What's Neu - News from the The NeuGroup Network of Peer Groups

Blog entry
By afriberg, August 21, 2012

This is posted in the NeuGroup Exchange as an FYI for all NeuGroup members:

The two NeuGroups for MNC foreign exchange managers will both meet in California in September; the first hosted by Bechtel in San Francisco on Sep. 12-13, sponsored by Standard Chartered, and the second hosted by Google in Mountain View on Sep. 19-20, sponsored by Chatham Financial.

The two groups share several topics of interest on their agendas; among them:

Regulatory update: what to do now that a “swap” is defined, including seeking board approval for claiming the end-user exemption from clearing. And, what will you really need to do with your ISDAs and CSAs, and how soon?

Optimized hedging strategies for cash-flow and balance-sheet risks, especially in light of new regulations (Dodd-Frank and Basel III) and process and cost changes resulting from these. Market uncertainty and pricing failures (e.g., Libor benchmarks) also contribute to increased monitoring of hedge programs and their efficacy.

Emerging markets, with a particular focus on China and LatAm: managing volatility at a reasonable price and dealing with cumbersome restrictions in these for MNCs increasingly important markets.

FX systems continue to be an active discussion and members seek to determine what really constitutes a “state of the art” systems architecture for treasury and FX risk management. Member case studies will anchor these sessions.

In addition, the first group will have a Eurozone-related session with a member case study on managing this risk by way of more vigilance and flexibility in where to put cash balances. The second group will talk about best-in-class trade execution and educating the business for the benefit of the business and its goals.

For information on how to join either of the two groups, please contact Anne Friberg at afriberg[at]neugroup.com.

Blog entry
By jneu, July 05, 2012

This post is being shared via the NeuGroup Exchange with all members.

The Wolfson Economics Prize, in a competition launched in November 2011, asked economists around the world to produce a workable solution to the following question:

“If member states leave the Economic and Monetary Union, what is the best way for the economic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership?”

A team from Capital Economics led by Roger Bootle was the winner of the £250,000 prize.

According to the Policy Exchange, which manages the prize for the Charles Wolfson Charitable Trust,  the winning entry “concludes that even though there would be some losers as well as winners from the exit of one or more members from the Euro, the net effect overall would be distinctly positive for the future growth and prosperity of the current membership – and for the wider world.”

Key points include:

  • A new currency is introduced at parity with the Euro on day 1 of an exit.
  • All wages, prices, loans and deposits are redenominated into it 1 for 1.
  • Euro notes and coins would remain in use for small transactions for up to six months.
  • The exiting country would immediately announce a regime of inflation targeting, adopt a set of tough fiscal rules, monitored by a body of independent experts, outlaw wage indexation, and announce the issue of inflation-linked government bonds.

But most notably:

  • Redomination of debt (and default).  It also recommends that government should redenominate its debt in the new national currency and make clear its intention to renegotiate the terms of this debt. This is likely to involve substantial default – perhaps sufficient to reduce the ratio of debt to GDP to 60%.
  • An exit would best come unannounced. The paper proposes that key officials from the exiting country meet in secret one month before publicly announcing a day of exit or ‘D Day’. Eurozone partners and other international monetary organisations would be notified of D Day three days before – preferably on a Friday – when a public announcement is made that the changeover to the new currency will take place at the start of the following week. Immediately after this announcement, domestic banks and financial markets should be closed to prevent capital flight.
  • Guidance on legal issues a must. The government of the exiting country and the institutions of the EU should seek to minimise uncertainty over the legal issues, for example by providing guidance on the validity of redenomination, the status of the exiting country with the EU, and the continuity of the Euro itself.

Visit the Policy Exchange site for more details and the full report of the winner and runners-up.

Blog entry
By jneu, June 26, 2012

This post is being shared via the NeuGroup Exchange with all members.

On a recent conference call with our Advisory Board, we asked them to identify the key issues they were confronting that would likely be of interest to our member network and readers. They covered a range of topics, most of which resonated with other advisors on the call. All are consistent with topics that came up over the course of NeuGroup meetings in the first half of the year and that are likely to emerge again in our meetings over the second half. Here are some highlights:

