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What defines best practices in treasury management technology? Is it your view of the world? Is it a system of checks and controls? Welcome to CurrencyCast. My name is Agustin Mackinlay. I'm the Senior Financial Writer at Kantox and your host. In this episode, we have the pleasure to welcome Royston Da Costa, Assistant Treasurer at Ferguson PLC. Royston, a very warm welcome to you and thank you for joining us in this episode of CurrencyCast!
00;00;48;12 - 00;01;29;08
Thank you, Agustin! It's been it's my pleasure looking grateful and looking forward to this discussion. All right Royston, can you please introduce yourself to our audience? Of course. So as Agustin mentioned, I work for Ferguson PLC. We are a North American leading value-added distributor of plumbing and heating products just under 30 billion dollars turnover, and we are primarily listed on the New York Stock Exchange. My current responsibilities are the looking after the company loans and driving the Treasury technology for our group, as well as supporting our Treasury operations and the more strategic transactions when they happen.
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I've been in Treasury for just coming up 36 years, although I've been at Ferguson in 22 years in various roles in Treasury. My previous experience has been with companies like Skye Gillette, Vivendi, Universal, Polygram and Sequent. Currently, we look after 13 cloud-based solutions, including Cooper, which is our main Treasury team, and we use Oracle for our ERP solution. All right, that's really interesting.
00;01;56;02 - 00;02;28;17
Now, you define yourself as a well as an advocate of best practices in Treasury management at Ferguson. And that begs the obvious question, how do you define best practices in Treasury management in 2024? Great question, Agustin. I mean, I suspect that, you know, there are a lot more other companies that would probably have a lot better terms of technology and process than we do at Ferguson.
00;02;28;19 - 00;02;51;23
But I think in terms what we set out to achieve and terms of what we have achieved, I would suggest these are the four pillars that I've kind of held to whenever we considered a new system or technology. And I still do when we look at any new solutions. And they're very simply this: number one, visibility. Well, that sounds like an old one to start with.
00;02;51;23 - 00;03;23;23
But actually it was very appropriate for when we looked at our cash visibility. And clearly that's a very big topic for a lot of companies today, in fact. But for me, visibility doesn't just apply to cash. It applies to everything that we do in Treasury within our group. And so the idea behind that is to make sure that whatever system we have in place, whatever technology we have in place, is giving us full transparency of, for example, trade finance or letters of credit.
00;03;23;26 - 00;03;45;20
Any FX stills, bank accounts obviously come into it. You know, basically whatever Treasury is responsible for, we have a group function that need to have that visibility. And whatever technology that's in place gives us that visibility. So I can say, for example, that we have 100% visibility, all of our bank accounts on the group. Right. And that's that's good starting point.
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Secondly, I would say connectivity, and again, it's an obvious one. But it's bizarre, quite surprising how sometimes when you look at new technologies, they don't always they're not as easy to implement or they give you that benefit. So it's very important for us and this is why cloud-based solutions are so much part of our infrastructure. We like the concept of plug-and-play.
00;04;13;05 - 00;04;42;22
And so when we look at new technologies or new solutions, they have to be very simple and easy to implement and connect with our existing infrastructure. And we could talk about this later on. I mean, I think APIs have probably a huge part to play in that going forward. Security, absolutely, without question. Every Treasurer's nightmare, if you like, in terms of, you know, the world we're living in today, it has to be beyond reproach.
00;04;42;24 - 00;05;02;27
And when I say that, I mean not in terms, not only just in terms of the you know, so when you look at it and you think, well, is it robust, is it secure? It has to meet our internal IT criteria and it is very stringent, I have to say, but not unreasonable. And the last one again, and another obvious one, efficiencies.
00;05;03;00 - 00;05;28;10
Any technology that you implement today, I feel would automatically in my mind should yield efficiencies. Sometimes it's very difficult to quantify those efficiencies in terms of financial benefits. But I would say that if that's not always possible, at the very least, they should offer big time savings. And I think we've managed to do all four of those points out.
