AFP Blogs

The smaller the organization, the more intensive the investment is for treasury operations relative to revenue, according to the 2009 Association for Financial Professionals’ Treasury Benchmarking Survey.

AFP conducted its second annual benchmarking survey to let financial professionals compare the performance of their organization’s treasury operation to that of their peers and top performers. AFP, IBM and Deutsche Bank collaborated again on the 2009 AFP Benchmarking Survey, which expanded to include corporates based in Europe. This year’s participants included AFP members 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.

Marilyn Spearing, Head of Trade Finance and Cash Management Corporates, Global Transaction Banking, Deutsche Bank, said, “Deutsche Bank is pleased to support the further expansion of this important peer group survey. We received very favorable responses from those U.S. corporates who participated in the initial survey that we looked to obtain this data on a cross-regional level. The theme of this year’s survey, ‘Optimal Delivery of Treasury Services,’ is particularly timely as treasurers in today’s market are seeking opportunities to compare the performance of organizations’ treasury operations against those of their peers.”

Other highlights from the 34-page public report, released Sunday at AFP’s 2009 Annual Conference in San Francisco:

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.

Complete survey results are available here.

Michael Lewis thinks working on Wall Street during the Crash of ‘87 and the hurricanes he experienced as a child growing up in New Orleans have one thing in common:

They were fun.

“I thought the Crash was fun and I got kind of excited but this may be a peculiar personality trait,” Lewis told AFP in an exclusive podcast that you can download here. “I do feel like I’m watching this hurricane rip through town and all I really want to do is go and throw out my Frisbee in it, that it’s just kind of this exciting event. And so this probably reflects the slowness with which I empathize with people who were losing their fortune but I do find them really engaging.”

As a best-selling (not to mention peculiar) author and former bond trader, Michael Lewis is well-equipped to explain what went wrong on Wall Street and Main Street the past 18 months. His newest book, Panic: The Story of Modern Financial Insanity, dissects the financial booms and busts that have occurred since the Crash of 1987. Lewis is perhaps best known for his groundbreaking book on baseball, Moneyball. His book about football, The Blind Side, is being made into a movie.

Lewis will speak and autograph copies of his book at AFP’s Annual Conference, Oct 4-7, in San Francisco.

Download the Michael Lewis podcast here.

More AFP podcasts and videos here.

AFP is pleased to announce a new series of virtual roundtables and webinars focused on treasury management: The Treasury Connection.

Each quarter, corporate practitioners can join a virtual roundtable centering on the hottest treasury and finance topic. A webinar on the same topic will follow each roundtable and feature expert advice and analysis from banks, consultants, or service providers.

The first virtual roundtable is The New Normal of Bank Relationship Management: Pain Points and the Prescription for Success, Aug. 11, 3:30 – 4:30 p.m. ET. The follow-up webinar is The New Normal of Bank Relationship Management: Perspectives from Both Sides of the Partnership, Aug. 18, 3:30 – 4:30 p.m. ET.

You can also purchase the entire series of four virtual roundtables and four webinars. Future dates TBD.

If you have any questions regarding The Treasury Connection series or have ideas for future series topics please contact Ernie Humphrey at EHumphrey@afponline.org.

Secretary Geithner faced broad questioning about the Obama Administration’s proposal to regulate OTC derivatives in his testimony before a joint hearing of two House committees. Chief among the concerns was that the administration might ban customized derivative products.

“We don’t want to ban customized derivatives,” Geithner assured members of the House Agriculture and Financial Services committees. “I can’t tell you how much higher” the regulatory and capital standards for customized derivatives will be. “These customized products can entail more leverage and more risk. I do believe there is a need for customized derivatives. Because those products come with a lot of risk and lot of losses from AIG were from writing customized derivatives, we need more oversight.”

Geithner also said he was still optimistic that SEC and CFTC would be able to harmonize their regulations by the end of September, a deadline established in President Obama’s financial regulatory overhaul proposal.

Asked whether President Obama had given up on the idea of joining the SEC and CFTC, Geithner hesitated. “Our judgment is, a necessary condition and the hardest thing to do is to bring the underlying laws into convergence. As [House Financial Services Committee Chairman Barney] Frank said, it’s about what we do to the substance of the regulation,” Geithner said. “So we begin with that task and that would provide a better basis for Congress to make these underlying reforms later in the future.”

Geithner also said that he believes Europe and the United Kingdom, where much of the OTC derivatives market exists, are in broad consent with the U.S. on regulating OTC derivatives.

Here is Secretary Timothy Geithner’s testimony.

After Secretary Geithner made his statement, House Agriculture Comittee Chairman Collin Peterson (D-MN) made clear his frustration about the administration’s lack of details about its proposal to regulate OTC derivatives, specifically about the definition of standardized and customized derivatives. “To what degree will a swap dealer or end user of derivatives know if it’s standardized or customized,” he asked.

Geithner replied: “There’s no definition yet. My suspicion is we lay out broad principles and have them defined later. The important thing is to have greater reporting and capital requirements across the entire market to avoid the risk that people try to get around the definition. We want higher capital requirements on customized derivatives.”

Speaking before a joint hearing of the House Agricultural and Financial Services committees, Secretary of the Treasury Timothy Geithner outlined six Obama Administration proposals for regulating over-the-counter derivatives:

1. All standardized derivative contracts must be cleared through well-regulated central counterparties and executed either on regulated exchanges or regulated electronic trade execution systems. Central clearing involves the substitution of a regulated clearinghouse between the original counterparties to a transaction. After central clearing, the original counterparties no longer have credit exposure to each other. “Central clearing of standardized OTC derivatives will reduce risks to those on both sides of a derivative contract and make the market more stable,” he said. “This should help to constrain threats to financial stability.”

