Defining the challenges that prevent increased Treasury participation in the commodity risk management strategy and operations and proposing a framework to address these challenges.
The heightened fluctuations observed in the commodity and energy markets from 2021 to 2022 have brought Treasury's role in managing these risks into sharper focus. While commodity prices stabilized in 2023 and have remained steady in 2024, the ongoing economic uncertainty and geopolitical landscape ensures that these risks continue to command attention. Building a commodity risk framework that is in-line with the organization’s objectives and unique exposure to different commodity risks is Treasury’s key function, but it must align with an over-arching holistic risk management approach.
Figure 1: Commodity index prices (Source: IMF Primary Commodity Price Research)
Traditionally, when treasury has been involved in commodity risk management, the focus is on the execution of commodity derivatives hedging. However, rarely did that translate into a commodity risk management framework that is fully integrated into the treasury operations and strategy of a corporate, particularly in comparison to the common frameworks applied for FX and interest rate risk.
On the surface it seems curious that corporates would have strict guidelines on hedging FX transaction risk, while applying a less stringent set of guidelines when managing material commodity positions. This is especially so when the expectation is often that the risk bearing capacity and risk appetite of a company should be no different when comparing exposure types.
The reality though is that commodity risk management for corporates is far more diverse in nature than other market risks, where the business case, ownership of tasks, and hedging strategy bring new challenges to the treasury environment. To overcome these challenges, we need to address them and understand them better.
To first identify all the challenges, we need to analyze a typical market risk management framework, encompassing the identification, monitoring and mitigation aspects, in order to find the complexities specifically related to commodity risk management.
Figure 2: Zanders’ Commodity Risk Management Framework.
In the typical framework that Zanders’ advocates, the first step is always to gain understanding through:
We will discuss each of these areas next in-depth and start to consider how teams of various skillsets can be combined to provide organizations with a best practice approach to commodity risk management.
A recent Zanders survey and subsequent whitepaper revealed that the primary challenge most corporations face in risk management processes is data visibility and risk identification. Furthermore, identifying commodity risks is significantly more nuanced compared to understanding more straightforward risks such as counterparty or interest rate exposures.
Where the same categorization of exposures between transaction and economic risk apply to commodities (see boxout), there are additional layers of categorization that should be considered, especially in regard to transaction risk.
Transactions and economic risks affect a company's cash flows.
While transaction risk represents the future and known cash flows,
Economic risk represents the future (but unknown) cash flows.
Direct exposures: Certain risks may be viewed as direct exposures, where the commodity serves as a necessary input within the manufacturing supply chain, making it crucial for operations. In this scenario, financial pricing is not the only consideration for hedging, but also securing the delivery of the commodity itself to avoid any disruption to operations. While the financial risk component of this scenario sits nicely within the treasury scope of expertise, the physical or delivery component requires the expertise of the procurement team. Cross-departmental cooperation is therefore vital.
Indirect exposures: These exposures may be more closely aligned to FX exposures, where the risk is incurred only in a financial capacity, but no consideration is needed of physical delivery aspects. This is commonly experienced explicitly with indexation on the pricing conditions with suppliers, or implicitly with an understanding that the supplier may adjust the fixed price based on market conditions.
As with any market risk, it is important to maintain the relationship with procurement teams to ensure that the exposure identifications and assumptions used remain true
Indirect exposures may provide a little more independence for treasury teams in exercising the hedging decision from an operational perspective, particularly with strong systems support, reporting on and capturing the commodity indexation on the contracts, and analyzing how fixed price contracts are correlating with market movements. However, as with any market risk, it is important to maintain the relationship with procurement teams to ensure that the exposure identifications and assumptions used remain true.
Only once an accurate understanding of the nature and characteristics of the underlying exposures has been achieved can the hedging objectives be defined, leading to the creation of the strategy and policy element in the framework.
Where all the same financial objectives of financial risk management such as ‘predictability’ and ‘stability’ are equally applicable to commodity risk management, additional non-financial objectives may need to be considered for commodities, such as ensuring delivery of commodity materials.
In addition, as the commodity risk is normally incurred as a core element of the operational processes, the objective of the hedging policy may be more closely aligned to creating stability at a product or component level and incorporated into the product costing processes. This is in comparison to FX where the impact from FX risk on operations falls lower in priority and the financial objectives at group or business unit level take central focus.
The exposure identification for each commodity type may reveal vastly different characteristics, and consequently the strategic objectives of hedging may differ by commodity and even at component level. This will require unique knowledge in each area, further confirming that a partnership approach with procurement teams is needed to adequately create effective strategy and policy guidelines.
When a strategy is in place, the toolbox of hedging instruments available to the organization must be defined. For commodities, this is not only limited to financial derivatives executed by treasury and offsetting natural hedges. Strategic initiatives to reduce the volume of commodity exposure through manufacturing processes, and negotiations with suppliers to fix commodity prices within the contract are only a small sample of additional tools that should be explored.
Both treasury and procurement expertise is required throughout the commodity risk management Processing and Execution steps. This creates a challenge in defining a set of roles and responsibilities that correctly allocate resources against the tasks where the respective treasury and procurement subject matter experts can best utilize their knowledge.
As best practice, Treasury should be recognized as the financial market risk experts, ideally positioned to thoroughly comprehend the impact of commodity market movements on financial performance. The Treasury function should manage risk within a comprehensive, holistic risk framework through the execution of offsetting financial derivatives. Treasurers can use the same skillset and knowledge that they already use to manage FX and IR risks.
Procurement teams on the other hand will always have greater understanding of the true nature of commodity exposures, as well as an understanding of the supplier’s appetite and willingness to support an organizations’ hedging objectives. Apart from procurements understanding of the exposure, they may also face the largest impact from commodity price movements. Importantly, the sourcing and delivery of the actual underlying commodities and ensuring sufficient raw material stock for business operations would also remain the responsibility of procurement teams, as opposed to treasury who will always focus on price risk.
Clearly both stakeholders have a role to play, with neither providing an obvious reason to be the sole owner of tasks operating in isolation of the other. For simplicity purposes, some corporates have distinctly drawn a line between the procurement and treasury processes, often with procurement as the dominant driver. In this common workaround, Treasury is often only used for the hedging execution of derivatives, leaving the exposure identification, impact analysis and strategic decision-making with the procurement team. This allocation of separate responsibilities limits the potential of treasury to add value in the area of their expertise and limits their ability to innovate and create an improved end-to-end process. Operating in isolation also segregates commodity risk from a greater holistic risk framework approach, which the treasury may be trying to achieve for the organization.
