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What can treasurers expect in 2024? 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 François Masquelier, CEO of Simply Treasury and Chair of both the EACT, the European Association of Corporate Treasurers, and of ATEL, the Luxembourg Association of Corporate Treasurers. Mr. Masquelier he is one of the leading minds in Europe when it comes to Treasury management as well.
A very warm welcome to you and thank you for joining us today on CurrencyCast. Thank you for welcoming me and of the invitation. All right. Let's start with perspectives for 2024. If I remember what we said about a year ago for 2023, we said that technology would help treasurers in a landscape of a wild economic uncertainty, shifting interest rate differentials between currencies and high foreign exchange volatility.
Now, it appears that the landscape has changed a little bit. There is maybe less foreign exchange volatility and there is even some talk that interest rates would at least stop from going up. So, beyond any forecasts, you know that at Kantox we don't give much importance to interest rates and foreign exchange forecasts. What is your outlook, broadly speaking, for 2024?
Do you think we can expect big changes from 2023 or what are your surveys telling you? What are the ATEL surveys, or the EACT surveys or the PW surveys telling you? Yeah, no problem. So as you say, it's the last to recent survey was the spring survey of EACT, it's an annual survey we will launch very soon in January.
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And of course when you think about it, the last survey was released at the time slightly after the bank crushes in the US with the Swiss banks, and also at the moment where interest rate was slightly picking up. So it's two important element that I will talk about. So of course the current context could maybe change and shift some of the priorities.
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Only I would say that I do not expect that 24 would be very different from 23. You know, it's like the races that we will have the same at the end, but maybe the ranking could be slightly shifted because of this new context and high interest rate and counter party risk. It's not a new risk, but it's more important. And of course, focus could change. And you rightly mentioned volatility, FX volatility, something down. But it's not the reason for thinking that is not the risk to be well treated because you know it can pick up a very soon. So I guess that's I do not expect to have major changes and I don't know if you want me to comment some of these risks and priorities, I'm ready to comment. Well, yes, you said that foreign exchange volatility coming down. That is of course, that sets the stage for complacency perhaps or recency bias coming in. So it could be potentially a little bit dangerous. But I think that a shift to another part of the of the landscape that is becoming more prominent as we go along, namely the issue of treasury centralisation or the centralisation of Treasury operations, it was on the cards last year.
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But it would seem that every day that passes by, there is a new piece of information or a new blog post or a new article, or somebody at a conference putting even more emphasis on the importance of centralising Treasury operations. This year at Kantox, we will have a big announcement or big launch in terms of foreign exchange risk management centralisation.
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But beyond that, François, what is your view? What is the idea behind this renewed emphasis on centralising Treasury operations?
As we say though, when you look at the different priorities, some are, let's say, identifying some risk that could be better managed and mitigated and centralised. Because for me, the two major lessons we all learned from this green swan crisis, COVID. And after the recent bank crisis and the pickup of interest rates, that things could go very fast.
It's important to be first centralised as much as possible and then automated or even going to the next stage, the hyper-automation.
Why is it important? Because if you centralise, of course, you will offset some of the risk. You will have some expertise at the central level and you can better manage by using maybe more adequate tools. So before you disclose what you announced
I keep thinking that any solution for better centralising Treasury is quite important. And we have noticed that a lot of companies try to centralise more and more, not globally because it's always difficult because of the different slopes. But at least what we call this is the regional treasury centres, and it's the notion that there are emerging a lot of companies where it could be more efficient to better centralise, to make sure that they capture all the entity’s control it at least a consolidated entity.
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So. Right. It's quite important this automation and centralisation are combined and really aligned. Because if you want to centralise, you need some tools to be more efficient and you need to automate, to free some time to make sure that you apply properly the policies, the strategies. You free some time not only to produce report, but also to extend, to analyse the report and to take more strategic decisions.
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So we are looking for more of a decision-making solution where you can go a step further. We do want you to remain a figure producer or report producer, but also to analyse and to bring more value to the C-level. That's why we see a sort of, as you rightly say, emergent of centralisation to try to centralise what is not yet centralised, sometimes for historical reasons, for legal reasons.
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And then we also notice that a lot of companies when they acquire have a tendency to be very slow to integrate new businesses, new divisions. So it's important that they realize that to centralise and to integrate the new businesses into your business. This aligns the fragmentation of businesses, because multinational companies don’t have only one single operational business, they have many businesses with different patterns, different specificities.
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So it's important to centralise. And also with the expertise, I mean, the resource is the human brain. So it's good to have tools, but you need to have a skilled team. And these days it's really difficult to find the skill and the talent, and to retain the talent, and to have a team dedicated to the Treasury issues working for the FX.
