11-06-2013, 11:18 AM
Corporate Treasury Technology: An Overview
Kelvin Walton, gtnews - 31 Oct 2013
This article, first of a series, explores the nature and benefits of various applications of technology in today’s corporate treasury. The series is centred on the evolving role of the treasury management system (TMS), which may be defined as ‘a technology system that acts as a central control hub, processing engine and reporting tool for corporate treasury cash and risk management and treasury accounting activities’.
The series will examine different aspects of the interaction of technology and corporate treasury management, including the relationship of the TMS with complementary technologies such as bank reporting systems, enterprise resource planning (ERP); market data feeds, dealing portals and confirmation management services, and the all-important internal communications with subsidiary networks.
It will review the key factors generally used to justify investments in treasury technology, such as control, cash and risk visibility, regulatory compliance and management reporting. The series will show how well-chosen applied technology can liberate treasury departments from repetitive, error-prone and effectively unproductive drudgery, and free valuable human resources to focus on value-adding professional activities.
Treasury technology investment has been buoyant ever since the 2008 global financial crisis. Increasingly, mid-range corporates are more likely to organise treasury departments and acquire supporting technology, wherever cost justification is found for enhancing cash and risk management quality.
A general rule for this series is that specific vendors and solutions will not be identified. This function is covered in the annual ‘gtnews TMS buyers’ guide’. Executives of entry level treasuries will also communicate with local and regional treasury associations, their corporate peer group and with specialist analysts and consultants to find out more specifics.
This initial article focuses on various common interactions of technology with different elements of this process, to provide a high level overview of the different ways in which technology can support treasury management in its core daily process, as outlined here:
![[Image: tms.png]](http://lucky.myftp.org:8181/pics/news/tms.png)
Download Bank Positions
The organisation’s bank cash position is based on the collection of bank balance and transaction statements that takes place early on in treasury’s time zone.
The role of the TMS is to coordinate, collect and consolidate information supplied by the organisation’s cash management banks; an operation often complicated by the array of different bank reporting systems that are found. These can range from contemporary web-based solutions and SWIFT messaging to older technology such as bank workstations. The key role of the TMS is to schedule and automate the various downloads in a standardised manner, and provide control information to verify that the required reports have been successfully retrieved. The effective TMS solution schedules and coordinates the process to complete it before the start of the working day.
Reconcile Bank Positions
TMS reconciliation processes provide an essential quality and accuracy control on the reported bank position, detecting significant errors before they are finalised into the cash position. In outline, the reported actual bank transactions are checked against today’s expected flows held in the TMS’s cash book.
TMS reconciliation tolerances are typically set up so that routine small differences, such as the charging of bank fees, are highlighted but do not hold back the cash positioning process unless significant. The key purpose of reconciliation is to detect substantial differences that would materially impact the accuracy of the cash position, and would cause significant errors if they were to be used as the basis for subsequent dealing operations. Stand-alone reconciliation offerings are available for organisations which need to supplement their treasury technology for this purpose.
Cash Position Construction
The multicurrency cash position is automatically constructed by the TMS by combining the reconciled bank position with the maturing flows of FX and money market deals recorded in the TMS database. The TMS consolidates today’s requirements for cash and surpluses of cash across the organisation. At this stage, the treasury department has the information needed to take the day’s dealing decisions, but what happens next and how it happens depends on specific corporate structure and treasury policy.
There are multiple potential technology inputs that may be relevant to particular cases; the TMS will be set up to manage and coordinate these and to generate the necessary reporting so that the treasury team has the information base needed for determining and initiating appropriate actions.
Most significantly for centralised treasuries and in-house banks (IHBs), subsidiaries’ cash and risk management needs need to be imported and consolidated into the action plan. The information may be transmitted via web based TMS modules, and other means. Subsidiaries’ inputs may be broadly classified into requests for funding and for investing surplus cash, hedging requests to cover foreign exchange (FX) and commodity exposures, payment requests for suppliers and other creditors, and cash forecasts. They may also relate to other activities, such as netting and trade finance. The TMS acts as the communications hub for this function, verifying and consolidating the incoming information.
Cash Forecasting
Many treasuries will additionally use the cash forecast to plan and execute dealing activities to accommodate future requirements – typically, although not necessarily, out to one week in the future depending on policy and forecast dependability. Cash forecasts may be compiled by TMS modules or by specialist stand-alone applications.
The forecast construction process may include input from the corporate ERP or accounting systems of payable and receivable information, typically consolidated in the data integration as summary totals for each value date and currency. Quite often, spreadsheet-based forecasting solutions are used, because of the operational complexities frequently encountered in the implementation of forecasting - still a challenging area for treasury technology.