2. Through capital requirements and other measures, encourage “substantially greater use” of standardized OTC derivatives and to facilitate substantial migration of OTC derivatives onto central clearinghouses and exchanges. “We will propose a broad definition of ‘standardized’ OTC derivatives that will be capable of evolving with the markets and will be designed to be difficult to evade,” he said. “We also will require that regulators carefully police any attempts by market participants to use spurious customization to avoid central clearing and exchanges. In addition, we will raise capital and margin requirements for counterparties to all customized and non-centrally cleared OTC derivatives.”

3. Require all OTC derivative dealers, and all other major OTC derivative market participants, to be subject to “substantial supervision and regulation,” including conservative capital requirements; conservative margin requirements; and strong business conduct standards. “Conservative capital and margin requirements for OTC derivatives will help ensure that dealers and other major market participants have the capital needed to make good on the protection they have sold,” he said.

4. Make the OTC derivative markets “fully” transparent. Relevant regulators will have access on a confidential basis to the transactions and open positions of individual market participants. The public will have access to aggregated data on open positions and trading volumes. “We will require the SEC and CFTC to impose recordkeeping and reporting requirements (including an audit trail) on all OTC derivatives,” he said. “We will require that OTC derivatives that are not centrally cleared be reported to a regulated trade repository on a timely basis. Increased transparency will improve market discipline and regulatory discipline, and will make the OTC derivative markets more stable.”

5. Provide the SEC and CFTC with clear authority for civil enforcement and regulation of fraud, market manipulation, and other abuses in the OTC derivative markets.

6. Work with the SEC and CFTC to tighten the standards that govern who can participate in the OTC derivative markets. “We must zealously guard against the use of inappropriate marketing practices to sell derivatives to unsophisticated individuals, companies, and other parties,” he said.

More to come…

AFP is soliciting member views for a comment letter to the International Accounting Standard Board (IASB) on whether credit risk should be incorporated in the initial and subsequent measurement of liabilities. The IASB recently issued a discussion paper asking for comments on credit risk in liability measurement–a topic that the organization says has generated more comment and controversy than any other aspect of fair value measurement.

The current guidance, IAS 39, is consistent with the FASB’s fair value measurement guidance in FASB Statement No. 157, Fair Value Measurements. But IASB is revisiting some of its previous conclusions about IAS 39. When determining the fair value of liabilities, IASB asks:

1. When a liability is first recognized, should its measurement (a) always, (b) sometimes or (c) never incorporate the price of credit risk inherent in the liability?
2. Should current measurements following initial recognition (a) always, (b) sometimes or (c) never incorporate the price of credit risk inherent in the liability?
3. How should the amount of a change in market interest rates attributable to the price of the liability’s credit risk be determined?

IASB also is considering several alternatives:

* Measure all liabilities using the risk-free rate of interest and expected future cash flows, excluding any expectations about default. Any difference between the resulting amount and cash proceeds should be charged to income immediately.
* Measure all liabilities using the risk-free rate of interest and expected future cash flows, excluding any expectations about default. Any difference between the resulting amount and cash proceeds should be charged to equity and amortized over the life of the liability
* Measure borrowings and other liabilities that result from an exchange for cash at the amount of the cash proceeds. Measure liabilities that do not have a cash exchange at the present value of the expected future cash flows, discounted at the market rates that exclude the effect of credit risk. Subsequent current measurements should incorporate changes in market interest rates. Changes arising from the entity’s credit quality or the price of its credit should be excluded from the market interest rates. This would have the effect of fixing the credit spread at the original amount and incorporating all changes in the risk-free rate.

Please send your comments to Salome J. Tinker at AFP.

If you think your company is too small to use SWIFT, check out the upcoming AFP webinar on the benefits of direct access to SWIFT for mid-market and smaller companies, July 23, 3:30-4:30pm EST.

Webinar participants will hear how a middle market corporation realized meaningful efficiencies though direct access to the SWIFT network. Speakers include Lise Gjertsen, regional manager–corporations, for SWIFT, and a corporate practitioner TBD.

This webinar has been approved for CTP/CCM and CPE credits. For more information on requirements for obtaining CE credits through AFP webinars, click here.

In an exclusive interview with AFP, former Labor Secretary Robert Reich said treasurers need to exercise patience during what he deemed the current “depression.” “Back in 2006, no one expected the end of 2007 and all of 2008 to be so difficult,” he said. Reich, one of the keynote speakers at the AFP Annual Conference, Oct. 4-7, in San Francisco, said treasurers need to pay special attention to foreign currency fluctuation and be as honest as possible with their companies’ leaders when discussing corporate finance.

Listen to the full interview with Robert Reich here.

With little easing in access to credit, U.S. organizations are continuing to stockpile cash, according the Association for Financial Professionals’ 2009 Liquidity Survey. Almost three-quarters (72%) of companies had increased or maintained their U.S. cash balances during the first part of 2009.

According to the survey, 42% of organizations increased their U.S. cash and short-term investment balances between December 2008 and May 2009, while 28% of organizations saw their U.S. cash and short-term investment balances deteriorate over the six-month period. Organizations with non-investment grade ratings were more likely to have seen their cash and short-term investment balances shrink.

“While many organizations with their strong cash positions will be well-positioned once the economy begins to improve, overall economic conditions will not improve until organizations can begin using their cash in activities that foster growth,” said Jim Kaitz, President and CEO of AFP.

Read more about the survey here.

Liquidity resources:

AFP 2009 Liquidity Survey
Video analysis
Cash and liquidity management advice
CNBC interview with AFP President & CEO Jim Kaitz