Yes. Well, yeah, thank you for that. You mentioned, of course, the solutions, the technology solutions in the context of centralisation. And when it comes to foreign exchange risk management and centralisation, we see that some of the existing solutions don't really address two, after listening to you, maybe three important pain points. Namely, so, for example, the optimisation of netting opportunities and for points management both at subsidiary level and headquarters level with a single software solution, but also the issue of cost, right?
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If all external trades, that is FX derivative transactions, are executed by one entity, in this case we have in mind headquarters, it will help the firm negotiate better terms with banks. And as you, of course, imply and even say very explicitly, the problem of building expertise at group level, what is your view on that point? So foreign exchange, risk management, centralisation in particular?
Yeah. So if we focus more on the FX risk, one of the many risks we are the master or the guardian of, I would say that yes, making is quite important because it's important to have said to see as much as you can, and it's not always possible because of the 1-to-1 approach. And of course, an automation system enables a 1-to-1 approach, because ideally the 1-to-1 approach is the best.
When you send a team, it's always great to claim that there is a natural hedge. In theory, it works, in practice, it's more complex than that. So it's really good to find things that would be fully offset at the same moment with the same value dates, etc... So at the end of the day to a lot of corporates, especially when they are well equipping them of a system prefer it, and also for the hedge accounting reason I39 and 939 and that is very smooth preferred to go to for the 1 to 1. Let’s say okay, I prefer to increase the volume by not netting because it's complicated, but it is my hedge accounting evidence documentation, so it's up to meet and my auditors to achieve the objective. And furthermore, I don't care about having a bigger volume of transaction because I have system and I centralise everything in one. The one point where I could have access via platform to the market and try to give the best execution.
But we all know that the best execution is just part of the game, because the pre-trade part is quite important to get access to the information. And there are commissions fee, because a lot of the pain point today, the fact that we have to roll between identification of risk and communication of risk before execution. And then we have the post-trade phase.
You also mentioned the forward points and it's quite important, you know, it's the environment where we have a high interest rate, we have some exotic currency, sometimes difficult or impossible to add. It's quite important that you diversify your platform, going have access to all these currencies and try to manage these four points to do. We need to always assume the person maybe not, but at least to have a dynamic approach where you can monitor your risk and the time could play in your favour, especially if you have forward points playing against you. You also mentioned cost, Agustin, is quite important because cost it's also the issue. Costs of hedging are increasing year on year for different reasons because of the counterparty risk, because of all the regulatory and capital adequacy constraints on the bank level, because some banks are not able to hedge all currencies, it's one we have emerging solutions like a StoneX or Ebury
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proposing to hedge these kind of exotic currencies. And by the way, for the business, it's good news because Treasury could create value for the business by opening doors to this exotic or more exotic currency that sometimes the CFO didn’t want to import. There you can open to market where you can onboard this currency because of your central expertise, manage this currency properly, make sure that it’s hedged properly.
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And if it's not hedged, monitor them in a way that, in case of a big shift, you can ask the machine to execute the hedging. And in case you can stay within a certain acceptable range, benefit from time passing and reducing the importance of these forward points. And it is a last point, you have not mentioned that is quite important in my view is the regulation. We should keep in mind regulation, accounting on one side is important with the adhoc reporting these days, it's key for not being qualified. And the financial regulation, maybe you know that at the moment we are or EU is reviewing EMIR, and we can expect that under the Spanish presidency or maybe the Belgian one, by the end of the existing commission EMIR could be sorted out. And there are some risks of re-incorporating new additional reporting. So for this element, I think that it's justified even more being automated and centralized. Absolutely.
Yes. I think we we would agree on this one, though. Of course, when we say foreign exchange, risk management, centralization, there are different possibilities. Right? On one end, we could have complete decentralization. So, for example, the subsidiaries both said their own ethics risk management policy and execute what we call external transactions. That is, if derivative transactions. Then on the other side, the full centralization where headquarters not only decides on the ethics risk management policy at all levels, at subsidiary levels levels, but also is the only entity that exec its actual effects, derivative transactions or external trades or in between.
That could be some possibilities of, say, partial centralization. How do you see this this playing out? No, I totally agree. So on one side, yes, the best for acquisitions. The theory on the other side is a practice that sometimes could be completed for for many reasons. So I like the idea of a mixed solution where you can if centralizing this centralized operation, of course, are generally the things that better to centralize everything for the execution at one level to avoid having different approach, it's important to have one policy for the office, even as you can see different policies and different strategies according to the businesses, the underlying business is a different division in recognition of companies per definition, divisions have different businesses. Although we try to concentrate on our core businesses. And you know that some businesses let’s the luxury industry, the power industry, you could have different factors depending on the underlying products.
