Amarjeet Singh Partner, Business Tax Services

Ernst & Young

The role of the Regional

Treasury Centre to underpin

global growth

Nikhil Ratnam MD, Transaction Banking

Standard Chartered Bank

Centralisation is evolving in different ways to meet the conflicting

demands of driving efficiency and providing more local support

2

TREND

Established MNCs centralising Treasury

from RTCs to Group Treasury

Leverage familiarity with markets and

established infrastructure / processes

Core driver is cost and efficiency

Typically dollar functional businesses

(e.g. Tech., Oil & Gas)

IMPACT

Demand for standard global banking services

Drive towards global In-House banking

structures / centralised processing solutions

TREND

RTCs expand capabilities, implement

advanced models, upgrade cash

management

Leverage better support for local business

as “weight” shifts to Asia

Typically local currency businesses with

strong local needs / growth

IMPACT

Standardisation of banking service with

specialised solutions for specific market

needs

Require value added problem solving advice

Reduced costs, increased operational flexibility and process

standardisation are the most critical missions for centralisation

3 Sources: KPMG Quarterly Global GBS Pulse Survey 2Q13

Op

era

tio

nal

Str

ate

gic

Globally, demand for outsourcing is diminishing as organisations are preferring to leverage

shared service centres and treasury centres to improve processes.

21%

22%

24%

29%

33%

34%

35%

37%

43%

41%

40%

46%

39%

36%

34%

39%

45%

44%

27%

32%

28%

27%

16%

21%

22%

12%

10%

11%

6%

2%

5%

15%

11%

4%

6%

3%

Improve analytical capabilities

Gain access to new technology

Gain access to talent

Re-engineer processes

More effective operations at global level

Meet compliance/regulatory requirements

Standardise processes

Greater flexibility to scale operations

Reduce operating costs

Mission critical Important, but not critical Somewhat important Not important at all

However, the choice of centralisation strategy is driven by the

underlying business needs

Location • Closer to head office • Closer to operating business

Standardisation • Greater process standardisation • Greater flexibility in regional set-up

Regulation • Easier to drive compliance framework • Easier to stay across local regulations

Services • Easier to drive global services

approach • Easier to tap local services / markets

Business Model

• Suits companies with international

business model in a dominant trading

currency (i.e. US Dollars), e.g. mining,

oil & gas, technology

• Suits companies operating localised

businesses across many markets and

multiple currencies, e.g. consumer

goods

Execution

• Group Treasury sets strategy and

policies, Treasury Centre executes

centrally

• Group Treasury sets strategy and

policies, Treasury Centre executes

locally

4

5

Understanding business needs requires Treasury to be a strategic

partner to the business. This requires greater transactional efficiency

Year 3

Year 2

Year 1

Time Vis

ibil

ity

Co

ntr

ol

Op

tim

ise

Transactional Treasury • Basic policies and processes

• Basic funding source, pooling

• Short term cash forecast

• Control on bank accounts

Process Efficient Treasury • Automate where possible

• Rationalise account structure

• Timely funding and debt admin

• Short – mid term cash/ WC forecast

• Monitor FX and IR risks

Value Enhancing Treasury • Leverage SSC, trading hubs, and netting centres

• Standardise bank connectivity (SWIFT/H2H)

• Improve collections, optimise costs, risks and returns

• Regional/global liquidity solutions

Scope of Services

Year 4+ Strategic Treasury • Advise on funding/capital structure

• Control and compliance focus

• Frequent review of bank partners

• Proactive Risk management

• Advise on supplier management

• Employ strategic Treasury consultants

6

T Treasury Efficiency Transaction Efficiency

Value and Efficiency

Many corporates are taking a holistic approach to centralisation to

realise the full benefit across the entire finance organisation

Decentralised Model

In Country Treasury

Regional Treasury Centre

• Managed by business units

• Basic Treasury needs

• Usually only a few entities

and simple funding needs

• Centralised payments

• Rationalise bank accounts

• Central funding

• Concentrate cash locally

• Netting Centre

• In House Bank

• Supply Chain Solutions

• Cash flow forecast

Payment Outsourcing

Payment Factory

Share Service Centre

• Retain in house the

initiation and authorisation

• Low volume of transactions

• Low AP/AR efficiency

• Standardise processes

• Payment warehousing

• E-banking solutions (STP)

• Automated reconciliation

• Payment factory functions

• Standard AP/AR processes

• Standard systems (ERP..)

