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Amarjeet Singh Partner, Business Tax Services
Ernst & Young
The role of the Regional
Treasury Centre to underpin
global growth
Nikhil Ratnam MD, Transaction Banking
Standard Chartered Bank
Centralisation is evolving in different ways to meet the conflicting
demands of driving efficiency and providing more local support
2
TREND
Established MNCs centralising Treasury
from RTCs to Group Treasury
Leverage familiarity with markets and
established infrastructure / processes
Core driver is cost and efficiency
Typically dollar functional businesses
(e.g. Tech., Oil & Gas)
IMPACT
Demand for standard global banking services
Drive towards global In-House banking
structures / centralised processing solutions
TREND
RTCs expand capabilities, implement
advanced models, upgrade cash
management
Leverage better support for local business
as “weight” shifts to Asia
Typically local currency businesses with
strong local needs / growth
IMPACT
Standardisation of banking service with
specialised solutions for specific market
needs
Require value added problem solving advice
Reduced costs, increased operational flexibility and process
standardisation are the most critical missions for centralisation
3 Sources: KPMG Quarterly Global GBS Pulse Survey 2Q13
Op
era
tio
nal
Str
ate
gic
Globally, demand for outsourcing is diminishing as organisations are preferring to leverage
shared service centres and treasury centres to improve processes.
21%
22%
24%
29%
33%
34%
35%
37%
43%
41%
40%
46%
39%
36%
34%
39%
45%
44%
27%
32%
28%
27%
16%
21%
22%
12%
10%
11%
6%
2%
5%
15%
11%
4%
6%
3%
Improve analytical capabilities
Gain access to new technology
Gain access to talent
Re-engineer processes
More effective operations at global level
Meet compliance/regulatory requirements
Standardise processes
Greater flexibility to scale operations
Reduce operating costs
Mission critical Important, but not critical Somewhat important Not important at all
However, the choice of centralisation strategy is driven by the
underlying business needs
Location • Closer to head office • Closer to operating business
Standardisation • Greater process standardisation • Greater flexibility in regional set-up
Regulation • Easier to drive compliance framework • Easier to stay across local regulations
Services • Easier to drive global services
approach • Easier to tap local services / markets
Business Model
• Suits companies with international
business model in a dominant trading
currency (i.e. US Dollars), e.g. mining,
oil & gas, technology
• Suits companies operating localised
businesses across many markets and
multiple currencies, e.g. consumer
goods
Execution
• Group Treasury sets strategy and
policies, Treasury Centre executes
centrally
• Group Treasury sets strategy and
policies, Treasury Centre executes
locally
4
5
Understanding business needs requires Treasury to be a strategic
partner to the business. This requires greater transactional efficiency
Year 3
Year 2
Year 1
Time Vis
ibil
ity
Co
ntr
ol
Op
tim
ise
Transactional Treasury • Basic policies and processes
• Basic funding source, pooling
• Short term cash forecast
• Control on bank accounts
Process Efficient Treasury • Automate where possible
• Rationalise account structure
• Timely funding and debt admin
• Short – mid term cash/ WC forecast
• Monitor FX and IR risks
Value Enhancing Treasury • Leverage SSC, trading hubs, and netting centres
• Standardise bank connectivity (SWIFT/H2H)
• Improve collections, optimise costs, risks and returns
• Regional/global liquidity solutions
Scope of Services
Year 4+ Strategic Treasury • Advise on funding/capital structure
• Control and compliance focus
• Frequent review of bank partners
• Proactive Risk management
• Advise on supplier management
• Employ strategic Treasury consultants
6
T Treasury Efficiency Transaction Efficiency
Value and Efficiency
Many corporates are taking a holistic approach to centralisation to
realise the full benefit across the entire finance organisation
Decentralised Model
In Country Treasury
Regional Treasury Centre
• Managed by business units
• Basic Treasury needs
• Usually only a few entities
and simple funding needs
• Centralised payments
• Rationalise bank accounts
• Central funding
• Concentrate cash locally
• Netting Centre
• In House Bank
• Supply Chain Solutions
• Cash flow forecast
Payment Outsourcing
Payment Factory
Share Service Centre
• Retain in house the
initiation and authorisation
• Low volume of transactions
• Low AP/AR efficiency
• Standardise processes
• Payment warehousing
• E-banking solutions (STP)
• Automated reconciliation
• Payment factory functions
• Standard AP/AR processes
• Standard systems (ERP..)
