00;00;00;09 - 00;00;33;01
What is the proper governance structure of your firm's Treasury operations? Is Treasury centralisation always the best approach? 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 Justin Callaghan, CEO of FTI Treasury and world expert on Treasury outsourcing. Justin, a very warm welcome to you and thank you for joining us on this episode of CurrencyCast.
00;00;33;03 - 00;00;47;29
Well, thank you very much, of course, Agustin. It's great to be invited on. I've followed the CurrencyCast series, so I'm a bit of a fan and I know what's in for me here. You like to get under the hood. So, you know, I'm looking forward to a good conversation. That's great. Justin, can you start by introducing yourself to our audience, please?
00;00;48;02 - 00;01;11;14
Sure. Yeah. Well, look, as you've already said, my name is Justin Callaghan. I'm the Chief Executive Officer here of a company called FTI Treasury. We're a Dublin-based Treasury Services company, and we specialise in providing Treasury outsourcing services in the main to multinational entities. And those services fall into two kind of main buckets, as we would see them.
00;01;11;20 - 00;01;48;22
The first is what we would refer to as in-house banking operations. And the second would be resources and support for Treasury service. So on the in-house banking side, we would typically see things like looking after cash and liquidity management structures, helping implement FX hedging strategies, managing inter-company netting, accounting outputs, currency forecasting and cash forecasting. Whereas on the Treasury support side, we would typically be providing Treasury systems middle and back office services.
00;01;48;24 - 00;02;09;09
As I said, our clients are all multinationals of varying sizes in terms of revenue, so anything from kind of $2 billion up to maybe $200 billion. The key characteristics that kind of tie them all together is that they all have a global footprint, which means they all bump into these sorts of issues that we can help them with.
00;02;09;11 - 00;02;36;25
And in particular, things like FX exposures, counterparty risk management, cash and liquidity management, are things that we look at on a day-to-day basis. And we offer our global right now. All right. Well, I'm sure we're going to discuss all of those topics. But let's start with the broad issue of the, say, the governance of Treasury operations and in particular that trend towards Treasury centralisation, that we've seen all FX.
00;02;36;28 - 00;03;23;28
So Justin, what lies behind this seemingly unstoppable trend towards, say, centralisation in general? Is it the need for better cash management solutions on the heels of pandemic wars, inflation and even some high-profile bank failures? And even at the more basic level, can you start by defining centralisation itself? Yeah, sure. So, I mean, you've raised a lot of topical issues there, and I would actually take a step back even further, actually, to look at the centralisation of Treasury. For a good number of decades now, treasurers have seen the benefits of centralisation, right?
00;03;24;00 - 00;03;51;20
They're pretty obvious when you look at it from the Treasurer's hat on, in terms of being able to manage counterparty risk, being able to manage consolidated FX risk, getting a better yield on available cash, you know. There's all sorts of pretty sort of obvious Treasury based reasons to try to centralised operations. And I'm talking in a broad context, we'll get into the sort of more specific FX side of things as we discuss further.
00;03;51;25 - 00;04;19;05
So this has been something that the treasurers, assistant treasurers and Treasury analysts have been pushing for within multinational organisations, for as long as I can remember. I started out in this business as a banker about 30 years ago, and even at that stage, you know, it was talking corporates about putting in place more consolidated banking structures to allow people get their hands on cash and visibility over cash flows and FX and the likes.
00;04;19;08 - 00;04;49;02
The problem was that there was an expense sort of associated with doing this and CFOs and CEOs and board directors at that stage hadn't as much interest in Treasury as they do now. So roll forward 20-odd years ago, Sarbanes-Oxley comes along and all of a sudden we have board-level accountability for Treasury. And at Treasury information and Treasury elements.
00;04;49;02 - 00;05;13;09
So it becomes a lot more focused and suddenly there's a lot more internal senior management focus on a lot of the role of the Treasury operations. And not that gave an impetus in terms of investment. And, you know, as I said, board-level buy-in to achieving some of the centralisation solutions that treasurers would have been looking at anyway for a period of time.