00;05;28;12 - 00;05;56;28
Sorry to pull those points. And in terms of infrastructure that we have today, But I really interesting on it goes exactly in the direction that we also favour for and they are connected some of them right you have visibility because also you have good connectivity. And you have good connectivity because you have course your when your API based connectivity that leads to efficiency.
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So all of them are connected now. Right. So what about the place of FX management? And I say FX management, beyond maybe FX risk management, in terms of best practices in Treasury management? Again, the great question is though, you know, it's very obvious for most treasurers and Treasury functions that FX risk management is a key part of their responsibilities and certainly within perks.
00;06;28;10 - 00;06;57;02
And it's been different admittedly we're not in terms of my experience, in terms of the companies I work for, we don't handle a huge market there. Thanks for the simple reason that we are a decentralised business and that means that we have and we do effectively supply our customers domestically and we source that product domestically. So there's very little cross-border exposures for us.
00;06;57;03 - 00;07;37;03
I mean, there are, we do face some exposures in terms of, for example, dividends that we pay to our shareholders that still require sterling dividends. But that's obviously any infrequently on an operational basis, we have limited exposures, it's restricted to our subsidiaries. Having said that, I kind of thought about it in terms of my past experience, and it's interesting how, you know, because I've been in charge you for the time I have, there was a time when you would deal you had to do exposures using a telephone. And the most you could do in terms of the number of banks you could invite to bid on a deal would be to banks purely
00;07;37;03 - 00;08;10;21
because depending on the type of thing. But generally, that was the kind of approach. And today you've got, obviously with the technology, you have online trading tools, systems. And in terms of all infrastructure, we've got that process pretty much automated apart from the actual deal itself that someone needs to execute themselves. But once that deal is executed, it all goes through our systems very automatically and there's very little manual intervention after that.
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But in terms of what I'm aware of, again, it's not necessary something we do at Ferguson. The technology today and the sophistication of some of the processes around risk management, like, for example, algorithms that not only the banks use but even corporates are using now. Where if, for example, I go back to when I worked at Seagram and we had a huge hedging program, over $10 billion worth of hedging that we used to do per annum.
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This was all conducted on spreadsheets in those days. Now, I'm not knocking spreadsheets. I'm sure we still, we use spreadsheets today. But my point being that like corporates are evolving that process and using much more sophisticated tools and mechanism and how they're kind of looking to automate. And we've seen in the cases of large companies putting in place very sophisticated FX hedging policies, but they were conducted on huge spreadsheets, creating both spreadsheet risk and key person risk, and all sorts of problems there.
00;09;20;22 - 00;09;55;18
So let's discuss now the topic of automation and control. And I'm going to say the obvious here, business process automation is one of the defining ideas of our time, right? And I can, as we like to say at Kantox, that we are maybe the leaders in what we call currency management automation, yet we are keen to emphasise to prospects, to customers that automation always comes with enhanced visibility and control.
00;09;55;20 - 00;10;39;23
Let me give you just two examples and then we'll go to the question. So the first example concerns the availability through all of the automation process, so manual checks. Be it at a pre-trade phase, during the trade phase itself or when the hedges are executed and confirmed. Even the post-trade phase with accounting and reporting, with hedging with hedge accounting and swap execution. We go even a lot more into that direction with what we call end-to-end traceability.
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So for example, along the transaction journey from an entry to a position, to a conditional order and then to an operation, a payment or several payments, if swaps are involved. Each individual element has its own unique reference number and here's the point. If that's the case, then automation does not only mean we can control, it enhances control.
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What is broadly your view here? Royston I'm sorry, I got to just ask the last bit again. What is so until we do it again at this point, maybe yes. No, look, I was a little bit confusing, right? And we're going to we're going to do that part again. If you're if you don't want to jump. Okay. When you tell me.
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All right, let's now change the topic a little bit to the subject of automation and control. And I'm going to start with the obvious here. Business process automation is one of the defining features of our age. Now, when it comes to currency management, automation, working to emphasize to prospects and to clients the fact that automation always comes with enhanced visibility and control.