One alternative to allocating tasks departmentally and distinctly would be to find a bridge between the stakeholders in the form of a specialized commodity and procurement risk team with treasury and procurement acting together in partnership. Through this specialized team, procurement objectives and exposure analysis may be combined with treasury risk management knowledge to ensure the most appropriate resources perform each task in-line with the objectives. This may not always be possible with the available resources, but variations of this blended approach are possible with less intrusive changes to the organizational structure.
With treasury trends pointing towards adopting a holistic view of risk management, together with a backdrop of global economic uncertainty and geopolitical instability, it may be time to face the challenges limiting Treasury’s role in commodity risk management and set up a framework that addresses these challenges. Treasury’s closer involvement should best utilize the talent in an organization, gain transparency to the exposures and risk profile in times of uncertainty and enable agile end-to-end decision-making with improved coordination between teams.
These advantages carry substantial potential value in fortifying commodity risk management practices to uphold operational stability across diverse commodity market conditions.
Unlock Treasury Efficiency: Exploring SAP’s GROW and RISE Cloud Solutions
As organizations continue to adapt to the rapidly changing business landscape, one of the most pivotal shifts is the migration of enterprise resource planning (ERP) systems to the cloud. The evolution of treasury operations is a prime example of how cloud-based solutions are revolutionizing the way businesses manage their financial assets. This article dives into the nuances between SAP’s GROW (public cloud) and RISE (private cloud) products, particularly focusing on their impact on treasury operations.
The "GROW" product targets new clients who want to quickly leverage the public cloud's scalability and standard processes. In contrast, the "RISE" product is designed for existing SAP clients aiming to migrate their current systems efficiently into the private cloud.
The public cloud, exemplified by SAP's "GROW" package, operates on a shared infrastructure hosted by providers such as SAP, Alibaba, or AWS. Public cloud services are scalable, reliable, and flexible, offering key business applications and storage managed by the cloud service providers. Upgrades are mandatory and occur on a six-month release cycle. All configuration is conducted through SAP Fiori, making this solution particularly appealing to upper mid-market net new customers seeking to operate using industry-standard processes and maintain scalable operations.
In contrast, the private cloud model, exemplified by the “RISE” package, is used exclusively by a single business or organization and must be hosted at SAP or an SAP-approved hyperscaler of their choice. The private cloud offers enhanced control and security, catering to specific business needs with personalized services and infrastructure according to customer preferences. It provides configuration flexibility through both SAP Fiori and the SAP GUI. This solution is mostly preferred by large enterprises, and many customers are moving from ECC to S/4HANA due to its customizability and heightened security.
Distinguishing between public and private cloud methodologies involves examining factors like control, cost, security, scalability, upgrades, configuration & customization, and migration. Each factor plays a crucial role in determining which cloud strategy aligns with an organization's vision for treasury operations.
The impact of SAP’s GROW (public cloud) and RISE (private cloud) solutions on treasury operations largely hinges on the degree of tailoring required by an organization’s treasury processes. If your treasury processes require minimal or no tailoring, both public and private cloud options could be suitable. However, if your treasury processes are tailored and structured around specific needs, only the private cloud remains a viable option.
In the private cloud, you can add custom code, modify SAP code, and access a wider range of configuration options, providing greater flexibility and control. In contrast, the public cloud does not allow for SAP code modification but does offer limited custom code through cloud BADI and extensibility. Additionally, the public cloud emphasizes efficiency and user accessibility through a unified interface (SAP Fiori), simplifying setup with self-service elements and expert oversight. The private cloud, on the other hand, employs a detailed system customization approach (using SAP Fiori & GUI), appealing to companies seeking granular control.
Another important consideration is the mandatory upgrades in the public cloud every six months, requiring you to test SAP functionalities for each activated scope item where an update has occurred, which could be strenuous. The advantage is that your system will always run on the latest functionality. This is not the case in the private cloud, where you have more control over system updates. With the private cloud, organizations can dictate the cadence of system updates (e.g., opting for yearly upgrades), the type of updates (e.g., focusing on security patches or functional upgrades), and the level of updates (e.g., maintaining the system one level below the latest is often used).
To accurately assess the impact on your treasury activities, consider the current stage of your company's lifecycle and identify where and when customization is needed for your treasury operations. For example, legacy companies with entrenched processes may find the rigidity of public cloud functionality challenging. In contrast, new companies without established processes can greatly benefit from the pre-delivered set of best practices in the public cloud, providing an excellent starting point to accelerate implementation.
Organizations choose between public and private cloud options based on factors like size, compliance, operational complexity, and the degree of entrenched processes. Larger companies may prefer private clouds for enhanced security and customization capabilities. Startups to mid-size enterprises may favor the flexibility and cost-effectiveness of public clouds during rapid growth. Additionally, companies might opt for a hybrid approach, incorporating elements of both cloud models. For instance, a Treasury Sidecar might be deployed on the public cloud to leverage scalability and innovation while maintaining the main ERP system on-premise or on the private cloud for greater control and customization. This hybrid strategy allows organizations to tailor their infrastructure to meet specific operational needs while maximizing the advantages of both cloud environments.
Migrating ERP systems to the cloud can significantly enhance treasury operations with distinct options through SAP's public and private cloud solutions. Public clouds offer scalable, cost-effective solutions ideal for medium-to upper-medium-market enterprises with standard processes or without pre-existing processes. They emphasize efficiency, user accessibility, and mandatory upgrades every six months. In contrast, private clouds provide enhanced control, security, and customization, catering to larger enterprises with specific regulatory needs and the ability to modify SAP code.
Choosing the right cloud model for treasury operations depends on an organization's current and future customization needs. If minimal customization is required, either option could be suitable. However, for customized treasury processes, the private cloud is preferable. The decision should consider the company's lifecycle stage, with public clouds favoring rapid growth and cost efficiency and private clouds offering long-term control and security.
It is also important to note that SAP continues to offer on-premise solutions for organizations that require or prefer traditional deployment methods. This article focuses on cloud solutions, but on-premises remains a viable option for businesses that prioritize complete control over their infrastructure and have the necessary resources to manage it independently.