00;05;13;12 - 00;05;52;28
So I think that was definitely one of the key sort of drivers and not sort of at the corporate governance level. And that continues, Agustin, as you quite rightly have referred to up until the present day. So we have things like the individual accountability frameworks that have been rolled out at a board level across Europe and in the US, be they under different guises. And more and more, I think the Treasury information, operations and risk are being brought up to the board level and therefore centralising makes sense from an ability to manage and and and report. Coupled with that, Agustin, I think was the fact that we had
00;05;52;28 - 00;05;57;26
a massive systems evolution. As you guys well know, you're part of us.
00;05;57;28 - 00;06;17;27
And if we think about the fundamental underlying need to be able to centralise Treasury, is getting your hands on data, getting your hands on information and understanding information. Now there are two very different things. You can often get your hands on a lot of information but not have any idea how to interpret that or how to use that.
00;06;18;02 - 00;06;44;17
So at a very fundamental level, the roll out of a PAN organisation, ERP systems has really allowed there to be a central area where a fundamentally important Treasury operation of Treasury exposures and the data is there. Now, it rarely is available from those systems in a very Treasury-usable way, and therefore there needs to be something kind of layered on top of that.
00;06;44;17 - 00;07;09;20
But certainly, that evolution in terms of kind of maximising data flow within organisations has allowed for centralisation. There are other developments, obviously, in the systems where like I think very much the Treasury Management Systems area has become very fragmented, right. Whereby now there are specialist systems to do specialist things and they're the best at doing those things right.
00;07;09;20 - 00;07;27;17
So, long gone is the day really of someone getting a big treasury management system and using it to do everything and treasury management systems obviously are important to in the Treasury world. But getting modular systems to lay on top of them are just as important in terms of delivering the end result.
00;07;27;23 - 00;08;08;12
So there's been a massive evolution in that and that's everything from, you know, like the control system from an FX perspective all the way through to things like forecasting and inter-company netting and the likes. Coupled with that then Agustin, you know, from a systems perspective, bank systems have come on massively as you're well aware. And even the ability now to use multi bank systems to consolidate information flow, cash flow and bank balances, you know that central information gives both the centralised reporting requirement, but also when you have that information, you can do something with from it from a Treasury perspective. Two more simple benefits.
00;08;08;12 - 00;08;36;10
One, I've mentioned the financial benefits ratio, if you can if you can get your data into into a good place, then there are obvious financial benefits. Be that from reduced FX margins that you're paying by consolidating all of the FX, right the way through to get your hands on cash that may have been kind of lying idle, or getting a very poor return and being able to use that to either pay down debt or invest at a much higher yield.
00;08;36;14 - 00;08;57;08
And these are definable financial benefits, of course. And, you know, you can simply say, if we didn't have this particular centralisation process in place, this is the return, we would have got it. This is the FX you would have paid, whereas now we're paying this. So the measurable benefits go a long way. And again, that's all sort of systems driven by.
00;08;57;10 - 00;09;18;07
Yeah, sorry, go ahead. It's the risk management really and this is a very big element, particularly given having gone through a real banking crisis. Right. Which no one kind of ever thought would happen 20 years ago. But then 15 years were poured into it and banks were going bust and everybody was worried about their phones being there.
00;09;18;09 - 00;09;48;08
And it was no longer a theoretical exercise. So now for a treasurer to be able to physically manage those financial risks, be they again kind of counterparty exposure from an FX perspective or cash perspective. It's a major kind of enhancement in terms of the overall risk management process within an organisation. And indeed kind of with the development of enterprise-wide risk management processes.
00;09;48;14 - 00;10;12;04
You know, the Treasurer has more and more been pinned to his collar in terms of being responsible for those sort of operational treasury elements. So you can see the evolution of a Treasury Department, you know, moving from sort of the concept of, you know, capital management, a headquarter debt management into internal liquidity processes, internal risk, internal risk management.
00;10;12;06 - 00;10;37;29
You know, so really there's a, you know, a major evolution in all areas surrounding what Treasury wants to do, governance and indeed the consistent capabilities that are in place. Absolutely. Now, you just mentioned the fact that companies need to, or Treasury right, to get your data in the right place. And that's a point that we emphasise a lot.
