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. 

Public Cloud vs. 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. 

Key Differences in Cloud Approaches 

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. 

1. Control: The private cloud model emphasizes control, giving organizations exclusive command over security and data configurations. The public cloud is managed by external providers, offering less control but relieving the organization from day-to-day cloud management. 
2. Cost: Both the public and private cloud operate on a subscription model. However, managing a private cloud infrastructure requires significant upfront investment and a dedicated IT team for ongoing maintenance, updates, and monitoring, making it a time-consuming and resource-intensive option. Making the public cloud potentially a more cost-effective option for organizations. 
3. Security: Both GROW and RISE are hosted by SAP or hyperscalers, offering strong security measures. There is no significant difference in security levels between the two models. 
4. Scalability: The public cloud offers unmatched scalability, allowing businesses to respond quickly to increased demands without the need for physical hardware changes. Private clouds can also be scaled, but this usually requires additional hardware or software and IT support, making them less dynamic. 
5. Upgrades: the public cloud requires mandatory upgrades every six months, whereas the private cloud allows organizations to dictate the cadence of system updates, such as opting for upgrades every five years or as needed. 
6. Configuration and Customization: in the public cloud configuration is more limited with fewer BAdIs and APIs available, and no modifications allowed. The private cloud allows for extensive configuration through IMG and permits SAP code modification, providing greater flexibility and control. 
7. Migration: the public cloud supports only greenfield implementation, which means only current positions can be migrated, not historical transactions. The private cloud offers migration programs from ECC, allowing historical data to be transferred. 

Impact on 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. 

Factors Influencing Choices 

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. 

Conclusion 

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. 

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. 

SAP's Solution: A Comprehensive Overview 

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). 

Functionalities of SAP Commodity Management 

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. 

Managing Commodity Exposures 

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. 

Innovations in SAP Commodity Management 

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. 

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.

Treasury Challenges in Carve-Out Situations

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. 

The Role of Technology in Carve-Outs 

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.  

Strategic Realignment for Treasury 

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.

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. 

Innovation of Payment Landscape

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. 

Changing Macroeconomic Environment

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.

Changing Market Rates

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. 

Data Analytics and Predictive Modelling

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

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 large organizations, the tendency is to select large scale ERP systems to support as much of the organization's business processes within this system. This is a goal that is driven typically by the IT department as this approach reduces the number of different technologies and minimizes the integration between systems. Such a streamlined and simplified system architecture looks to mitigate risk by reducing the potential points of failure and total cost of ownership.

Over the years the treasury department has at times chosen to rather deploy “best of breed” treasury management systems and integrate this separate system to the ERP system. The treasury business processes and therefore systems also come with some significant integration points in terms of trading platforms, market data and bank integration for tasks such as trade confirmations, payments, bank statements and payment monitoring messaging.

The IT department may view this integration complexity as an opportunity for simplification if the ERP systems are able to provide acceptable treasury and risk management functionalities. Especially if some of the integrations that the treasury requires does overlap with the needs of the rest of the business – i.e. payments, bank statements and market data.

Meanwhile, the treasury department will want to ensure that they have as much straight through processing and automation as possible with robust integration. Since their high value transactions are time sensitive, a breakdown in processing would result in negative transactional cost implications with their bank counterparts.

Deciphering Treasury System Selection: Below the Surface 

The decision-making process for selecting a system for treasury operations is complex and involves various factors. Some are very much driven by unique financial business risks, leading to a functional based decision process. However, there are often underlying organizational challenges that play a far more significant role in this process than you would expect. Some challenges stem from behavioral dimensions like the desire for autonomy and control from the treasury. While others are based on an age-old perception that the “grass is greener on the other side” – meaning the current system frustrations result in a preference to move away from current systems.

An added and lesser appreciated perspective is that most organizations tend to mainly focus on technical upgrades but not often functional upgrades on systems that are implemented.  Meaning that existing systems tend to resemble the version of the system based on when the original implementation took place. This will also lead to a comparison of the current (older version) system against the competing offerings latest and greatest.

Another key observation is that with implementing integrated TMS solutions like the SAP TRM solution in the context of the same ERP environment, the requirements can become more extensive as the possibilities for automating more with all source information increase. Consider for example the FX hedging processes where the source exposure information is readily available and potential to access and rebalance hedge positions becomes more dynamic.

