Why Preparing for the Hike Into the Financial

Volume 4, Issue 1 Spring/Summer 2010

a Strategic Treasurer newsletter Treasury Vision: Why preparing for the hike into the financial wilderness Of Roadmaps is no time to take risks! and Waypoints Credit Spreads in Valuation | 4 SWIFT & eBAM | 10 Developments in Treasury Technology | 13

Special Report:

New Research Sheds Light on Money Fund Risk Factors Contents. Treasury 3 | Treasury Vision: Of Roadmaps and Waypoints Leadership Update A Strategic Treasurer 4 | An Introduction to the Use of Credit Spreads in Fair Valuation Newsletter Financial Risk Management 500 Westpark Drive, Suite 110 Peachtree City, GA 30269 5 | New Research Sheds Light on Money Fund Risk Factors +1 678.466-2220 Sponsored Content

7 | Achieving Visibility to Your Liquidity Subscriptions Relationships, Hedges, & Counterparties For a free subscription, visit www.StrategicTreasurer.com/ 9 | SWIFT Benefits: Options and Considerations for Corporations Newsletter Sponsored Content To unsubscribe, send your 10 | SWIFT and Electronic Bank Account Management name, organization, and Treasury Technology -- SWIFT mailing address to TreasuryUpdate@ 13 | Developments in Treasury Technology StrategicTreasurer.com Technology Column

Advertising: For information and rates, Is it Time to Invest in Your Mind? contact: TUSales@ Read The Strategic Treasurer: A Partnership for Corporate Growth StrategicTreasurer.com Hear what leading Treasurers are saying: +1 678.466-2220 “…will become a tattered book on many treasurers’ bookshelves…” Mission Statement Tim Hart, treasurer Treasury Update, a resource First National Bank of Nebraska for Treasury professionals, is published bi-annually to raise “…I appreciate the void Craig is filling with awareness of key Treasury his book…He offers practical methods with items, issues, and events; assist immediate application.” with tactics and strategies; George Zinn, vice president and corporate and enable Treasurers and treasurer, their organizations to be more Microsoft Corporation resilient, effective, and efficient.

“…No treasurer faced with managing through the dynamic years ahead will want this book far from his or her fingertips.” Copyright © 2010 by Strategic Richard Moss, senior vice president finance Treasurer. All Rights Reserved. and treasurer Reproduction by any means in whole or part without permission Hanesbrands, Inc. is strictly prohibited. The information contained in this “…captures the essence of what it takes to be newsletter has been prepared a strategic treasurer and valuable business by Strategic Treasurer unless partner. It is an extremely practical resource otherwise noted. We make no representations, express or implied for anyone seeking to learn more about the as to its accuracy or completeness. strategic, technical, and operational aspects of Opinions expressed herein are leading a successful treasury organization.” Author, Craig Jeffery subject to change without notice. John Tus, vice president and treasurer Founder & Managing Partner This is a newsletter meant for Honeywell International, Inc. Strategic Treasurer informational purposes. It should not be construed as offering legal, Available through www.TreasuryBook.com and wherever books are sold. financial, or other advice. Volume 4, issue 1 • Spring/Summer 2010

Treasury Vision: Of Roadmaps and Waypoints The Big Bang is for Theorists, not Treasurers. Leadership

ny good Treasurer must be direction is north, and you can use Finding water sources is also crucial, A a visionary. Being able to it in combination with your map to as faucets aren’t conveniently located see what the future looks like and determine the direction you ought on trees, and no one can carry all having the ability to describe it to go—but make sure it isn’t one of of the water they need for an entire in aspirational terms (the ‘I have those cheap compasses charged in the weekend. a dream…’), is more than just an wrong direction. The compass by itself Below are examples of situations that emotional plea. It is the required first won’t tell you where you are, but it is can arise on a hike, along with their step in the journey to being a strategic a useful tool nonetheless. However, a analogous examples for reaching Treasurer with a strategic Treasury Global Positioning System (GPS) can Treasury’s future state. department. Beyond the rah-rah aspects of vision, a fair amount of Minimalistic Map Use. Bringing real work is required, although this only the maps you ‘need’ on a trip should not be taken as a minimization appears to be a good idea for saving of what is required to establish and space and money. However, if you socialize the vision for Treasury. arrive at your planned water stop—a mountain stream—and discover it Map/Compass/GPS Analogy. If you is completely dried up, your route take a group on a planned weekend may need to be altered. Not having hike (versus a Friday afternoon hike a contiguous map in your backpack on which you got lost and wandered may mean you must completely alter for the entire weekend), several key your route and miss the great vista. activities and tools to optimize the However, if you had packed the extra opportunity for success are required. map, you might be able to see a bigger While success can be different for tell you where you are (you may have stream only a half click away that various groups and people, let us loaded the waypoints into it, which would get you back on track, with assume “success” means you get where is a best practice) and track your only a one-hour delay, and still see the you intend to go at the approximate progress and distance in an extremely great vista. A similar situation emerges time you expect to arrive, while fairly accurate manner. The GPS will with Treasury. Having a clear roadmap closely following the planned route. provide two coordinates which can to where you are taking Treasury and Of course, lack of life-threatening be referenced on your maps—if you ensuring you have allowed enough injuries or loss of possessions also brought the right ones—to provide flexibility in your set of roadmaps to adds to the level of success you hope further confirmation of your location alter your trip without throwing away to achieve. in relation to your trip plan. all of your planning are both vital. One of the required tools for this Waypoints (or interim steps). On Unfamiliarity with Using the Tools. hike to be successful is the right set a short hike, loading in waypoints In the backwoods, whenever you see of maps. This map set should contain may be a bit too much work or even someone unwrap their GPS for the your starting and ending points as unnecessary. However, in unfamiliar first time and insert the batteries, well as your route. Additionally, territory, loading them is very a barely audible ‘are you kidding’ you will mark waypoints along the useful. Backtracking for six tenths comment might escape your lips. To path, such as a favorite camping of a mile (one kilometer, or click) is depend on a tool you haven’t used—or spot, a scenic view, or a water stop. less disheartening than discovering may only use on this one trip—and Knowing and seeing these waypoints you followed another trail that haven’t tested can be quite dangerous. confirms you are on the right path. veered off and took you three hours Typically, there isn’t a GPS Help Your compass indicates which off course. Kiosk out in the woods with a helpful 3 (continued on page 11) An Introduction to the Use of Credit Spreads in Fair Valuation Financial Risk Management