An alternative or additional approach to forecasting is taken by many North American treasuries, where statistical and history-based forecast approaches may be employed. The treasury technology is central to the substantial data management and computation required to support such methods.
Dealing
The first stage of the dealing process involves the cash movements that can be made internally to fund shortfalls in the organisation without recourse to external dealing. Cash movements may take place through IHB operations automated by the TMS. The available or required cash will reflect the results of notional or physical cash pooling operations, and may involve TMS functionality to direct or validate banks’ actions and calculations, depending on the IHB’s detailed mandate.
The dealing requirements are also a function of any multilateral netting operations, typically performed on a monthly basis via the TMS or by a specialist third party system. The results are reflected as payments and receipts in the functional currency of each participating subsidiary. Netting operations may be extended to external counterparties such as suppliers. The TMS process may include an analysis of the organisation’s FX exposure; this may alternatively be constructed by an external specialist system.
The required result is an analysis clearly showing the exposures, borrowing needs and investment surpluses to be managed. The TMS will have consolidated the cash position to reflect the day’s movements, combined with the import and analysis of the organisation’s requirements for treasury dealing activity.
At this stage, treasurers may use TMS or third party risk management tools, to evaluate the theoretical impact of different deals or strategies before executing in the market; such decision support functionality often requires a formidable combination of logic and computing power. Risk management analysis requires that the underlying system be served with current market rates, prices and volatilities, so interfacing with a market data source is required here, as well as for subsequent accounting and management reporting purposes.
The subsequent actions will involve borrowings, including facility drawdowns, investments, FX swaps (where these provide cost effective funding and investment alternatives) and FX and commodity hedging.
The most advanced treasury dealing workflows involve an intimate interaction between the TMS and a range of complementary third party systems, combined with the application of treasury policy to ensure (as far as possible) that operations remain compliant with the mandates authorised by corporate finance management.
A substantial volume of treasury FX and money market dealing activity takes place through the agency of a third party electronic trading portal or platform. Such offerings combine the benefits of best available price execution, together with appropriate back office administrative follow up. The interaction between TMS and dealing service requires a dynamic two-way interface. The TMS exports the parameters of the deal, and the TMS database is subsequently automatically updated with execution details fed back by the service. The process should accommodate management of counterparty limits as an essential element of risk management.
Deals transacted by telephone are either entered manually or imported into the TMS, so all deals enter the treasury settlement workflow regardless of execution method. The TMS monitors each deal against treasury policy, and reports all exceptions detected against pre-defined conditions, such as limit breaches of all kinds. Policy documentation held within the TMS provides an essential information source for treasury dealers and the TMS will update the FX and other positions in real time, enabling dealers and their management to monitor progress against the day’s objectives.
Confirmations
Interacting with electronic confirmation management services is another crucial treasury technology process. The TMS formats and exports electronic confirmation messages, which the service matches against information received from the deal counterparty. The information fed back to the TMS either indicates that a match has been verified, or provides information about mismatches so these can be researched, necessary corrections made and the process repeated. Independent automated confirmation matching represents best practice in the control of the treasury dealing workflow, and a successful match can act as a switch to open the settlement gate.
The print or otherwise generate confirmations that are not accommodated by an electronic service. A manual verification against the counterparty’s confirmation is needed to retain control.
Payments
TMSs include payment export processes, which are heavily secured in terms of the permissions, validations and authorisations that must be correctly performed before payments are exported to the external banking system. As with statement imports, payments management can involve interactions with multiple bank technologies, or it may be standardised using SWIFT. The essential role of the TMS is to create payment messages in the required format, and manage them according to the security and control dictates of treasury policy.
TMSs are used to varying extents to manage commercial payments and wires. Primarily this is a function of its capability to manage large volumes of bulk payments, as is needed in some corporations’ IHBs and payment factories. A specialist bulk payment system may be used as a standardised channel to manage all the organisation’s payments, where the TMS cannot accommodate high volume requirements. In such cases, the TMS simply exports its payments, and there may be a status feedback to control the process.
Regulations and Controls
TMSs support robust and controlled treasury operations. Often a TMS project secures authorisation and budgeting in response to a crisis generated by an adverse audit report, highlighting unacceptable levels of financial and operational risk in treasury.
As noted earlier, a key element of control is the advanced TMS capability of holding and enforcing treasury policy. TMS audit trails track all events occurring in the TMS database, thus providing the means for alerting urgent issues to management, and for generating the required reporting that provides independent proof that treasury is indeed operating within the boundaries of policy.