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So to give you just an example, we would like to say that in all our automated solutions, there is a feature that we call end-to-end traceability, meaning that along the transaction journey, each element has its own individual reference number. What I want to say with this is that far from weakening control, automation can lead to more efficient and even enhanced control.
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And that leads me to the question, Royston, do you see the perception out there in the Treasury world that there is a fear of automating business processes, in particular in Treasury operations, leading to less control? Which of course we don't agree with, but what is your view on that? That's a great question. Again, that I do have some sympathy with that view and I'll explain why.
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And so let me start with we talked about automation journey back in 2010, post-economic crisis and new senior management, and new CFO basically looked at our infrastructure and thought, you've got some systems yet, but they're not joined up. It's very little automation, very manual. And so he saw the wisdom, if you like, or the benefit of having automation.
00;13;44;21 - 00;14;13;19
So I think when you approach the subject of automation with pressures, it might sound a bit obvious, but we need to we need to think about what process we're looking at, right? If it's like we did it initially, market data, it's low sensitivity, low risk potentially, you know, you're ingesting market data coming in. That's an easy process to automate and shouldn't really be a huge issue for most Treasury functions or treasurers.
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When you look at FX, which is the other in a sense, end of the spectrum or payments, there's a lot more risk for sure. And when trusts I think approached this subject of automation myself, we are going to be naturally risk averse. We are going to be naturally cautious, and conservative. And I've always maintained that, you know, technology is I'm a big fan of it, and I think most people are.
00;14;38;28 - 00;15;12;18
But we should always also be very careful in terms of making sure that the underlying process that's being used is clear, transparent and fully understood. Now, for someone like myself who, I'm not saying therefore I just go and do anything without thinking about it, but I'm more familiar with some of these processes. They might mentioned APIs early on, but I would still, if I were looking to implement something new, I would want to understand the internal process. In the same breath,
00;15;12;18 - 00;15;47;06
I'm also aware of what you've said about some of the benefits of that automation. But more importantly in a sense for me is the endorsement, the support from our auditors and compliance and regulators. So when in our company, we are subject to Sarbanes-Oxley. And, you know, but it's not really surprising, but it's interesting how very keen they are on wherever possible having an automated report.
00;15;47;06 - 00;16;09;24
And that report, a PDF report even better. So I kind of put that out there just basic to see in terms of one of the clear benefits that you get from automation is at the very least, you know, this sort of tick from the auditors and which treasurer wouldn't want to have that. But let's get back to your core question, which I think is still important and I want to address.
00;16;09;27 - 00;16;35;23
So depending on the person that we look at FX, I think for me, I would say let's look at what we can automate that we're comfortable with. So to do it stay the day so that we don't have this particular process as such in Ferguson. But of what I'm aware of and in my previous job, I'd want that to be automated potentially. But I'd still want some sort of balancing check at pivotal points.
00;16;35;23 - 00;17;09;09
In other words, if someone suggests to me, okay, your subsidiaries are sending you this data and we can offer you a process that would automate that process, all the way from the subsidiaries sending the data to the deal being executed in market. No manual intervention at all. I wouldn't be comfortable with that. Now, I'm not saying that might not work, and it probably does work for some corporates. But I would still want some sort of intervention at least once, if not twice, in that process just to be sure.
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I think the other point to bear in mind also in terms of those balancing checks. They could also potentially have controls using technology where you say, okay, it's a manual check, let's put a limit in place. So that would also be a way of how you kind of avoid potential disaster scenarios occurring where, you know, let's say the proverbial $2 billion goes out into the market to get traded by mistake.
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Too many zeros, that sort of thing. But I'm definitely.The fat finger mistake, right? Yeah. I'm still a big fan of where possible and wherever practical and obviously, Treasury policy plays a big part in this. We want to make sure we're compliant with then that absolutely automation is the key. And as I said, again, just to repeat the point, you will get that validation from the auditors, which I think is a big plus.