If you need help thinking through your decision, we at Zanders would be happy to assist you.
Unlock Treasury Efficiency: Exploring SAP’s GROW and RISE Cloud Solutions
The recent periods of commodity price volatility have brought commodity risk management to the spotlight in numerous companies, where commodities constitute a substantial component of the final product, but pricing arrangements prevented a substantial hit of the bottom line in the past calm periods.
Understanding Commodity Risk Management is ingrained in the individual steps of the whole value chain, encompassing various business functions with different responsibilities. Purchasing is responsible for negotiating with the suppliers: the sales or pricing department negotiates the conditions with the customers; and Treasury is responsible for negotiating with the banks to secure financing and eventually hedge the commodity risk on the derivatives market. Controlling should have clarity about the complete value chain flow and make sure the margin is protected. Commodity risk management should be a top item on the CFO's list nowadays.
Each of these functions need to be supported with adequate information system functionality and integrated well together, bridging the physical supply chain flows with financial risk management.
SAP, as the leading provider of both ERP and Treasury and risk management systems, offers numerous functionalities to cover the individual parts of the process. The current solution is the result of almost two decades of functional evolution. The first functionalities were released in 2008 on the ECC 6.04 version to support commodity price risk in the metal business. The current portfolio supports industry solutions for agriculture, oil, and gas, as well as the metal business. Support for power trading is considered for the future. In the recent releases of S/4HANA, many components have been redeveloped to reflect the experience from the existing client implementations, to better cover the trading and hedging workflow, and to leverage the most recent SAP technological innovations, like HANA database and the ABAP RESTful Application Programming Model (RAP).
Let us take you on a quick journey through the available functionalities.
The SAP Commodity Management solution covers commodity procurement and commodity sales in an end-to-end process, feeding the data for commodity risk positions to support commodity risk management as a dedicated function. In the logistics process, it offers both contracts and orders with commodity pricing components, which can directly be captured through the integrated Commodity Price Engine (CPE). In some commodity markets, products need to be invoiced before the final price is determined based on market prices. For this scenario, provisional and differential invoicing are available in the solution.
The CPE allows users to define complex formulas based on various commodity market prices (futures or spot prices from various quotation sources), currency exchange translation rules, quality and delivery condition surcharges, and rounding rules. The CPE conditions control how the formula results are calculated from term results, e.g., sum, the highest value, provisional versus final term. Compound pricing conditions can be replicated using routines: Splitting routines define how the formula quantity will be split into multiple terms, while Combination routines define how multiple terms will be combined together to get the final values.
Pricing conditions from active contracts and orders for physical delivery of commodities constitute the physical exposure position. Whether in procurement, in a dedicated commodity risk management department, or in the treasury department, real-time recognition and management of the company’s commodity risk positions rely on accurate and reliable data sources and evaluation functionalities. This is provided by the SAP Commodity Risk Management solution. Leveraging the mature functionalities and components of the Treasury and Risk Management module, it allows for managing paper trades to hedge the determined physical commodity risk position. Namely, listed and OTC commodity derivatives are supported. In the OTC area, swaps, forwards, and options, including the Asian variants with average pricing periods, are well covered. These instruments fully integrate into the front office, back office, and accounting functionalities of the existing mature treasury module, allowing for integrated and seamless processing. The positions in the paper deals can be included within the existing Credit Risk Analyser for counterparty risk limit evaluation as well as in the Market Risk Analyser for complex market risk calculations and simulations.
Physical commodity exposure and paper deals are bundled together via the harmonized commodity master data Derivative Contract Specification (DCS), representing individual commodities traded on specific exchanges or spot markets. It allows for translating the volume information of the physical commodity to traded paper contracts and price quotation sources.
In companies with extensive derivative positions, broker statement reconciliation can be automated via the recent product SAP Broker Reconciliation for Commodity Derivatives. This cloud-based solution is natively integrated into the SAP backend to retrieve the derivative positions. It allows for the automatic import of electronic brokers' statements and automates the reconciliation process to investigate and resolve deviations with less human intervention.
To support centralized hedging with listed derivatives, the Derivative Order and Trade execution component has been introduced. It supports a workflow in which an internal organizational unit raises a Commodity Order request, which in turn is reviewed and then fully or partially fulfilled by the trader in the external market.
Significant innovations were released in the S/4HANA 2022 version.
The Commodity Hedge Cockpit supports the trader view and hedging workflow.
In the area of OTC derivatives (namely commodity swaps and commodity forwards), the internal trading and hedging workflow can be supported by Commodity Price Risk Hedge Accounting. It allows for separating various hedging programs through Commodity Hedging areas and defining various Commodity Hedge books. Within the Hedge books, Hedge specifications allow for the definition of rules for concluding financial trades to hedge commodity price exposures, e.g., by defining delivery period rules, hedge quotas, and rules for order utilization sequence. Individual trade orders are defined within the Hedge specification. Intercompany (on behalf of) trading is supported by the automatic creation of intercompany mirror deals, if applicable.
Settings under the hedge book allow for automatically designating cash flow hedge relationships in accordance with IFRS 9 principles, documenting the hedge relationships, running effectiveness checks, using valuation functions, and generating hedge accounting entries. All these functions are integrated into the existing hedge accounting functionalities for FX risk available in SAP Treasury and Risk Management.
The underlying physical commodity exposure can be uploaded as planned data reflecting the planned demand or supply from supply chain functions. The resulting commodity exposure can be further managed (revised, rejected, released), or additional commodity exposure data can be manually entered. If the physical commodity exposure leads to FX exposure, it can be handed over to the Treasury team via the automated creation of Raw exposures in Exposure Management 2.0.
Modelled deals allow for capturing hypothetical deals with no impact on financial accounting. They allow for evaluating commodity price risk for use cases like exposure impact from production forecasts, mark-to-intent for an inventory position (time, location, product), and capturing inter-strategy or late/backdated deals.
Even though a separate team can be responsible for commodity risk management (front office) - and it usually is - bundling together the back office and accounting operations under an integrated middle and back office team can help to substantially streamline the daily operations.
Last but not least, the physical commodity business is usually financed by trade finance instruments. SAP has integrated Letters-of-Credit, as well as Guarantees into the Treasury module and enhanced the functionality greatly in 2016.
