Is a CMP the answer to your regulatory challenges?


Basel III to CRD IV. Regulatory changes continue to present challenges for treasury and finance professionals around the world – How can a CMP help?


James Higgins, BankSense Product Director and David Leslie, BankSense Treasury Consultant discuss the regulatory challenges facing treasury and finance professionals over the next few years.


Capital Requirements Directive IV (CRD IV)

James & David discuss CRD IV, a directive which states that treasurers must have a good view of liquidity trends, including negative positions and historical trends within balance sheets. This potentially arduous process requires technology to intervene with time-saving automation.

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How will CRD IV affect firms with business operations in the EU?

CRD IV will affect a number of financial and credit institutions. After the financial crisis in 2008, there was an overwhelming requirement by regulators to create a sense of safety in the market so before that point we had financial and credit institutions holding cash but not necessarily reporting it to regulators like the prudential regulatory authority, which is the Bank of England. With the crash, we had banks over-leveraged. What CRD IV within the UK necessitates is that treasurers have a good view of liquidity trends so they’ll have to have a view of their negative positions, along with the historical trends of how the balances are.

During an operating month, a bank with have inflows of cash, outflows of cash, what the regulators are really interested in is the net negative position to illustrate they’ve got sufficient capital and that they can cover that net negative position in an intra-day basis. So, what’s required is a lot of manual reporting today so you have treasurers who have to run reportings every day, it isn’t automated. They have to look at MT950s which is statement messages from institutions and then break that down into what the net negative position is.

What Cash Management Platforms (CMP) allow, is to have a trend analysis attached to it, but then it also automates that function and it shows it in a visual format. So, if a treasurer were to sit down, they could click a button and look at their net negative position quite easily rather than reconciling on a day by day basis.

Basel III

The biggest change to banking regulations in decades is discussed here. The changes are so profound that they will affect corporates as well. Some of the ways corporates will need to change their practice are explored here, as well as the technologies that can play a vital role.

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So, Basel III. It’s one of the biggest regulatory changes the banking industry has been through in decades. How do you see those changes impacting the relationship between banks and corporates, and how do you think business should adapt?

Basel III regulations are coming down the line like a freight train and the banks will have to incorporate a lot of changes. For example, the requirement on intra-daily liquidity reporting then we’re going to see some of the requirements that the banks have to comply with inevitably trickle down to the corporate sector because the banks are going to have to report on a new set of data, or a new set of data requirements that they haven’t that they haven’t been reporting on previously and they haven’t had access to the data for. So, they’ll be able to identify predictable patterns of behaviour, they’ll be able to forecast patterns of behaviour in terms of currency flows. Those data sets inevitably will be made available to corporate treasurers of corporate entities. So, they could make good use of that type of information to identify good payers, bad payers, predictable patterns etc, and manage their own balance sheet more effectively. This is the upside!

On the downside, depending on which side of the fence you’re on, the banks will be able to identify exactly who is using and who are the consumers of that intra-daily liquidity. An inevitable step is that they’ll start charging for that so corporates might find that where they are heavy consumers of intra-daily liquidity from their bank provider they may start incurring a charge for that.
We’re going to have what the treasury alliance calls the ‘end of notional pooling’. The notional pooling is a key tool of treasurers today whereby they can have multiple branches, multiple jurisdictions, multiple banks within those jurisdictions and pool balances together. So, you could have one entity which is cash rich, and one which isn’t. As long as they have a bilateral agreement between them, they can net the position and not carry an overdraft where they don’t have the cash.

However, with Basel III the insistence now from regulators this is not necessarily the correct way to conduct banking because you’re not truly reflecting the capital position of a corporate entity at any given point. You’re almost hiding or shadowing the position from another area so IS32 (Investment Accounting Standards) which have been revised under the 32nd version necessitate that the kind of pools be exposed and advised on, so what does this mean for corporates? At the end of the day, a lot of the corporates today within Europe would be notional pooling, more so than the US. In the US, the concept of an overdraft doesn’t exist for many corporates and SME would have to get a credit line to have that facility. Whereas in Europe we allow an overdraft to occur and we charge an interest for it. Now, this whole concept of notional pooling has allowed for treasurers to carry on without having to sufficiently fund their entities. What this will mean is they will now have to have very hands on visibility of cash positions across various entities and tools like BankSense would allow for them to quite easily and quickly be alerted to positions where they do have a short position so they can fund it because the future is banks themselves aren’t themselves going to offer notional pooling so speaking to a number of large banks, they’re end strategy is to get rid of notional pooling because of the regulatory requirements that stand behind it. Also, there is a larger scrutiny on the banks positions during the day.