00;10;38;01 - 00;11;02;15
Know your company, know your business and make sure that you understand all the ins and outs. And for that, of course, the availability of data is an all important factor. Justin, would you say that size is a matter here when we discuss centralisation still in general? We're going to go into more details about FX, but
00;11;02;15 - 00;11;43;23
in general. Yeah. Not a one size fits all approach is well, what about the problem with size overall when it comes to centralisation? Yeah. So ironically sometimes the very large organisations are the ones that are most difficult to centralise because they tend to have grown out of acquisition and conglomeration and the likes. Even though they often, when you run the maths on it, are the ones that can sort of, you know, get the most benefits from it. We would always argue that any organisation that has an international footprint and has any kind of reasonable level of of cash flow,
00;11;43;24 - 00;12;27;04
you know, be that single currency or multi-currency, can benefit from a centralisation approach. And it's both the financial benefit and the risk management benefit that flows from that. However, what we would not say is that there's a one size fits all approach. Definitely not. We look at the again, if we look at the sorts of processes that we would manage here, like if we think of, for instance, you know, cash and liquidity management. You know, what is the most effective cooling structure for a company that's very much going to be driven by you know banking relationships, by the number of currencies that entity is dealing in, by the levels of cash held
00;12;27;04 - 00;12;55;10
in various pockets around the world and by banking ability to service those jurisdictions. And so, you know, there's definitely not a one size fits all there in terms of FX. It's definitely not a one size fits all and quite simply, that's because every, as you mentioned, every business has a different business approach. And FX exposures, you know, they arise in very different ways depending on how the business is set up.
00;12;55;12 - 00;13;16;08
I mean, we sort of almost have the sort of easy exposures that arise out of centralisation, which are things like, you know, inter-company loans and, you know, the significant balance sheet elements that may be in place. But the more difficult ones sometimes to identify and to manage on a consolidated basis are sort of those future cash flows, right.
00;13;16;13 - 00;13;43;19
You know, hedging profitability and economic hedging and the likes. And so definitely, definitely not a one size fits all. Having said that, we see certain processes that assist along the way, right? So you know, in terms of an in-house bank, having a good cash liquidity management system, having a good inter-company netting system, having a good process around FX hedging and an agreed policy around affects hedging which is implementable and having good forecasting and reporting.
00;13;43;19 - 00;14;03;25
You know, they are common things. How you achieve them, definitely not a one size fits all, but they're common objectives and common elements of processes that really help an organisation to get to where they want to be. Right. And you just mentioned in-house banks. Let’s discuss a little bit this before again tackling the the more specific subject of FX.
00;14;04;03 - 00;14;35;14
centralisation. I know you've been involved in implementing some projects of in-house bank solutions. Yes. What does that entail in practical terms? Yeah, sure Agustin. And maybe just to set the scene right and an in-house bank sort of, you know, come to this wider this way. Right. So there's a you know, there's a very broad scope within there when we talk of in-house banks and we are generally talking about the treasury elements of an in-house bank.
00;14;35;14 - 00;15;07;22
So we're not talking about payment factories, POBO and COBO and the likes. Even though they often kind of hang on to the edges of the in-house banking structure. But they're generally more managed by, you know, shared services, center accounts payable, etc. And so what we're looking at is establishing the correct Treasury infrastructure to allow an in-house bank to centralise and processes and you ask about what's the kind of lifecycle I suppose, of an in-house bank.
00;15;07;24 - 00;15;32;14
It's quite well defined actually, because the same issues come up over and over again. So, the very initial catalyst for this is often a requirement, not a requirement but a wish, a requirement for Treasury to become more efficient in the way that it's centralised processes and managing its risks. And in order to do that, there is an initial kind of process scoping.
00;15;32;14 - 00;16;01;15
So the concept of an in-house bank is obviously that you're able to manage all of your cash liquidity and bank risk, you know, within it, within a certain environment that a single legal entity are a Treasury center, are the HQ balance sheet. So it doesn't really matter. The concept is that you're putting it all on in one place and the initial step in that is to understand what processes you want to host there.
00;16;01;19 - 00;16;27;16
And as I said, typically the processes we would see how is there are management action, liquidity management in terms of managing building structures, intercompany loan management, intercompany netting and then cash reporting and forecasting. There seems to be there a sort of five foundation points and and entities will often choose to implement one or two or three of them as a starting point.
00;16;27;16 - 00;16;48;00
You know, it's not a kind of a big bank to do to jump in. So once you've identified the process that you want to initially establishing the in-house bank and, you know, made a business case for those processes, the next big hurdle really is always the text talks and regulatory considerations, right? Because, you know, obviously you're undertaking financial transactions.
