AFP Blogs

Do you take every expense into account when performing a cost analysis? That’s the key step when deciding which electronic payments process to implement, says corporate treasury consultant Mark Krawcyk, CTP. Overlooking expenses leads corporate treasury professionals to underestimate the true savings they can realize on e-payments. “For example, in your cost analysis you may forget to identify the time it costs your mainframe to run an accounts payable report, or the individual time it takes to process a check,” says Krawczyk.

A two-time member of AFP’s Board of Directors, and a faculty member for the Graduate School of Banking at Louisiana State University, Krawczyk will lead AFP’s e-payments seminar, November 4 and 5, in Atlanta. The seminar is approved for up to 11 CTP/CCM Credits and 11 CPE Credits. Learn more here.

Learn to:
• Use basic concepts and terminology related to electronic payment collections and disbursements
• Recognize the most popular types of non-paper-based payment instruments, their formats and mechanisms
• Identify how each payment type is originated and settled and the participants involved
• Consider speed, finality, remittance data, transaction costs, limitations and risk when selecting payment mechanisms

Take-aways:
• List of resources and references for payments and payments system issues

Topics covered:
• Payments Systems Concepts
• Governing Laws and Regulations
• FedWire, CHIPS, TARGET
• ACH
• Check Conversion
• Card Payments
• E-Payments Risk

How often do you leave your office and check in with your treasury and finance staff? How often do you break bread with them?

John J. Tus, vice president and treasurer with Honeywell, says he spends 90 percent of his time meeting with staff. But he insists he isn’t micro-managing.

“I’m finding out what they’re doing, their problems, checking the data as it calls up,” he says. “I think it helps people make decisions because the decisions aren’t being made in a vacuum. Fostering that collaborative culture not only helps with getting to the right answer, it also provides people with a developmental opportunity because they can see how the decision is made.”

If, for example, the data shows s an unexpected cash flow shortage, Tus visits the staff member with oversight of this area to discuss the implications for treasury and the company bottom line. Note the tone of the visit — it’s collaborative, not accusatory. Tus wants to work with the staffer to figure out a solution, not assign blame.

Because Tus is constantly visiting with staff, larger group meetings aren’t necessary, so he says he still has time to return to his office and focus on big-picture items like acquistion funding.

As for lunch, Tus eats with roughly five to 10 treasury staff at Honeywell headquarters every day (Honeywell has 29 treasury staff globally). Lunch topics aren’t necessarily business-related. “It’s a partnership,” Tus explains. “The ideal model is a partnership between the corporation and the person, and I want to maximize that relationship.”

Tus and Craig Jeffery, managing partner with Strategic Treasury, will host “Seven Keys to Building a Resilient Treasury,” October 29, 3:30 ET. Their 60-minute webinar will tackle risk, transparency, visibility, automation, staff, and more. This webinar has been approved for CTP/CCM and CPE credits. For more information on obtaining CE credits by participating in AFP webinars, please view the re-certifictation requirements.

The lesson corporate treasury learned from the current financial crisis: be resilient. And the key to building a resilient treasury, says Craig Jeffery, is preparing for predictable and unpredictable events.

Of the latter, says Jeffery, managing partner with Strategic Treasurer, it’s “patently not correct” that corporate treasury cannot prepare for unpredictable events. “You can’t prepare for detailed action steps,” he says, “but there are certainly things you can do to put yourselves in position to be resilient.” Steps include creating a vision and operating model for your treasury team, maintaining good visibility throughout the organization, and building a strong network of advisors that you can lean on “when things are going crazy.”

Jeffery and John J. Tus, vice president and treasurer, Honeywell International, Inc., will address this topic when they host “Seven Keys to Building a Resilient Treasury,” October 29, 3:30 ET. The 60-minute webinar will tackle risk, transparency, visibility, automation, staff and more. This webinar has been approved for CTP/CCM and CPE credits. For more information on obtaining CE credits by participating in AFP webinars, please view the re-certifictation requirements.

Global Capital Markets

The U.K. raised 7 billion pounds ($11.6 billion) from its sale of 50-year bonds, the longest- dated securities issued by a European government this year.

The Federal Deposit Insurance Corp. will end a debt-guarantee program and offer emergency backing for bond sales as the agency winds down a financing option that covered billions of dollars in bank borrowing. The FDIC board unanimously approved letting the program, which the agency said guaranteed $309.4 billion in outstanding debt as of mid-October, expire Oct. 31.

