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Interested in scanning your processes to improve the efficiency of Treasury operations? 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 of welcoming Patrick Kunz, a Treasury consultant and owner of Pecunia Treasury and Finance.
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So, Patrick, a warm welcome to you! Thanks for having me in beautiful Barcelona. Right! Now, Patrick, can you introduce yourself? Sure. My name is Patrick Kunz, I am owner and Treasury consultant at Pecunia Treasury and Finance. I founded that 11 years ago, that's where I started because I love Treasury. I love doing Treasury stuff. It's also all I know about.
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I knew nothing else than Treasury. So I love helping clients improve their Treasury. Nice! Look, Patrick, you define yourself sometimes as a Treasury interim. So what are the things that you look first when you assess a company from the perspective of Treasury? Yes. And are there some maybe quick wins there? Yeah, definitely. There are many. I developed a Treasury scan which we implement to my clients to find these quick wins.
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Treasury is all about money. It is this nice, shiny treasury chest with all your money inside. So I ask the CFO or the group Treasury if there's a Treasury. How much money do you have? How much money do you have now? Right. They usually know that question. They can say, well, roughly this amount. So you get good answer,
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I like it. And then next question, how much money do we have in six months? Oh, and then they start to struggle at like, right. Maybe this, maybe this depends on so many things. Or the CFO knows I know how much profit I'm going to make, I guess. But does this profit pay your salaries? Does it pay for your raw materials?
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Probably not or maybe not. So that's usually a good starting point. Have the cash, the cash focus, that's one pillar of the treasury. And the next one is risk. Are you in charge of your risk? In my opinion, Treasury is not a profit centre, it's a cost centre. So the goal is not to maximize return, the goal is to minimize your risk. And the risk that Treasury handles is currency risk and interest rate risk, and in some cases, financing.
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we’re financing in corporate finance risk. And maybe commodity price risk as well. In some cases, yes, but that's a 50-50. With some clients, that's with procurement, even though Treasury might advise because they are derivative products now, it's mainly the FX and the interest rate. Right. You're probably interested in the FX risk. Yes. Well, let's discuss in general terms.
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When you say scanning there, is there a view on automation? Is there a view, as you said, on cost reduction. Cost reduction, partly. I usually would start with do you have all the information you need in your Treasury to run a Treasury? Because Treasury is a small department. It's two, three, or four people in an average-sized company, in a big corporation
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it might be 15 to 20 people. Might still be significant but compare that to accounting and controlling, where you have 40, 50, or 60 people, at least a lot. So with a few resources, you have to still manage a big part of an organization. But you cannot manage what you cannot measure, right? Indeed, indeed. So you need information, and that's the key.
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For example, do you have insights in all your bank accounts? And some clients say yes, but some clients, they have a shoebox. I literally had one client shoebox with all these bank tokens in there. And he said, yes, if I log into Santander, I take this token, this token, this token. If I go on holiday, I have to take my shoebox, because otherwise I cannot log into my my banks.
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Well, I get a little bit itchy if I see that. Because there are tools out there which can help you push a button, see your information of all your cash balances. It’s already 5 minutes work, one hour work, 2 hour’s work in the old situation. Right. That's time saved to improve your Treasury. And Treasury is always forward looking.
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Yeah. We're not accountants, we're not controllers, we don't want to look back. We want to look back on the bank statements, how much money do we have in the first 5 minutes of the day and then we continue. Because we have to inform the CFO how much cash do we have in six months, how much risk are we currently having,
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and we need to hedge that risk. So always information dependent, a key factor in Treasury. Absolutely, now at Kantox, we share the view that automation is about not only achieving cost savings of course, but it's also of course managing risk. But moreover, it's about growth, right? We want to help companies embrace currencies, buy and sell confidently in more currencies. Patrick, let’s discuss a little bit more in detail that idea of automation of treasury processes.
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We hear sometimes the idea of focusing on, say, one point of the workflow, in our case the FX workflow, sometimes called discrete automation. Whereas we tend to favour a view of what we call end-to-end automation. Tell us your views there. Yep, I think that's the ultimate goal in any process. Starting point, ending point,
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what are the steps that I need in between. Are those 20 step? Are those 3 steps? Doesn't necessarily matter. And how much time do all these steps take? If there are 20 steps and it takes me four days, by the time I finish step 20, you can basically start step zero again. Because you lost three days in the process and new information has come up.
