By Joseph Neu
In light of our new format, the Editor’s Notes feature is also changing to focus more on what’s in each issue—a more traditional approach better suited to this space. Here are my three key takeaways from this issue.
Disrupters wanted. The April issue starts with a cover story by Ted Howard on Bitcoin, which is a topic that it seems no one can quite ignore. There are really two reasons for this: (1) there remains a level of distrust in the global financial system (post-2008 crisis), and hence its fiat currencies, that the governments and central banks of the major economic powers have not fully dispelled and (2) the predominant trend in technology these days is as a disrupter, with scores of start-ups seeking to introduce a better way of doing things through new apps and/or related hardware. Further, if the way things are being done merely preserves value for some entrenched interests (e.g., car dealers or traditional equity exchanges), then you have more people rooting for disruption.
Bitcoin may not be the precise vehicle (just as an exchange built for fantasy trading cards is likely ill-suited as a global finance hub), but it embodies a desired disrupter to challenge currency and payment platforms. The latter will be easier to disrupt without systemic issues. Entrenched interests must respond either way.
Tri-party repo disintermediation. Given the linkage between money-markets and tri-party repo, it should not be surprising the cash-rich corporates might consider cutting out the middle-man, as John Hintze’s article suggests that more of them are. Regulation of MMFs and low yields from money funds help this trend as would proposed changes to the net stable funding ratio rules that would make non-financial corporates more desired repo counterparties. The NeuGroup’s Treasury Investment Managers’ Peer Group looked at repo investing in some detail at its fall 2012 meeting with the help of Deutsche Asset and Wealth Management (DB Advisors). The key takeaway then was that collateral is the key to successful repo investing. Find a trusted agent to help manage this and it can be a satisfying yield-pick-up mechanism. But quality collateral has been in short supply, due to Fed (and other central bank) asset purchasing as part of QE and the increasing collateralization of everything, including derivatives transactions. Fed tapering may help matters, but what of its plans to take its “full-allotment overnight reverse repurchase agreement facility” out of beta testing?
Working capital committees add layer. A third feature in this issue is Geri Westphal’s piece on the benefits of a working capital committee. Working capital committees, as discussions last year with the Treasurers’ Groups of Thirty underscored, are vital to improving working capital management, a common CFO priority, because they foster ongoing interaction on, and accountability for, WC measures. But only if the CFO, at least, if not the entire C-Suite, is fully engaged. Such fully sponsored committees and their associated governance frameworks improve insight into available cash, operating cash flow, along with AR, AP, inventory and other WC elements.
This insight not only leads to more efficient business processes, but it also ties corporate strategy and investment decisions to working capital contributions at all levels. Eventually, though, good governance will lead to less of it, not more, so working capital frameworks should join ERM programs and set an objective to embed working capital into existing corporate governance frameworks.