00;16;48;03 - 00;17;11;06
There'll be things like withholding tax and interest deductibility where they're inter-company loans and the treatment of internal affects and the likes would also be important. So so that's really where you're opening up to the working team, you know, to include tax on the accounting teams and coming up with the best structure and put this to wrap around this in-house bank.
00;17;11;12 - 00;17;40;12
And as I said, that could be, you know, could be the HQ balance sheet operating out of the US. It could be a regional treasury centre operating out of Luxembourg or Ireland. It could be a special purpose vehicle operating out of the UK or could be, you know, a Swiss or Swedish operation. It really doesn't sort of matter where it's based, to be perfectly honest, as long as it works for that organisation and the processes can be managed on a remote on a remote basis.
00;17;40;15 - 00;18;09;09
So following that, like you now have a big picture of what you want to do, right? You know where you want the how is your in-house bank and roughly speaking, what you want to achieve from it in terms of processes, then you're getting it through a detailed design. And that's sort of I won't spend too much time in that because you can imagine you can spend a long time talking about that, but really you're talking about how things are going to link up in terms of information flow process and whether to touch points around the group in terms of what's going to take place in the Indian Bank.
00;18;09;12 - 00;18;32;04
And as I said, it's around those key elements like, you know, liquidity management and netting FX. They're core Treasury operations. Right. But they have an impact, obviously, on the operations. So, you know, you're going to expect operations to push all their funds through whatever liquidity structure using you're going to expect them to undertake all the hedging and with the central and with the central platform.
00;18;32;06 - 00;18;50;00
And you're going to expect them to use you as the in-house lending and borrower, you know, so so so, you know, there are touch points that need to be considered and there's that there is definitely a lead time with that in terms of bringing people along and education and the likes. And the other important thing is of course systems implementation.
00;18;50;00 - 00;19;10;22
So and not not only systems implementation systems integration is what I would say is the big thing there because you know you're going to have as these different types of systems to undertake the different processes that you're looking at, at, they're going to have to be integrated with banking systems, with ERP systems for data, maybe with FX trading systems, whatever.
00;19;10;22 - 00;19;58;01
You know, I mean, depending on where you're going on and on. Certainly here, of course, is where, for example, APIs write application programming interfaces will play a major role. Correct. And again, to, you know, APIs and even just SFP solutions, you know, they're more and more required, you know, where expected in terms of automated dataflow and automated and automated to automate the results and for instance, like, you know, in terms of like a product, like the context of a product like, like, like, like being able to guess an answer to your problem is really what you're trying to do, you know, so so we can have all this data flowing around the
00;19;58;01 - 00;20;19;25
place. But unless we know at the end of the day what our exposure is in Swedish, our exposure is in sterling. You know, we don't want to be going back to spreadsheets to do that. And it's the same if it's f X or if it's liquidity management or whatever, you know, you know, it's about using the best in class solutions to manage the data that's available in reality.
00;20;19;27 - 00;20;41;23
So having gone through those sorts of processes and those systems implementations, you end up at a position where you're ready to go live. And then generally speaking, it's a process by process and live event. But some people, you know, some people go with the Big bang. It's really sort of up to the individual culture.
00;20;41;26 - 00;21;05;23
Typically speaking, if there is a culture of centralisation, big banks are easy enough. Both of these things have been done locally for many years. Well, then you're kind of trying to bring people along and ensuring that they're comfortable along the way. That includes both the subsidiaries who you'll be interacting with in terms of actual FX trading or our customer equity management, but also important to all of the head office functions, tax, accounting, etc., etc..
00;21;05;23 - 00;21;37;14
They all need the necessary input feedback. Absolutely. Now, Justin, we think we've covered the broad issues of issues of Treasury centralisation in general. Let's go a little bit more into the details of, say, foreign exchange centralisation. You know, that we just launch a can talks or we're launching Qantas in-house. It thinks it's an automated solution for the management of currency risk between headquarters and subsidiaries.
00;21;37;14 - 00;22;10;09
And we are sort of tackling some of the pain points there or existing solutions like hi, if it's raining costs or the lack of traceability to assess conformance from the internal trades all the way to the external trade friends with banks and and also maybe the lack of 24 seven liquidity for subsidiaries. All of that is now being tackled with automated solutions.