For example, luxury fashion, the expensive fashion where you have the quarterly release of new dresses. You can have the perfume, where we have a longer period. You can also have the jewellery, with different elements. So it's a mix of that, including the commodity risk for some people. So at the end of the day, it's difficult to say that one is the best fit for all models.
It could be a mix and it's always the machine help, making sure that if you are partially centralised, a decentralised operation, at the end of the day, you can capture all the deals and make sure that the proceeds are respected and you’re aligned. Because the big risk is to what division applying a different strategy than another, or different policies. It's quite important to be in line and something that a lot of auditors, external auditors, are checking at the moment.
And last point, don't forget that a lot of companies seem to be very focused on the core businesses and they have different divisions. And we saw that, especially in the pharmaceutical sector, that you at Kantox know quite well. You have a lot of healthcare division of the pharmaceutical group. Try to be, let's say, a spinoff or could be separated from the business or some times they try to have a certain autonomy, because it's possible that in the future you want to IPO a division or separate the division.
Is the case for some big companies, the Johnson&Johnson, Sanofi, Novartis, etc. They tried to refocus, so if you want to reorganize, sometimes it's good to have a certain decentralisation, a certain competitor providing you have one tool. And you can capture everything in one single solution, just to make sure that at the end you are aligned in respect of policies and strategies while being efficient.
And again, I don't claim that centralisation is the only way to do something. It could be, as you rightly say, a mix and a combination of solutions depending on the different situations. Yeah, that's right. As you said, look, you could have the optimal centralisation. So for example, allowing the business to specialise on their operations, but at the same time taking away from them the burden of executing the FX derivatives transactions. Letting them, of course, carry out the internal FX trades with headquarters.
That appears to be a really interesting combination because it'll give them the ability to concentrate further on their business. But at the same time, it takes away the risk of having derivative transactions being handled by subsidiaries. So absolutely spot on there François. So let's go to the not totally unrelated, of course, topic about one of your recent articles on you say that the king is back.
Right. And you're mentioning course the importance that is not going away any time soon, Of course, cash and liquidity management. And there seem to be people discussing cash, it's going some say cash is going in a tribute to the late monarch of the UK. And we've seen we have a guest saying cash is the emperor.
And if we continue like that, it's going to be the monarch or the despot. Why not the tyrant right? Explain to us a little bit again why for 2024 you see again cash as the king here in terms of treasury operations? So it's obvious it hasn't always been said, it's a sort of common say that cash is king or queen or whatever, qualified as you want, as you wish.
But it still didn't do to make it quite important. And it's clear that because of the recent COVID crisis, financial supply chain disruption, you remember the Suez channel story, because of the chinese being closed for one, because of the picking up of interest rates. And more recently in the spring of 23, we had this banking issues in the US with the First Republic, with the SVB Silicon Valley Bank and some others in trouble as well as the Swiss bank.
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We found the solution, but still it was quite interesting. So liquidity is extremely important when you are cash-rich just make sure that you have good management diversification. If you counterparty risk there is good centralisation in alignment to policy. It's quite important for corporate treasurers to sleep well at night. But on the other side, don't forget that it's quite important for the cash-poor companies to ensure liquidity, via buffer via committee to create facilities, the recourse to the capital market or to different sources of funding and diversification is quite important.
And what I fear in coming back to my view on the risk for 2024, one of the risks I perceive it's the difficulty of refinancing. A lot of companies in 24/25 will have the renewal of existing credit facility that they are negotiating three, four, five years ago quasi at zero or negative rate but flow zero. So when you pay 0% margin of 100 basis point, it means that if we are now at 4% basis point plus the same 100 basis point, assuming that the spread we earn the same.
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It means that you have multiplied by three, four or five the cost of funding through the services. so it will be a big issue to have access. And in the meantime, we saw that a lot of companies have continued to increase their gearing. Is something that you can read in paper in the US, but also in Europe. So all in the gearing of companies indebtedness level has increased over time.
It was also a consequence of the crisis, by the way. Some were obliged to get access to the market. François, as you say in your piece, is also this year that I think you think is misguided, the ideal of increasing debt ratios in order to lower the weighted average cost of capital, as the cost of that is lower than the cost of equity.
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But you do criticize a little bit that approach, is it right? Yeah, because again, I'm really a big defender of the classic economic principle and maximizing your WAC it's a good idea. Of course, you try to play on the leverage and to maximize your leverage. But at the end of the day it could be risky because we saw that in the recent crisis, not only the recent COVID crisis, but all of the crises we face over the last 15 years, could kick the can be extremely fast.