All-in-all, every commodity-driven business, upstream or downstream, consumer or producer, works under different setups and business arrangements. The wide variety of available functionalities allows us to define the right solution for every constellation. Especially with commodity management functionalities active in the supply chain modules of the ERP system, SAP commodity risk management can offer a lot of efficiencies in an integrated and streamlined solution. We are happy to accompany you on the journey of defining the best solution for your enterprise.
Unlock Treasury Efficiency: Exploring SAP’s GROW and RISE Cloud Solutions
The corporate landscape is continuously reshaped by strategic realignments such as mergers, divestments, and other M&A activities, wherein a company divests a portion of its business or acquires other businesses to refocus its operations or unlock shareholder value. These transactions greatly affect Treasury management, influencing cash flow, banking structures, financial risk management, financing, and technology. This article explores the challenges Treasurers face during the disentanglement or carve-out process, emphasizing the need for strategic realignment of Treasury activities and focusing on the Treasury perspective of a divesting company. It acknowledges the transitional complexities that arise and the demand for agile response strategies to safeguard against financial instability. We will have a look at the special carve-out situation of building a Treasury function for a stand-alone company in a second part of this article.
In the dynamic world of corporate restructuring, carve-outs present both a new frontier of opportunity and a multifaceted challenge for Treasurers. While divesting a part of an organization can streamline focus and potentially increase shareholder value, it can place unique pressures on treasury management to reassess and realign financial strategies.
When a corporation decides to execute a carve-out, the Treasury immediately takes on the critical task of separating financial operations and managing transitional service agreements. From the perspective of the divesting company, preserving liquidity and ensuring compliance with financial covenants is a key priority. This intricate division process demands the disentanglement of complex cash flows, re-evaluation and unwinding of cash pooling and internal as well as external debt structures, as well as a review of financial risk and investment policies. Such an endeavour requires rigorous planning and flawless execution to ensure that operational continuity is maintained. Additionally, it requires going into the details, such as the allocation of planning objects (e.g., vendor contracts, machines, vehicles) to the right business for purposes of liquidity forecasting.
Our experience shows that factors like company revenue, industry complexity, and operating countries affect the volume and frequency of treasury transactions. This can increase complexity and workload, especially for intricate transactions. An interesting remark is that carve-out transactions also impact the remaining group. Potentially, the geographic footprint is smaller, or the number of individual business models within the group is less than before – with a significant impact on Treasury.
A key component in the disentanglement process is represented by Treasury technology. In evaluating treasury technology during a carve-out, scrutiny of the landscape and meticulous planning are paramount to ensuring a smooth transition. The systems must not only handle specific needs such as segmenting data, independent entity reporting, and tracking discrete cash flows and risks, but they must also facilitate a seamless detachment and swift reconfiguration for the newly autonomous entities in the course of the disentanglement of a business. It is essential that these systems support operational independence and continuity with minimal disruptions during the restructuring process.
Implementing the right technology for the new entity, e.g., to cover stand-alone requirements, is crucial. It must meet current transaction needs and be robust enough to handle future demands. Given our breadth of experience across various technological domains and in various M&A scenarios, we have enriched many discussions on which solutions possess the adaptability and scalability necessary to accommodate the evolving needs of a redefined business. 'Right-sizing' the systems, structures, and processes, tailored specifically to the unique contours of the carved-out entity, is a decisive factor for laying the groundwork for sustainable success post-divestiture.
Any M&A transaction significantly changes the Treasury Process Map for both the remaining group and the carved-out entity. It has inherited risk and different risk types. We think that Treasury should deal with operational risks first, such as filling resource needs and/or stabilizing business operations. The resource issue requires an analysis of the available employees and their specific skill sets. Onboarding interim resources and back-filling resource gaps until the onboarding of dedicated new staff are alternative options to cover shortfalls.
The operational issue focuses on the impact on cash management and payment operations. Treasury needs to assess the impact on the existing banking and cash management structure and on liquidity as funds received by one entity are required by another. Bank relationships are foundational to Treasury operations and must be revisited and sometimes reinvented. Treasuries must work diligently to maintain trust and communication with old and new banking partners, articulating changes in the company's profile, needs, objectives, and strategies. Beyond negotiation and administration, the process often entails renegotiating terms and ensuring that the newly formed entity's financial needs will continue to be met effectively. The technical and operational ability to execute and receive payments through the company’s (new) bank accounts is a core requirement, which needs to be at the top of the list of priorities. Next, centralization of liquidity and cash structures is essential to avoid cash drag if inflows cannot be invested and/or concentrated in a relatively short time.
Treasury may also deal with different types of financial risk, such as interest rate or foreign exchange exposures. The financial risk management perspective is a crucial one for companies, but in the context of carve-out activities, it is often a second-order priority (depending on the financial risk profile of a company). However, proper identification and assessment of financial risk shall always be a top priority in a disentanglement process. Process implementation can be approached following the establishment of sound business and treasury processes if there is no significant financial risk.
If your organization is contemplating or in the midst of a carve-out, contact Zanders for support. Our consultative expertise in Treasury is your asset in ensuring financial stability and strategic advantage during and post-carve-out. Let Zanders be your partner in transforming challenges into successes.
Unlock Treasury Efficiency: Exploring SAP’s GROW and RISE Cloud Solutions
The evolving economic landscape has placed a spotlight on the critical role of treasury in value creation. Our latest roundtable, themed ‘Treasury’s Role in Value Creation,’ delved into the challenges and strategies private equity firms must navigate to enhance financial performance and prepare for successful exits. This event gathered industry leaders to discuss the expectations from treasury functions, the integration of post-merger processes, and the use of innovative technologies to drive growth. Read more as we explore the insights and key takeaways from this engaging and timely discussion, offering a roadmap for treasurers to elevate their impact within portfolio companies.
The roundtable’s theme, ‘Treasury’s Role in Value Creation,’ was chosen to address the pressing economic and operational challenges that resulted in longer holding periods and slowed exits in 2023. In this context, private equity firms are increasingly focusing on growth and optimization strategies to drive long-term financial performance improvements, positioning their portfolio companies for successful exits once deal markets rebound. Key questions explored included: What is expected from the treasury function? How can treasurers navigate priorities and challenges to deliver productivity, financial performance, and value-added analysis to their company and PE sponsor? How can successful treasury post-merger integration be achieved in a buy & build scenario? And how should one prepare for an exit?
