller banks tended to have a higher coverage ratio due to shifting more weight from the up scenario to the base scenario or changes in the underlying models.  

DACH 

For the German, Austrian and Swiss region (DACH),³ a relatively stable trend was observed in the overall coverage ratio from 2020 to 2022, which was then countered by a sharp upward trend from 2022 to 2023. Among the banks noted, RBI stood out from its peers in reporting significantly higher overall, Stage 2 and Stage 3 coverage ratios during the study period. RBI is one of Austria's leading corporate and investment banks, operating in Central and Eastern European markets. In some Eastern European countries, Stage 2 loans remain exceptionally high, at 15 to 20 percent, leading to large overall and Stage 2 coverage ratios. 

Compared to 2022, the increase in the overall coverage ratio can be attributed to higher Stage 2 coverage ratios for half of the sampled banks. Julius Bär also experienced an exceptionally high stage 3 coverage ratio of up to 93% in 2023, primarily from its Lombard loan portfolio.  

UK 

During the benchmarking period from 2020 to 2023, most UK banks⁴ reported a decrease in the overall coverage ratio from 2020 to 2021. Then the overall coverage ratio stabilized for the remaining two years, except for one of the sampled banks, whose coverage ratio had been increasing since 2021 and recorded the second-highest overall coverage ratio in 2024 (i.e. 1.6% vs. the median of 0.8% for all sampled UK banks). 

The highest coverage ratio of all years is from Monzo. As a relatively new digital bank focused on expanding, Monzo has significantly expanded its lending in recent years, with a doubling of the gross carrying amount in the latest reporting period. However, their overall coverage ratios remained high, at around 14% to 14.6% over the past two years. In the figure below (and the figures at the end of the article), Monzo has been excluded, as it individually inflated the results and rendered the other results unreadable. 

Across regions 

In general, all regions showed a decrease in the overall ECL coverage ratio during the initial benchmarking period, from 2020 to 2021. Compared to 2020, the coverage ratio in the most recent year has decreased, except for the DACH region, where the overall coverage ratio has reached a level comparable to that of the UK, due to a significant increase in Stage 2 numbers. The UK has the highest overall, as well as Stage 1 and Stage 2 coverage ratios, while the DACH region has the highest Stage 3 coverage ratios (i.e., the highest LGD).  

In short, this shows that both the UK and DACH region demonstrate a higher overall coverage ratio, which seems to be consistent throughout all the years from 2020 onwards. Even the lowest reported average coverage ratio for the DACH region, 0.76% in 2021 is higher than the highest reported value for the Netherlands, 0.69% in 2020. As the values differ greatly between regions while the macroeconomic occurrences were similar (Covid-19, Ukraine war), it could be noted that this must be caused by significant differences in how the ECLs are modelled. And as markets are not aligned how to model ECL, it is worthwhile to further investigate how European regions can learn from each other in modelling ECL. 

As Zanders has a presence in each of these regions and is in constant contact with many of the active banks in those regions, we are the best strategic partner to help improving your IFRS 9 modelling. Whether it is an independent validation of an existing model of if help is needed with the (re)development of new IFRS 9 models, we can help clients achieve the optimal accuracy with regards to their ECL estimates. 

If you wish to learn more about IFRS 9 please contact Kasper Wijshoff.

The EU instant payments regulation¹ comes into force on the 5^th October this year. Importantly from a corporate perspective, it includes a VoP (verification of payee) regulation that requires the originating banking partner (Payment Service Provider) to validate one of the following data options with the beneficiary bank:

• IBAN and Beneficiary Name
• IBAN and Identification (for example LEI or VAT number)

This beneficiary verification must be carried out as part of the payment initiation process and be completed before the payment can be potentially reviewed and authorized by the corporate and finally processed by the originating banking partner. Now whilst this concept of beneficiary verification works perfectly in the instant payments world as only individual payment transactions are processed, a material challenge exists where a corporate operates a bulk/batch payment (file based) model.

Many large corporates will pay vendor invoices (commercial payments) on a weekly or fortnightly basis or salaries on a monthly basis. Their ERP (Enterprise Resource Planning) system will complete a payment run and generate a file of pre-approved payment transactions which are sent via a secure connection to their banking partners. Typically, this automated file-based transmission contains pre-authorized transactions which has been contractually agreed with the banking partners. The banking partners will complete file syntax validation and a more detailed payment validation before processing the payment through the relevant clearing system.