The intra-daily liquidity positions, if they’re allowing this kind of bilateral agreement to be placed between branches, is that truly reflective of a.) the clients’ positions and b.) the banks position because the bank would inevitably have to net off against another one of their entities, so this is a challenging time, thankfully humanity always finds a way of finding a solution. Fintech’s are finding solutions and BankSense is a list of one of those products that would help a treasurer find an alternative to notional pooling.

Access to real-time info becomes much more important. Conducting trend analysis and being aware of forecasting are key things which are going to become a huge part in the way treasurers conduct themselves.

If you take notional pooling within a provider, out of the equation then you have to have greater visibility of where your cash is, and it has to be a bank agnostic solution because if you take away notional pooling, what you’re probably going to end up with is corporate treasury is going to have to bring in a process of physical pooling so you’re going to have to manually move these funds between providers, so you need a solution , you need technology to sit between the corporate and the bank and aggregate that info and allow the corporate treasurer to make decisions to move the funds physically in the market. But in order to do that, in order to make timely decisions you need real-time information.


Changes to UCITS and AIFMD are coming and financial institutions and finance professionals need to know what these changes are and how to respond to them. James and Dave cover everything from convertible assets, to the current problems with audit management data.

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What key changes to UCITS and AIFMD do treasury and finance and professionals need to be aware of?

This is more applicable to financial institutions and finance professionals who are typically looking after a UCITS fund or an AIFMD fund today. They will have to adhere to both the directives and both the directives necessitate that the funds have easily convertible assets within them to cover any capital loss within the investments held within those collective schemes.

So, if you were to go out today and place your money and place it in, as Warren Buffet said in an index fund or a collective fund, so when you do that a part of that fund has to have liquidity within it. The problem is, for a fund manager, they have an audit management system which instructs trades through to a custodian via a broker, and then you have the custody record. So, you have the audit management record, which is created by the actual fund manager and then you have the record at custody. There isn’t anywhere in between so you have the audit management data which isn’t necessarily data that comes from the bank and then the custody record is usually delayed. So, when this happens you have a mismatch at times because one settles before the other, so the liquidity that the fund manager has to be completely aware of isn’t necessarily up to date, and there are issues if you don’t keep within that range and the fund doesn’t become compliant after a certain point.

So, this means that treasurers or oversight managers within those fund manager departments will have to have sight of the liquidity within each one of those funds to ensure that they have convertible assets to hand, which includes cash and money markets, and includes easily convertible instruments which you can take to cash without a loss or without the loss of capital, so the preservation of the initial capital is going to be important within that pool, so treasurers, or oversight managers within those areas will have to keep a close eye on the liquidity of  availability within those funds.

Large Exposure Restrictions

Large exposure restrictions are one of the key strands of the new regulatory framework that banks must adhere to, but which will trickle down to corporates. Here, the role technology can play in automating rules and providing relevant information to corporate treasurers is explored.

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What large exposure restrictions, levies, structural measures do treasury and finance professionals need to adhere to?

Large exposure restrictions are one of the key strands of the new regulatory framework that banks in particular have got to adhere to. BankSense work primarily with corporates but it’s a regulation that has some elements of best practice which can be applied to the corporate world because effectively what it’s saying is that you are restricted in terms of how much of your balance sheet can be held with an individual institution, and what it’s seeking to address is the risk that your organisation could be brought down by the failure of a market participant or a group of market participants. So, what we’re seeing is corporate treasurers even in SME enterprises all the way up are starting to think about actually spreading the risk of the balance sheet across multiple providers.This is how it’s trickling down.