One of the significant discussion points was the value of cash management as a directly measurable lever of value creation. The panel emphasized the importance of focusing on free cash flow, EBITDA, and debt levels, which form the backbone of a successful investment. These metrics are crucial during due diligence, as they are scrutinized by Limited Partners (LPs). The consensus advocated for a focus on organic growth and business transformation over multiple expansions, which can signal stability and long-term value to LPs, and therefore add significant value to PE firms.
Moreover, it was discussed that, LPs intensely evaluate the financial models of portfolio companies, focusing on recurring revenue, Capex, margins, and debt levels. These factors often determine the soundness of an investment. The robustness of financial operations and the sophistication of the technologies employed are crucial in investment decisions, underscoring the important role of treasury in due diligence.
Effective cash management was highlighted as a key factor influencing the success of ‘buy and build’ strategies, which involve acquiring companies and then integrating and growing them to enhance value. Effective cash management ensures the necessary liquidity and financial oversight during the integration and growth phases. An attendee noted that firms often "buy but forget to build." Quantifying the impact of effective treasury management is essential to addressing this gap.
A way of realizing operational improvements is through increased automation. Despite some pushback from PE firms on automating treasury functions, there are instances where sponsors are willing to invest in technologies to support the treasury function. For instance, an attendee mentioned receiving a sponsor’s support to invest in technology that will improve cash flow forecasting. Additionally, the approach to value creation at the portfolio company level depends on the sponsor's type and level of commitment.
The use of Artificial Intelligence (AI) in search of value creation was also discussed. Notably, various tangible use cases for AI in Treasury are envisaged. One example highlighted was ASML’s use of AI for forecasting optimization. Even though the large chip-manufacturer is not PE-owned, ASML’s use of AI for forecasting optimization served as a prime example in the discussion. In 2023, ASML implemented an AI-powered material intake forecast model to enhance the effectiveness and efficiency of its purchase FX hedging program1. This sharpened focus on FX risk management is a visible trend across private market firms. Deploying more sophisticated tools to increase FX hedging effectiveness at the PE fund or portfolio company level is an area worth exploring.
We reflect on a successful inaugural edition of the Private Equity Roundtable. We learned that effective cash management is crucial for value creation, focusing on free cash flow, EBITDA, and debt levels to ensure liquidity and financial oversight, particularly in ‘buy and build’ strategies. Moreover, automation and technology investments in treasury functions, such as improved cash flow forecasting, are essential for operational improvements and enhancing value creation in portfolio companies. After the event, participants shared that the event added significant value to their roles as treasurers of PE-owned companies. The positive feedback energizes us to organize similar sessions in other countries.
Is your company about to be or already owned by private equity? We can share our experiences regarding the added complexities of being a treasurer for a PE-owned company. For further information, you can reach out to Pieter Kraak.
Unlock Treasury Efficiency: Exploring SAP’s GROW and RISE Cloud Solutions
This article highlights key points mentioned in our whitepaper: Treasury 4.x - The age of productivity, performance and steering. You can download the full whitepaper here.
Tectonic geopolitical shifts leading to fragile supply chains, inflation, volatility on financial markets and adoption of business models, fundamental demographic changes leading to capacity and skill shortages on relevant labor markets – a perpetual stream of disruption is pushing businesses to their limits, highlighting vulnerabilities in operations, challenging productivity, and leading to damaging financial consequences. Never has there been a greater need for CFOs to call on their corporate treasury for help steering their business through the persistent market and economic volatility. This is accelerating the urgency to advance the role of treasury to perform this broadened mandate. This is where Treasury 4.x steps in.
Treasury deserves a well-recognized place at the CFO's table - not at the edge, but right in the middle. Treasury 4.x recognizes the measurable impact treasury has in navigating uncertainty and driving corporate success. It also outlines what needs to happen to enable treasury to fulfil this strategic potential, focusing on three key areas:
1. Increasing productivity: Personnel, capital, and data – these three factors of production are the source of sizeable opportunities to drive up efficiency, escape an endless spiral of cost-cutting programs and maintain necessary budgets. This can be achieved by investing in highly efficient, IT-supported decision-making processes and further amplified with analytics and AI. Another option is outsourcing activities that require highly specialized expert knowledge but don’t need to be constantly available. It’s also possible to reduce the personnel factor of production through substitution with the data factor of production (in this context knowledge) and the optimization of the capital factor of production. We explain this in detail in Chapter 4 – Unlocking the power of productivity.
2. Performance enhancements: Currency and commodity price risk management, corporate financing, interest rate risk management, cash and liquidity management and, an old classic, working capital management – it’s possible to make improvements across almost all treasury processes to achieve enhanced financial results. Working capital management is of particular importance as it’s synonymous with the focus on cash and therefore, the continuous optimization of processes which are driving liquidity. We unpick each of these performance elements in Chapter 5 – The quest for peak performance.
3. Steering success: Ideologically, the door has opened for the treasurer into the CFO’s room. But many uncertainties remain around how this role and relationship will work in practice, with persistent questions around the nature and scope of the function’s involvement in corporate management and decision-making. In this document, we outline the case for making treasury’s contribution to decision-making parameters available at an early stage, before investment and financing decisions are made. The concept of Enterprise Liquidity Performance Management (ELPM) provides a more holistic approach to liquidity management and long-needed orientation. This recognizes and accounts for cross-function dependencies and how these impact the balance sheet, income statement and cash flow. Also, the topic of company ratings bears further opportunities for treasury involvement and value-add: through optimization of both tactical and strategic measures in processes such as financing, cash management, financial risk management and working capital management. These are the core subjects we debate in Chapter 6 – The definition of successful steering.
The foundations for a more strategic treasury have been in place for years as part of a concept which is named Treasury 4.0 . But now, as businesses continue to face challenges and uncertainty, it’s time to pick up the pace of change. And to do this corporate treasury requires a new roadmap.