redit, or default, risk refers to risk in derivatives is complicated by the derivatives by changes to accounting C the risk [or possibility] that fact that the future is uncertain—the principles, namely FAS157 (Fair Value the issuer of a fixed income security, derivative’s value can move in the Measurements), which have impacted [a corporate bond, for example], may company’s favor (a positive value) and how companies value their derivatives default, (i.e., the issuer will be unable out of the company’s favor (a negative used in hedging. to make timely principal and interest value) over time. The current market payments on the security.) Credit risk value of the derivative only represents The issue of fair valuation is an is gauged by quality ratings assigned the potential gain/loss today and ongoing hot topic. Given that, this by rating [agencies].” (Fabozzi F. The does not account for future changes article focuses on the choice of the handbook of fixed income securities. credit spread(s), with an overview of the mechanics used for adjusting 3rd ed. p. 33.) This risk impacts the “In light of the confusion, the fair value of hedge instruments net yield—the “credit spread”—of a practitioners have endured a corporate bond over the “risk-free” rate for both the company’s as well as number of challenges in fair of government bonds. As pointed out the counterparty’s credit. It also valuing their derivative hedge by Fabozzi, investors in corporate debt, highlights some of the implications of however, are more concerned with instruments specifically related to these credit adjustments to FAS133 changes in the “perceived” credit risk the credit adjustment component.” (Accounting for Derivative Instruments of an issuer rather than with the actual and Hedge Activities). It is simply an risk of default since the perceived in value. It is no longer safe to assume overview, and is not intended to be risk impacts the valuation of their that your hedges are secure, given the a comprehensive “white paper.” The investment through the adjustment of fact that you deal with only highly reader may be referred to other sources the credit spread. As other investors rated counterparties and are diversified for information on specific topics. anticipate a worsening situation for a among several of them. FAS133 (ASC815) Requirements corporate bond issuer, the yield they FAS133 has always required would require over the risk-free rate In light of this risk, practitioners companies to consider the increases (the credit spread widens), should be employing more creditworthiness of their hedge which lowers the fair market value they sophisticated, analytical techniques counterparties in complying with are willing to pay for the bond. Yields to value both their current and future hedge accounting principles. For / interest rates and bond prices have an exposures to account for the possibility example, Statement 133 Issue (DIG inverse relationship. of default by their counterparties. Further, many corporate users of Issue) No.G10 (Cash Flow Hedges: Corporate practitioners engaged in derivatives have been subjected to Need to Consider Possibility of Default hedging their financial risks with amendments to their ISDA agreements by the Counterparty to the Hedging over-the-counter (OTC) contracts by their counterparties with respect to Derivative) specifies that “the entity are also subject to credit risk or the credit exposure, including the addition must be aware of the counterparty’s possibility that their counterparty to of cash or other collateral requirements creditworthiness (and changes the hedge transaction—an interest based on thresholds for various credit therein) in determining the fair value rate swap, for example—may default. rating levels or other credit events, of the derivative.” Other issues, Further, corporate stakeholders have should they occur. including No.G7 (Cash Flow Hedges: become increasingly aware of this Measuring the Ineffectiveness of a risk in light of the financial crisis of Such credit exposure and suggested Cash Flow Hedge under Paragraph 2008 and the collapse or potential analyses notwithstanding, companies 30(b) When the Shortcut Method collapse of several large financial have also been impacted in their Is Not Applied), as well as No.G9 institutions. Measurement of credit financial reporting and valuation of (Cash Flow Hedges: Assuming No

(continued on page 6) 4 New Research Sheds Light on Money Fund Risk Factors Sponsored Content - Capital Advisors Group