00;22;10;11 - 00;22;38;27
And let's go into detail, if you will, in the subject of netting, you call it intercompany netting, like larger, we use the term more exposure netting. You've written that it provides lots of benefits, including savings on transactions, of course, less credit risk, better cash flow, and perhaps even the need to set aside less capital in terms of collateral requirements.
00;22;38;27 - 00;23;08;08
Right. Could you elaborate on these points? Yeah, sure. Sure. So yeah, like I suppose there are nuances around when you talk, when you talk about when you talk of netting. So when we talk nationally, there's two elements to it. First of all, there is the netting of intercompany payables and receivables, and that results then in a much more efficient balance sheet that can then be used to assess the FX exposures, if that makes sense.
00;23;08;08 - 00;23;36;16
So there's kind of a leapfrog element to it. So just to address some of the things that you have that you have that you've mentioned there. And first of all, when we look at the netting of intercompany payables and payables and receivables, it obviously significantly reduces down the number of gross balances outstanding, and that's what I was hoping to do any.
00;23;36;18 - 00;24;15;02
And because, you know, so typically, typically in an in-house banking structure, we would not see those being cash settled, but they'd be settled against the ledger effectively. So so so what you're doing is are closing down all this web of sort of potentially intercompany accounts payable in receivables and collapsing them into a single currency exposure in the base currency of the of the operating entity with the in-house bank that then would feed into a system like the control system, which would go to hedge the overall group exposure in those and in those in those in those particular particular currencies.
00;24;15;04 - 00;24;47;10
And from the hedging, I mean, again, we we we run intercompany netting on behalf of a lot of clients and really the key driver of financial results, you know, financial benefit is that is the level of and the level of FX deals that would have been required effectively versus those that are executed. And some of the transaction savings, as you mentioned.
00;24;47;10 - 00;25;07;11
But the fix is by far the biggest. Just to be just clear about that, we would run savings estimates and they run anything from about $2 million to October, $25 million a year depending on the flows. So, you know, if you're a company that has massive intercompany flows, then you're safe. You're going to be saving yourself a lot.
00;25;07;13 - 00;25;33;27
And that's before you talk about some of the other things existing like, you know, cash flow management, understanding flows, being able to integrate and the FX and the FX elements of that at most of that is saved by being able to, as you mentioned, offset FX and so, you know, you're obviously ending up with a net and that affects results rather than people buying and selling various currency pairs at the same time.
00;25;33;29 - 00;26;00;12
And then also by achieving effectively wholesale rates as opposed to kind of retail rates are at a local at a local banking local banking level. And generally we'd look at them in tiered levels, you know, maybe up to 10 million, up to 20 million up to 40 million, about 40 million or whatever. So yeah, massive opportunity really, to be honest, and something that companies have grappled with.
00;26;00;12 - 00;26;25;17
As you as you well know, it seems like a relatively straightforward thing to be able to do. And in some ways it is a cost in terms of balance sheet elements. And because they're there, right, that reported there in the ERP. But then when you get into some of the cash flow hedges and a predicted flows out into the future, it becomes more difficult.
00;26;25;17 - 00;26;57;29
And that's where, you know, real sort of systems on an element of air and an element of, you know, intelligence comes into play in terms of knowing what might happen into the future and trying to win that around the borders and make it make sense, make it make make it make sense with budget. And then all the way down, as you mentioned, to, you know, implementing the actual fixed rates, which if done properly and, you know, you can obtain significant savings just even from a uncompetitive basis across banks or whatever branch.
00;26;58;04 - 00;27;24;28
I am speaking of savings, you just mentioned the massive savings on the volume of FX transactions itself, but also if you centralise those, those external FX rules with my head office, it would be in a position to negotiate better terms with banks. So it's the double savings that. Right. And even perhaps think, well, improve your long term strategic relations with banks.
00;27;24;28 - 00;27;55;10
Do you agree with that? Yeah, absolutely. Listen, one of the things we do actually on behalf of clients is monitor bank volume and value and stuff like that. A, For one, you want to drive your FX towards your relationship banks, your balance sheet funders effectively. And that's, you know, common treasury practice. Obviously. But also you want to be able to demonstrate to banks what they're getting from you effectively.