Unlock Treasury Efficiency: Exploring SAP’s GROW and RISE Cloud Solutions
Whether a corporate operates through a decentralized model, shared service center or even global business services model, identifying which invoices a customer has paid and in some cases, a more basic "who has actually paid me" creates a drag on operational efficiency. Given the increased focus on working capital efficiencies, accelerating cash application will improve DSO (Days Sales Outstanding) which is a key contributor to working capital. As the industry adoption of ISO 20022 XML continues to build momentum, Zanders experts Eliane Eysackers and Mark Sutton provide some valuable insights around why the latest industry adopted version of XML from the 2019 ISO standards maintenance release presents a real opportunity to drive operational and financial efficiencies around the reconciliation domain.
Whilst the objective will always be 100% straight-through reconciliation (STR), the account reconciliation challenges fall into four distinct areas:
1. Data Quality
2. In-country Payment Practices and Payment Methods
3. Statement File Format
4. Technology & Operations
At a high level, the benefits of ISO 20022 XML financial statement messaging can be boiled down into the richness of data that can be supported through the ISO 20022 XML messages. You have a very rich data structure, so each data point should have its own unique xml field. This covers not only more structured information around the actual payment remittance details, but also enhanced data which enables a higher degree of STR, in addition to the opportunity for improved reporting, analysis and importantly, risk management.
Enhanced Data
Enhanced Risk Management
In Summary
The ISO 20022 camt.053 bank statement and camt.052 intraday statement provide a clear opportunity to redefine best in class reconciliation processes. Whilst the camt.053.001.02 has been around since 2009, corporate adoption has not matched the scale of the associated pain.001.001.03 payment message. This is down to a combination of bank and system capabilities, but it would also be relevant to point out the above benefits have not materialised due to the heavy use of unstructured data within the camt.053.001.02 message version.
The new camt.053.001.08 statement message contains enhanced structured data options, which when combined with the CGI-MP (Common Global Implementation – Market Practice) Group implementation guidelines, provide a much greater opportunity to accelerate and elevate the reconciliation process. This is linked to the recommended prescriptive approach around a structured data first model from the banking community.
Finally, linked to the current Swift MT-MX migration, there is now agreement that up to 9,000 characters can be provided as payment remittance information. These 9,000 characters must be contained within the structured remittance information block subject to bilateral agreement within the cross border messaging space. Considering the corporate digital transformation agenda – to truly harness the power of artificial intelligence (AI) and machine learning (ML) technology – data – specifically structured data, will be the fuel that powers AI. It’s important to recognize that ISO 20022 XML will be an enabler delivering on the technologies potential to deliver both predictive and prescriptive analytics. This technology will be a real game-changer for corporate treasury not only addressing a number of existing and longstanding pain-points but also redefining what is possible.
Unlock Treasury Efficiency: Exploring SAP’s GROW and RISE Cloud Solutions
The corporate treasury agenda continues to focus on cash visibility, liquidity centralization, bank/bank account rationalization, and finally digitization to enable greater operational and financial efficiencies. Digital transformation within corporate treasury is a must have, not a nice to have and with technology continuing to evolve, the potential opportunities to both accelerate and elevate performance has just been taken to the next level with ISO 20022 becoming the global language of payments. In this 6th article in the ISO 20022 XML series, Zanders experts Fernando Almansa, Eliane Eysackers and Mark Sutton provide some valuable insights around why this latest global industry move should now provide the motivation for corporate treasury to consider a cash management RFP (request for proposal) for its banking services.
These are both very relevant important questions that corporate treasury should be considering in 2024, given the broader global payments industry migration to ISO 20022 XML messaging. This goes beyond the Swift MT-MX migration in the interbank space as an increasing number of in-country RTGS (real-time gross settlement) clearing systems are also adopting ISO 20022 XML messaging. Swift are currently estimating that by 2025, 80% of the domestic high value clearing RTGS volumes will be ISO 20022-based with all reserve currencies either live or having declared a live date. As more local market infrastructures migrate to XML messaging, there is the potential to provide richer and more structured information around the payment to accelerate and elevate compliance and reconciliation processes as well as achieving a more simplified and standardized strategic cash management operating model.
So to help determine if this really applies to you, the following questions should be considered around existing process friction points:
If the answer is yes to all the above, then you are already following a best-in-class multi-banking cash management model. But if the answer is no, then it is worth reading the rest of this article as we now have a paradigm shift in the global payments landscape that presents a real opportunity to redefine best in class.
Whilst structurally, the XML V09 message only contains a handful of additional data points when compared with the earlier XML V03 message that was released back in 2009, the key difference is around the changing mindset from the CGI-MP (Common Global Implementation – Market Practice) Group1 which is recommending a more prescriptive approach to the banking community around adoption of its published implementation guidelines. The original objective of the CGI-MP was to remove the friction that existed in the multi-banking space as a result of the complexity, inefficiency, and cost of corporates having to support proprietary bank formats. The adoption of ISO 20022 provided the opportunity to simplify and standardize the multi-banking environment, with the added benefit of providing a more portable messaging structure. However, even with the work of the CGI-MP group, which produced and published implementation guidelines back in 2009, the corporate community has encountered a significant number of challenges as part of their adoption of this global financial messaging standard.
The key friction points are highlighted below:
Diagram 1: Key friction points encountered by the corporate community in adopting XML V03
The highlighted friction points have resulted in the corporate community achieving a sub-optimal cash management architecture. Significant divergence in terms of the banks’ implementation of this standard covers a number of aspects, from non-standard payment method codes and payment batching logic to proprietary requirements around regulatory reporting and customer identification. All of this translated into additional complexity, inefficiency, and cost on the corporate side.
However, XML V09 offers a real opportunity to simplify, standardise, accelerate and elevate cash management performance where the banking community embraces the CGI-MP recommended ‘more prescriptive approach’ that will help deliver a win-win situation. This is more than just about a global standardised payment message, this is about the end to end cash management processes with a ‘structured data first’ mindset which will allow the corporate community to truly harness the power of technology.
The RFP or RFI (request for information) process will provide the opportunity to understand the current mindset of your existing core cash management banking partners. Are they viewing the MT-MX migration as just a compliance exercise. Do they recognize the importance and benefits to the corporate community of embracing the recently published CGI-MP guidelines? Are they going to follow a structured data first model when it comes to statement reporting? Having a clearer view in how your current cash management banks are thinking around this important global change will help corporate treasury to make a more informed decision on potential future strategic cash management banking partners. More broadly, the RFP will provide an opportunity to ensure your core cash management banks have a strong strategic fit with your business across dimensions such as credit commitment, relationship support to your company and the industry you operate, access to senior management and ease of doing of business. Furthermore, you will be in a better position to achieve simplification and standardization of your banking providers through bank account rationalization combined with the removal of non-core partner banks from your current day to day banking operations.