BACKGROUND investors—and may be too often overlooked. to identify tell-tale signs that help to reveal oney fund due diligence is among Furthermore, these two risk factors can often when there is market risk. several topics du jour with be intricately related. M corporate investors. Prior to the Putting the Factors Together Reserve Primary Fund “breaking the buck” It is not difficult to argue why liquidity risk To conclude, we think our methodology in September 2008, loss of principal and management is more critical than managing presents a unique way of evaluating prime liquidity in a money market fund was barely credit risk, although both are important. money fund risk. While ratings agencies a concern for most corporate cash investors. We think the previous version of SEC Rule reviews of money market funds typically Much has occurred in the fund industry 2a-7 already did a reasonably good job in reflect current facts, our research offers a more since then, and the investing public should limiting portfolio credit risk, so much so forward looking assessment. For instance, of no longer count on the government to be that shareholders of the Reserve fund are the 169 domestic prime funds that are rated the knight in shining armor. We believe it is now expected to lose no more than 1.25% of by Moody’s, all but two are rated AAA.** now crucial that investors have due diligence principal.* On the other hand, having lost We think it’s important to look deeper. Our methods to critically evaluate the risks of access to an asset pool designed for day-to- credit scores, while derived from a rigorous money fund investing. day usage can be devastating and potentially process of converting various factors into deadly to a company if alternative liquidity is scores, convey our relative view and offer the Unfortunately, few options are available for not readily available. History shows that when investor a clearer and more convenient means the typical corporate investor. In retrospect, a fund is forced to halt redemptions, it often to compare funds. few, if any, of the traditional measures, ceases to be a going concern and enters into *Bloomberg Businessweek, Reserve Got $170 Million for $785 from credit ratings to portal reports to fund an unwinding process that may take weeks Million Lehman Debt (Update2), April 14, 2010 commentaries, proved completely effective or months. It is for this reason that our own **As of 1/1/10, as presented on Moody’s Global Managed Investments Ratings List in avoiding funds like Reserve Primary. money fund due diligence process focuses The knowledge of a particular fund’s heavily on several liquidity risk factors. characteristics such as its weighted average Specific Risk Monitoring maturity (WAM), average credit rating, and Liquidity risk can come in many forms. exposure to specific asset classes seems no Through our methodology, we find it useful to more helpful, since funds with a few similar isolate two major types of forces that may bring characteristics may still have significantly such stress onto a fund: internal and external. different risk profiles. Internal stress may come from the makeup of Lance Pan As a regular part of the investment process a fund’s investment portfolio and through the at Capital Advisors Group, we evaluate the strength of the fund sponsor and management Lance is Capital Advisors Group’s Director creditworthiness of money funds in our of Investment Research. He is responsible for team. Among factors unique to a fund assessing the risk of various asset classes in order portfolios routinely and often are faced with portfolio are its weighted average life (WAL), to safeguard the investments of Capital Advisors the same challenge. Due to our liquidity how maturities are laddered, diversification of Group’s clients. His role includes creating advanced mandate for cash portfolios, prime money non-government securities by sector, industry credit approval and surveillance procedures, funds often represent our largest credit issuing credit driven investment opinions to the and issuers, the use of complex securities, company’s trading desk, and providing credit based concern. With no suitable off-the-shelf and the risk of repurchase agreement (repo) investment strategies to Capital Advisors Group’s solutions, we set out several years ago to dealers. Additionally, a mismanaged fund portfolio management team. develop a practical, intuitive, and effective is a direct source of risk to shareholders. In Capital Advisors Group has recently introduced fund evaluation tool for ourselves. our fund assessment, we look closely at the its FundIQ money market fund research. For funds’ sponsors and their management teams more information on FundIQ please contact us What Does “Risk” Mean in a at [email protected] or call us at (617) using fundamental techniques to evaluate the 630-8100. Money Fund? manager’s resourcefulness and the sponsor’s First, it is important to understand exactly The information contained in this report has been prepared willingness to step in for contingency support. by Capital Advisors Group, Inc. (“CAG”) from outside what risks we are trying to identify, avoid or sources, which we believe to be reliable; however, we make minimize. In simple terms, the myriad of risks no representations, express or implied, as to its accuracy or External stress may come in the form of completeness. Opinions expressed herein are subject to change associated with a typical fund can be reduced systemic/macro events or shareholder risk. without notice and do not necessarily take into account the to two items: the loss of principal when a fund particular investment objectives, financial situations, or Such external factors can play a major role particular needs of all investors. This report is intended for breaks the constant dollar share price and in a fund’s risk characteristics. A run on a informational purposes only and should not be construed as the loss of liquidity when fund management single fund may result in a “contagion” of a solicitation or offer with respect to the purchase or sale of any security. CAG is under no obligation to make changes decides to halt redemptions. While credit runs on the entire family of funds due to their or updates to this report and therefore disclaims any liability risk is generally well understood and feared, interconnectedness of the securities held and should the information or opinions contained herein change or subsequently become inaccurate. Past performance is no liquidity risk often can be a larger threat to of the shareholders. In our research, we work guarantee of future results. (Credit Spreads: continued from page )4 Ineffectiveness When Critical Terms by a third party such as your both auditors and the SEC may have of the Hedging Instrument and the counterparty or other pricing service their own rules in analyzing valuations. Hedged Transaction Match in a Cash would not constitute a Level 1 value. Flow Hedge) either specify or imply • Level 2 is a calculated value based The Challenges that “the likelihood of the obligor on observable market inputs that This FV principle is not only a hot not defaulting is assessed as being are reasonably available in the topic among corporate practitioners probable.” Prior to FAS157, however, absence of quoted market prices but also has received increased focus such assessments of creditworthiness such as an interest rate swap based among the auditor community. were more qualitative vs. quantitative. on the closing Libor rate curve. Unfortunately however, there is This level covers mostO TC no established consensus on the FAS157 (ASC820) Requirements derivatives pricing / valuation. methodologies being employed among FAS157 provides principles on how the companies at this time; the consensus valuation of currently fair valued assets continues to evolve. See fasb.org for FV Level Priority / liabilities should be accomplished. more information on FAS133, FAS157, Level 1 Quoted Prices According to May 2008 FASB article and related issues as well as to confer “Some Facts about Fair Value,” the Level 2 Observable Inputs with external auditors. statement “clarifies the fair value Level 3 Unobservable Inputs objective and establishes a framework In light of the confusion, practitioners have endured a number of challenges for developing fair value estimates … • Level 3 is a calculated value based It is intended to convey to investors in fair valuing their derivative hedge on internally derived assumptions that value of an asset or liability at instruments specifically related to the / unobservable inputs such as the measurement date (current value), credit adjustment component, such as: volatility and/or other components, not the potential value of the asset • Which credit spread(s) to use— including derived forward price or liability at some future date.” Fair bond spreads, credit default swap curves or a valuation based on a value (FV) is the price that would be (CDS) spreads, or others? unique, internal model. received or paid to transfer an asset • How should the credit spread(s) be or liability in an orderly transaction The point is that FAS157 provides only employed—flat spread or spread (not in a “fire sale”) between market guidance on how the fair valuation of curve? participants at the measurement date. financial instruments that are currently • What should the credit adjustment For an asset, this may be referred to as being fair valued should take place. As be applied to—net value, net cash the “exit price,” while for a liability, the such, it requires the reporting entity flows, or all cash flows? FV may be referred to as the “transfer to include credit spreads or other • What if the credit component is price.” The FV is always from the adjustments for creditworthiness in not observable? perspective of the reporting entity. the valuations. Classification of the • What is the impact of credit exposure mitigation terms in FAS157 establishes hierarchies or FV is based on the lowest level that is “significant” to its fair value, which can contracts—collateral posting “levels” of valuation calculations, with or other margin requirements be influenced by credit adjustments if emphasis on maximizing the use of contained in a Credit Support such adjustments are significant as well observable inputs, quoted prices, or Annex (CSA) to an ISDA as unobservable, i.e., internally derived. readily available market data used in agreement? This statement has not only increased valuation models, for example. The • What is the impact to hedge volatility in financial reporting (recall the statement specifies the category for the accounting, specifically impact to financial institutions’ financial FV level based on the following criteria: effectiveness assessment and the statements amid the financial crisis), but measurement of ineffectiveness, • Level 1 is the unadjusted quoted has also caused confusion. Moreover, if the derivative is now fair valued price in liquid markets, such as the while it provides principles or guidance under a credit adjustment, but the NYSE quoted price of a stock or to fair value calculations, it does not exposure may not be? NYMEX futures price. A price dictate how to arrive at such values. On for an OTC derivative provided the other hand, it has been noted that (continued on page 12) 6 Volume 4, issue 1 • Spring/Summer 2010