Citigroup Inc., sold $5 billion of debt backed by the Federal Deposit Insurance Corp. before the government-guarantee program expires Oct. 31.

Yields on junk bonds narrowed 2 basis points relative to similar-maturity Treasuries to 767 basis points, the tightest since July 25, 2008,

JPMorgan sold $1 billion of 30-year trust preferred securities in its first sale of such debt in more than a year,

Mexico sold $290 million in catastrophe bonds, becoming the first country to use a World Bank program that passes the cost of natural disasters to investors.

State Bank of India Ltd. raised $750 million from the country’s first so-called benchmark dollar bond sale in almost three years after receiving investor bids for more than $5 billion of notes.

Rite Aid Corp., and satellite-communications provider Viasat Inc. led a 19.2 percent rise in high-yield, high-risk bond sales this week as borrowing costs fell to the lowest since January 2008 on investor optimism that defaults have peaked.

The steepest equity market rally since the Great Depression is turning 2009 into the worst year in a decade for convertible bond sales as executives conclude the cost of the securities is too high.

U.S. Treasuries

Treasuries fell as the U.S. announced plans to sell a record $123 billion of notes and inflation-protected debt next week.

Commercial Paper Update

The U.S. CP market expanded for a 10th straight week Federal Reserve data showed on Thursday. For the week ended Oct. 21, the size of the U.S. CP market rose by $39.9 billion to $1.366 trillion outstanding, from $1.326 trillion the previous week.

The overall U.S. CP market peaked at about $2.2 trillion outstanding in August 2007 before being dramatically eroded in the credit crisis.

Asset-backed CP outstanding rose by $5.9 billion after a rise of $11.3 billion the previous week. U.S. asset-backed CP outstanding rose to $548.6 billion in the latest week from $542.7 billion the previous week.

Unsecured financial issuance outstanding rose $27.9 billion after a rise of $22.2 billion the previous week

LIBOR

Dollar borrowing costs between banks in London declined to the cheapest level on record, while yen rates weakened to a three-year low.

The London interbank offered rate, or Libor, for dollar loans fell to a record 0.28219 percent, according to the British Bankers’ Association. The cost to borrow in dollars has stayed below the rate for the yen since Aug. 24, with the spread now 4.5 basis points.

The Libor-OIS spread, a gauge of bank reluctance to lend, widened 1 basis point to 12 basis points.

The rate for three-month yen loans dropped to 0.32750 percent, the lowest level since June 19, 2006, according to the British Bankers’ Association.

The Tokyo three-month interbank offered rate, or Tibor, for yen deposits abroad was unchanged at 0.52769 percent, the lowest level since December 2006, according to the Japanese Bankers Association.

Swaps

Interest-rate swap spreads were mixed as yields rose on U.S. Treasuries and the rate banks charge for dollar loans in London remained in a month long pattern of little daily change.

The difference between the rate to exchange floating- for fixed-interest payments and Treasury yields for two years, known as the two-year swap spread, widened 0.13 basis point to 36.06 basis points. Swap spreads are based in part on expectations for the London interbank offered rate, or Libor, and are used as a gauge of investor perceptions of credit risk.

Harvard University’s failed bet that interest rates would rise cost the world’s richest school at least $500 million in payments to escape derivatives that backfired.

Tennessee limited the use of interest-rate swaps, which emerged in the 1990s as a way to lower borrowing costs, after several towns and counties in the state, were burned by them in last year’s credit crisis.

New Jersey taxpayers are sending almost $1 million a month to a partnership run by Goldman Sachs for protection against rising interest costs on bonds that the state redeemed more than a year ago.

Central Banks

Hungary’s central bank cut the benchmark interest rate to the lowest since July 2006 and said it may continue to reduce rates as the nation’s worst recession in 18 years blunts price pressures.

Banking

Last Friday, San Joaquin Bank became the 99th FDIC-insured institution to fail in the nation this year, and the tenth in California.

Credit Ratings

The United States, which posted a record deficit in the last fiscal year, may lose its Aaa-rating if it does not reduce the gap to manageable levels in the next 3-4 years, Moody’s said this week.

Japan Airlines Corp.’s credit rating was cut to B- from B+ by S&P. 