00;27;55;12 - 00;28;26;15
And that can be difficult. People can struggle with that. So just even by being able to say, well, look, you know, we did 6 billion FX across all our banks this year. You picked up 600 million of them. But if you tweak your pricing a little bit, you got 2 billion. You know, having that information around gives you sort of the upper hand when you're having those conversations around relationships and the long term suitability for each other and as partners, as well as quite simply being able to manage your exposure better.
00;28;26;18 - 00;28;48;07
You know, for one, you're going to reduce your gross exposure to banks if you've got a lot of forward or swap activity in play. But also importantly, you can manage where trades get directed to if you feel you have an overexposure to one particular bank. Be that either from a credit risk perspective are more often we see it being from a business perspective.
00;28;48;07 - 00;29;06;09
In other words, one bank might be very strong on a very big currency pair, but no other banks are getting much wallet as a result. So you might make the choice to take a bit of pain, take a bit of financial pain in an effort to come share that wallet, because the greater good of having a you know, we're working on your banks rather than a single reliance.
00;29;06;11 - 00;29;35;04
Now what about the another benefit which is a little bit harder to harder to quantify so you financially but would you would you would you not agree that by having those headquarters centralise the execution of all external FX rates, you know, you would have more expertise and group level? That's an important point. Would you agree with that 100%?
00;29;35;06 - 00;30;01;07
We are constantly terrified when we hear of clients who are allowing their local financial controllers to undertake, you know, significant FX activity, particularly in the forward markets. They don't tend to have the systems to manage just as being managing spreadsheets. You know, you do a 50 million forward sale of dollars instead of a forward purchase, and you don't find out till six months down the road you're going to be in trouble.
00;30;01;09 - 00;30;46;23
So definitely having the expertise to understand and implement particular policy and to be able to communicate that to the local entity level so that they know how to, you know, put in place what level of cover they're supposed to put in place with the ADD quarters is really important. And then I just wouldn't underestimate the requirement or ability to have that information in terms of exposure versus hedge and mark to market information and monitoring of risk move on some days monitoring of that FX and that that's very, very hard to achieve on a decentralised, decentralised basis.
00;30;46;26 - 00;31;16;04
And so absolutely I couldn't agree more. There are massive risk reduction benefits to be gained by centralising these sorts of activities. And as you say, they're not always quantifiable, but sometimes they are, you know, in terms of looking at volatility on underlying versus hedge, etc., etc.. Right, Right. Well, okay, let's talk about another subject related to the management of foreign exchange exposures.
00;31;16;04 - 00;31;48;15
In this case, you discussed recently the topic of managing or demystifying hedge accounting. What I want to say about this is so, for example, you would take the recent book by some on corporate FX risk management. So hedge accounting is really well represented. It allows us, of course, to reduce the net income volatility that arises from the different treatment of all the exposure items and hence instruments.
00;31;48;17 - 00;32;16;02
But the authors also argue that it's so costly and in any case, financial analysts are well trained and they will dismiss temporary episodes off of or net income volatility that may arise. What we like to say at Qantas, and I think we would agree with you on this topic is there's a need to sort of take it easy and demystify a little bit.
00;32;16;02 - 00;32;58;08
So for example, from our perspective we have with those pressures that the tools for the traceability tools are there for you to automate, Just simply automate all the, the, the requirements that are needed to, to perform hedge accounting, hedge accounting. Would you agree with that? Yeah, I absolutely agree, because then the only way to implement a reasonably efficient hedge accounting approach is by system, you know, correct systems and system correct systems usage.
00;32;58;11 - 00;33;23;16
And if you do that, it can be actually reasonably straightforward. One of the issues like again, if we if we kind of look back historically, one, when I asked 39 or phase one, 33 was first issued and you know, there was like a 4000 page document on it and and and and it was difficult to understand, you know, what are we supposed to be doing here?
00;33;23;20 - 00;33;41;15
Where do we use this? What is the practical implication of this? And at that stage, as you probably well remember, a lot of the big four can see firms were making an industry out of this in terms of, you know, and in fairness to them, they probably had to do that in order to get to the bottom of themselves.
00;33;41;22 - 00;34;04;03
And some of the solutions that were proposed were actually very complex and probably overly complex in terms of their requirement. So I think there was an initial scare off of people wanting to sort of, you know, take a bite at this. And then if you roll on a few more years, things became a bit more practical.