Achieving Visibility to Your Liquidity Relationships, Hedges, & Counterparties

A particular county in California as some have posited, to be ”financial In Part I of “Achieving Visibility to invested heavily in Lehman Brothers weapons of mass destruction” (Buffet Your Liquidity” (Jeffery C. Treasury before Lehman’s bankruptcy—and W. Letter to Berkshire Hathaway Update. 2009. 3(1, Spring/Summer by heavily, we mean very heavily. shareholders. 2002.) Merely because 2009):1. Available from: www. By their own accounting, they had they are intended to reduce volatility StrategicTreasurer.com/Newsletter.), more exposure (over $100mm) than and not create anything approaching we discussed the heightened need for the next seven largest county or city mass destruction does not allow for increased visibility given the market governments inaction. They must be managed turbulence. We then identified the combined. thoughtfully and carefully. Handling three major steps related to preparation them properly requires using the and being able to respond, which proper tools and processes. connects to other responsibilities of Treasurers. These three steps included: Proper tools . • Achieve timely visibility to the To qualify for hedge accounting firm’s liquidity treatment, which should reduce • Assess threats to organizational volatility of the income statement While liquidity results, requires, in most cases, testing much noise • Execute rapid decisions according the hedge to see if it is likely to be has already to plan effective (which is understood to mean been made about rating agencies “able to accomplish its purpose”). The providing information far too late Part II of the series (Jeffery C. purpose of the hedge is often to reduce Achieving visibility to your liquidity, to be useful, there are few excuses the level of volatility of the identified part ii. Treasury Update. 2009. 3(2, for not having a network of advisors, risk to a particular level or within a Winter): 6. Available from: www. formal or informal, that would provide range. Tools should help in this effort. StrategicTreasurer.com/Newsletter.) early alerts and indications of what The technology tools and processes covered the assessment of threats and the market is seeing or doing. Using should support several processes impacts to an organization’s liquidity. various proxies for rating information including: hedge effectiveness testing, We examined direct and indirect areas (credit scores, credit default swaps, hedge accounting, and the matching that impacted liquidity. etc.) is, of course, prudent (to say of the hedges to the exposure. Any one nothing of appropriate diversification). of these can identify an unpleasant In this third part, we will However, investing a small amount of situation. What alerts you to the fact look at relationships, hedges, time each day or each week will allow that there was a hedge on an exposure and counterparties. For many you to have both a general sense of the as you are about to do away with the organizations, two or three of these market and some specific indications of exposure? For example, suppose you areas require careful review. We will where the market is concerned. Ignore were retiring some variable rate debt examine them in order, covering the these relationships, and you put your that had an interest rate swap on it. most salient issues. Please note that organization at greater risk. What would alert you to the fact that this article is not intended to treat the the exposure (the debt) was being issue exhaustively. Hedges (caps, collars, floors or strips, removed and was associated with a straps, straddles, swaps). hedge? Removing the exposure, but aintaining situational Hedges are often used by corporations leaving the hedge in place, will turn M awareness can prevent or limit and other organizations to reduce your attempt at minimizing volatility unpleasant outcomes. Maintaining this volatility in line with the organization’s into a ‘speculative’ transaction. Thus, type of awareness requires leveraging a risk appetite. They are not intended, you would be left exposed to volatility set of relationships. 7 (continued on page 8) (Visibility: continued from page )7 that you neither had before nor All data for counterparties is not in the on: bank balances, investments, intended to take on. same system or format. Let’s look at a hedges, and credit facilities. few simple examples the Treasurer is These features are not designed Counterparties (banks, insurance concerned about: to include customer exposures or companies, customers, vendors, etc.). • Customers. Customer master data to pull the ultimate counterparty Counterparties may be banks information shows up in different of an institutional money market that hold your accounts, custody places with different names and investment, whether used directly assets, and short term investments. different customer numbers. This is or acquired through a portal. The counterparty may even be an true whether you are working on a While the expanded capabilities institutional money market fund single ERP instance or whether you are nice, most firms will find they or all of the holdings of that fund. have a number of different accounts still have to do the work to go the Customers and vendors can both be receivable systems. This customer rest of the way. counterparties, even if they throw information must be aggregated. • Money Market Funds / off a different type of risk. Financial Various methods of aggregating Investment Portals. institutions who sit on the other side What are the information range from the of your derivative contracts are also the holdings of the institutional relatively easy level to the major- counterparties. money market fund you purchased project level. Describing the levels through a portal? Some portal Exhibit 1: Counterparty Risk and methods would fill a chapter providers and visibility vendors Dashboard shows an aggregation of in a book; however, the need to offer an easy and more current risk by counterparty. In this example, have all of this data aggregated in way to see through to the ultimate we show two banks with a stacked bar order to see total exposures is vital. holdings and counterparties. To showing exposure amounts by category. As this information is ranked by date, these offerings look at their There is a second graphic for each exposure on an aggregated basis, it universe but do not give a broader bank which shows the last two credit can then be enriched by credit and/ view of counterparty exposure. or rating information which allows default swap (CDS) rates. The CDS is The broader view must be achieved a more useful view of the data and viewed by many as a proxy for a rating. either through more manual processes, is now regarded by more firms as a This qualitative data shows the current dependent upon people, or by requirement. position and the recent trend of the deploying various levels of technology. CDS rate. This enriched data allows • Treasury-Centric Information. Treasurers must know what they can the firm to view both data sets together, Many Treasury Workstations see and what they can’t see. Then, a allowing for more refined analysis. This (TWS) have been adding process to gather this information analysis may lead to action or a more capabilities to their counterparty to ensure total visibility must be knowledgeable ‘hold’ position. risk reports. These are focused employed. This process can be managed Exhibit 1: Counterparty Risk Dashboard through a people-intensive approach, or it can use current technology. Using the phrase ‘you don’t know what you don’t know’ as an excuse not to have visibility to counterparty exposures is not a good idea. When companies begin to explore their counterparty risk as part of a visibility initiative, they are almost always surprised to discover that their exposures are significantly different than they expected. It is now possible to know what you didn’t know, if the problem is approached correctly. Craig Jeffery 8 SWIFT Benefits: Options and Considerations for Corporations Sponsored Content - Axletree Solutions