00;18;03;18 - 00;18;35;17
Right. And I know from our experience, we know that auditors really like that feature of perfect traceability, right? You can track each element in it, along the transaction journey, the underlying exposure. And that's very, very useful in terms of working with auditors. Sorry, one other point after that, and I think you have to split that process again in the sense that what goes out to the market clearly is going to be more sensitive.
00;18;35;17 - 00;19;07;09
So that process that happens before the trade is done it's a bit more critical than after it's been done. I mean, the whole process is critical. But thinking of the point about automation, once trade’s been done, I see no problem and no reason why anyone would not want all of that process to be automated. Because frankly, there's not much value being added after that point by someone manually intervening, once a trade is done, it's done.
00;19;07;12 - 00;19;28;27
I mean, if it's wrong, then obviously someone needs to check. But automation will help ensure that that check happens a lot more quickly. Like we do currently for argument's sake the deals done, goes into TMS, goes up to Finastra for bank for confirmation and then the report is then generated for someone to check, to make sure that things matched all that sort of process.
00;19;28;27 - 00;19;57;15
You do need automation because the more quickly that's done speedily, that's the more likely if there's an issue, an error or a mismatch being picked up, you're going to benefit from that. Alright, I find this is really interesting because if I understand you correctly, you would be putting more emphasis on control rather at the pre-trade phase of the FX workflow than the trade and the post-trade phase.
00;19;57;15 - 00;20;44;19
And it's really, really interesting and we fully agree with that as there are in the process of the currency management automation, lots of manual checkpoints. Especially in the face of exposure collection and exposure processing, because there could be critical errors that need to be avoided. Absolutely in agreement with that. Royston, I was reading a research paper yesterday on the link between the quality of internal controls and the quality of reporting in general. And even beyond that, making a link with the quality of corporate governance and perhaps even the cost of capital.
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I know it's a very broad issue, but it goes along the lines of your thinking, right? The importance of internal controls, checks and balances, leading to perhaps a lower cost of capital. Is that correct? Yeah. I mean, the issue I think we had, I had, when I looked at building a business case for implementing some of the technology we have today, it was it wasn't immediately clear what the financial benefits would be.
00;21;17;14 - 00;21;41;19
And that within Treasury it's a no-no really, frankly. And the point of it being frankly, when you're looking to get your CFO to sort of present a business case for a new technology or new project, you need to ideally confirm or quantify what the financial benefits are going to be.
00;21;41;21 - 00;22;17;00
But what I found actually that we were able to do, I would say more easily but more transparently, is quantify the time savings initially. And in fact, today we end many of our presentations, I quote a number of 100 full days per year over time. And overall for the technology we've implemented. Just I will make, I’ll put this out there as well, because I know sometimes the obvious question is if you save so much all that time, then why is it that you didn't lose team members or staff?
00;22;17;02 - 00;22;51;08
And this what I say as well with Treasury, we've always been very lean and being most Treasury functions, baseball team, the way to look at is this way trade technology effectively helps you to futureproof your Treasury function, I think. In other words, let's hope that we all want our companies to grow as ours has done. And so in terms of the thought you had perhaps in the past, we'd have had to increase our team to accommodate some of the extra expansion that we've experienced.
00;22;51;10 - 00;23;19;20
The technologies helped to mitigate that. But nevertheless, I still maintain that in terms of the benefits we've seen from the technology, time savings I mentioned, there have been obviously some cost savings as well over what we would do. For argument's sake, you know, with cloud-based solutions, we didn't have the amount of IT support that we needed with our host solution in the past and upgrades and so on, so forth, a lot less, you know, maintenance in that respect.
00;23;19;23 - 00;23;51;15
But I think coming back to today's world need I mentioned, and I think we've done really well so far for not bringing the P word, the pandemic. I think a lot of companies recognise, unfortunately, that they needed cloud-based solutions once the pandemic struck. Because in order to enable their teams to work remotely, as we do at Ferguson or were able to do at Ferguson, and technologies are a big part of that.