  • Managing human capital. There are three principal elements to this: 1) time management—working through continual crisis and the day-to-day tasks of finance practitioner mean that people don’t have time to manage all their demands; 2) talent management—it is simply getting harder and harder to find and retain good talent; and 3) shifting to a growth focus—so much attention gets paid to reducing costs and other austerity measures in response to the global economic downturn that firms are forgetting that finance is also about helping businesses grow; plus, focusing on growth is more exciting and motivating.
  • Anti-growth measures being imposed in developing markets. Growing the business is all the more challenging and needing additional resources thanks to policy changes in countries like Argentina, where parallel-to-official currency rates are surpassing those of Venezuela (and CDS spreads are higher too), and India, where the RBI is forcing in-bound investors to convert to rupees so that they stand little chance of getting their money out. Indeed, capital and FX controls are starting to creep into the picture in more and more places, from African nations like Angola to perhaps even developed countries in the eurozone.
  • Inflation as a global concern. While central banks have pumped the financial system full of liquidity to avoid deflation in the face of crisis, several advisors fear that inflation is the only foreseeable way for heavily-indebted governments to get out from under their obligations. Other advisors were less inclined to think central banks will give up their core inflation-fighting mandate, however, the unprecedented levels of money in the system may make it difficult, if not impossible for central bankers to reign in the inflationary forces set forth by their unprecedented, expansionary monetary policy.  As one of our advisors noted, data found on the St. Louis Fed’s website shows that M1 has doubled since 2000 and the increase in M1 from then to now has been as much as the entire supply history of the US dollar, from 1792.
  • Mounting compliance costs for banks. Along with Dodd-Frank, Basel III and related capital and liquidity rules, banks are also be forced to comply with the Foreign Account Tax Compliance Act (FATCA), which is the US Treasury’s effort to ensure US taxpayers aren’t using off-shore accounts to avoid paying tax. Under FATCA, banks will have to report directly to the IRS on accounts held by US taxpayers. The systems costs required to comply by January 2014 run in the hundreds of millions of dollars. The costs of these marginal compliance issues, following KYC and other Anti-Money Laundering rules, followed by additional capital and liquidity requirements will all be passed on to customers eventually.
  • Private equity and VC funds holding back. While better than the worst of the post-crisis doldrums, private capital is still showing a reluctance to commit in many areas of the market, which makes it difficult for private firms to get deals done and for sellers to see fair value on their transactions. The Facebook IPO also has discouraged many, if not most of the IPOs in the pipeline to pull out.
  • Risk management as a treasury constant. With risk management an ever-growing portion of treasury’s brief, starting with managing the counterparty risk at the banks (a fresh issue again with the Moody’s downgrades) and ending with the risk to business profits due to capital and currency controls, treasurers should step back and see what role their departments should ideally play in the more integrated and constant risk management approach that MNCs today require.
  • CCP exemption for corporate end-users of OTC derivatives no certainty.  The political calculation currently holding sway with Democrats is that they should run on having implemented Dodd-Frank without compromises. This will make it extremely difficult for corporates lobbying for exemption legislation to win the bi-partisan support needed to pass the bills that have been proposed. Meanwhile, a study sponsored by the CME shows that in the FX space, which presumably will be exempt from clearing, there has been a tilt in recent years toward CME FX futures as opposed to OTC FX forwards. This suggests that even if given an exemption, market participants may choose to transact via a centralized clearing counterparty because of counterparty risk concerns dealing with OTC dealers directly.
  • What impact will the US election have? While there is a sense that some of the issues concerning treasurers, like inflation, are likely to happen regardless of who wins the election in November. However, a second Obama term is more likely to adversely affect international tax reform, which is all-important from the perspective of most US MNC treasurers who see cash building up offshore. Next up, rather than a repatriation tax holiday, might be further curbs to the ability to utilize foreign tax credits and the extension of the sub-part F income regime to transfers using payments on intellectual property from high-tax to low-tax jurisdictions.  The IRS has typically lost in tax court when it has sought to challenge the transfer pricing on intercompany IP, so with a sympathetic Administration the White House it will move to just change the rules.
Blog entry
By jneu, June 26, 2012

This post is being shared via the NeuGroup Exchange with all members.

In conjunction with recent conference calls with our Advisory Board, The NeuGroup is pleased to welcome Ron Chakravarti, Managing Director and Global Solutions Head, Liquidity & Investments at Citi GTS and Eileen Zicchino, Managing Director and Chief Marketing Officer for JP Morgan Treasury Services to our advisory group.

We have known and worked with Ron for many years and he has become an invaluable resource for The NeuGroup. He was instrumental recently in helping to promote our Global Cash and Banking Group’s collaboration with Citi Treasury DiagnosticsSM on the World-Class Cash Management Principles project.   This led to several joint presentations, including before the Citi GTS Client Advisory Board and regional client roundtables, SIBOS and several webinars. Ron has also key to Citi’s support of our groups, including The Treasurers’ Group of Thirty and our newest group, The Assistant Treasurers’ Group of Thirty, which will launch in September. As global solutions head for liquidity and investments, Ron leads a global team responsible for the design and delivery of integrated global treasury and liquidity solutions for Citi’s corporate and financial institutional clients. He shares our desire to deliver solutions that meet what practitioners see as their immediate needs.

Eileen is also someone we have known for many years and who has been a source for many good ideas that we have either implemented or wish we had. As chief marketing officer for J.P. Morgan Treasury Services, Eileen brings several decades of experience and unrivaled knowledge of bank products for treasury—plus the messaging that goes with them. She has been closely involved with J.P. Morgan’s support of our groups, including recent meetings of The Tech20 Group of Treasurers, The Treasurers’ Group of Thirty, The Global Cash and Banking Group, The European Treasurers’ Peer Group and The Latin American Treasury Managers’ Peer Group.  Eileen is also actively involved with the Business Marketing Association serving on its national board and as president of its New York City chapter. She thus brings a tremendous amount of business marketing know-how along with her bank and treasury services expertise.

We look forward to having the benefit of both Ron’s and Eileen’s insights as they join our Advisory Board.

Blog entry
euro crisis
By jneu, May 29, 2012

This post is being shared via the NeuGroup Exchange with all members.

Reading about the amount of funding needed to keep Euro Payment Systems liquid through the euro crisis (see for example, below), it makes you wonder what the risk is of having money going through them at the wrong time.

Has anyone explored this risk?

This post from Simon Johnson on Huffington Post sheds light on the exposure:

More importantly and less known to German taxpayers, Greece will also default on 155 billion euros directly owed to the euro system (comprised of the ECB and the 17 national central banks in the euro zone). This includes 110 billion euros provided automatically to Greece through the Target2 payments system -- which handles settlements between central banks for countries using the euro. As depositors and lenders flee Greek banks, someone needs to finance that capital flight, otherwise Greek banks would fail. This role is taken on by other euro area central banks, which have quietly lent large funds, with the balances reported in the Target2 account. The vast bulk of this lending is, in practice, done by the Bundesbank since capital flight mostly goes to Germany, although all members of the euro system share the losses if there are defaults.