• For most support functions

Banks are also responding to demands for greater efficiency with

solutions that facilitate centralisation while supporting local needs

7

Automation increase automated workflow across all banking services

Connectivity H2H for payments, collections, confirmations, reporting

E-commerce end-to-end initiation, confirmation and settlement for FX dealing,

investment, supply chain finance

Reconciliation higher efficiency using virtual accounts and automated software

Liquidity automated liquidity structures including multi-bank sweeping

System full bank integration with TMS / ERP

Connectivity SWIFT connectivity / ISO 20022XML

Interface Global payment / collection channels, liquidity portals

Services Single dealing point / consistent pricing across markets / global billing

Guidance on regulatory constraints / options and structuring solutions advisory

Tailored products / services to local conditions (e.g. customs / tax payments,

documentary work flow

Partner with local banks to deliver specific services, e.g. remote cheque printing,

multi-bank collections / pooling

Efficient

Cash

Management

Consistency

Across

Regions

Local

Support

Treasurers may face a range of challenges in centralising despite

the significant benefits

8

Business Justification Quantify benefits

Develop business case

Generate buy-in for change

Justify major investment required

Expertise Access to specialist RTC knowledge

Development of RTC blueprint / roadmap

Tax, accounting, regulatory due diligence

Changes to process, risk framework, policies

Resources / Support Systems development / integration

RTC project management

Ongoing change management

YOUR CHALLENGES?

Facing the challenge of driving efficiency, cost reduction, and

centralization of control

9

Standardise banking practices across group

Rationalise unnecessary bank accounts

Expand use of electronic payment / collection channels

Set up reporting feeds to improve visibility and cash flow forecasting

Utilise liquidity structures to maximise daily liquidity / self-funding

Develop options to maximise yield whilst managing counterparty risk

Develop policies and processes to provide better control over critical risks

Establish controls over bank account opening and operation

Ensure appropriate hierarchy of payment authorisations

Centralise low value activities in hubs to drive efficiency / costs – AP, AR

Consolidate and automate low value transactions to reduce costs, e.g. auto FX

Outsource low value activities, e.g. cheque printing

Integrate ERP, TMS and banking

Utilise straight trough processes for reporting, payments processing, reconciliation

Leverage value added bank technologies to improve key processes, e.g. AR matching

Joint workshops with various

corporate functions

Identify key dependencies and

contingency plans

Establish the “As-Is” base line

Clearly define the “To-be” model

based on best practices, and

focused on “Best Fit”

Evaluate and decide Treasury

servicing scope, delivery model

and resources available

Establish KPIs

Define strategic Treasury

objectives & operating principles

Establish blue print, road map,

phases of implementation plan

Review business requirements

Focus groups with senior

management

Plan For

Transition

Gap Analysis

Benchmarking

Decide Treasury

Operating Model

Develop Treasury

Strategy

Define Company

Strategy

Establishing a clear Work Plan with a well defined approach aligned with the core objectives of your company

Vision, Governance,

Policies and People

Strategic Direction and

Business Alignment

Best in Class Treasury

Organisation

Corporate and Functional

Alignment

Change Management

10

The transformation journey can take 12-36 months and usually

starts from defining the RTC‟s responsibilities

11

F

it

Strategic

Regulatory Constraints

Business Constraints

Whether centralisation and

standardisation creates competitive

advantages or benefits for overall

group

Understand the extent of regulatory

restrictions on providing services to

Affiliates and establish business

model to alleviate, if possible

The degree of business complexity

that requires the activities to be

retained locally

Re

ad

ine

ss

People

Process

Platform

Ease of transfer or sourcing the

required skill-sets at the RTC

location

Design of common processes

covering Affiliate needs as well as

local requirements

Ease of on-boarding countries by

leveraging or implementing

common systems platform (ERP,

TMS, banking technology)

Country specific considerations must be explored before a

centralisation strategy is finalised

12

Central

Bank

Reporting Thin

Capitalisation

WHT on bank / related

party interest

Transfer pricing re

interco loans / fees

Treasury Centre

tax position

(profit / cost centre,

location, incentive)

FX Controls

ROBO/POBO

Allowed ?