Rating Agencies

S&P lowered its default-rate prediction for U.S. high-yield corporate bonds to 6.9 percent, in what the credit-rating company said may be a temporary improvement driven by U.S. government efforts to support financial markets.

OTC Derivatives

The House Agriculture Committee approved legislation regulating over-the-counter derivatives after adopting a provision that may speed agreement on regulation of the $592 trillion industry. The amendment by committee Chairman Collin Peterson would exempt end-users — companies such as manufacturers and airlines that employ derivatives to hedge their operational risks — from increased capital, trading and disclosure requirements.

IPOs

Initial public offerings in the U.S. are suffering the worst returns since at least 1995 at the same time that the stock-market rally is spurring the most new listings in almost two years.

Dole Food Co., the world’s largest producer of fresh fruit and vegetables, became the fifth U.S. company since September to cut its initial public offering price, raising $446 million to pay down debt.

CDS

The cost to protect against defaults on U.S. corporate bonds using a benchmark credit-default swaps index fell from a seven-day high.

Munis

Municipal bonds headed for their worst monthly performance in a year, as state agencies from California and Alabama plan to tap the debt markets for more than $750 million apiece.

Commodities

Crude oil traded above $81 a barrel in New York, poised for a fourth week of gains, on improved prospects for an economic recovery in the U.S., the world’s biggest energy consumer.

Copper prices jumped to a one-year high.  

Currencies

The dollar weakened beyond $1.50 per euro for the first time in 14 months as optimism the global economic recovery is gathering momentum increased demand for riskier assets at the expense of the greenback.

The Australian dollar briefly rose above 93 U.S. cents.

Your firm just suffered its worst year in history and you’re scrambling to improve risk management. What’s the solution? Spend more on IT.

That’s a key suggestion from a report by the Senior Supervisors Group (SSG), a gathering of regulators from the U.S. (including the Fed, OCC, SEC and the New York Fed Bank), Canada, France, Germany, Japan, Switzerland and the UK:

Overall, the crisis highlighted the inadequacy of many firms’ IT infrastructures in supporting the broad management of financial risks. In some cases, the obstacle to improving risk management systems has been the poor integration of data that has resulted from firms’ multiple mergers and acquisitions. This problem has been seen as affecting firms’ ability to implement effective transfer pricing, consistently value complex products throughout an organization, estimate counterparty credit risk (CCR) levels, aggregate credit exposures quickly, and perform forward-looking stress tests. Building more robust infrastructure systems requires a significant commitment of financial and human resources on the part of firms, but is viewed as critical to the long-term sustainability of improvements in risk management.

This is an utterly predictable regulatory response. Sure, some firms have IT gaps that prevent them from properly measuring and mitigating risk. But that’s a symptom of the underlying problem, not the problem itself. Until senior management and boards focus on risk management, IT departments and corporate treasury won’t worry about installing better IT controls.

So why does the SSG report address IT spending (in fairness, it also addresses board and management failings)? Regulators tend to struggle when it comes to getting management and boards to listen, and sometimes the company even has a well-crafted risk management policy that nobody follows–Enron being one example. It’s quick and easy for regulators to demand more technology and hope the latest software catches the next problem.

We recently caught up with Ken Isaacson, vice president in the wholesale product office at the Federal Reserve Bank of New York, to talk about impending Fedwire format changes to support remittance data. This is an issue AFP’s Payments Advisory Group has really led the way on in the last several years.

Isaacson said that hopefully by November of next year, the Fedwire message format will be updated to include 9,000 characters of payments invoice data. This should allow corporates to automate the posting process and reduce costs associated with manually posting wires. You can find more information from the Fed here. In November’s issue of AFP’s Payments newsletter, you can also read a Q&A with Isaacson. Here’s a bit from that interview:

AFP: We’re at least a year out of implementation, how should corporates be preparing at this point?

KI: They should be looking at their wire process on the origination and the receipt side and they should be looking at which systems that they use would need to know about these new remittance information data elements in order to post straight through. A general ledger system may not need to know this detail. The accounts receivables system may need to know. What I’ve learned from working with corporations is there are a lot of ways corporations originate and receive wires. Each corporation needs to look at their process and make a judgment.

Interested in comparing your performance to your corporate treasury peers in Europe? The second annual AFP Treasury Benchmarking Survey for the first time includes data from European corporate treasurers. This year’s participants included members of AFP as well as subscribers to London-based gtnews, an AFP company and on-line resource for the treasury and finance community, doubling respondents to this year’s survey to more than 800 organizations. AFP, IBM and Deutsche Bank collaborated on the 2009 AFP Treasury Benchmarking Survey.