WIFT (The Society for Worldwide Financial Interbank Telecommunication) has clearly proved its value for “Corporates” S (non-financial institutions) by supplying a single, secure, standardized platform and generating many forms of cost reduction and risk mitigation, rendering an average ROI of 200 - 400% (even without counting intangible benefits). Early participants such as GE, Microsoft, Chevron, DuPont, and Novartis are now joined by somewhat smaller Corporates who use SWIFT both for international and domestic financial messaging and for a host of other value-added services. A Corporate has to make a critical decision early on regarding the mode of connectivity to SWIFT. Make this decision carefully, because reversal later on can incur substantial loss of time and money. Option A: Connect to SWIFT “Directly” (in-house architecture). Since SWIFT requires highly specialized knowledge, those who opt for “Direct” connectivity often contract Professional SWIFT Consulting services (a “SERVICE PROVIDER”). Benefits of the “Direct” option include full control / independence / no intermediate link involved. Option B: Connet to SWIFT “Indirectly” (outsource the connectivity to a SWIFT “SERVICE BUREAU”). Benefits of “Indirect” connectivity (outsourcing) include lower costs, faster time to benefit, and less distraction from the core business. To avoid an increased IT overhead, most (80%) of Corporates now choose Indirect connectivity to SWIFT.

FACTORS TO CONSIDER WHEN SELECTING A HOW AXLETREE SOLUTIONS, Inc. MATCHES UP SWIFT SERVICE BUREAU / SERVICE PROVIDER A Service Bureau must offer the same strengths as doesS WIFT: Axletree matches all criteria through separate production/backup/ Availability (99.9995%), Security, Resilience, Non-repudiation, testing/hot disaster recovery servers; independent UPSS power grids Guaranteed Delivery and backup generators: preventive monitoring of all systems; Business Continuity Planning. All are verified by SAS 70 Type II and SWIFT Audit Reports. Track Record: Tenure of Clients Axletree has never lost a Client to another Service Bureau. Specialization in SWIFT For over nine years, Axletree has been exclusively dedicated to Clients in all aspects of SWIFTNet connectivity. Resources and Qualifications Axletree has the largest Team of SWIFT-specialized staff in North America, combining SWIFT Certifications with extensive hands-on experience. Scope of hosting varies from simple connectivity to fully managed Axletree offers fully-managed, end-to-end hosting, guiding you every services step of the way to provide you with complete “Peace of Mind.” Applying SWIFT Products ensures compliance to SWIFT standards Axletree exclusively uses SWIFT products (or approved by SWIFT) to insure compatability with new SWIFT releases and upgrades. Value-added products and services The AxletreeM arketplace offers the largest selection of Value-added services, including Cash Reporting & Funds Transfers, Electronic Bank Account Management, Exceptions & Investigations, IBAN, Reconciliation, Automation of Documentary Credit, all presented under a “single window.” Location Axletree’s facilities are owned, located, and operated in the United States. With today’s interconnectivity, proximity to Client’s location is not a factor; worldwide service coverage is. Support Coverage / Time Zones Axletree offers 24 x 7 x 365 global support.

[email protected] • (732) 296 - 0001 • www.axletrees.com SWIFT and Electronic Bank Account Management Treasury Technology - SWIFT

