Nothing but slings and arrows?

The treasurer of today is facing a shifting economic landscape both in the eurozone and worldwide. What milestones lie ahead and what must be done in order for the treasurer of tomorrow to build financial stability?

Treasurers of all breeds, both in the corporate and financial sector, have had a rough time of it lately. And the truth is, that's not likely to change. As they grapple with Europe's new financial architecture, treasurers will continue to be assailed by an alphabet soup of regulations coming from European and national regulators. Some of these, such as the introduction of same-price, straight-through, cross-border payments, date from before the economic crisis, but have been modified in its wake. Others, such as new liquidity rules, capital cushions, the complete overhaul of stress-testing procedures and risk management in general, were triggered by the meltdown.

The technical requirements for much of this will be defined in the so-called Omnibus Directive that is taking shape in the coming months. And at year's end, there arrives the Basel committee's latest package of proposals, which will be wrapped into the new EU-wide rule book.

On top of these, treasurers have had to deal with the on-going consequences of volatile exchange rates, massive increases in sovereign debt in many countries, anxieties about the future role of the US dollar (there's even talk of a new Bretton Woods to restore exchange rate predictability), and cracks in the eurozone, such as the ongoing economic fluctuations of Greece, Ireland, Spain and Portugal.

Let's start with foreign exchange volatility. As Paul Graydon, Head of Business Development, Global Markets with HSBC explains, pointing out that foreign exchange markets are confused about how to react to this new economic environment, for any business with a sizeable exposure to the euro or the dollar, volatility represents one of the biggest risks to profitability.

"Sterling's unexpected and rapid collapse from €1.45 to a low of €1.02 in early 2009 saw the profit margins of many UK importers destroyed," he says. However, while the consequent 30 per cent increase in import costs was impossible to predict, exporters now have an opportunity to lock in their future euro receipts at historically low rates. Most importantly, "leaving foreign exchange exposures to chance is not an option in today's turbulent times."

Thus, in the next few months, treasurers face fundamental systemic issues such as the flaws in the single currency revealed by the Greek crisis.

As Mark Berrisford-Smith, Senior Economist, HSBC Bank, observes, the risk of contagion from other vulnerable countries such as Spain and Portugal has not gone away, only abated. He doesn't however expect the eurozone to disintegrate, if only because the departure of one country would only feed speculation about which nation would be the next to default. "Divorce is not an option," he says. "For better or worse, members of the eurozone have to make it work."

Divorce is not an option ... members of the eurozone have to make it work.

Meanwhile, there are ongoing points of dispute between pan-European and national regulators on the one hand, and various financial sector trade organizations on the other. There are a lot of gaps to be filled and much fine print written. For example, the new European Banking Authority won't be set up until January 2011 and until then treasurers won't know exactly which standards will become legally binding and which will not.

What is certain, according to Gianfranco Orlandi, president of the Italian Association of Corporate Treasurers, is that the new payments system, the broader scope of the International Financial Reporting Standards (IFRS) and other influences will force treasurers to broaden their skills in order to cope with this complex landscape: "Tomorrow's treasurer will need to be more integrated both vertically with his executives, and also horizontally with the other company functions," he says. To assist his members, the Italian organisation is forming alliances with his country's counterpart associations of credit managers and finance managers.

Italy's response very much reflects the new reality. The role of treasurers has broadened greatly, leading to the need for deeper knowledge, deeper collaboration among fellow treasurers and deeper involvement with business divisions in the management of risk and working capital.

Fortunately, treasurers have long been willing to collaborate either individually or through official associations. As it happens, HSBC has encouraged this kind of meeting of minds to debate key issues. As Tim Fitzpatrick, Head of Payments and Cash Management with HSBC, says, "The bank predicts collaboration will accelerate as treasurers look to share practical knowledge and solutions to common, global problems."

Brave new treasury world

With the ripples of the economic crisis still being felt, all parties are feeling their way forward. For instance, the latest proposals on risk management from the Committee of European Bank Supervisors (CEBS) attracted some cogent responses from the banking community. It was suggested that only a very few designated individuals in a financial institution could be expected to have a full knowledge of risk management rather than everybody in the organisation, as CEBS' proposals implied. (The banks won this one – the offending paragraph will be amended to replace "full understanding" with "level of understanding commensurate with their responsibilities".)

One of the most practical and urgent issues is the Single Euro Payments Area (SEPA) initiative. The introduction of the single payments system, with all it entails in terms of compliance, software, pricing and new forms of competition, represents a sea change in the eurozone's financial community. According to Fitzpatrick, all companies and business will benefit from SEPA by way of lower pricing, more certain transaction timing and richer information on SEPA payments, especially those being made across borders within the 32 countries covered. In addition, multinationals could generate further efficiencies from a greater degree of centralisation of payables and receivables, rationalised bank accounts and improved liquidity management.