In order to do that there is a role that technology can play to automate some of these rules and provide the relevant information when lines have been crossed or predefined limits have been breached straight to corporate treasury so that corporate treasury’s job doesn’t become one of spending 80% of their day compiling info to make sure that they’re complying with either large exposures in the case of a bank or a similar internal risk framework that they’ve devised for a corporate. So, it’s good practice that we’re seeing across corporate treasury regardless of the type and size of organisation.

With levies, we’re in an environment at the moment where customers are finding they’re incurring a levy on long balances in Euros, in the form of negative credit interest. Because of that, we’re going to see a proliferation of alternatives. So, this is a fairly unique situation which corporate treasurers are facing and this is inevitably leading to the Fintech community and other providers seeking to find ways using technology to allow corporate treasurer to make better use of their cash balances and with the BankSense product, that’s exactly the area of the market that we’re looking to address is to insert ourselves in between the corporate and the bank using technology and providing a software layer to allow corporate treasurers to gather info much quicker, make more timely decisions and therefore deploy their cash balances in a more productive manner for better returns and avoiding some of these levies.

Liquidity Coverage Ratio

Liquidity Coverage Ratio is something the banks are going to be focussing on. They will have less appetite to take on unpredictable deposits, or fluctuations in the deposit base with it impacting on their ability to comply with LCR. Corporates are going to need technology to manage balance sheets and cash flows more than ever.

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The Liquidity Coverage Ratio. A very important part of the Basel accords. They define how much liquid assets should be held by FIs. How do these regulations affect those in the treasury and finance world?

Inevitably the liquidity coverage ratio is something that the banks are going to be thinking increasingly about in terms of what deposits they want to attract to the balance sheet because there’s the concept of liquidity coverage ratio friendly, or unfriendly deposits. In the case of LCR, then we’re probably going to see the banks are going to have less of an appetite to take on unpredictable deposits or fluctuations in the deposit base because it impacts on their ability to comply with LCR.

So, what the customers are going to be faced with is the banks will introduce measures to encourage predictable behaviour from their customer base and so that will inevitably trickle down to the corporates. They’ll be asked to manage their cash or manage their balance sheet in ways that they possibly haven’t before because their activity has an impact on the banks’ ability to manage the LCR, and so what that means is bringing this full circle from a technology perspective, then those corporates need the right tools to be able to manage their balance sheet and their cash flows according to the banks requirements, they can’t simply have the onus put on them without having the right levers in place to do so.

Capital Adequacy Ratio

The 2008 financial crash has understandably made the banks warier of having riskier assets with a high-risk weighting on the balance sheet. James & David discuss what this means for corporates, and how they can reduce the danger of incurring higher costs of financing.

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What are the implications of the Capital Adequacy Ratio (CAR) on organisations looking to raise funds?

The CAR is inevitably going to have an effect on all types of organisations becasue ultimately the banks are going to be looking at that ratio and saying ‘well the capital to risk weighted assets, we need to make sure that we’re above the specifies tolerance’ – the higher you get that ratio the better it looks from an external perspective.

So, as capital adequacy ratios reduce the appetite of the bank to have those riskier assets with a higher risk weighting on the balance sheet, then inevitably they’re going to start removing some of those and that will then lead to higher cost of financing for organisations.

The CAR has even become more of an issue for fund managers as well so in operating the number of funds that they do, it is quite vital that they keep sufficient capital to cover any losses within the fund. So, it’s an industry wide thing and if you’re a bank as well with investments you have to have restitution risk capital set aside as well. It goes back to Basel III. So, if you look at a bank today, they’ll have very little appetite to have non-operating capital within their books because of what’s happened previously with the financial crisis. So, for non-operating capital they’re trying to reduce that as much as possible, but they are, from a risk restitution perspective they do have to keep a certain amount available. However, it is an exposure, so monitoring these types of balances and liquidity elements are very key for any institution.

Liquidity Stress Testing

In the same way that new cars are subject to tests to analyse their durability, balance sheets must now undergo an equivalent process. This could become extremely labour-intensive. James & David discuss how technology could make LST as easy as clicking a button.

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Liquidity Stress Testing, it a term we typically associate with banks. But it’s something corporates are looking at more and more. How can treasury professionals identify, analyse, manage their risk to ensure liquidity contingency planning?