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So the key is, especially in FX, speed of information, the correctness of information. Because that's the key in everything, my exposure has to be correct. I have to trust my exposure because I'm going to trade on it. And of course, the risk of errors in the process. If I need people touching things, and uploading, downloading, there's always the risk of errors and zero extra at the end.
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I'm buying too many dollars from selling too many renminbis. A big mistake, my exposure’s off. So it's going to cost you money, right? So if automation can help you speed up the process, fine. But automation can also help you get more trust in your data. And I probably like that even more, because it's always a question mark for some data of some clients.
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I'm looking at data, I'm like, is this correct? Can I trust this data or should I do a validation on it? Or do you need people to tell me? Or am I aggregating data? And often I have to because it's not one source where I get my exposure data, it’s often many sources. I will discuss that in about a couple of minutes.
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Okay. Um, so data, aggregating the data, acting upon it and execution. That step should be as short as possible and as trustworthy as possible. I think if you can achieve that, you're a happy company, happy Treasury. Absolutely! Now we give always, sometimes that example of discreet automation when you focus on one process.
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So, for example, on reducing trading costs, right? Like by integrating with a multi-dealer trading platform and you achieve best price execution and stuff like that, it’s wonderful, we are all in favour of that. But more important to us sometimes is the proper integration with what comes before the process of, among others, pricing with an FX rate and collecting the exposure. Because sometimes failure to properly integrate those phases costs you much more than what you would achieve with
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best price execution and features like that. Do you agree with that sort of end-to-end view? Fully. But let's do both, let's get the best price and the correct exposure. But exposure is key. I always make fun in Treasury, execution is the easy bit. So I just push a button and the deal is done.
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I have to check that I trade left side or right side by yourself, might be quite important. It has become boring. When I started in Treasury 17-18 years ago, you had 360T, FXAll that were starting up. But you also still had phones. So for the big deals, I took the phone. I had three phones,
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so two phones one left, one right. It was still fun to talk to traders. Say, what's your price? If another bank on the other line, it's half a bip less. Come on! The deal is with you, can you match it? Got money? Come on, let's do some trades. It was more fun.
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That's right, it's more fun. But do you see that mentality still prevailing? Sometimes, namely a little bit, like the trader mentality and perhaps also disregarding other aspects of the workflow? In Treasury, definitely. We care about money. Yeah, we treasurers, so we want the best price. But the tools are already helping us at putting the best price on top.
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So if I click sometimes it's good so far. So I'm oh! it's BNP who’s best, I click. Before you click hit, it already jumps to the next bank. And I was like, oh! didn't I click, didn't I trade BNP, it went to ING. All right, sorry guys, but there was a split second. It has slightly become boring, but the easy bit, most important bit, exposure. Spend more time on exposure than on execution.
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Absolutely. Because that's where the win is. Of course, we will, or I would look at pricing and execution because it's price times quantity. If your quantities are high enough and I can get the price down only 10-20%, if I do 1 billion in turnover it’s still a huge saving. But if your exposure is off and you're doing wrong trades, wrong trades is wrong exposure. And at the end of the year, in your P/L is still reporting currency losses or gains, and the CFO will be at the treasurer's table.
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That's right. What did you do? And the Treasury will probably tell it's not cash flow exposure, it's translation. Right. But you can never get it to zero. But still, at least the Treasurer has to make sure that his exposures, which he's getting, he’s not responsible for the exposures. In many cases, he's not the cause of the exposures, but he's the user of these exposures.
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So he needs to get the data from procurement, from sales, from whatever department that creates exposures, and act upon them. Absolutely. And trust them. And the last one, this is important right. Now, Patrick, I know your work also focuses on Treasury management Systems or TMS. Tell us a little bit more of that about that, more precisely, about that part of your activity.
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I think TMS has become a wonderful part in Treasury, because it's going to help Treasury automate all their boring tasks and get rid of these huge massive Excel sheets, which we also love as Treasury. We’re Excel gurus, we can do a lot of Vbasics, VLOOKUPs. We're good at that. But still the TMS can do it better and TMS prices have come down. About seven or eight years ago it was only for the big multinationals.