The Swift MT-MX migration and global industry adoption of ISO 20022 XML should be viewed as more than just a simple compliance change. This is about the opportunity to redefine a best in class cash management model that delivers operational and financial efficiencies and provides the foundation to truly harness the power of technology.
Managing over 80 intercompany loans annually and with a wide geographical scope, Royal Philips faced the challenge of complying with their Transfer Pricing obligations.
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.
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.
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.
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
Find out more
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
Find out more
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
Find out more
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
Find out more
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
Find out more
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
Find out more
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,
Find out more
Yet, the ongoing dilemma lies in achieving optimal returns on these investments. In this intricate financial landscape, the importance of delivering robust financial performance not only at
Find out more
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
Find out more
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
Find out more
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
Find out more
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
Find out more
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
Find out more
The heightened fluctuations observed in the commodity and energy markets from 2021 to 2022 have brought Treasury's role in managing these risks into sharper focus. While commodity prices
Find out more
VaR has been one of the most widely used risk measures in banks for decades. However, due to the non-additive nature of VaR, explaining the causes of changes to VaR has always been
Find out more
The Covid-19 pandemic triggered unprecedented market volatility, causing widespread failures in banks' internal risk models. These backtesting failures threatened to increase capital
Find out more
Challenges with backtesting Expected Shortfall Recent regulations are increasingly moving toward the use of Expected Shortfall (ES) as a measure to capture risk. Although ES fixes many
Find out more
Across the whole of Europe, banks apply different techniques to model their IFRS9 Expected Credit Losses on a best estimate basis. The diverse spectrum of modelling techniques raises the
Find out more
As organizations continue to adapt to the rapidly changing business landscape, one of the most pivotal shifts is the migration of enterprise resource planning (ERP) systems to the cloud.
Find out more
While many business and SAP users are familiar with its core functionalities, such as limit management applying different limit types and the core functionality of attributable amount
Find out more
In brief: Prevailing uncertainty in geopolitical, economic and regulatory environments demands a more dynamic approach to default modelling. Traditional methods such as logistic
Find out more
The recent periods of commodity price volatility have brought commodity risk management to the spotlight in numerous companies, where commodities constitute a substantial component of the
Find out more
In brief Prepayment modelling can help institutions successfully prepare for and navigate a rise in prepayments due to changes in the financial landscape. Two important prepayment
Find out more
The corporate landscape is continuously reshaped by strategic realignments such as mergers, divestments, and other M&A activities, wherein a company divests a portion of its business
Find out more
The evolving economic landscape has placed a spotlight on the critical role of treasury in value creation. Our latest roundtable, themed ‘Treasury’s Role in Value Creation,’ delved
Find out more
This article highlights key points mentioned in our whitepaper: Treasury 4.x - The age of productivity, performance and steering. You can download the full whitepaper here. Summary:
Find out more
Whether a corporate operates through a decentralized model, shared service center or even global business services model, identifying which invoices a customer has paid and in some cases,
Find out more
The final article from Zanders on the DRM model presents the lifecycle of the DRM model over a single hedge accounting period and the prospective and retrospective assessments that are
Find out more
The corporate treasury agenda continues to focus on cash visibility, liquidity centralization, bank/bank account rationalization, and finally digitization to enable greater operational and
Find out more
The Basel IV reforms published in 2017 will enter into force on January 1, 2025, with a phase-in period of 5 years. These are probably the most important reforms banks will go through
Find out more
Dan Delean recently joined Zanders as Managing Director of our newly formed US risk advisory practice. With a treasury career spanning more than 30 years, including 15 years specializing
Find out more
The productivity and performance of the treasury function within insurance companies have undergone a transformative evolution, driven by the emergence of what is now termed Treasury 4.x.
Find out more
Unlock Treasury Efficiency: Exploring SAP’s GROW and RISE Cloud Solutions
The productivity and performance of the treasury function within insurance companies have undergone a transformative evolution, driven by the emergence of what is now termed Treasury 4.x. In this digital era, characterized by rapid technological advancements, Insurance Treasury is transitioning towards a more dynamic and strategic role. Treasury 4.x is distinguished by its capacity to envision and operate within various financial scenarios, reflecting a forward-thinking approach. The contemporary Insurance Treasury aligns itself with the principles of "Fit-for-purpose" – emphasizing a centralized organizational structure embedded seamlessly within the financial supply chain. Highly automated processes, often referred to as "exception-based management," are integral to this paradigm shift, enabling treasuries to focus resources on critical issues and exceptions, thereby enhancing efficiency and minimizing manual intervention. This evolution underscores the imperative for insurance treasuries to leverage cutting-edge technologies and embrace a proactive, scenario-driven mindset, ensuring adaptability and resilience in the face of dynamic market conditions.
In the ever-evolving landscape of payment innovation within the treasury functions of insurance companies, a pivotal focus has been placed on migrating to the ISO 20022 XML messaging standard and moving away from FIN MT messages. This migration, driven by SWIFT, is not just a strategic choice but an industry-wide mandate, compelling all financial institutions, including insurance companies, to transition to the ISO standard by November 2025. This migration is a cornerstone in revolutionizing payment processes, offering a standardized and enriched data format that not only enhances interoperability but also facilitates more robust and information-rich communication. As insurance companies navigate this time-sensitive transition, a review of address logic within payment files becomes even more critical. The insurance companies are mandated to review and refine address logic within payment files by November 2026. Ensuring that the company is compliant with evolving financial messaging standards will not only improve the overall efficiency, speed and compliance of payments, but it will also provide the opportunity to redefine the best-in-class cash management operating model.