n August 2009, we (Strategic account reporting (on account TheseM X messages provide a solid I Treasurer) wrote a blog article products, controls, and other specifics), framework and useful messaging on Bank Account Management that and account closing, electronically via standards. However, to allow for the poked fun at one common method of SWIFT. There are no “Know Your inevitable additional paperwork that Bank Account Management we have Customer” (KYC) provisions in any will be required by each financial observed, namely the Post-it® Note. of these messages. eBAM assumes an institution, it is possible to group (See http://blog.strategictreasurer. existing bank-corporate relationship a BAM message with the required com/TU/?p=26.) When SWIFT where the legal documents allowing PDF or Word documents in a file announced in their recent newsletter the electronic process to occur have archive to establish a link between the to Corporates that Electronic Bank documents and the initiating message. Account Management (eBAM) was “....44% would switch banks Additionally, there are provisions live, we started to believe that the Post- to get better service, in every eBAM message for digital it® Note and fax might finally be put standardization, and automation signatures, even though Digital ID out to pasture when it comes to bank through eBAM processes.” from SWIFT has not yet hit the street. account management tools. (Carlo How to use the digital signatures, Palmers, Issue 4 Q2 2010, Corporates already been signed. This eliminates including provisions for signing the on SWIFT, SWIFT: 7.) We hope, at the need for KYC documentation in whole document, or only part of least, that this signals the beginning of this process. The effect of eBAM is it, as well as provisions for multiple the end of the Post-it® Note method of to get rid of paper, increase control, signatures, is currently left to the account management. automate workflow, decrease time, institution and the corporate customer and standardize the process for the to decide. eBAM is a series of 15 eXtensible corporate. It also promises great Markup Language (XML) messages benefits for the bank, such as increased SWIFT has provided vital leadership that provides a framework for a straight-through-processing (STP), that should enable more rapid, corporate customer to manage account better control, less paper, lower cost, streamlined, and automated bank opening, account maintenance, and increased internal standardization. account management, but this is really only the pipeline for the communication and the standard, enabling concise communication. The key will be the products developed by the software vendors, now that there is a usable standard. We know that IdenTrust (with Bank of America), Weiland, and Speranza are working in this space, and with the recent acquisition of Speranza by Wall Street Systems (http:// www.finextra.com/News/Fullstory. aspx?newsitemid=21327), it will be interesting to see if any of the other workstation vendors decide to offer this functionality in a more robust manner than the more common basic account management capabilities.

10 Volume 4, issue 1 • Spring/Summer 2010

(Treasury Vision: continued from page )3 Finally, eBAM alone will not usually customer service agent available to true with Treasury projects which may provide the business case for a train you on its use at a moment’s have a number of critical path items corporate to join SWIFT. However, notice. What if the batteries have lost that must be done in sequence. For it may be the incremental change their charge or are defective, or the example, we must have connectivity that causes the business case to tip in GPS is defective, or it is set to a scale to the bank to pull down transaction favor of SWIFT for many corporates different from your map’s scale? Well, information before we can map all of that are managing large amounts of some Treasury professionals launch the transactions to the general ledger. bank accounts. According to a 22 out on significant journeys or projects There are often those in Treasury who February 2010 article by Finextra.com, thinking they’ll just get the hang of are willing to rush the testing and a 2009 survey of corporate Treasurers their new Treasury tools along the way. parallel activities to make up for poor (conducted by Finextra.com) said Besides the fact that survival is often planning and executive decisions made that 44% would switch banks to get an excellent motivator, this “learn- along the way which can threaten an better service, standardization, and as-you-go mentality” often falls into entire project. automation through eBAM processes. the ‘too risky’ category. Get the right Guides? We don’t need them. (Pegasystems Inc. September 2009. tools, learn how to use them, and you Exploring is fun, as there is a sense of On-boarding and electronic bank have a resource to help you either in adventure in it. When going through account management for corporate your planning or hiking along the trail—or both. uncharted territory, particularly on treasuries. White paper.) We won’t be longer trips, having an experienced shedding any tears for the demise of Route Plan. Hikers can often be lost guide along makes immeasurable the fax, and we are certain that most for days before anyone knows they are sense. Guides can help you learn which companies can find better uses for their missing. They never told anyone where mistakes to avoid and help you correct Post-it Notes. ® they were going hiking, what route the ones you’ve made, before too much they were taking, or where they would . Action: For organizations with more damage (time and/or cost) has occurred stop. This lackadaisical approach can than 100 bank accounts, it is time work when everything goes according Sidetracked. When hiking along to formalize your financial account to plan, but sometimes hikes—and your planned route, it is amazingly framework and policy. This must cover Treasury projects—don’t go according easy to get off track. You are following your banking structure, controls, and to plan. Filling out the route map a well marked trail and making good management processes. For those firms and letting people know what you are time when suddenly the trail diverges, that take some simple steps today, planning to do is extremely important. and you follow the broader path— they will realize significant financial especially if it is a bit downhill. The Critical Path Concepts. benefits and process improvements. If you need smaller, slightly uphill, spur trail—the Happily, this will set your organization three water stops on your weekend one you are supposed to follow— up for the superior process that eBAM trip, they need to be spread out in passes through your line of sight as promises as the adoption of eBAM by time. You can’t plan all three water though it is invisible. You are making banks develops. Ask your banker about stops for Friday night and expect great time on the broader path, their timeline for adopting eBAM. not to get a dehydration headache and you comment to your hiking on Saturday afternoon. Some things companions, “We should be at camp must be intentionally scheduled. by now. Hey, we aren’t supposed to You can’t speed up a pregnancy from cross a river….” After examining your nine months to one by putting nine map for a while, you determine your women on the task. Some activities current location, and you identify the are single-threaded, take time, and point of departure from your planned must be planned accordingly. For a route. Now, the uphill climb to the Ric Thompson hike this may mean we have to cross original route begins, with spirits a Sr. Technology Analyst & the river at the bridge and then hike bit dampened, but at least you are Leader of Strategic Treasurer’s making good time. Treasury Technology Practice for another hour before we arrive at In Treasury, it a campsite with water. This is just as is just as easy to get sidetracked if you 11 (continued on page 12) (Credit Spreads: continued from page )6 Approaches to Credit Adjustments More on the Use of Credit Spreads in • Overview of the impact of Although confusion exists in a Fair Valuation FAS157 on FAS133 effectiveness number of areas regarding FV, this For a more complete overview on assessments article attempts to address only a few the use of credit spreads in adjusting • Conclusion and suggested recommendations of the issues at this time, including the fair value of derivative hedge a recommendation for which instruments, the reader is referred to credit spread(s) to use and various, the complete version of this article: The basic methods for employing the Use of Credit Spreads in Fair Valuation, credit spread(s) in fair valuation. which is available for download at As mentioned, there is no single or http://www.strategictreasurer.com/ right way of calculating the credit resources/newsletter. The article David W. Stowe, CFA adjustment. As with any valuation continues with a look at the following Director & Head of Strategic Treasurer’s technique, the methodology should areas: Risk Management Practice be appropriate, logical, transparent, • Credit spreads – the alternatives defensible, consistent, and reproducible (Treasury Vision: continued from page 11) by others. Further, the process and • Credit Default swaps – defined aren’t looking at the destination as parameters should be well documented • Methods for the use of credit well as looking at your next waypoint. and disclosed in the notes to financial spreads in fair valuation – from Following the map or plan is vitally statements where required. simple to more complex important. It is easy to accomplish a large amount of work (making good time) only to find it was ineffective (not going in the right direction). Flexibility. No plan seems to remain as it was envisioned. As soon as reality is confronted, changes will likely be necessary to keep you on track to WHAT’S IMPORTANT TO TREASURY reach your overall goals. If you have Try it FREE for 30 days at the proper guides, the right tools and experience using those tools, and you iTreasurer.com/trial keep checking your maps along the way, you can be flexible while remaining Daily, Weekly and Monthly News, Analysis and Resources focused on reaching your objective. Every DAILY LATEST INTELLIGENCE: Covers a different treasury topic each day, step moves you toward your destination. including market updates, treasury management, technology, developing issues, Safely. On time. And on budget. and legal and regulatory issues. So, determine both your starting point NEWS BRIEFS: A carefully filtered collection of news articles from the financial and destination, and be sure you know press featuring issues that are likely to affect your treasury and organization. how to use the tools. Oh, enjoy the INTERNATIONAL TREASURER: the online version of the flagship newsletter hike, knowing you are well prepared. that delivers a monthly in-depth perspective on what’s important to treasury and treasury professionals, including monthly reports from The NeuGroup Peer Group meetings. RESOURCES: Hot topics at-a-glance such as the developments in OTC derivatives legislation and hedge accounting reforms, checklists and calculators to help support decisions relevant to current treasury challenges.