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It's important to be able to react. And if you optimize no but maximize your WAC, you could be at risk when the situation would be really rapidly deteriorating. And the speed and the size of the changes could shift could be quite, quite difficult. So I would certainly not recommend maximising but try to optimise and try not to go to the last limit, the last digit, but to try to take some buffer.
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And we saw recently some corporates having in their policy to maintain a cash buffer extremely liquid. I know some corporates, large ones, having policies that say okay all the excess cash should be placed with a daily liquidity, could imagine so it creates some thromboses this crisis. So it's quite important to also consider that access to liquidity can be difficult.
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But is not when the crisis is there that you should think about diversification of your funding. Always tried to remind people, and it was a key priority in the last survey, number two if I'm correct, and it would be still high in the 24 I guess. And I believe in the fact that working capital is the first source of funding for a company.
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So work on your working capital try to optimise it. Work on your cash flow forecasting, if you have better provision of future cash flows, you can better size your quick facilities. Always take reserves and buy insurances with commodity rate facilities. And last but not least, we've recently heard from Christine Lagarde, in front of ECB a recent speech that CMU, Capital Markets Union, is quite important
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in Europe. We are more dependent on bank borrowing compared to the States and you should have a better balance between capital market and bank borrowing. And it's something that we should keep in mind if we want to survive. So yes, king is back and cash is king. That's all good. So let's link now the two issues of foreign exchange risk management and cash and liquidity management, and even working capital management.
And then we have phrases like this. See what you have to say on this. We at Kantox always say that by embracing currencies without currency risk so companies could sell in the currencies of their customers and thereby lowering the risk in their accounts receivable. And at the same time they can confidently contract or buy in the currency of their suppliers, which presumably could allow them to get extended paying terms.
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So we have the working capital management there here. In present also when it comes to foreign exchange risk management, we're going to give more examples. So for example, automated swap execution or delaying hedge execution when you have unfavourable forward points so that you of course, diminish the need to set aside cash in terms of collateral requirements. So there are these issues, there are no silos.
What is your view here François with a view on 2024. Fx and cash management is a big portion, because we are all international multinational companies, small or big, big sizes, whatever. But it's important because even working capital, we have a lot of FX issues. We have also the cashflow forecasting. Which is quite important because we need to try to anticipate the revenue in different currencies.
By the way, one of the first things I recommend to our members is to consider the functional currency, sometimes by changing your functional currency, you can reduce your risk. And if you are an air fright company, it may be more logical to be exposed to US dollar to be functional currencies despite the fact that you can be located in the EU.
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So that's the first step. The second step, as you rightly mentioned, in a difficult economic environment in some businesses you need to find new markets, new customers, diversifying the market and going abroad. Maybe it's attacking some markets that were emerging and not really key for the CFO. Could be quite interesting and by doing this kind of centralisation, automation, by monitoring of this swap point, because of the potential of the huge debt or the swap points for some currencies, you could certainly enter in markets where you were not able to grow. So it's quite important to diversify your market.
And it's also important to invoice in the currency of your supplier, of the currency of your customer, because then you can master and manage yourselves your risk, rather than to live it and push it to your customer. Because some people, let’s say are a bit candid, they think asking for your supplier if you are media company, you buy film rights from a US major.
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If you ask, you can certainly get invoiced expedited in Euros. But at the end of the day, if you push this through your supplier, get that your supplier would try to insert clauses to 3x and more growth market buffers, etc. And so at the end of the day, it's that the good it seems to be a good a good it's not that increase one in the local currencies supplier the customer always better because you can master your risk and decrease your potentially ever competitive advantage with the value of the company. Absolutely yes. François let’s discuss a little bit the topic of Treasury technology. Now you frequently update the media, if I read it correctly the Treasury Landscape, no no the Treasury Technology Landscape by SimplyTreasury.
We find it a really interesting resource of course for treasurers to find their place in the complex and shifting world of Treasury technology.
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And we must say that we are very pleased to see our Currency Management Automation alongside ERP and TMS. Discuss a little bit this technology map. Just to give you a bit of background and history of this map, I started about two years ago because I realised that through technology in Treasury, not only in Finance, in Treasury in particular, it's quite a jungle of solutions. Is difficult for corporate treasurers If you don't go outside to meet people to find your way. And so I thought it was necessary to help our members to have a better view. Then what is quite unique in this mapping landscape, I would say, is the fact that I decided to have categories, that most people consider everything is TMS. TMS are supposed to do everything, they should do everything that we do, but they are not able to do everything. And so it's why I decided to separate and I would explain what I plan to do for the next stage. In the debut with Suzuki, we have TMS, we have ERP and we have different solutions to the CMA, but you go to the banks and give it gateway for the bank connectivity and some of the different elements that could be provided by some large usual suspects, the big players on the market, could also be individualised. So the idea was to put the name in the major category the players are acting on. For example, SAP, Iron, or Kyriba in TMS, SAP in ERP or TIS in banking go get to it for example. And so I tried to put categories that were quite new in my view, to define the different categories and to put name on it.
