Presented by: FTI Treasury International House 3 Harbourmaster Place IFSC, Dublin 1 Ireland +353 1 6360000 pleavy@ftitreasury.com

Corporate Treasury Challenges and

Opportunities for 2015

Strengthening your

treasury organisation

Corporate Treasury Challenges and Opportunities for 2015

Corporate Treasuries are now having to respond to external and regulatory

changes and invest time and effort in meeting demands that are not directly

related to their underlying business and financial risks. These challenges will

continue in 2015. There are also opportunities.

Content

Finalising and Leveraging SEPA

Corporate Concerns over further Financial Regulation & Reform

Accounting Standards

MMF Regulation

Negative Yields

The Chinese Renminbi Juggernaut

Taxation – Simmering or beginning to boil?

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Finalising and Leveraging SEPA As we move away from the 1st February 2014 deadline for the euro area to comply with the core provisions of the SEPA Regulation, the deadline for non-euro country compliance of 31 October 2016 looms on the horizon. Effectively, this means that as of these dates, existing national euro credit transfer and direct debit schemes will be replaced by SCT and SDD. Corporates are now looking to leverage their SEPA investment and identify ways of

centralising the payment process in companies more deeply, aiming to replace

multiple banking connections with a single host-to-host channel and standardized

formats. We are now working with companies on payment-on behalf-of (POBO)

payment factory structures to:

Reduce costs: o Save time and effort in the subsidiaries and

operating units, reduce headcount o Reduce the number of external bank

accounts. o Reduce bank transaction processing costs

by consolidating transaction volumes o Cut FX fees and exposures by the

concentration of FX purchasing.

Reduce risk through standardized and harmonized processes and systems that improve security and control.

Generate efficiencies through simplification in such areas as network arrangements, operational processes and technology.

Improve visibility of funding requirements and liquidity.

Treasury Actions:

Review bank communication channels and file formats

Examine potential for payment factory and in-house banking structures

Review cash management bank account structure and implement efficiencies.

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Corporate Concerns over further Financial Regulation & Reform

The impact of financial regulation and reform on corporates has now been well felt,

having experienced the implementation of OTC derivative reporting obligations under

Dodd Frank, EMIR and dealing with further developments in Canada, Australia and

Japan. Further planned regulation aimed at the banking sector will also impact

corporates, for example:

MiFID II:

MiFID II came into force on 2nd July 2014 and must be transposed into national law by Member States by 3 July 2016. Many of the provisions of MiFID II will be implemented by means of technical standards to be drafted by ESMA and approved by the European Commission. ESMA aims to deliver final technical standards to the Commission by July 2015.

While MiFID I regulates investment firms including dealers in derivatives, corporates currently rely on the dealing own account exemption of MiFID (Article 2(1)(b)). However, MiFID II includes a new dealing on own account exemption definition: “members of or participants in a regulated market or an MTF or have direct electronic access to a trading venue.” There is a fear that this could jeopardize corporates exempt status because of commonly used platforms such as FxAll or 360T.

Basel III:

Basel III is the global, voluntary regulatory standard on bank capital adequacy, stress

testing and market liquidity risk. It requires higher capital versus risk weighted assets,

leverage ratio standards, and minimum liquidity requirements, the implementation of

which commenced in 2014 and will be phased in up to 2019. The following specific

future timeframes apply:

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2015:

Minimum capital requirements: Higher minimum capital requirements are fully implemented

The leverage ratio and its components will be tracked and disclosed but not mandatory.

Initial introduction of the Liquidity Coverage Ratio (LCR), with a 60% requirement.

2016-2019:

Phasing in of conservation buffer

Final adjustments to the leverage ratio and becoming mandatory in 2018.

Introduction of the Net Stable Funding Ratio (NSFR) in 2018

100% LCR is expected in 2019.

Potential impact on corporates: Higher cost of bank credit, lower returns on cash

deposits (can they get any lower!).

Bank Recovery and Resolution Directive (BRRD):

The Bank Recovery and Resolution Directive 2014/59/EU published on 12 June 2014

sets out new resolution rules for all EU banks and will enter into force on 1 January

2015. From this date a single regime will apply throughout the EEA for the recovery

and resolution of EEA banks and large investment firms. Member States must now

transpose the Directive into their national legislation within the defined timeline.

BRRD will make bondholders and depositors bear the cost of bailing out failing banks.

This Bank bail-in regime will increase the risk for corporate depositors and retail

institution may be prohibited in offering OTC derivatives to its customers.

The European Union Financial Transaction Tax (EU FTT) is a proposal made by the

European Commission to introduce a financial transaction tax. On 6 May 2014, ten

out of the initial eleven participating member states agreed to seek a tax on equities

and some derivatives by 1 January 2016.

Treasury actions:

Review credit status of permitted counterparties

Evaluate all fees and revenue you create for your banking partners and pre-empt any proposed increases based on Basel III requirements

Evaluate your funding strategy and seek to diversify both across banks and to non- bank funding.

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Accounting Standards

IFRS 9 We have been working with companies who have already early adopted IFRS 9. As you know IFRS 9 replaces IAS 39 and IFRS state that ‘the package of improvements introduced by IFRS 9 includes a logical model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting’. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. Our concentration has been on:

1. Developing FX hedging strategies which allow corporates to take advantage of the allowance of hedge accounting for Net FX positions

2. Identifying opportunities to apply hedge accounting to derivatives which would not have been possible under IAS 39

3. Re-aligning hedge documentation and effectiveness testing to meet IFRS 9 requirements

4. Re-aligning hedge relationships to take advantage of allowance to take movements in the Interest Differential mark to market on FX forward contracts to the OCI.

