What’s on the International Treasurer radar screen this week?
This week’s editorial meeting brought forth a number of key issues starting with a discussion going on amongst members of the Global Cash and Banking Group (GCBG) concerning intercompany lending rates.
Interco lending is a perennial topic that gets renewed urgency as tax authorities worldwide scrutinize transfer pricing, including the potential use of intercompany lending to shift profits out of a given jurisdiction. Further, many treasury departments are having renewed interest in in-house bank structures, as they offers multinationals maximum flexibility when it comes to cash and liquidity management (and for much more than tax planning). Accordingly, the focus of discussion for GCBG members is on benchmarks and spreads to use when setting rates on in-house bank deposits and loans.
Another item for discussion was the preliminary agenda topics for The NeuGroup’s Engineering & Construction Treasurers’ Peer Group meeting in late September. These include an update on capital and bank funding markets, the impact on project and export finance, a look at the state of LCs, bank guarantees and performance bonds, on-going challenges with FX management and professional development and incentives to maximize the productivity of treasury staffs.
Finally, in preparation for action items stemming from the derivative reform elements of Dodd-Frank (the number-one topic for the September meetings of the FX Managers’ Peer Groups), presuming it passes soon as expected, we are looking at the disconnect between 1) the case corporates continue to make for exemptions from central clearing and its collateral and margin requirements due to the demands on liquidity and 2) the continued historic build-up of cash and cash equivalents on corporate balance sheets.
Sooner or later, regardless of the final nature of the legislation and how it gets implemented by regulators, dealers will be asking for compensation or credit support to offset new costs of doing business in derivatives.
For this reason, treasurers should become better-versed in making use of cash investment holdings in credit support arrangements and the market should respond to their needs in this regard by making it easier for them to do so with better processes and automation, plus rewarding them with better, more transparent pricing on collateral-supported trades (what’s the ROI on a T-Bill pledged as collateral on a long-dated FX hedge?). Treasurers in the financial sector, for instance, tend to be well-versed in pledging bits of their portfolio to satisfy collateral demands while still retaining the ability to earn on these assets and the timing is right of non-financial treasurers to get in on the game.
So long as corporates choose to impose a drag on their balance sheets by holding cash far in excess of expected operating and capital expense, for almost no return, why not put some of it to work as collateral?