Closing thoughts

There is no single right answer to this question for all cases. However, it is important to ensure that the process you follow in making this decision is sound, informed and fair. Involving an external specialist with experience in navigating such decisions and exposure to various offerings is invaluable.

To support these activities, Zanders has also built solutions to make the process as easy as it can possibly be, including a cloud-based system selection tool.

Moreover for longer term satisfaction, enabling the evolution of the current treasury system (be it best of breed or integrated) is essential. The system should evolve with time and not remain locked into its origin based on the original implementation. Here engaging with a specialist partner with the right expertise to support the treasury and IT organizations is key. This can improve the experience of the system and this increased satisfaction can ensure decision making is not driven or led by negativity.

In support of this area Zanders has a dedicated service called TTS which can come alongside your existing IT support organization and inject the necessary skill and insight to enable incremental improvements alongside improved resolution timeframes for day-to-day systems issues.

For more information about out Treasury Technology Service, reach out to Warren Epstein.

Mid 2023, Bolt successfully implemented its new full-fledged treasury management system (TMS). With assistance of Zanders consultants, the mobility company implemented Kyriba – a necessity to support Bolt’s small treasury team. As a result, all daily processes are almost completely automated. “It's about reliability.”

Bolt is the leading European mobility platform that’s focused on more efficient, convenient and sustainable solutions for urban travelling. With more than 150 million customers in at least 45 countries, it offers a range of mobility services including ride-hailing, shared cars and scooters, food and grocery delivery. “Bolt was founded by Markus Villig, a young Estonian guy who quit his school to start this business with €5,000 that he borrowed from his parents,” says Mahmoud Iskandarani, Group Treasurer at Bolt. “He built an app and started to ask drivers on the street to download it and try it out. Now we have millions of drivers and passengers, almost 4,000 employees and several business lines. Last August, we celebrated our 10th anniversary. So, we have one of the fastest growing businesses in Europe. And our ambition is to grow even faster than so far.” 

Driven by technology 

Because of its fast growth, Bolt’s Treasury team decided to look for a scalable solution to cope with the further expansion of the business. Freek van den Engel, Treasury manager at Bolt: “We needed a system that could automate most of our daily processes and add value. Doing things manually is not efficient and risks are high. To help us scale up while maintaining efficiency, we needed our Treasury to be driven by technology.” 

Iskandarani adds: “Meanwhile, our macro environment is changing and we had some bank events. In the past years, startups or scale-ups have seen big growth and didn't focus too much on working capital management. Interest rates were low, which made it easy to raise money from investors. Now, we need to make sure that we manage our working capital the right way so that we can access our money, mitigate risks, and that we get a decent return on our cash. That’s when it's controlled by Treasury and invested correctly.” 

Choosing Kyriba

Van den Engel led a treasury system selection process three years ago for his previous employer, where he also worked together with Iskandarani. “That experience helped us to come up with a shortlist of three providers, instead of having a very long RfP process looking at a long list of vendors. We started the selection process in June 2022 and two months later we chose Kyriba because of its strong functionality. Also, it’s a solution offered as SaaS, which means we don't have to worry about upgrades – a very important reason for us. Kyriba has been working with tech companies similar to ours. Another decisive factor was their format library, called Open Format Studio. It allows us to use self-service when it comes to configuring payment formats, reducing our costs and turn-around time when expanding to new geographies.” 

Implementation partner 

For Bolt, Kyriba will function as in-house bank system, and support its European cash pool. During the selection process, the team had some reference calls with other Kyriba users to discuss experiences with the system and the implementation. “One piece of feedback we received was that it works very well to bring in implementation partners to complete such a project successfully. Zanders stood out, because of its proven track record and the awards it had won. Also, Mahmoud and I both had experience with Zanders during some projects at our previous employer. That’s why we asked them to be our implementation partner.” 

In October 2022, the implementation process started. In July 2023, the system went live. Kyriba’s TMS solution covered all treasury core processes, including cash position reporting (including intra-day balance information), liquidity management, funding, foreign exchange with automatic integration to 360T and Finastra, investments, payment settlements and risk management.  

Trained towards independency 

As part of the implementation process, Zanders trained Bolt on how to use the new tool, and assisted in using the Open Format Studio. In this way, the team built the knowledge and experience needed to roll out to new countries more independently.  

