Royston Da Costa, Assistant Group Treasurer, Ferguson, Plc
The rapid growth of globalization brings equally rapid regulatory changes that compel international organizations to keep their ears to the ground and adapt. The onus of adaptation lies on treasury to comply with global audits. As regulatory audits are sent down the pipeline, proper process controls need to be in place, allowing treasurers to ensure that all subsidiaries abide by regulatory statute while simultaneously providing the central treasury with valuable systemic visibility.
For companies expanding internationally, there are a number of regulations that treasurers need to keep their eyes on.
Basel III: The introduction of Basel III has had wide ranging implications for the way in which liquidity is viewed by financial institutions—and consequently on the pricing and services offered to corporate customers. Implementation began in 2013 and is due to be completed by 1st January 2019.
Money market fund regulation: European money market funds were required to comply with new rules by January 2019. While fund managers have been busy converting CNAV funds to the new LVNAV model, treasurers have had plenty to do to prepare for the changes, such as updating investment policies, engaging with auditors and checking that their cash and treasury management systems can accommodate the new products.
PSD2: One of the most significant implications of the second payment services directive (PSD2) is the move towards open banking. This paves the way for the use of application programming interfaces (APIs), to give third-party providers access to clients’ bank data in order to provide related services.
IFRS (International Financial Reporting Standards) 9: IFRS 9 Financial Instruments became mandatory from January 2018, with significant implications for the accounting of financial instruments—not the least of which was removing the 80-125 percent rule for hedge effectiveness testing. Compared to IAS 39, IFRS 9 has the potential to make hedge accounting more achievable, while reducing the associated back office complexity.
IFRS 16: Meanwhile, treasurers also need to be aware of the implications of the new lease accounting standard, which came into force in January 2019. Under IFRS 16, lessees “will now be required to recognize most leases on their balance sheet,” while accounting for lessors remains substantially unchanged.
Know-your-customer (KYC) compliance is a major burden for corporations around the world. With banks increasingly alert to the risk of fines, simply opening a bank account is a process that can sometimes take months to achieve. Likewise, even established relationships can come with regular requests for KYC information
AML (Anti Money Laundering): Regulatory authorities cracking down on terrorist funding and other illicit uses of funds has resulted in this regulation,
BEPS (Base Erosion and Profit Sharing): The final Base Erosion and Profit Sharing (BEPS) Action Points were published in 2015. The objectives of the rules include preventing companies from moving profits to different jurisdictions for tax purposes. The action points include several areas which may have implications for transfer pricing, country-by-country reporting, intercompany loans and in-house banking.
GDPR: While not aimed specifically at financial services, the EU General Data Protection Regulation (GDPR) adopted last year has had significant consequences. The regulation, which introduced strict rules for data privacy and security—and hefty fines for non-compliance—has implications for treasurers as well as their providers.
The demise of Libor: With Libor expected to be phased out by 2021, structural changes in capital markets are requiring treasury departments to reevaluate their debt and derivative structures. While the valuation of derivatives has traditionally relied upon a discount curve “derived from the Libor rates and their underlying swaps, futures etc.,” the reduced liquidity in Libor is necessitating a change to discount curves based off overnight indices such as SONIA (in the UK), SOFR (in the U.S.) and EONIA (in the EU).
IMPLEMENTING PROCESS CONTROLS
As we will discuss in our AFP 2019 session, treasury departments need to implement process controls to ensure that their subsidiaries abide by regulations and provide visibility to the central treasury. There are a number of tools that can be used today if you have a SaaS treasury management system, including some of the standard traditional ones used by most companies. Treasury policy requires visibility of the following areas in our TMS solution:
- Bank accounts
- User access
- Cash balances
- Foreign exchange deals (internal and external)
- Intercompany loans
- Counterparty exposure
- Market Data.
Treasury should also complete reviews in three key areas.
Treasury policy: The policy should be reviewed regularly and signed off by local treasurers.
Internal audit: Regular reviews of internal audit requirements are needed to ensure that treasury processes are robust and suitably controlled. If a TMS is involved, consider what processes could be automated
Treasury procedures: Regularly review your procedures, and the use of technology to simplify the requirements from your subsidiaries, where possible. Ensure they are compliant and are updated.
We will go into even more detail on in our upcoming session, Dismantling Corporate Silos Through Embedded Process Controls, at AFP 2019. We’ll examine the intricacies of financial audits and highlight how key controls will solidify company-wide compliance. I hope to see you all there.