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And it's an evolving document because of course every week I receive. I don't put a date on a regular basis just because I want to update it, just because I receive demand from people who identified a new system that are that's the words to be put in the map. It also changes logos, changes, name acquisition and mergers, etc. So it's a living document, and the next stage will be to already exist with a single map where I tried to see just focus on the TMS providers and see what all the different categories they are really proposing a solution for.
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And we know that sometimes they could cover different categories. So I just empty the map and just focus on the 2025 major players and I will keep evolving. And I'm also working on the third map where I will focus more on SMEs, family offices and ultimately funds, because it's a different category of player having different needs.
So it's a different one. But the idea would be toward the map where people and then it would be transforming to a website, could go see. Okay, I'm interested in that solution to, for example, for bank fees and there is this awful bank guarantee. I would like to go into the category to focus on the category to see what are the major player into the sort of marketplace where I can find information, and find some of the think it's the technical sheet where I could get some information. And then in the next stage it would be a tool for preparing RFPs for corporates. Okay, what are all the different providers I could use for populating my RFP when I want to update them to change my mind. I got this really useful.
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We look forward everyone to your updates on the Treasury technology map and again really glad to feature there with currency management automation. Let's get a little bit slightly more polemic in terms of Treasury technology. You know that in the end in Treasury technology, it always goes from discovery then to hype, then to adoption and finally scaling up. All right. We have the feeling at Kantox that application programming interfaces, perhaps as opposed to more high technologies such as artificial intelligence, we are there with APIs already well into the face of scaling up right well beyond hard, well beyond adoption.
It is really going very, very fast. And the latest examples allow us to put it almost all together. So for example, writing in ATEL, a commentator just said that if you want end of the day reconciliation processes using SWIFT and in P940, you can just use a new API tool to provide real-time data, right? And that would allow you to make better liquidity management decisions, which I find really incredibly important because of course that may allow treasurers to want to use less of liquidity buffers. Just by having this technology API connectivity, allowing them to to pull out the necessary information at the right time.
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Right. And if you couple that with what we just said about currency management, where APIs also play a very, very important role. So it seems that we're coming full circle and that application programming interfaces are fully in scaling-up mode. How are we going to even talk about apiculture, right? Or like beekeeping?
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But this culture of APIs is an important part in terms of Treasury tech. What is your view here? No, I totally agree because we were talking about technologies and fintech or tech companies, now we are talking about APIs and interfaces. And it's true to say that I understand the concept of API culture. It's often potent because it's something that is like for own is quite, quite important and quite use of information.
Associated these we can better serve the corporates and then other of banks, BNP or larger Merchant International group of banks try to have access to the technology but also use API. And what I always recommend to our members for working with these banks, more open to co-create, is to try to identify the problem and to see. Because the problem is always with the objective of being more in the real-time to accelerate the process of decision to get better access to the information more immediately to react faster.
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Because we know that time is really an issue this days. And the when you see some large bank, we try to develop co-creation with the customer to try to build an API, to try to solve the problem, to find the information where it lies, and to improve the system. And this solution there could be industrialised and the duplicate towards the customers.
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So I think it's certainly a recommendation for our members across Europe. Do not hesitate to talk to your bank, to explain a pain point, and to try to see if with the API hedge information blocks of where you can access the information, make some use of it, and get access to it real-time. Because the real time it's really the motive for the coming years.
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We need to have a faster access to the information and the more accurate information also. So innovation is quite key in that aspect I would say. All right. Look François Masquelier you CEO of Simply Treasury and chair of both ATEL and EACT, I think we'll come full circle. We started with the outlook for 2024, we then went to the subject of Treasury centralisation with lots of topics there to discuss.
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We went back to the recurrent issue of cash is king, and we are now ending up this conversation by discussing application programming interfaces, all with an eye on this year of 2024. Let's see how it goes. I really, really like to thank you for this presentation along with the questions and answers. It's been really a pleasure and will do, I'm sure, another interview sometime this year, or at least to be sure to prepare also for 2025.
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So many thanks and we'll see you next time. Thank you.