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I think a TMS is now achievable for medium-sized company, they can afford it. And the fact that they can afford it means they can use it to build a business case. That's usually how I approach it. TMS is going to cost you X, but the TMS is going to bring you extra information, it's going to give you cost savings in banking
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costs, cost saving in FX execution and potential time savings for your treasurer. So that's the business case which I will make with the client often it fits in the favour of, especially this client who had a shoebox with these 10 banks could get rid of the shoebox. In the morning, he pushed in a button,
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he had this cash position. He told his CFO, I need this money for the TMS because I don't want to be stupid stuff logging into banking portals, I want to do valuable stuff. Logging into a TMS, already having my cash position and then using that for the rest of the day to really work on the business. Work on the cash flows, work of forecasting, work on exposure management, and then having more informed decisions.
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So a TMS is going to help you do more informed decisions in Treasury. And then you have a better Treasury. Now let me introduce a little bit of a polemic question, if you will, here. As at Kantox, we've excelled mined many, many TMS and from the foreign exchange management point of view, we see usually some shortcomings.
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So for example, do they have what we call a strong FX rate feeder? that is feeding, so to say, the commercial teams with the real-time FX rate they need for pricing purposes. So for example, by clients segment, markups, and is it the spot rate, the well, the one month forward, the three months forward. Sometimes we don't see, or most of the times, we don't see TMS is providing that capability.
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Yeah, no, I can confirm. I think the TMS is mainly for administrative purposes, at the end of the process. We've already done the deal, we push the button in 360T/FXAll or whatever. In some cases, we have an API with the TMS and we push the FX deal in there. We manage the FX yourself so we can settle them there.
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Get the SSI from the banks, it's easier payments. We don't have to touch the deals anymore. But we just discussed the end-to-end process, like pushing the button is only the last step. So getting the correct exposure, in some cases, you can use parts of the TMS because some teams have a cash flow forecasting module.
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So it could go there and see, hey, let's look at my cash flow forecast and sort it on currency. And then I can determine, okay, this is a non-functional currency for this entity, this is exposure. Should I be trading on that? But then you should ask yourself, is the information in the cash flow forecast complete? Because that might be fed from an ERP system which is accounts payable, accounts receivable data.
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That's data where you already have an invoice. If you get an invoice, you’re already in the procurement process, you're quite late. That's exactly the point. We want systems that are, that can better handle the cash flow type of exposure that we need in most hedging programs. For example, also the capability or the possibility of combining those, say, forecasted exposures with what then is going to come, namely the actual transactions.
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We have we want to combine sometimes those forecasted exposures with the information that comes from firm sales orders. And we don't see really TMS having that capacity then. Because it's a struggle, because your exposure data comes from your budget, your invoices, your traders, your procurement, your sales, all these different departments. And where is the overlap? If sales done a sale should I subtract it from the budget or they still use budget data? But your data is usually monthly data.
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And if I'm in the middle of the month, should I take half? So it usually doesn't work. For example, with one client who is a trader in certain commodities and in fast commodities. I always recognize that the traders, they are on the floor doing stuff should talk to one of the traders. Like if you do a deal, is that the firm deal, right?
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He said yes, yes, I did a great deal. I just sold this and this. And I was like, yeah but you sold it in US dollars, we’re a Euro company. It would really help if, at the end of the day, I would know all the trades which you've done. Because you just created exposure for me and before it's in the system, ERP system, which is only updated once a week.
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So I had a gap of maximum for five days of exposure data. So we have to build a tool for the traders to enter their trades and at the end of the day all the trades went to Treasury. So Treasury could at the end of the day, this is the delta of the dollar positions, we put on an FX rate.
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We didn't know the exact settlement date yet, so we had to make some assumptions there. But at least the exposure was settled. Maybe not on the exact day, but 90% of the exposure was out of the way. Fairly big project. But again, easy bit execution at the end of the day one Euro-dollar deal. Main problem was getting the correct exposure in the system. And having the exposure, the derivatives transactions,
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the adjusted to the commercial exposures. And we call that at Kantox swap execution or swap automation indeed are very important. But now Patrick, let's focus our attention on a topic that is going to be huge for us in coming weeks and months. And broadly, let's call it centralization and a focus on net exposures. So when you go from a domestic exporter to a consolidated group with foreign distributors, and then to a consolidated group with foreign production units.