00;34;04;05 - 00;34;30;20
Most people focused initially not on their focus really in reality because they have bigger exposures. If they had interest rate swaps and the like, and which can be, you know, the mark to market movement and the like can really knock the success of your panel unless you're on this year, unless you unless you're pretty careful. And in fairness, at those fixed income and interest rate derivatives in terms of hedge you can take are much more complicated than that and fixed.
00;34;30;23 - 00;34;46;13
The beauty of them, though, is that generally speaking, once you have it settled for, you know, a five year interest rate swap, you just leave it in the background ticking over and it works away. Whereas on the side that tends to be a lot more activity in terms of, you know, monthly hedging. Our education program about the likes.
00;34;46;16 - 00;35;11;19
But in terms of sort of what you mentioned there in terms of complication and the demystifying, of course, and like we often would come across clients who are put off implementing what they see as the right fixed at risk management approach because the accounting team are scared of the going. And we still see it to this day.
00;35;11;19 - 00;35;41;04
And we have, for example, seeing clients or prospects of shying away altogether from some of the fixed risk management because of the perceived costs and, and of hedge accounting. Yeah, yeah, yeah. And it is so look like when it boils down to FX, FX educating is reasonably it's pretty straightforward from a balance sheet items. Okay you can just take everything for a value to the PNL and you'll get it all set.
00;35;41;06 - 00;36;11;01
It only really becomes in any way complicated. And I say that inverted commas because I wouldn't view it as being so when you're looking at cash flow, hedge, cash flow, hedge accounting and really once you have developed a pretty reasonable forecasting approach and have defined the hedge documentation properly in terms of, you know, the risks you're trying to cover and how you sort of documents, not really.
00;36;11;01 - 00;36;39;11
Once you've done that once, it's just a case of we have an IRA saying here which is called Lena Bernie. It means fill in the gaps. You know, you're really just replicating what you've done before because you've created a proper infrastructure and framework and system. And to do it, there, you know, look at simple techniques like, you know, all you know, everybody, you know, these very small, but like, you know, instead of doing a, you know, 100 million forward hedge, do 1010 million.
00;36;39;11 - 00;37;01;20
So, you know, one, you know, if one's ineffective, it's only a 10 million mark to market. Not, not, not 100 million having a having a reasonable way of defining actual cash flows versus hedges to prove kind of effectiveness of the hedges. Again, no big deal. You know, it can be done using systems in the relatively straightforward manner.
00;37;01;20 - 00;37;25;04
And then really it just becomes a case of being able to produce the accounting outputs most times now will do that for you as long as you have a decent accounting team that will not hedge to us. And really the key to this we found is to pump the accounting output directly into the IRP, because the accounting can be output and they don't have to sort of necessarily worry about it.
00;37;25;04 - 00;37;46;01
Right. And Treasury therefore, is taking responsibility or sort of the hedge documentation and stuff like that. And again, as I say, that doesn't have to be, you know, if you set it up right, that could be a very efficient, very efficient process. So like, I think, you know, we've got and as you know, you know, things to change with IFRS nine, the like.
00;37;46;01 - 00;38;14;15
So things have become a little bit, you know, a little bit easier but like there is no reason for any company at this stage to be scared of doing the right thing from a risk management perspective because they think the accounting is going to be too overwhelming. Absolutely. Well, Justin Callahan, CEO of FTI Treasury, thank you very much for having discussed today a wide range of topics.
00;38;14;15 - 00;38;45;03
We started out with Treasury centralisation in general. I what I sort of asked you whether you thought it was something that was so due to the latest events like the pandemics, the inflation, the wars, and even some bank failures. But you put it in a broader context, going back at least 30 to 40 years. So, really, listen, don't judge too much.
00;38;45;05 - 00;39;18;13
Right? Then we went on to discuss all the massive benefits of alternative centralisation, FX, centralisation in particular, netting. And you agreed of course, that it also allows us to build up expertise at that office level. So a really important point. Finally, we just discussed a little bit the demystification of hedge accounting. Justin, is there something you would like to add?
00;39;18;14 - 00;39;41;24
Because it's been a pleasure talking about these things. You know, as I mentioned, we specialise in providing outsourcing services to multinationals. So, you know, we're always, our door is always open to talk to people about all these elements. So you'll help over to our website if you wish to do that. Perfect, Justin thanks a lot and we'll see each other soon. Thanks Agustin, see you!