Regulatory compliance demands on treasury operations grow more demanding each year, and TMSs provide a convenient means for transparent, efficient compliance with legislation and regulation such as the US Sarbanes-Oxley Act (SOX), International Financial Reporting Standards (IFRS), the European Market Infrastructure Regulation (EMIR) and the Foreign Bank Account Report (FBAR).
Treasury Accounting
Historically, the TMS has supported accounting requirements to varying degrees. All modern systems include functionality to perform cash flow-based and accrual accounting, and to produce robust accounting records such as balance sheets and profit and loss (P&L) statements via TMS nominal ledger functionality. A virtually universal technology feature of treasury accounting is the export of journal entries (in summary or detail) to corporate ERP and accounting systems.
Reporting
A key benefit of a TMS is the facility its database provides for generating a practically unlimited set of operational and management treasury reporting; the storage and manipulation of data are classic bases for the use of technology in business, and the power and flexibility of reporting facilities enable treasurers and their management to enjoy faster, more complete and more penetrating analysis than ever.
Both internal and third party tools are used to build reports, and systems generally have intuitive ad-hoc report building tools that are user friendly enough for use by all levels of treasury personnel. Technology provides the means to generate timely and dependable management reporting on treasury activity, positions, risks and results without extensive additional team efforts.
A common technology development is the adoption of a specific set of treasury key performance indicators (KPIs) to provide objective analysis and management reporting of treasury activity against pre-defined standards and benchmarks. An example is an analysis of the variance between subsidiaries’ cash forecasts and actual cash flows, which may be used to set objectives and measure performance as a group effort to improve forecast quality.
TMSs may be interfaced with management reporting tools such as consolidation systems, which some organisations use to provide an enterprise view of corporate positions and risks. The web provides an excellent medium for effortlessly communicating all kinds of reports to a global network of corporate subsidiaries; including deal confirmations, external and in-house bank reports, position and risk analysis and forecast performance.
Conclusion
Forthcoming articles will explain and analyse the various treasury technology applications outlined in more detail, for anyone who is seeking to understand how technology enhancement could help their organisation. They will demystify technical jargon; explain the potential benefits that can be achieved at all levels of treasury evolution, organisation and sophistication, and aim to help treasurers make better informed and hence more effective technology decisions.
Kelvin Walton, gtnews - 31 Oct 2013
This article, first of a series, explores the nature and benefits of various applications of technology in today’s corporate treasury. The series is centred on the evolving role of the treasury management system (TMS), which may be defined as ‘a technology system that acts as a central control hub, processing engine and reporting tool for corporate treasury cash and risk management and treasury accounting activities’.
The series will examine different aspects of the interaction of technology and corporate treasury management, including the relationship of the TMS with complementary technologies such as bank reporting systems, enterprise resource planning (ERP); market data feeds, dealing portals and confirmation management services, and the all-important internal communications with subsidiary networks.
It will review the key factors generally used to justify investments in treasury technology, such as control, cash and risk visibility, regulatory compliance and management reporting. The series will show how well-chosen applied technology can liberate treasury departments from repetitive, error-prone and effectively unproductive drudgery, and free valuable human resources to focus on value-adding professional activities.
Treasury technology investment has been buoyant ever since the 2008 global financial crisis. Increasingly, mid-range corporates are more likely to organise treasury departments and acquire supporting technology, wherever cost justification is found for enhancing cash and risk management quality.
A general rule for this series is that specific vendors and solutions will not be identified. This function is covered in the annual ‘gtnews TMS buyers’ guide’. Executives of entry level treasuries will also communicate with local and regional treasury associations, their corporate peer group and with specialist analysts and consultants to find out more specifics.
This initial article focuses on various common interactions of technology with different elements of this process, to provide a high level overview of the different ways in which technology can support treasury management in its core daily process, as outlined here:
Download Bank Positions
The organisation’s bank cash position is based on the collection of bank balance and transaction statements that takes place early on in treasury’s time zone.
The role of the TMS is to coordinate, collect and consolidate information supplied by the organisation’s cash management banks; an operation often complicated by the array of different bank reporting systems that are found. These can range from contemporary web-based solutions and SWIFT messaging to older technology such as bank workstations. The key role of the TMS is to schedule and automate the various downloads in a standardised manner, and provide control information to verify that the required reports have been successfully retrieved. The effective TMS solution schedules and coordinates the process to complete it before the start of the working day.