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Now the complexity of currency risk management can become really impossible, right? Yes. Now we call that, what I call the paradox of complexity. You reached that level of complexity and then you focus on simplifying a little bit with managing net exposures. Do you see that as a trend? What is involved in all of this?
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Yes, it should be the ultimate goal, yes. But there's a big struggle to get there. In Treasury, in a way, with the technology that we have now, with global payments one we have, receivables one we have, in-house banking, in-house cash, intercompany netting… If you would combine all that, and it sounds very easy, I would need one bank account per currency worldwide. Because all the Euro flows that it arrives on one bank account and then we split it to the entity which owns it.
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But then the complexity starts, of course, because the euros for the Euro entity, fine, no exposure. But if euros arrive for the US entity, that you see was dollar functional, it's an exposure. Even though if the consolidated group is a Euro company, you would still want to hedge that because you have a consolidated risk on euros.
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But Patrick, who does it? Is it a subsidiary? Is it headquarters? Are we talking full centralisation, where FX risk management and derivatives trade execution are carried out only by headquarters? Or is it partial centralisation, where some of the tasks might be divided up between subsidiaries and headquarters? We have our strong views on that, let’s discuss that a little bit. I also have strong views there.
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It's a struggle, it's often shared because of the complexity. Because even though you have a headquarter Treasury, and Treasury is often a headquarter function, in some cases you still have small regional treasuries. And the reason is because you have regional needs. In Asia, it really helps to have somebody on the ground in Singapore, Hong Kong, whatever.
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They can also much better handle the foreign exposures. And by the way, if I need to wait until I wake up in the morning in London or Amsterdam, the Asian market is already closing. So I'm at the end of the day, I don't have great liquidity. So often three Treasury centres makes sense. One headquarter, one in Singapore, one in LatAm or North America.
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But you need to work together and headquarter determines the Treasury policy. And often in the policy it mentioned say this is a threshold above a certain threshold you need to hedge. That sounds very easy, in practice it's not always implemented or people don't adhere to it. Just because why should somebody in the US care about their FX exposure? They’re head of the subsidiary.
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They're having to consult consolidated numbers, it's not hurting them, their bonus is not linked to it. So often you have to really as a headquarter Treasury, push them. Hey guys, this is the policy, adhere to it because I need your information. But they need their motivation as well, right. So for example, I don't know, maybe link their compensation packages to the quality of their forecast. Scary, scary.
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But not to the execution of those derivative transactions, leave that to headquarters. Yeah, I agree. I agree HQ should execute, but HQ is dependent on the information of the local entity. And of course, we could check with the help of TMS because hey, the US entity, the US subsidiary, they have €10 million on their bank account, so maybe you should call them or ask them:
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Hey guys, you have €10 million that's an exposure, maybe we should hedge that. But maybe it's not even exposure, maybe they had €10 million inflow and they have invoices for €9.5 million somewhere. So the net exposure might only be €9.5 million. So it's always a struggle on finding the again, this capacity of a treasury, which is small team, it has to do less.
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So I'm really dependent on quality data, moving to full in-house banking also for FX. And I need to be able to do multicurrency netting, but that also means I almost have to implement a full in-house bank. Right. And that's a huge project. About which we will have news again in coming weeks and months.
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I will let you know, of course. Patrick what would you say are the main benefits of full FX risk management centralisation? Would you say it's about for example, saving on trading costs, as now all of the trading could be so concentrated on HQ, and thereby that could be in a position to negotiate perhaps better bid-ask spreads on the subsidiaries could achieve on their own?
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Or is it maybe, perhaps to gain, to accumulate more FX expertise at group level? What would you say? I think I would love to be both. The first definitely applies. The higher the volume, the better bargaining power buying for the banks. I tell them the spread is too high, I need better margin or I use a tool where I have 10-15 banks in there and it's the best execution basis. Not necessarily ideal from for my bank relationship management, but from a pricing perspective, it's great.
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And it also gains you insight and the possibility to see patterns. For example, the Asian entity who's receiving dollars that we're selling on behalf of them, and other entities might be on the buying side of dollars. So if I can come up with a strategy from Treasury perspective, theses value dates if you put them on the same day,
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I don’t have to buy $50 million and sell for $30 million. Let's only buy 20, and create an internal deal for 50 - 30, and not go a bid-ask spread for big tickets. Right. It could be only half a pip but half a pip for 50 million if you do that once a week, it becomes serious money.