• For most support functions
Banks are also responding to demands for greater efficiency with
solutions that facilitate centralisation while supporting local needs
7
Automation increase automated workflow across all banking services
Connectivity H2H for payments, collections, confirmations, reporting
E-commerce end-to-end initiation, confirmation and settlement for FX dealing,
investment, supply chain finance
Reconciliation higher efficiency using virtual accounts and automated software
Liquidity automated liquidity structures including multi-bank sweeping
System full bank integration with TMS / ERP
Connectivity SWIFT connectivity / ISO 20022XML
Interface Global payment / collection channels, liquidity portals
Services Single dealing point / consistent pricing across markets / global billing
Guidance on regulatory constraints / options and structuring solutions advisory
Tailored products / services to local conditions (e.g. customs / tax payments,
documentary work flow
Partner with local banks to deliver specific services, e.g. remote cheque printing,
multi-bank collections / pooling
Efficient
Cash
Management
Consistency
Across
Regions
Local
Support
Treasurers may face a range of challenges in centralising despite
the significant benefits
8
Business Justification Quantify benefits
Develop business case
Generate buy-in for change
Justify major investment required
Expertise Access to specialist RTC knowledge
Development of RTC blueprint / roadmap
Tax, accounting, regulatory due diligence
Changes to process, risk framework, policies
Resources / Support Systems development / integration
RTC project management
Ongoing change management
YOUR CHALLENGES?
Facing the challenge of driving efficiency, cost reduction, and
centralization of control
9
Standardise banking practices across group
Rationalise unnecessary bank accounts
Expand use of electronic payment / collection channels
Set up reporting feeds to improve visibility and cash flow forecasting
Utilise liquidity structures to maximise daily liquidity / self-funding
Develop options to maximise yield whilst managing counterparty risk
Develop policies and processes to provide better control over critical risks
Establish controls over bank account opening and operation
Ensure appropriate hierarchy of payment authorisations
Centralise low value activities in hubs to drive efficiency / costs – AP, AR
Consolidate and automate low value transactions to reduce costs, e.g. auto FX
Outsource low value activities, e.g. cheque printing
Integrate ERP, TMS and banking
Utilise straight trough processes for reporting, payments processing, reconciliation
Leverage value added bank technologies to improve key processes, e.g. AR matching
Joint workshops with various
corporate functions
Identify key dependencies and
contingency plans
Establish the “As-Is” base line
Clearly define the “To-be” model
based on best practices, and
focused on “Best Fit”
Evaluate and decide Treasury
servicing scope, delivery model
and resources available
Establish KPIs
Define strategic Treasury
objectives & operating principles
Establish blue print, road map,
phases of implementation plan
Review business requirements
Focus groups with senior
management
Plan For
Transition
Gap Analysis
Benchmarking
Decide Treasury
Operating Model
Develop Treasury
Strategy
Define Company
Strategy
Establishing a clear Work Plan with a well defined approach aligned with the core objectives of your company
Vision, Governance,
Policies and People
Strategic Direction and
Business Alignment
Best in Class Treasury
Organisation
Corporate and Functional
Alignment
Change Management
10
The transformation journey can take 12-36 months and usually
starts from defining the RTC‟s responsibilities
11
F
it
Strategic
Regulatory Constraints
Business Constraints
Whether centralisation and
standardisation creates competitive
advantages or benefits for overall
group
Understand the extent of regulatory
restrictions on providing services to
Affiliates and establish business
model to alleviate, if possible
The degree of business complexity
that requires the activities to be
retained locally
Re
ad
ine
ss
People
Process
Platform
Ease of transfer or sourcing the
required skill-sets at the RTC
location
Design of common processes
covering Affiliate needs as well as
local requirements
Ease of on-boarding countries by
leveraging or implementing
common systems platform (ERP,
TMS, banking technology)
Country specific considerations must be explored before a
centralisation strategy is finalised
12
Central
Bank
Reporting Thin
Capitalisation
WHT on bank / related
party interest
Transfer pricing re
interco loans / fees
Treasury Centre
tax position
(profit / cost centre,
location, incentive)
FX Controls
ROBO/POBO
Allowed ?