According to the survey, deploying automated systems can reduce cycle times and staffing requirements, especially for cash management activities.

Additional findings include:
Treasury Costs – The smaller the organization, the more intensive the investment is for treasury operations relative to revenue. Also, the financial services industry tends to incur the highest level of FTEs and costs. This is likely due to the regulatory requirements and strategic emphasis on cash management. In other words, financial services organizations view treasury as a competitive differentiator.

Full-Time Treasury Equivalents - The smaller the organization, the more FTEs are required to conduct treasury operations relative to revenue. The financial services industry tends to employ higher FTE levels.

Treasury Cycle Times - With a few exceptions, size is not a significant predictor of cycle time, suggesting that size does indicate overall complexity when other factors are constant. Financial services tend to have lower average and benchmark cycle times than those of other industry groups.

You can download the executive summary of the 2009 AFP Treasury Benchmarking Survey.

Global Capital Markets

Borrowers have sold more than $1 trillion in U.S. corporate bonds in 2009, the fastest pace on record, taking advantage of lower rates and government support to bolster cash holdings after last year’s credit freeze.

U.S. Treasuries

Treasuries fell, with 10-year note yields reaching their highest level in three weeks, as Federal Reserve reports showed a gradual increase in manufacturing in the Northeast and little inflation.

Commercial Paper Update

The U.S. CP market expanded for a ninth straight week, adding to evidence of an economic rebound, Federal Reserve data showed on Thursday. As the impact of the global credit crisis fades, the CP market, which the Fed had to rescue from paralysis last year, is flowing much more smoothly than a few months ago.

(more…)

Just got off the phone with Scott Anderson, a senior economist with Wells Fargo, who said that the continued cautiousness of finance executives is well founded. Wells Fargo expects rapid GDP recovery in the third quarter to slow considerably next year as the U.S. economy searches for ways to replace demand lost as consumers deleverage by saving and paying down debt. ”The engine of growth of the consumer isn’t going to be what it once was,” Anderson said. “We’re going to have to find other growth drivers.”

For businesses that rely heavily on consumer spending, that’s not very good news. It’s causing many to think twice about re-investing at this point, and question signs of economic recovery, Anderson said. ”Businesses are very cautious about expanding right now given the fragility of the consumer and the chance the consumer could retrench,” Anderson said.

“I wouldn’t rule out the possibility of a double dip,” Anderson said, earlier. ”History has suggested when you have a banking crisis of this magnitude it’s very hard to extract yourself in one or two years.”

Robert Reich, a Labor Secretary under President Clinton, had similar things to say about the return of consumer demand last month at AFP’s Annual Conference in San Francisco.

Look for a story in the November issue of Exchange magazine on AFP’s October survey, business conditions and economic recovery.

Hackers are always thinking. Trusteer, the New York-based maker of desktop security products, sent out an advisory (PDF) on Oct. 15, warning corporations of a new Trojan scheme designed to lift log in credentials.

It goes like this: Corporates are targeted with an e-mail seemingly sent from the company’s own IT department; the company’s name is even embedded in the sender’s address. The note will direct Outlook Webmail users to click on a link to visit a fraudulent Outlook site. Once there, they’ll be asked download software that will help adjust their settings to comply with an upgrade. What happens next may be obvious: the software is actually a Trojan called Zeus, or ZBOT, that will snatch credentials used to access online bank accounts, SaaS applications, Webmail, etc.

Visit Trusteer’s Web site for more information. The advisory, available at Trusteer’s reasearch publications page, comes complete with screenshots of a fraudulent e-mail and the fake Outlook site. Here are a few of Trusteer’s tips to avoid becoming a Zeus victim:

1. Educate employees regarding this specific attack. Most enterprises educate employees regarding phishing. However, since this attack looks as an internal email, it is deceiving

2. Block the download of exe files and zip files from the web. This is not a fool proof solution, since the fraudulent website may use adobe and other types of browser add-on vulnerabilities to download itself into the browser. However, it is a good security practice.

3. Use browser lockdown tools to prevent unauthorized code from executing inside the browser. These tools, including our Rapport product, can block Zeus and other Trojans from executing and stealing information from employees.