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You’re pretty okay in Treasury. Pretty quickly becomes serious money. Indeed. But yeah, you need a central treasury to be able to do that and you need to tell your subs: Hey, tell me your exposures. If you need deals and you need a tool to be able to manage data, because you're doing the trade on behalf. It means you need to do a mirror trade, HQ trades for the bank, HQ trades but
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as a mirror and I don't want it in an Excel sheet. If it's too complex, it gets too big. And you need the full traceability on that. Even from the internal hedge all the way to the external trade or hedge execution, with the bank. You need really what we call end-to-end traceability.
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Each element along the transaction journey has its own unique reference number and then that's how you track all of this. Patrick, let's change a little bit to the subject of the conversation. At Kantox, we don't discuss markets in the sense that we don't think it's the business of treasurers to speculate on what happens in markets.
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Yet, there is a point that is obviously here, September 2023, in the mind of everybody. Shifting interest rates worldwide. Now, how do you think the interplay between course interest rates and FX, in the in the sense of managing those forward points or those interest rate differentials? We are really, really, really keen on having treasurers focusing on that because there's lots of opportunities.
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You could delay hedge execution when forward points are not in your favour. You could anticipate as much as you can when they are in your favour. You can use those forward points for pricing purposes as well. Do you see, given what's happening with interest rates worldwide, more interest in that type of thinking? Yes and no.
00;29;25;04 - 00;29;57;03
That's the boring answer. And it depends. Why does it depend? Because some Treasury policies say, if the exposure happens, you have to hedge. Which is the prudent way to do it. A treasurer is risk-averse. I have an exposure which is created over risk, I need to hedge it. I need to immediately eliminate it. Which is fine because I'll be playing the curve for to save a little bit of forward points.
00;29;57;06 - 00;30;22;25
Well, it happened that the euro dollar went 3% in a day, 3% versus maybe ten basis points saving. I can sell it to my CFO. But what I can do is think about strategies, and I had a client who had a hedging policy set to hedge three months forward every time and keep rolling it. So I challenge him.
00;30;22;27 - 00;31;02;20
I like, does it make sense to do? Where does this three months come from? But that's a good point. Historically, it happened even though his cycle wasn't even three months, it was slightly longer. Slightly shorter, of course, but it increasing interest differentials forward points have become more expensive, right. It made sense to shorten the cycle. I even proposed to him let's do spot hedging because we also had multi-currency cash pools connected to it. So we could play around like long-assured currencies, even though the interest conditions on the cash pool were less favourable than in swap points.
00;31;02;22 - 00;31;25;27
But in some cases on this forward curve, forward interest curve. We had a point where three months was more expensive than two months in more than four months. So playing around a little bit could save a little bit of forward points. More work because you have to roll more often. But that can be automated as well, right?
00;31;25;29 - 00;31;58;14
So for example, you just mentioned, Patrick, a really interesting topic there. The time-based approach versus a market-driven approach to the management of interest rate differentials in currency management. Quite weak. And you said that your client also focusing on a three-month time-based approach. We strongly favor a more of a market-driven approach where we set conditional stop-loss orders in the event of unfavourable forward points, right.
00;31;58;16 - 00;32;22;09
Depending on your dollars to risk there. But there is when you achieve those low savings on forward points. But that mentality there of a time-based approach is still very much prevalent. Right. Instead of again, more of a market-based approach which can be implemented now we have the tools to do that. But it's what you say.
00;32;22;09 - 00;32;47;04
Yeah, it's more difficult, right? It's like what we have to do. Is it okay what we have and does it make sense to put more work in it? So more effort? What's the output of this more effort? And do I have the time to put more work in it? Again, small Treasury teams, sometimes at capacity. I even had one client,
00;32;47;06 - 00;33;19;00
they concluded, okay that was three-four years it was pre-COVID, but they concluded every time I'm paying forward points, why? The market thinks it's these forward points, but the market was flat. Different markets I understand. So they implemented the value-at-risk model. So what's my risk appetite I'm willing to take? And it was a couple of percent, because if your risk appetite is zero, you should do forwards all the time.