Smaller businesses, meanwhile should now find doing business internationally more straightforward and consistent, enabling them to expand more easily out of their domestic environment.

But SEPA has generated a heady debate and it's not over yet. The payments committee of the European Association of Corporate Treasurers (EACT) has gone so far as to complain formally that the European Payments Council (EPC) – whose mandate is to standardise the interbank environment for SEPA payments – neglected to consult corporate treasurers, claiming the consequences could be serious for the entire programme.

"Without some major changes, SEPA credit transfers and direct debit, as described in the rulebooks, will not reach a critical mass and justify the shift from national payment instruments to SEPA," the association warned. "This is simply because the SEPA instruments are not equivalent to the best of the existing domestic schemes."

EACT cited the likelihood that, under SEPA, corporates will have to manage different formats in order to communicate with different banks, which is the opposite of SEPA's intention.

Under the circumstances, there's no question the timeline for migration from legacy retail payments to SEPA today remains uncertain. In response, the EPC Plenary has approved some enhancements to the SEPA Direct Debit, which are not compulsory for the banks, but which some user communities assert are critical for a smooth migration.

In addition, the European Commission and European Central Bank are making moves to create a SEPA Council from June 2010, the objective of which will be to bring together all stakeholders for the realisation of the SEPA vision laid out in a Roadmap for 2009 to 2012. In this way, without replacing any existing groups, like the EPC, both the supply side and the demand side will together take decisions on the execution of all next steps.

Finally, the European Commission is leading an initiative to agree an end-date (or dates) by which the migration from legacy retail payments instruments to SEPA will have to take place.

Meantime, stress-testing of banks has risen to the top of the treasurer's agenda. In the UK, the Financial Services Authority sees stress-testing and related liquidity issues as nothing short of a national duty.

"Strengthened liquidity requirements can bring substantial long-term benefits to the competitiveness of the UK financial services sector," the regulator says in its latest guidelines, citing the crucial importance of counterparties' confidence in firms' financial soundness.

In view of the urgency, the FSA isn't waiting for international guidelines to be drawn up and will phase in its programme over the next few years. It will be some relief to firms however that quantitative measures, which could reduce available capital, won't be applied until the economy is out of the woods.

The onus is mounting in particular on treasurers of cross-border firms. The CEBS' supervisory colleges are already up and running for 35 of the bigger cross-border banking groups and the committee is rolling out new ones for smaller international institutions.

In the wake of shocks such as the Madoff and Stanford frauds, the collapse of Icelandic banks and the illiquidity of Dubai's quasi-sovereign borrowers, the CEBS is very much on the front foot. Gioanni Carosio, chairman of CEBS, told the EC's monetary and economic affairs committee in late January 2010 that his group was planning more EU-wide stress-testing exercises of major banks as it pursues "cross-sectoral dimensions" in much of its work.

Extremely active, the CEBS is churning out consultation papers with broad implications for bank treasurers in particular, such as its latest on core tier one capital, which contains important ideas on the eligibility of certain capital instruments. It also pitched into the debate on minimum retention requirements for securitisation, which relates to President Obama's and Paul Volcker's proposals to ban proprietary trading. It's just another example of the way treasurers will have to take into account the big – and sometimes global – picture as the entire regulatory environment moves towards international standards.

In this challenging new world, treasurers need to look beyond the high-level cash flows showing up on the spreadsheet, urges Fitzpatrick. Instead they must understand the nature of those flows, such as their source, the currencies concerned, their reliability in terms of timing, and their overall certainty. "This requires systems, highly experienced people, a bird's eye view of the globe, and commercial judgement."

In all this, management of the group's liquidity remains paramount. This poses numerous challenges, just one of which is exactly which flows can be consolidated and the impact of that consolidation.

By no means least, one of the crucial issues is exactly where the treasury function should be based. Should the determining factor be the impact of regulations, tax efficiency, number of staff on site or the time zone? All of these could be decisive but take just the issue of the time zone, which is rarely considered, points out Fitzpatrick. If treasury is too far east or west, for example, most transactions will occur after staff have left the office and they will be forever working a day behind.

Treasurers face daunting challenges in the months and years ahead. The growth in emerging markets, increased regulation, changes in payment zones across the developed world, deeper integration into the supply-chain, better-managed liquidity, the adoption of improved IT systems: all will test the capabilities of treasury staff in the next decade.