WEEKLY DATAPOINTS: Unique charts and graphs that highlight a weekly topic Craig Jeffery and give you the data to make a decision or change in your treasury. Founder & Managing Partner Strategic Treasurer

12 Volume 4, issue 1 • Spring/Summer 2010

Developments in Treasury Techonology

Technology Column

This column is a regular feature of Treasury hedge accounting in a closed-end quick configuration of the system and all Update and is designed to superficially explore environment. necessary follow-up rules. Reporting is a differentiator among these three systems. some of the recent developments in the Treasury Working Capital Management Tools technology space as well as offer a bit of light 2. Collection Management - Three These three great tools advance staff commentary. For some, these items may be providers currently appear to hold efficiency, risk-based collections, and news. For others, our interpretation of what is the most traction in this space, while effective working capital management. happening may provoke valuable thoughts. the use of this software is growing For mid-sized firms to the largest rapidly due to a focus on receivables multinational, at least one of these during challenging times. Collection leasing developments continue solutions should be able to meet management tools let credit and P in the Treasury Technology their collection needs if they have a collection departments prioritize and space across a wide front of services corporate client base. and product sets. Quite notably, order their work as well as follow up mergers and acquisitions have been automatically. These tools allow for a Connectivity as a Service (CaaS) prioritized (based on size or risk level) uncharacteristically quiet, with the 3. Connectivity as a Service – includes and rapid follow-up on collection exception of Wall Street System’s service bureaus and data consolidators. acquisition of Speranza in late April. activities, including calls, emails, and phone conversations. With an increase in the use of CaaS Risk • Sungard’s AG GETPAID, a (as one of the more obvious Strategic 1. FINCAD Development - FINCAD long-time leader in this space, faces Treasurer predictions and as one that continues to quietly expand their increasingly stronger challenges is now well established in the real offerings, which are delivered via two from two SaaS providers of late. service models: (See next two bullet points.) • The Excel add-in (FINCAD • D&B Collection Manager - This “Does Wall Street System’s Analytics Suite for Excel), a system targets most mid-sized to acquisition of a former long-favored option, continues larger firms. Its obviously tight partner, Speranza, signal a new to grow from an adoption integration with D&B’s credit data direction in their ‘center of the standpoint across the network, and SaaS model makes this an easy chessboard’ strategy?” delivering a multitude of financial set-up and allows them to rapidly product valuation models as an scale their customer levels. add-in for MS Excel, providing world), the clear benefits of having the flexibility of Excel for the • CreditPoint - This offering’s assistance with connecting to banks valuation of trades/hedges. capabilities seem to be focused on small- to medium-sized firms and other partners are increasingly • Over the past year, their SaaS needing an affordable collection understood, whether these benefits model options—known in management tool. are accomplished through SWIFT FINCAD’s world as Fair Value or other means. This expanded use Insight and The Perfect Hedge— Collection Manager and CreditPoint are of connectivity service providers have experienced a strong uptake the two primary SaaS provider offerings (data consolidators, which include a in users. The SaaS model is fully allowing for an extremely rapid set-up, number of banks), service bureaus, hosted and is delivered, as hosted which is primarily accomplished because etc., has relieved corporations of much models are, via the web. These the technology infrastructure is already of the thankless work they previously two models provide the ability up and running. Furthermore, the use of absorbed. Most organizations, even for fair valuation and basic the most current technology facilitates a those preferring to do everything 13 (continued on page 14) (Technology: continued from page 13) themselves, find CaaS providers to The Progression of Visibility Tools when all the data sits within the be far better suited for this task. We (Counterparty Exposure and Risk Treasury workstation. The challenge see continued certification of service Management) comes when the data sits in different bureaus as outsourcing providers, with As companies endeavor to meet the locations. This data needs to be fed both Axletree and BankServ possessing increasing demands to achieve better in and then must be normalized or SAS 70 Type II certification for their visibility, the information challenges modified. The ultimate solution for data center and processes. We believe all present themselves in sequence. visibility across a number of fronts service bureaus and data consolidators, In achieving better visibility to oftentimes will contain some second over the next 12-18 months, will follow counterparty risk, for example, we find generation BI tools. suit as a defensive requirement. This commonality in approaches to solve Craig Jeffery follows the adoption of SAS 70 Type II the emergent information challenges. certification with other types of service Treasury groups seem to respond in providers such as Treasury workstations a manner that demonstrates a fairly STRATEGIC TREASURER using the Software as a Service (SaaS) consistent methodology as they step is recognized as the leading delivery model. through the options. provider of advice and implementation assistance 1. Companies start out with roughly in treasury and risk Forecasting handled spreadsheets, trying to management technologies. 4. Bottomline Technologies has rolled gather information and data from out an interesting tool set called multiple sources to show exposures C-SeriesTM, which currently has two to counterparties. Our practice areas include: separate modules, C-SeriesTM Cash 2. Outside data entered into Reporting and C-SeriesTM Wires. TREASURY AUTOMATION databases and spreadsheets requires Bottomline also has plans for more • Treasury Optics Treasury to continue refreshing • Treasury Workstation modules in this product line, with each this data. It often resides in (Client server, ASP) being an individual module capable disparate databases with different • Risk Management of standing on its own. C-SeriesTM formats and must be consolidated • Reconciliation Cash Reporting is an API for Excel • Bank Account to show that exposure. combined with other database services Administration to provide a better look-through for 3. First generation BI tools begin to Financial Risk receipts and disbursement forecasting. be viewed and deployed to pull and Management C-SeriesTM leverages SWIFT’s Alliance gather this data. As changes are • Risk Management Lite functionality to access bank data required, the recursive process of Framework and other database tools (SQL) to first generation BI tools gives way • FAS133 Assistance interrogate internal ERP information. to second generation BI tools. TREASURY These tools enable C-SeriesTM Cash 4. Second generation BI tools MANAGEMENT Reporting to connect directly, in combined with enriched • Treasury Assessment/ view mode, with accounts payable or Process Reviews data are helping firms answer accounts receivable data and track the • Efficiency/Controls the questions, “Where is my actual status of what has been paid, exposure? What’s the value of WORKING CAPITAL received, or disbursed by the bank. This that? What directions are my • WC Optimization can then be compared to the historical counterparties heading in? How • Order-to-Pay & Order- forecast, enabling additional clarity for to-Collect do I do additional analysis as the the next forecast. This system is not a demands for reporting change?” Treasury Management System, but it does take advantage of some good data A number of Treasury workstations Practical Advice. connectivity capabilities to streamline have added features for counterparty Trusted Solutions. portions of the forecasting process. risk which tend to work very well Measurable Results.