00;33;19;03 - 00;33;47;00
But they had some risk appetite. So they implemented of our model, a lot of work to implement it, more work to maintain it because you have to calculate your volatility all the time. Not easy, but the potential benefits was a lot of forward points saved. Absolutely. Okay. They stopped it during COVID because the market turned crazy and the exposures also went wild.
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But I think you need some track record to, I think now it makes sense to slightly start it up again. We've seen that recently a lot with the dollar to Mexican peso, the spot rate relatively stable, yet an enormous amount of forward discount to the Mexican peso. Patrick Kunz, let me ask you one last question perhaps, and it is about a treasurer's priorities, what do you say?
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If we read surveys, all of them, right, there's no exception, they focus on cash management cash is king, cash is queen or cash is king and cashflow is queen, whatever. What would you say and what's the the position of FX? I personally do not like that neat separation, because I think there is much more, these topics are really related one to another.
00;34;43;25 - 00;35;13;13
But again what is your view there on those surveys, that keep telling us that cash management is the top priority? And it will be, cash is emperor, right. I used to say in a webinar a couple of weeks ago, and why treasurers we are forward-looking. So it means and top priority number one is always cash flow forecasting in treasury for ten years.
00;35;13;16 - 00;35;31;22
So we have a top priority, but we cannot solve it. And why can’t we solve it? Because the future is uncertain and that's the problem. So the forecasts are make it now for three months, six months, nine months, and two weeks from now, I need to make a new one because the world has changed, the information has changed.
00;35;31;24 - 00;36;01;27
I need to constantly update it. If I have a client with a forecasting accuracy at a 70, 80, or 90% range, I say, well done, you're great because this is perfect. And that means if I can't already get my forecasting right, yes, it hurts everything else. Absolutely. It hurts how much cash needs do I have in three months, or how much surplus cash do I have in three months?
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If that's uncertain, I need to build in a bandwidth. If my cash surplus is 50 million, I wouldn't put a time deposit of free three months for 50 million, because if it's 45, I'm 5 million short. All right. So I need to determine, and that's the treasurer’s role, how certain these forecasts are going to be and how do I adjust my Treasury to it.
00;36;26;00 - 00;37;05;12
Is this cash surplus 80%, 90%, hundred percent certain maybe I should invest 40 million for a longer period to maximize my interest result? Same on the exposures. My 0 to 1-month exposures, they are fairly certain they are 90-100% certain committed cash flows committed. Which is the other part that is not as difficult, right? Yes, exactly. It comes out of my cashflow forecasting and my the fact that the Treasury looks at it looks into the future and acts upon this I see in the future I have an FX exposure, I'm going to hedge it, but I need to adjust my hedging strategy to the certainty of that exposure.
00;37;05;14 - 00;37;37;19
And part of these exposures are fully committed, a hundred per cent certain exposures. I put a hedge against that, which is a hundred per cent committed, swaps forwards or whatever, but then I have exposures which are more uncertain, solidly uncommitted, at least because of budget, because of projected sales, not hard sales yet to put a forward against that. Not maybe not because uncommitted exposure versus committed hedge, that's a risk.
00;37;37;22 - 00;38;06;19
But you can combine the two, right? So I want an uncommitted hedge with an uncommitted exposure. So I might look into options or indeed barriers which make sense. Again, it's more difficult. I still see clients using committed exposures, committed hedges, forwards. But then they say, okay, my exposure is not certain. I take 70% of that and I hedge that, because I use the bandwidth method.
00;38;06;21 - 00;38;27;26
It’s the easy method, works, works okay-ish if you're stressed about time in a treasury. Um, but you can think about different methods. I don’t see many clients using FX options, might be interesting in some cases, especially now in volatile markets. But then again it's more difficult. So you need to have the capacity to trade that, administer that, settle that,
00;38;27;26 - 00;38;52;06
be able to trade them. And it's not easy. And changing a treasury like we've been doing forwards for 20 years already, why should we change that? That's also different to sell and that's not to sell, it's challenging the status quo. And yes, maybe you're good, maybe you can be better, but we have to investigate.
00;38;52;11 - 00;39;09;17
Absolutely. All right, Patrick Kunz, Treasury consultant and owner of Pecunia Treasury and Finance. Thank you very much for being today with us at CurrencyCast. See you next time. Thanks. I love this.