Reconcile Bank Positions
TMS reconciliation processes provide an essential quality and accuracy control on the reported bank position, detecting significant errors before they are finalised into the cash position. In outline, the reported actual bank transactions are checked against today’s expected flows held in the TMS’s cash book.
TMS reconciliation tolerances are typically set up so that routine small differences, such as the charging of bank fees, are highlighted but do not hold back the cash positioning process unless significant. The key purpose of reconciliation is to detect substantial differences that would materially impact the accuracy of the cash position, and would cause significant errors if they were to be used as the basis for subsequent dealing operations. Stand-alone reconciliation offerings are available for organisations which need to supplement their treasury technology for this purpose.
Cash Position Construction
The multicurrency cash position is automatically constructed by the TMS by combining the reconciled bank position with the maturing flows of FX and money market deals recorded in the TMS database. The TMS consolidates today’s requirements for cash and surpluses of cash across the organisation. At this stage, the treasury department has the information needed to take the day’s dealing decisions, but what happens next and how it happens depends on specific corporate structure and treasury policy.
There are multiple potential technology inputs that may be relevant to particular cases; the TMS will be set up to manage and coordinate these and to generate the necessary reporting so that the treasury team has the information base needed for determining and initiating appropriate actions.
Most significantly for centralised treasuries and in-house banks (IHBs), subsidiaries’ cash and risk management needs need to be imported and consolidated into the action plan. The information may be transmitted via web based TMS modules, and other means. Subsidiaries’ inputs may be broadly classified into requests for funding and for investing surplus cash, hedging requests to cover foreign exchange (FX) and commodity exposures, payment requests for suppliers and other creditors, and cash forecasts. They may also relate to other activities, such as netting and trade finance. The TMS acts as the communications hub for this function, verifying and consolidating the incoming information.
Cash Forecasting
Many treasuries will additionally use the cash forecast to plan and execute dealing activities to accommodate future requirements – typically, although not necessarily, out to one week in the future depending on policy and forecast dependability. Cash forecasts may be compiled by TMS modules or by specialist stand-alone applications.
The forecast construction process may include input from the corporate ERP or accounting systems of payable and receivable information, typically consolidated in the data integration as summary totals for each value date and currency. Quite often, spreadsheet-based forecasting solutions are used, because of the operational complexities frequently encountered in the implementation of forecasting - still a challenging area for treasury technology.
An alternative or additional approach to forecasting is taken by many North American treasuries, where statistical and history-based forecast approaches may be employed. The treasury technology is central to the substantial data management and computation required to support such methods.
Dealing
The first stage of the dealing process involves the cash movements that can be made internally to fund shortfalls in the organisation without recourse to external dealing. Cash movements may take place through IHB operations automated by the TMS. The available or required cash will reflect the results of notional or physical cash pooling operations, and may involve TMS functionality to direct or validate banks’ actions and calculations, depending on the IHB’s detailed mandate.
The dealing requirements are also a function of any multilateral netting operations, typically performed on a monthly basis via the TMS or by a specialist third party system. The results are reflected as payments and receipts in the functional currency of each participating subsidiary. Netting operations may be extended to external counterparties such as suppliers. The TMS process may include an analysis of the organisation’s FX exposure; this may alternatively be constructed by an external specialist system.
The required result is an analysis clearly showing the exposures, borrowing needs and investment surpluses to be managed. The TMS will have consolidated the cash position to reflect the day’s movements, combined with the import and analysis of the organisation’s requirements for treasury dealing activity.
At this stage, treasurers may use TMS or third party risk management tools, to evaluate the theoretical impact of different deals or strategies before executing in the market; such decision support functionality often requires a formidable combination of logic and computing power. Risk management analysis requires that the underlying system be served with current market rates, prices and volatilities, so interfacing with a market data source is required here, as well as for subsequent accounting and management reporting purposes.
The subsequent actions will involve borrowings, including facility drawdowns, investments, FX swaps (where these provide cost effective funding and investment alternatives) and FX and commodity hedging.
The most advanced treasury dealing workflows involve an intimate interaction between the TMS and a range of complementary third party systems, combined with the application of treasury policy to ensure (as far as possible) that operations remain compliant with the mandates authorised by corporate finance management.
A substantial volume of treasury FX and money market dealing activity takes place through the agency of a third party electronic trading portal or platform. Such offerings combine the benefits of best available price execution, together with appropriate back office administrative follow up. The interaction between TMS and dealing service requires a dynamic two-way interface. The TMS exports the parameters of the deal, and the TMS database is subsequently automatically updated with execution details fed back by the service. The process should accommodate management of counterparty limits as an essential element of risk management.
