By Ted Howard
The year 2014 continued the transitions begun after the crisis. The same themes will cross over to 2015 no doubt.
For the most part, 2014 for treasurers was a lot about continuing to put “crisis mode” further behind them as they got back to the business of managing the company’s cash. The list of challengeswill be familiar to most as they’ve dominated corporate treasuries for several years—some even before the financial crisis. These include regulation, cash and working capital, taxes and dollar strength, among others.
Cash management
One of the big themes of the past several years has been where to put excess cash in a low-yield environment, and it was no different in 2014. New money-market fund rules from the Securities & Exchange Commission finally arrived—including the dreaded floating net asset value regime—and although companies have a two-year window before they kick in, it’s top of list as to where to put funds.
In the US the rules are different for institutional and government funds. The SEC said institutional prime MMFs will be required to use a floating NAV instead of the current $1.00 stable share price. Meantime, government and retail money market funds will be allowed to continue using floating NAV. Similar changes are happening in the European MMF space.
According to a treasurer at a European multinational, companies already are exiting euro money market funds. “Corporate treasurers I have spoken to have all left euro MMFs and had to find alternatives,” he said. This has been challenging as “banks don’t want money under two months.” Therefore, there has been “a lot of focus on cash forecasting and terming out in 3 to 6 month timeframes; using sticky deposits and fixed-income.”
That sentiment was confirmed by Fitch Ratings in a November note to clients. “The proposed [European] rules would probably drive some outflows as corporate treasurers accustomed to constant net asset value…would look for alternatives.”
Regulation
In the US, MNCs mostly looked on as banks dealt with the Volcker Rule, which was officially rolled out in December 2013. The rule, a part of Dodd-Frank financial reforms, was designed to prevent banks from trading for their own profit while enjoyingimplicit taxpayer protection. The deadline for compliance is July 2015 but banks have been lobbying hard to extend the compliance deadline another seven years.
As for Dodd-Frank itself, treasurers spent 2014 making changes to their reporting habits. At spring meetings of The NeuGroup’s FX Managers’ Peer Groups, most members reported that they are ready to comply with timely confirmation, portfolio reconciliation and dispute resolution. In Europe, the Single European Payments Area (SEPA) and European Market Infrastructure Regulation (EMIR)—the DFA equivalent—were the dominant rules. Europeans became SEPA-compliant in August and also met EMIR reporting requirements.
Both “cost a huge amount of man-hours and systems changes and we still have not found anyone that can explain how all that information will be useful, especially intercompany derivatives,” said one European treasurer. Another European treasurer echoed the sentiment. “Going live with EMIR compliance was a big challenge,” he said.
Susan Hillman, founding partner of consultancy Treasury Alliance, concurred in the opinion that SEPA took up a lot of resources. She said “rush to be SEPA-ready for companies with European operations… in many cases put pressure on ERP implementations.” Overall, she said in an email, the word for 2014 on regulation was “compliance, compliance, compliance,” which also took up resources, particularly those of banks.
Taxes force change
One of the big tax issues, if not the big issue of 2014, was the infamous “inversion.” A corporate inversion of course is a transaction whereby a US company merges with a foreign entity usually in a more “tax friendly” country. The result is the ability to claim non-U.S. residence and adopt the foreign country’s lower corporate tax structure. The US Treasury and the IRS cracked down on the practice, issuing a number of new regs in order to make it more difficult to qualify for tax advantages with inversion transactions and reduce the benefits.
Dollar strength and FX volatility
A strong dollar has also dominated 2014, and the fact that it may go higher now is registering on treasurers’ radar screen. “The return of FX volatility has been an issue, which had been absent in the previous few years,” said one US treasurer.
Much of the volatility has been caused by central bank activity as the European Central Bank and the Bank of Japan maneuver to bring back growth. It’s causing steep declines in both the yen and the euro and keeping currency traders on their toes and volatility in the marts.
To be continued
Challenges know no bounds. They don’t follow any calendar but their own. As such many of the challenges that treasury faced in 2014 will be there bright and early on January 1, 2015. With that continuity in mind, 2015 will be a year where treasury remains on the hunt for ways to support the business, be it streaming cash and working capital or participating in cross-functional projects that add further value.
But whatever new challenge 2015 throws its way, treasury will doubtless be up to the task.