Interco lending / Netting
Allowed?
Non-resident Account
restrictions
Treatment on
Local / x-border Payments
Approval /
Paperwork
Treasury Centre as a
Financing Operation
Allowed?
Stamp Duty /
Other Taxes
Bank
Footprint
Range and depth
of banking
products
available?
Risk management
available?
Cross-
guarantee
issue
Bank servicing
and pricing
model
A holistic financial risk management framework for a Regional
Treasury Centre
At the onset of RTC taking over responsibilities from the affiliates we recommend a gradual approach to
transacting foreign exchange and deposit transactions with an initial emphasis on understanding the
specific characteristics of each market
As expertise and understanding grows we then recommend further automation
As the RTC becomes experienced in hedging transactional risk the next step in adding value to the
affiliates is by understanding, quantifying, and hedging currency and interest rate exposure
We will introduce the following best practice Financial Risk Management framework
1.Identify Risks
2.Diagnose Risks
3.Set Risk Tolerance
4.Determine Hedging Strategy
5.Hedge Unwanted Risk
With the quantifying and hedging of risk systematised, the RTC should focus on optimising the cash usage
and liquidity of its affiliates.
Optimising intercompany funding
Synthetic funding via currency markets
Cash trapped solutions
The RTC can also focus on expanding its scope to include other products such as commodities and
ascertain what benefits it would gain if traded out of Singapore
STEP 1
Consolidate and
Automate
To enhance visibility
and control
STEP 2
Optimise
To increase
efficiency in liquidity
management
STEP 3
Risk Management
To coach,
mentor and provide
advisory assistance
We propose a three step approach to managing an FX exposures
1
3
Extending an RTC to independently owned or operated Affiliates
pose additional unique challenges
Legal / Operational
Independence
Independently owned or operated Affiliates
can only be encouraged, not coerced into
model. Buy-in a must
Communicate benefits and openly discuss
concerns to obtain buy-in from each Affiliate.
Consider “competitive sourcing” model
Clear Benefits Affiliates must see clear corporate benefit
to participate in the arrangement
Clearly quantify benefits for each Affiliate.
Develop low cost execution model to
encourage participation. Share cost savings
generated by model with Affiliates
Arms Length
Arrangement
Affiliates not wholly owned / controlled so
policy based mandate insufficient, i.e.
must be structured on arms length basis
Develop formal Service Level Agreement to
govern provision of services and commercial
arm‟s length pricing
Performance Risks
Treasury Service Centre could be
assuming significant legal risks by
performing activities on behalf of Affiliates
Ensure roles and responsibilities, operating
procedures and legal protections are clearly
spelt out in the Service Level Agreement
14
A separate legal entity Profits accumulated and retained at the Treasury Centre
A branch of head office Shared by subsidiaries via benefit re-allocation from the
Treasury Centre
A division of an existing local entity (i.e. with
a separate set of accounting books)
Paid as a dividend to the parent or
Shared between the Treasury Centre and the subsidiaries
Determining the optimal legal structure of the Treasury Centre must
also be considered and will depend on tax, location choice
15
Profit Centre Treasury models are increasingly uncommon
Objective to minimise financial risk is at odds with the idea of profiting from
Treasury activities
Treasury Cost Centre does not require it to be loss making
Typical “Cost Recovery” model, with appropriate “arm’s length” pricing on all
service and management related fees, designed to cover the operating expenses
of the Treasury unit with a small profit margin
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