14 Volume 4, issue 1 • Spring/Summer 2010

Get to Strategic Treasury Conferences 2010 Treasurer's Groups! Strategic Treasurer has created several New York Cash Exchange groups dedicated to being terrific June 2-4, 2010 resources for members of the Treasury New York profession through discussions, news, networking, and information. Current Alexander Hamilton Awards groups include: October 28-29, 2010 New York Treasury Videos on the Web • Treasury & Risk Technology Strategic Treasurer’s website contains a video viewer • Working Capital & Supply Chain The UNC Treasury allowing you easy access to videos on specific topics Finance Management Program within various Treasury categories. Topics include: October 10-13, 2010 Float, Positive Payment, Working Capital, Account • Treasury Resiliency Chapel Hill, North Carolina Analysis, Remote Deposit Capture, etc. More videos are planned for 2010, so check back often. • Treasury Government SIBOS • Treasury Non-Profit October 25-29, 2010 www.StrategicTreasurer.com/Videos Amsterdam Connect to Strategic Treasurer’s consultants, learn about these groups, and Practical Advice. AFP Annual Conference ‘Link In’ by visiting: Trusted Solutions. November 7-10, 2010 www.StrategicTreasurer.com/LinkedIn San Antonio Measurable Results. © Copyright 2010, Strategic Treasurer

Letter to Readers

We hope you enjoyed this issue of the Treasury Update If you aren’t feeling more pressure to manage risks, newsletter! What began four years ago as a four page drive efficiency, and improve visibility, it is likely you newsletter with a small distribution has expanded to 16 aren’t working in finance. From emerging risks with pages with thousands of readers around the world. Thank counterparties, instruments, and countries, simply you for your help in making this newsletter better with each maintaining the status quo puts your organization at issue. We try hard to deliver useful and timeless content risk. As consultants in Treasury, we work with our clients without giving away all of our secrets. to solve their old and newly emerging issues gracefully. Readers of past issues will notice that, with the expansion If we can be of any service, or if you just want to discuss of the magazine, there are a few ads and some excellent your situation, please contact us at +1 678.466-2220 (North sponsored articles. We are delighted that other Treasury America) or +44 (0) 20 3178 8705 (Europe). I would be solution providers recognize the value of this newsletter; like happy to take your call directly at +1 678.466-2222 or email them, we believe it has significant value for our readers. at [email protected].

Strategic Treasurer is a Treasury consulting firm with Until then, our North American office in Atlanta and our Western European office inL ondon. We stand ready to advise and help corporations, government entities, banks, and technology firms meet their Treasury and business goals Craig A. Jeffery, managing partner through our consulting and outsourcing services. On the Strategic Treasurer, LLC adjacent page, you can see our four main practice areas for corporations: Cash/Treasury Management, Working P.S. See our new blog location: Capital Management, Financial Risk Management, and blog.strategictreasurer.com Treasury Technology.

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