If we focus on euro denominated electronic payments, these must be fully compliant with the new EU regulation from 5^th October. This means the banking partners will need to verify the beneficiary information before the payment process can continue. So the banking partner will send an individual VoP check for each payment instruction contained within the payment file (batch of euro transactions) for the beneficiary bank to provide one of the following verification statuses:

• Match
• Close Match
• No Match
• Not applicable

The EU regulation then requires the banking partner to make the status available to the corporate to allow a review and approve or reject transactions based on the status that has been returned. This means there may be a ‘pause’ in the euro payments processing before the originating partner bank can proceed in processing the euro payment transactions. But this ‘pause’ may be exempted by contractual agreement, which is referred to as an  ‘Opt-Out’. This is only  available to corporates and covered in more detail below.

Key Considerations for the Corporate Community:

1- Notification of VoP Status: This new EU regulation will include the following status codes which will apply at a group and individual transaction level.

Group Status

RCVC  Received Verification Completed

RVCM  Received Verification Completed With Mismatches

Transaction Status

RCVC  Received Verification Completed

RVNA  Received Verification Completed Not Applicable

RVNM  Received Verification Completed No Match

RVMC  Received Verification Completed Match Closely

These new status codes have been designed to be provided in the ISO 20022 XML payment status message (pain.002.001.XX). However, a key question the corporate community need to ask their banking partners is around the flexibility that can be provided in supporting the communication of these VoP status codes. Does the corporate workflow already support the ISO XML payment status message and if so, can these new status codes be supported? At this stage, corporate community preference might be skewed towards leveraging a bank portal to access these new status codes, so an important area for discussion.

• Time to complete the VoP Check: The regulation includes a 5-second rule for a single payment transaction VoP request which includes the following activities:

• the time needed by the originating banking partner to identify the beneficiary bank based on the IBAN received,
• send the request to the beneficiary bank,
• beneficiary bank to check whether received info is associated to received IBAN,
• beneficiary bank to return the information,
• originating bank to return info to initiator.

If we now consider the timing based on a file of payments, the overall timing calculation becomes more challenging as it is expected originating banks will be executing multiple VoP requests in parallel. The EU regulation requires the originating banking partner to carry out the VoP check as soon as an individual transaction is ´unpacked´ from the associated batch of transactions. At this stage, a very rough estimate is that a file containing 100,000 transactions will take around 4 minutes to complete the full VoP process. But this is an approximate at this stage. The important point is that the corporate community will need to test the timings based on their specific euro payment logic to determine if existing file processing times need to be adjusted to respect existing  agreed cut-off times and reduce the risk of late payments.

Corporate Action on VoP Status: This will be another area for discussion between the corporate and its banking partners, but the current options include:

• Authorize Regardless: Pre-authorise all payments, including those with mismatches.  
• Review and Authorize: Review mismatches and provide explicit authorization for processing.  
• Reject: mismatched payments or the entire batch.  

The corporate discussion should also include how the review and approval can be undertaken. Given that the October deadline is fast approaching, the current expectation is that banking portals will be used to support this function, but this needs to be discussed including whether exceptions can be rejected individually, or if the whole file of transactions will need to be rejected. Whilst the corporate position is very clear that the exceptions only approach is required, it is still unclear if banks can support this flexibility.

Understanding the ‘Opt-Out’ Option:

Whilst the EU regulation does include an ‘opt-out’ option, meaning a VoP check will not be performed by the originating banking partners on euro transactions, this option currently only applies to bulk/batch payments and not a file containing a single payment transaction. Whilst the option to use a bank portal to make individual transactions has been suggested as a possible workaround, there is increasing corporate resistance to using bank portals given the automated secure file based processing that is now in place across many corporates.

The opt-out option needs to be contractually agreed with the relevant partner banks, so the corporate community will need to discuss this point in addition to understanding the options available for files containing single transactions, which will still be subject to the VoP verification requirement.   

In conclusion

Whilst the industry continues to discuss the file based VoP model, the CGI-MP (common global implementation market practice) group which is an industry collaboration, is now recommending corporates to opt-out at this stage due to the various workflow challenges that currently exist. However, corporate and partner bank discussions will still be required around files containing single payment transactions.

There is no doubt VoP provides benefits in terms of mitigating the risk of fraudulent and misdirected payments, but the current EU design introduces material logistical challenges that require further broader discussion at an industry level.