Van den Engel: “We aimed to be independent and do as much as possible ourselves to reduce costs and build up in-house expertise on the system. Zanders helped us figuring out what we wanted, explained and guided us, and showed what the system can do and how to align that with our needs in the best possible way. Once we were clear on the blueprint, they helped us with our static data, connectivity and initial system set-up. After the training they led, we were able to do most of it ourselves, including the actual system configuration work, for which Zanders had laid the foundation.” 

Rolling out the payment hub 

With assistance of Zanders consultants, Bolt also set up a framework to roll out the payment hub, for the vendor payments from its ERP system called Workday and its payroll provider, Immedis. The consultants assisted with configuration of initial payment scenarios and workflows. “We made the connections, tested them and did a pilot with Workday last summer. After training and with the experience that we've built up using Open Format Studio, we can roll out to new countries and expand it ourselves. Starting in August, we continued to roll out Kyriba’s payment hub to more countries, and to implement Payroll. With the payment hub we are now live in 16 countries and that's basically fully self-serviced. Apart from some support for specialized cases, we don’t need support anymore for the payment hub.” 

Many material benefits 

Having a small hands-on project team meant no need for a complex project management organization to be set-up. Naturally Bolt and Zanders started using agile project management, with refocus of priorities to different streams as necessary. The Kyriba implementation project was closed within the set budget in 9 months’ time.  

Iskandarani is happy with the results. “It is clear there are benefits of this implementation when it comes to efficiency and risk management. We now have the visibility over our cash and the fact that we have a system telling us that there’s an exposure that we should get rid of, that has a lot of value. Also, we have some financial benefits that we could not have achieved without the system. Today we can pool our cash better, we can invest it better, and we can handle our foreign exchange in a better way. Before this, we have overpaid banks.” 

Reliability and control 

“We could have hired more people”, Van den Engel adds. “But some things are just very difficult to do without this system. It's also about reliability. Even if you have a manual process in place that works, you will see it breaking down from time to time. If someone deletes a formula, or a macro stops working, that becomes very risky. It’s also about the control environment. As a company we're looking to become more mature and implement controls that should be there – that too is very difficult to do without a proper system that can generate these reports, be properly secured with all the right standards that we need to adhere to, or do fraud detection based on machine learning in the future. It's impossible to do all that manually. Those are material benefits, but hard to quantify.”

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.  

The most popular financial instruments in this regard are sustainability-linked loans and bonds. But more recently, corporates also started to focus on ESG-related derivatives. In short, these derivatives provide corporates with a financial incentive to improve their ESG performance, for instance by linking it to a sustainable KPI. This article aims to provide some guidance on the impact of regulation around ESG-related derivatives.

As covered in our first ESG-related derivatives article, a broad spectrum of instruments is included in this asset class, the most innovative ones being emission trading derivatives, renewable energy and fuel derivatives, and sustainability-linked derivatives (SLDs).

Currently, market participants and regulatory bodies are assessing if, and how new types of derivatives fit into existing derivatives regulation. In this regard, European and UK regulators are at the forefront of the regulatory review to foster activity and ensure safety of financial markets. Since it’s especially challenging for market participants to comprehend the impact of these regulations and the valuation implications of SLDs, we aim to provide guidance to corporates on these matters, with a special focus on the implications for corporate treasury.

Categorization & classification

When issuing an SLD, it’s important to understand which category the respective SLD falls in. That is, whether the SLD incorporates KPIs and the impact of cashflows in the derivatives instrument (category 1), or if the KPIs and related cashflows are stated in a separate agreement, in which the underlying derivatives transaction is mentioned for setting the reference amount to compute the KPI-linked cashflow (category 2). This categorization makes it easier to understand the regulations applying to the SLD, and the implications of those regulations.

In general, a category 1 SLD will be classified as derivative under European and UK regulations, and swap under US regulations, if the underlying financial contract is already classified as such. The addition of KPI elements to the underlying financial instrument is unlikely to change that classification.

Whether a category 2 SLD is classified as a derivative or swap is somewhat more complicated. In Europe, this type of SLD is classified as a derivative if it falls within the MIFID II catch-all provision, which must be determined on a case-by-case basis.

Overall, instruments that are classified as derivatives in Europe will also be classified as such in the UK. But to elaborate, a category 2 SLD will classified as a derivative in the UK if the payments of the financial instrument vary based on fluctuations in the KPIs.