Liquidity stress testing is another example of banking regulation which can be applied as a best practice to any corporate treasurers’ risk and control framework. Basically, the concept of LST says that you apply stress scenarios to your balance sheet and look at what the result would be. That could be simple measures such as an increase in the unemployment rate or changes in interest rates all the way through to simulating historical events, to see what impact that would have on your current balance sheet. Just good practice that organisations where it’s not regulatory mandates corporates should be looking at this for best practice for their risk and control framework.

The concept of LST should be something that corporates should be able to just click a button on piece of software and simulate some of these tests on a day to day basis because a balance sheet fluctuates on a day to day basis so we should move away from it being a weekly or monthly exercise to a more continuous one.
We’re providing the types of solutions and types of data sets in our software that will allow a corporate treasurer to do that and have much greater visibility not just of balance sheet in its current liquidity positions but also what those positions would look like in certain events.

Another thing we need to be aware of as we cover all these different types of regulations and risk management practices is not only is there a lot of them but there is a lot of scope for national interpretations of how it gets implemented and potentially that can lead to more complexity in the regulatory landscape because what you end up with is regulatory arbitrage where organisations are basically playing off national or geographic interpretations of the regulation against each other so just further complicating some of the way that the way these regulations are interpreted and corporate treasures have to then manage from balance sheet perspective in terms of what’s going to derive the best value for the organisation.

The CRD IV is an interpretation of an element of Basel III so you have this split of regulations being interpreted by different regulators so you might have different reporting requirements within different regions, so what that means from the treasurers’ standpoint is they have multiple reporting to be done across multiple areas. Issue of trends is going to be very important. The seasonality of treasurer operations means that most large treasuries have an inhouse bank. These inhouse banks act as banks within the organisations. From their perspective, applying these types of stress test scenarios to seasonality (e.g. Christmas shopping, Black Friday) they can calculate how to best utilise the liquidity that comes out of those events through historical trend analysis. This is where these Fintech tools really come into their own. Products like BankSense really allow a trend analysis to be done without going into spreadsheets because you can click a tab, put your dates in and then it shows you the historic trend within a certain period.

Particularly in a depressed rate environment such as today, we’ve taken the view at BankSense that real-time information is only the start of it. What you need to get to is forecasting and automated generation of predictive data because only then can you start to make best use of your liquidity because there will be scenarios where liquidity dries up late in the day so if you’re spending all your time gathering info then you have little time to invest that you’re going to be faced with more punitive rates so we’re using technology at BankSense to give customers, corporate treasurers the opportunity to invest based on forecasted info, based on predictive analytics that we generate before the event has happened.

European Money Market Fund regulations

It’s no secret that we’re in a depressed, negative interest environment. Treasurers need alternative instruments through which to make money. Money markets have become a default choice, but there are pitfalls to these markets. Can technology provide the answers?

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What are the key impacts for corporate treasurers when it comes to European Money Market Fund regulations?

the EMMR mirrors US regulation which came into force around September last year. The EMMR aren’t going into full effect until mid-2018. The key difference for treasurers is that they’re going to have access to more money markets as a result of some changes that are happening. Today, you’ve got a Constant NAV (net asset value) money market fund, a variable money market fund, or a Floating NAV money market fund. That’s going to now change to constant and variable but you’re going to have a Low-volatility NAV as well. It’s important because a survey was conducted recently from a treasury standpoint and 58% of treasurers advised that they would like to reassess their strategy in terms of investing money market funds.

In terms of who utilises these 58% of treasurers of EMEA utilised money market funds, because we’re in an environment where we’re in a depressed interest environment, we’re in a negative interest environment. This all means that a treasurer has to have access to other instruments to make some money through. So, Money markets are the default choice but even within these changes treasurers are going to need to change their strategy.

In terms of changing their policy, treasurers will need to provide evidence of the trends within these accounts that they’re looking to add money markets to. This is where tools like BankSense can come in because they can draw down the data from a tool like BankSense and then have a portfolio of data to present to a bank to say we have £150m across 30 days, we’re perfect candidate for a Stable NAV or a Low-volatile NAV as well.

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