Deals transacted by telephone are either entered manually or imported into the TMS, so all deals enter the treasury settlement workflow regardless of execution method. The TMS monitors each deal against treasury policy, and reports all exceptions detected against pre-defined conditions, such as limit breaches of all kinds. Policy documentation held within the TMS provides an essential information source for treasury dealers and the TMS will update the FX and other positions in real time, enabling dealers and their management to monitor progress against the day’s objectives.
Confirmations
Interacting with electronic confirmation management services is another crucial treasury technology process. The TMS formats and exports electronic confirmation messages, which the service matches against information received from the deal counterparty. The information fed back to the TMS either indicates that a match has been verified, or provides information about mismatches so these can be researched, necessary corrections made and the process repeated. Independent automated confirmation matching represents best practice in the control of the treasury dealing workflow, and a successful match can act as a switch to open the settlement gate.
The print or otherwise generate confirmations that are not accommodated by an electronic service. A manual verification against the counterparty’s confirmation is needed to retain control.
Payments
TMSs include payment export processes, which are heavily secured in terms of the permissions, validations and authorisations that must be correctly performed before payments are exported to the external banking system. As with statement imports, payments management can involve interactions with multiple bank technologies, or it may be standardised using SWIFT. The essential role of the TMS is to create payment messages in the required format, and manage them according to the security and control dictates of treasury policy.
TMSs are used to varying extents to manage commercial payments and wires. Primarily this is a function of its capability to manage large volumes of bulk payments, as is needed in some corporations’ IHBs and payment factories. A specialist bulk payment system may be used as a standardised channel to manage all the organisation’s payments, where the TMS cannot accommodate high volume requirements. In such cases, the TMS simply exports its payments, and there may be a status feedback to control the process.
Regulations and Controls
TMSs support robust and controlled treasury operations. Often a TMS project secures authorisation and budgeting in response to a crisis generated by an adverse audit report, highlighting unacceptable levels of financial and operational risk in treasury.
As noted earlier, a key element of control is the advanced TMS capability of holding and enforcing treasury policy. TMS audit trails track all events occurring in the TMS database, thus providing the means for alerting urgent issues to management, and for generating the required reporting that provides independent proof that treasury is indeed operating within the boundaries of policy.
Regulatory compliance demands on treasury operations grow more demanding each year, and TMSs provide a convenient means for transparent, efficient compliance with legislation and regulation such as the US Sarbanes-Oxley Act (SOX), International Financial Reporting Standards (IFRS), the European Market Infrastructure Regulation (EMIR) and the Foreign Bank Account Report (FBAR).
Treasury Accounting
Historically, the TMS has supported accounting requirements to varying degrees. All modern systems include functionality to perform cash flow-based and accrual accounting, and to produce robust accounting records such as balance sheets and profit and loss (P&L) statements via TMS nominal ledger functionality. A virtually universal technology feature of treasury accounting is the export of journal entries (in summary or detail) to corporate ERP and accounting systems.
Reporting
A key benefit of a TMS is the facility its database provides for generating a practically unlimited set of operational and management treasury reporting; the storage and manipulation of data are classic bases for the use of technology in business, and the power and flexibility of reporting facilities enable treasurers and their management to enjoy faster, more complete and more penetrating analysis than ever.
Both internal and third party tools are used to build reports, and systems generally have intuitive ad-hoc report building tools that are user friendly enough for use by all levels of treasury personnel. Technology provides the means to generate timely and dependable management reporting on treasury activity, positions, risks and results without extensive additional team efforts.
A common technology development is the adoption of a specific set of treasury key performance indicators (KPIs) to provide objective analysis and management reporting of treasury activity against pre-defined standards and benchmarks. An example is an analysis of the variance between subsidiaries’ cash forecasts and actual cash flows, which may be used to set objectives and measure performance as a group effort to improve forecast quality.
TMSs may be interfaced with management reporting tools such as consolidation systems, which some organisations use to provide an enterprise view of corporate positions and risks. The web provides an excellent medium for effortlessly communicating all kinds of reports to a global network of corporate subsidiaries; including deal confirmations, external and in-house bank reports, position and risk analysis and forecast performance.
Conclusion
Forthcoming articles will explain and analyse the various treasury technology applications outlined in more detail, for anyone who is seeking to understand how technology enhancement could help their organisation. They will demystify technical jargon; explain the potential benefits that can be achieved at all levels of treasury evolution, organisation and sophistication, and aim to help treasurers make better informed and hence more effective technology decisions.