In additional to the industry migration to a new messaging standard, the introduction of Central Bank Digital Currency (CBDC) could impact the traditional roles of treasuries by offering new means of payment, settlement, and potentially altering liquidity management strategies. CBDCs could enhance efficiency in cross-border transactions, simplify reconciliation processes, and influence investment strategies. Insurance treasuries might need to adapt their systems and processes to incorporate CBDCs effectively, ensuring compliance with regulatory requirements and taking advantage of potential benefits associated with this digital form of currency. We are also witnessing an increase in momentum around the use of distributed ledger technology within the wholesale banking domain. In December, JP Morgan announced it was live on Partior, the Singapore-based interbank payment network that uses blockchain and is designed as a multi-bank, multi-currency system for wholesale use, with each bank controlling its own node. This is clear evidence we are starting to gain real traction around potential solutions using both blockchain and CBDC’s that will further increase the number of payment rails available to support the payments ecosystem.
Finally, the payment landscape of insurance companies sees further innovation with Faster Claims Payment (FCP). This solution streamlines the disbursement of claims, decoupling it from traditional monthly processes. FCP integrates seamlessly with the Vitesse payment platform, ensuring direct access to insurer funds and significantly reducing delays in payments. This paradigm shift promotes efficiency and enhances customer satisfaction through its accelerated claims payment system. The innovative payment landscape, however, could highlight a potential impact for processes of insurance treasuries. Increased application of faster and real-time payments requires insurance treasuries to have sufficient liquidity readily available to meet the immediate financial obligations. This demands careful planning of cash reserves to ensure uninterrupted claim processing while maintaining financial stability and stresses the importance of effective cash management for navigating any potential downside impact of FCP.
The insurance treasury is profoundly influenced by macroeconomic events, and the convergence of several geopolitical challenges has introduced heightened uncertainty and downside risks. Elevated geopolitical tensions, particularly the intensified strategic rivalry between the United States and China, the Russia-Ukraine war, and the recent Middle East conflict, pose significant threats to the insurance industry's stability. These events bring the potential for energy price shocks, amplifying concerns about increased insurance industry losses stemming from geopolitical and economic upheavals. Furthermore, the scheduled elections in 76 countries, with pivotal ones in the United States, Taiwan, and India, add an additional layer of uncertainty. Political transitions can introduce policy shifts, impacting regulatory environments and potentially altering economic landscapes, further complicating risk assessment for insurance treasuries. As the global geopolitical landscape remains dynamic, insurance treasuries must navigate these challenges prudently, emphasizing resilience and adaptability in their financial strategies to mitigate potential adverse impacts.
Interest rate changes command a substantial impact on the treasury functions of insurance companies, and the recent shifts in central bank policies have introduced a dynamic landscape. The conclusion of the central banks' rate tightening cycle, coupled with the Federal Reserve's announcement of rate cuts for 2024 and beyond, signals a pivotal change. While these rate cuts are aimed at supporting economic recovery, they pose challenges for insurance treasuries that traditionally benefit from higher interest rates. The insurance industry faces the paradox of modest GDP growth across advanced economies, with the downside risk of a potential rebound in inflation and further geopolitical shocks. The relatively elevated interest rates, however, offer a silver lining for (re)insurers, providing a boost to future recurring income. As maturing assets are reinvested at higher rates, this strategic advantage could help mitigate some of the challenges posed by the shifting interest rate environment, fostering resilience and adaptability in the treasury functions of insurance companies.
Taking into account the aforementioned macroeconomic changes, insurance treasuries must ensure they possess local treasury experts capable of supporting multiple regions with adapting to shifting business dynamics.
The impact of changing market rates on the asset management activities of insurers is profound, extending to collateral management practices. Market rate fluctuations exert direct influence on the valuation and performance of their investment portfolios, notably affecting the required Variation Margin (VR) and Uncleared Margin Rules (UMR) on derivatives holdings. As rates oscillate, the value of derivative positions can vary significantly, necessitating adjustments in margin requirements to effectively manage risk exposures and collateral obligations.
Additionally, these changes in market rates affect the liquidity position of insurers, prompting the need for more dynamic models to optimize liquidity management. Given the importance of maintaining sufficient cash and liquid assets, insurers must adapt their strategies to ensure they can meet obligations promptly, especially considering the impact of FX fluctuations on assets denominated in non-base currencies. This entails employing more dynamic models to gauge liquidity needs accurately and employing strategies such as RePo agreements to enhance flexibility in accessing cash when required. Thus, navigating the complexities of changing market rates requires insurers to employ a comprehensive approach that integrates risk management, liquidity optimization, and currency hedging strategies.
The integration of artificial intelligence (AI) and predictive analytics has revolutionized the treasury function within insurance companies, particularly in the realm of cash flow forecasting. These advanced technologies enable insurance treasuries to analyze vast datasets, identify patterns, and make more accurate predictions regarding future cash flows. AI algorithms can process information rapidly, taking into account a multitude of variables, such as market trends, policyholder behavior, and economic indicators. This enhanced predictive capability is instrumental in optimizing liquidity management, allowing insurance companies to proactively anticipate cash needs and allocate resources efficiently. The importance of AI and predictive analytics in cash flow forecasting cannot be overstated, as it empowers treasuries to make informed decisions, mitigate financial risks, and navigate the complexities of the insurance landscape with greater precision and agility.
Regulatory compliance is pivotal for insurance company treasuries, significantly influencing financial strategies and operations. The complex regulatory landscape, including directives like the Insurance Recovery and Resolution Directive, Solvency II, and EMIR Refit, aims at ensuring financial stability, consumer protection, and market integrity. These requirements, from solvency standards to reporting obligations, impact how treasuries manage assets, liabilities, and capital. Non-compliance can lead to severe consequences, prompting insurance treasuries to invest in sophisticated systems for continuous monitoring. Striking a balance between compliance and strategic financial goals is crucial for navigating the regulatory environment and ensuring long-term organizational sustainability.
Additionally, insurance companies operating across different jurisdictions face fragmented compliance regulations, consisting of local laws and regulations. This has become a prominent challenge experienced by insurance company treasuries and visible in various treasury processes, from payments to liquidity management. Establishing robust processes and conducting regular compliance reviews could help insurance companies to address the fragmented compliance framework. By proactively addressing compliance challenges and embracing innovative solutions, insurance companies could achieve robust global operations and success in an increasingly interconnected world.
For more information about Treasury 4.x, download our latest whitepaper: Treasury 4.x - The age of productivity, performance and steering.
In a continued effort to ensure we offer our customers the very best in knowledge and skills, Zanders has acquired Fintegral.