00;23;51;15 - 00;24;18;23
So there are so many benefits that are not necessarily quantifiable from a financial perspective. But clearly in this day and age, they are, I would say, the basic standard that most companies have to incorporate if they want to be able to kind of ensure going forward that their teams can continue to be if, God forbid, another pandemic or another crisis were to occur.
00;24;18;25 - 00;24;45;03
Right. Okay. Now, at the beginning of this conversation, I say that cost I hear was going to discuss best practices in Treasury management. And I asked the question, is it did about technology where this goes up a little bit, is it about controls? We discussed that extensively. But there's also perhaps a broad view of the world. And I would like to go in that direction, if you don't mind,
00;24;45;09 - 00;25;20;02
Royston with that. Starting with what we discussed perhaps in private about central bank digital currencies or CBDCs. I remember teaching a course in finance here in Barcelona two years ago and I presented the E-krona project, the project of the Riksbank, the central bank of Sweden, about the digital krona. And the student was so enthusiastic about it that he immediately asked me if we could write about it.
00;25;20;05 - 00;26;04;09
What I sense, correct me if I'm wrong, that there's a little bit less enthusiasm going on right now. We're going to have specific questions, but first, what is your overall view about the development of Central Bank Digital Currencies? Do you think is going to go ahead? It's not really for me to say whether it's going to go ahead in terms of there are 11 countries that have already implemented CBDCs globally, and there are another 53 countries, including the UK, China and some of the other world economy, the US, that are in the advanced planning stages, and another 46 researching CBDCs.
00;26;04;10 - 00;26;38;15
So I think that alone says to me it's happening, it's happened and it's happening. And I think it's interesting that CBDCs and if we include that term, which is central bank digital currencies in the wider scope of what that how that's discussed, cryptocurrency comes into play into that discussion and why still if you look at that under the umbrella of technology, the same theme keeps recurring, which is Treasury, treasurers,
00;26;38;18 - 00;27;06;24
extremely skeptical about all of this. And you mentioned the word fear. I think that has a big part to play with it, and I think there's no shame in saying that for the simple reason that that's how we've been brought up in Treasury. We have been brought up to be naturally cautious, etc... I mean, fear is probably not the right word to use in that respect, but nevertheless to approach everything with caution. With prudence right?
00;27;06;27 - 00;27;39;07
With prudence as well. Now, where I kind of draw the line is to say that's absolutely correct. Yes, that's how we should operate. But how do you then deal with this area of technology, CBDCs and what we're looking at today? Because this is the tip of the, hold on I used the word iceberg, but it's not because it gives the wrong connotations, but the icing on the cake. In my view, frankly, because there's so many other technologies now that I know of, which I think will have a huge impact on Treasury, like digital trends.
00;27;39;07 - 00;28;10;00
But let me talk about CBDCs, I think this is very important in this world. I know you're an advocate of the idea that it could bring better payments, more transparent payments, faster payments. Is that right? Absolutely. Absolutely. And there are banks that are already offering a form of digital currency, for example, JP Morgan have their own payment, Onyx and I believe even HSBC bring out something like tokenized deposits.
00;28;10;00 - 00;28;34;00
Now, admittedly, both these banks are only offering this within their own network. But when you look at CBDCs, the digital currencies, I think you have to now separate what I'm looking at or referring to from cryptocurrency. Because I would not advocate, we don't use it in Ferguson, but I would not advocate using cryptocurrencies as a norm because of the volatility.
00;28;34;00 - 00;29;04;04
And as I said, most Treasury functions, we are here to manage risk. And so is not the kind of. But having said that, again, what I've been hearing is and this is more about the cryptocurrency, when the challenge we've had around trapped cash in certain areas of the world. Cryptocurrency is being used as a solution to get that cash out, which is very interesting to me and it looks very promising.
00;29;04;06 - 00;29;33;16
But we'll come back to CBDCs because my view there it's to look at what's the value, what's the benefit that we’ll get from digital currencies, and why are governments looking at this in such a strong way? Very simply, I think speed, the cheaper to process 24/7 in terms of validating, and it's transparent, you know, it's very auditable.