Interco lending / Netting

Allowed?

Non-resident Account

restrictions

Treatment on

Local / x-border Payments

Approval /

Paperwork

Treasury Centre as a

Financing Operation

Allowed?

Stamp Duty /

Other Taxes

Bank

Footprint

Range and depth

of banking

products

available?

Risk management

available?

Cross-

guarantee

issue

Bank servicing

and pricing

model

A holistic financial risk management framework for a Regional

Treasury Centre

At the onset of RTC taking over responsibilities from the affiliates we recommend a gradual approach to

transacting foreign exchange and deposit transactions with an initial emphasis on understanding the

specific characteristics of each market

As expertise and understanding grows we then recommend further automation

As the RTC becomes experienced in hedging transactional risk the next step in adding value to the

affiliates is by understanding, quantifying, and hedging currency and interest rate exposure

We will introduce the following best practice Financial Risk Management framework

1.Identify Risks

2.Diagnose Risks

3.Set Risk Tolerance

4.Determine Hedging Strategy

5.Hedge Unwanted Risk

With the quantifying and hedging of risk systematised, the RTC should focus on optimising the cash usage

and liquidity of its affiliates.

Optimising intercompany funding

Synthetic funding via currency markets

Cash trapped solutions

The RTC can also focus on expanding its scope to include other products such as commodities and

ascertain what benefits it would gain if traded out of Singapore

STEP 1

Consolidate and

Automate

To enhance visibility

and control

STEP 2

Optimise

To increase

efficiency in liquidity

management

STEP 3

Risk Management

To coach,

mentor and provide

advisory assistance

We propose a three step approach to managing an FX exposures

1

3

Extending an RTC to independently owned or operated Affiliates

pose additional unique challenges

Legal / Operational

Independence

Independently owned or operated Affiliates

can only be encouraged, not coerced into

model. Buy-in a must

Communicate benefits and openly discuss

concerns to obtain buy-in from each Affiliate.

Consider “competitive sourcing” model

Clear Benefits Affiliates must see clear corporate benefit

to participate in the arrangement

Clearly quantify benefits for each Affiliate.

Develop low cost execution model to

encourage participation. Share cost savings

generated by model with Affiliates

Arms Length

Arrangement

Affiliates not wholly owned / controlled so

policy based mandate insufficient, i.e.

must be structured on arms length basis

Develop formal Service Level Agreement to

govern provision of services and commercial

arm‟s length pricing

Performance Risks

Treasury Service Centre could be

assuming significant legal risks by

performing activities on behalf of Affiliates

Ensure roles and responsibilities, operating

procedures and legal protections are clearly

spelt out in the Service Level Agreement

14

A separate legal entity Profits accumulated and retained at the Treasury Centre

A branch of head office Shared by subsidiaries via benefit re-allocation from the

Treasury Centre

A division of an existing local entity (i.e. with

a separate set of accounting books)

Paid as a dividend to the parent or

Shared between the Treasury Centre and the subsidiaries

Determining the optimal legal structure of the Treasury Centre must

also be considered and will depend on tax, location choice

15

Profit Centre Treasury models are increasingly uncommon

Objective to minimise financial risk is at odds with the idea of profiting from

Treasury activities

Treasury Cost Centre does not require it to be loss making

Typical “Cost Recovery” model, with appropriate “arm’s length” pricing on all

service and management related fees, designed to cover the operating expenses

of the Treasury unit with a small profit margin

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