When a category 2 SLD is issued in the US, it will only be classified as a swap if KPI-linked payments within the financial agreement go in two directions. Even if that is the case, the SLD may still be eligible for the status as commercial agreement outside of swaps regulation, but that is specific to facts and circumstances.

Apart from the classification as derivative or swap, it is also helpful to determine whether an SLD could be considered a hedging contract, so that it is eligible for hedging exemptions. The requirements for this are similar in Europe, the UK, and the US. Generally, category 1 SLDs are considered hedging contracts if the underlying instruments still follow the purpose of hedging commercial risks, after the KPI is incorporated. Category 2 SLDs are normally issued to meet sustainability goals, instead of hedging purposes. Therefore, it is unlikely that this category of SLDs will be classified as hedging contracts.

Regulation & valuation implications

When issuing an SLD that is classified as a derivative or swap, there are several regulatory and valuation implications relevant to treasury. These implications can be split up in six types which we will now explain in more detail. The six types (risk management, reporting, disclosure, benchmark-related considerations, prudential requirements, and valuation) are similar for corporates across Europe, the UK, and the US, unless otherwise mentioned.

Risk management

As is the case for other derivatives and swaps, corporate treasuries must meet confirmation requirements, undertake portfolio reconciliation, and perform portfolio compression for SLDs. Additionally, regulated companies are required to construct effective risk procedures for risk management, which includes documenting all risks associated with KPI-linked cashflows. While these points might be business as usual, it must also be determined if and how KPI-linked cashflows should be modeled for valuation obligations that apply to derivatives and swaps. For instance, initial margin models might need to be adjusted for SLDs, so they capture KPI-linked risks accurately.

Reporting

Corporate treasuries must report SLDs to trade repositories in Europe and the UK, and to swap data repositories in the US. Since these repositories require companies to report in line with prescriptive frameworks that do not specifically cover SLDs, it should be considered how to report KPI-linked features. As this is currently not clearly defined, issuers of SLDs are advised to discuss the establishment of clear reporting guidelines for this financial instrument with regulators and repositories. A good starting point for this could be the mark-to-market or mark-to-model valuation part of the EMIR reporting regulations.

Disclosure

Only Treasuries of European financial entities will be involved in meeting disclosure requirements of SLDs, as the legislation in the UK and US is behind on Europe in this respect, and non-financial market participants are not as strictly regulated. From January 2023, the second phase of the Sustainable Finance Disclosure Regulation (SFDR) will be in place, which requires financial companies to report periodically, and provide pre-contractual disclosures on SLDs. Treasuries of investment firms and portfolio managers are ought to contribute to this by reporting on sustainability-related impact of the SLDs compared to the impact of reference index and broad market index with sustainability indicators. In addition, they could leverage their knowledge of financial instruments to evaluate the probable impacts of sustainability risks on the returns of the SLDs.

Benchmark-related implications

In case the KPI of an SLD references or includes an index, it could be defined as a benchmark under European and UK legislation. In such cases, treasuries are advised to follow the same policy they have in place for benchmarks incorporated in other brown derivatives. Specific benchmark regulations in the US are currently non-existent, however, many US benchmark administrators maintain policies in compliance with the same principles as where the European and UK benchmark legislation is built on.
Prudential requirements

Since treasury departments of corporates around the world are required to calculate risk-weighted exposures for derivatives transactions as well as non-derivatives transactions, this is not different for SLDs. While there is currently little guidance on this for SLDs explicitly, that may change in the near future, as US prudential regulators are assessing the nature of the risk that is being assumed with in-scope market participants.

Valuation

The SLD market is still in its infancy, with SLD contracts being drawn up are often specific to the company issuing it, and therefore tailor made. The trading volume must go up, trade datasets are to be accurately maintained, and documentation should be standardized on a global scale for the market to reach transparency and efficiency. This will lead to the possibility of accurate pricing and reliable cashflow management of this financial instrument and increases the ability to hedge the ESG component.

To conclude

As aforementioned, the ESG-related derivatives market and the SLD market within it are still in the development phase. Therefore, regulations and their implications will evolve swiftly. However, the key points to consider for corporate treasury when issuing an SLD presented in this article can prove to be a good starting point for meeting regulatory requirements as well as developing accurate valuation methodology. This is important, since these derivatives transactions will be crucial for facilitating the lending, investment and debt issuance required to meet the ESG ambitions of Europe, the UK, and the US.

For more information on ESG issues, please contact Joris van den Beld or Sander van Tol.