FRS 101 and 102 FRS 101 and FRS 102 are applicable to all companies and entities in United Kingdom and Republic of Ireland other than listed groups who must use IFRS. The effective date for mandatory adoption of either of these new standards is 1 January 2015 (i.e. comparatives from 1 January 2014 onwards). The areas of particular interest for treasury are:

Foreign currency The contract rate (the rate of exchange specified in the contract between the parties) is no longer allowed. A definition for ‘functional currency’.

Fair value FRS 102 requires the use of fair value through profit or loss for equity investments; derivatives, and some investments in debt instruments Borrowing costs An entity electing to adopt an accounting policy of capitalising borrowing costs as part of the cost of a qualifying asset may elect to treat the date of transition

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to this FRS as the date on which capitalisation commences.

Treasury actions:

For IFRS 9 adopters, review FX hedging strategy and take advantage of net hedging opportunities

For IFRS 9 adopters, review current FX hedge relationships and take advantage of changes in accounting approach to Forward Contracts and options

For FRS 102 adopters, develop FX hedging process to ensure hedge accounting is achievable

For FRS 102 adopters, review all debt and derivatives outstanding and implement hedge accounting process where possible and applicable.

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MMF Regulation The European Commission published a proposal for a Regulation on Money Market Funds on 4 September 2013, the main elements of which include: Constant NAV The Proposed Regulation provides that only with a "capital buffer" of 3% of the total value of assets under management may advertise a constant NAV (“CNAV”). The capital buffer must be composed of cash and held in a protected reserve account in the name of the CNAV MMF. {In the US, the SEC rejected the idea of capital buffers for money market funds, which it considered to be costly and ineffective]. Fund provisions Criteria regarding eligible assets; investment restrictions for MMFs; provisions for the valuation of MMF assets; Short-Term" weighted average maturity (“WAM”) of no more than 60 days and a weighted average life (“WAL”) of no more than 120 days for short term MMFs (greater for Standard MMFs). Support

CNAV MMFs may only receive support through the specific NAV

capital buffer Other MMFs (variable) will be prohibited from

receiving external support.

On November 12, 2014 The Italian Presidency of the Council of Europe published a

compromise text of the proposed Regulation including that CNAV MMFs would not be

required to put a NAV buffer in place. The European Parliament is due to formally vote

on the proposed Regulation in March 2015. Their decision will impact on the

availability and adequacy of Money Market Funds in Europe as investment

instruments for corporates. Negative Yields

Corporate Treasurers have had to address the question of negative yields during 2014.

This environment is likely to continue into 2015. The implications are obvious:

Return versus capital security

Capital erosion in low risk investments

Discount factors and impact on valuations

Policy breaches and compliance.

Treasury Action: Review investment and counterparty risk policies

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The Chinese Renminbi Juggernaut

The ‘internationalisation’ of the Chinese Renminbi (RMB), [the circulation of RMB

outside mainland China], continued apace during 2014. Over time the Renminbi could

eventually challenge the dollar and its pivotal position in global currency markets as

China becomes the world's second largest economy. 2014 developments included:

Turnover in offshore Renminbi (CNH) continuing to rise

rapidly.

Shanghai Free Trade Zone materialized and in July, SAFE (China’s State Administration of Foreign Exchange) extended benefits to foreign-invested enterprises.

November saw Hong Kong remove caps on Renminbi conversion to coincide with the launch of the Shanghai-Hong Kong Stock Connect which will allow global investors easier access to Shanghai-listed shares.

In November Canada joined seven other official offshore RMB clearing centres – Hong Kong, Macau, Taiwan, Singapore, London, Germany, Korea.

Central banks increasing their acceptance of RMB as a foreign exchange reserve currency

It is suggested that Renminbi

could be fully convertible

during 2015. The question of

whether the RMB should be

part of the International

Monetary Fund's Special

Drawing Right, the composite

reserve currency, is being

discussed by the IMF and

World Bank and a decision

will be made in the next 15

months. AND, the RMB(CNY)

continues to appreciate.

Treasury Action: Take advantage of new rules that permit off-shore intra-group lending by Chinese entities

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6.4

6.6

6.8

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7.2

7.4

7.6

USD/CNY

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Taxation – Simmering or beginning to boil?

The temperature of international tax matters has increased during 2014. The

controversy surrounding Luxembourg’s tax policies during Jean Claude Juncker’s,

tenure as prime minister, now the new President of the European Commission, has

fuelled the fire of the taxation reformists. The agenda in 2015 will be heightened with

regards to:

The OECD’s focus on base erosion and profit

shifting project (Beps) - draft new rules for

global taxation are being developed - SOON.

Germany, France and Italy are urging the EU to

write common corporate tax laws and are

calling for an EU wide law by the end of 2015

that would outlaw aggressive tax planning.

The debate within the EU about a Common

Consolidated Corporation Tax Base (CCCTB)

may be revived.

The European Commission’s state aid inquiries

involving Ireland, Luxembourg and the

Netherlands will have more focus.

Treasury Action: Bring intra-group lending transfer pricing rules up to date

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Other Treasury Stuff for 2015!

Policy upgrade

Technology - STP

Cash centralisation

Netting &Intra-group

reconciliation

Acquisitionfinancing

Fast growthcompanies -

infrastructure

Risk management including derivatives

in pension funds

Keeping ‘up with the Jones’

EUR stability- Greece debt

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