00;29;33;18 - 00;30;01;18
Digital currencies CBDCs are not cryptocurrency. And from a Treasury perspective, you know, we are today still dealing with payments that take up to 48 hours, if not longer, to be paid end to end. Whereas you and I both know this generation have grown up in an environment where most of them don't even have to open a bank account, like we do or did.
00;30;01;20 - 00;30;34;10
They can open in 2 minutes on their phone and they can process the payment within seconds or we can process payment within seconds, I think in today's generation. So this is what I'm saying in terms of going looking forward, you know, there's the kind of accepting making payments the traditional way is going to be challenged more and more. Because why should we have to wait 42 days for, you know, for payments to be processed.
00;30;34;13 - 00;31;05;06
Absolutely. And that goes well with these ideas of both the ECB and the Fed speeding up their programs in terms of instant payments. That's really interesting. And it's going to have major consequences, if all of this really goes ahead in terms of working capital management and liquidity management. Yes, I agree with that. Absolutely. Royston, is there something that you would like to add there on the topic of CBDCs?
00;31;05;09 - 00;31;40;13
Yes. So one thing I wanted to talk about is looking ahead at what impact CBDCs will have on on companies generally. So I'm not sure if you're aware, but Visa Direct recently announced that they are able to convert cryptocurrency to fiat currency. So again, that's another example where, you know, the world is evolving at this pace where, you know, currencies, digital currencies are being offered by some of the wider market providers.
00;31;40;15 - 00;32;20;10
But I think further to that, if you look at technology like quantum computing, and the accuracy of forecasting, cash flow forecasting and managing exposures is increasing on a daily basis. What I mean by that is I know of companies, and one in particular, that uses quantum computing to hedge commodity exposures to an 80% degree accuracy. Now that's quite a pretty impressive metric to look at. And I see that with even, with generally companies who, where accurate forecasting is quite a challenge to try and get that level of accuracy today.
00;32;20;12 - 00;32;51;21
But as data becomes more widely, more available at using these technologies and we can begin to hone in on to the sort of, the differences. I think this is where, you know, again, not just CBDCs, but the technology working together will help improve the work that we do in Treasury. What I would say as well is I don't see currency exposure disappearing because of digital currency.
00;32;51;24 - 00;33;31;10
The simple reason there's 180 currencies globally, and you only need two currencies for FX to exist, two major currencies. Of course we know that we've got at least the dollar. And you know, you've got UK sterling and Chinese yuan. But so my view, until someone invents the proverbial crystal ball, you will still need treasurers, you still need FX, and someone who could manage quickly, and have the right skills to manage that risk and exposure.
00;33;31;12 - 00;33;51;11
And this is why, again, the technology comes into play. Because, you know, if you look stand back, I can see two kind of streams that are going to converge at some point in time. But can I say for sure exposures will disappear? I don't think I can call that, and I don't think it will happen suddenly in my lifetime.
00;33;51;13 - 00;34;18;09
But in terms of improving the way that we interact with banks, with fintechs, that process is definitely going to get much sharper, much more efficient. And I think in terms of even your product that you offer, I think you'll be interested to see what that's going to, how that's going to evolve. Thank you. Yes, absolutely.
00;34;18;09 - 00;35;06;10
And I think our audience now has come to the conclusion that Royston Da Costa is man with a wide range of interests. And I really thank you a lot for that. Royston I think we've been through several topics here. We started out with a best practices in Treasury management. We discussed a little bit some technology issues there and we went to the all important points of controls, checks and controls, checks and balances, along the Treasury process, and we then discussed central bank digital currencies how to speed up and improve payments.
00;35;06;12 - 00;35;31;23
It's been really a pleasure Royston and again, I want to thank you for that and well, I hope you will have the opportunity to talk to you again soon. Royston Da Costa, Assistant Treasurer at Ferguson PLC, thank you very much for joining us today on CurrencyCast. Thank you, Agustin. It's been a very interesting and enjoyable conversation.
