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The Right Way to Manage Liquidity Globally Elyse Weiner, Global Product Head Liquidity & Investments, Citi
Odette Izquierdo, Liquidity & Investment Head for Latin America, Citi Peter Langshaw, Client Management Global Sector Head, Energy, Power &
Chemicals, Citi
The Financial Professionals Forum 2012
Table of Contents
1. Global Perspectives 2
2. The Latin America Environment 7
3. Client Perspectives 13
4. Conclusion 16
The Financial Professionals Forum 2012
The Right Way to Manage Liquidity Globally
What This Session Is About?
Maintaining access to funding is a fundamental objective of corporate treasurers. – With access challenged by regulation and market uncertainty, companies are turning inward to extract
cash from their working capital cycle. – Achieving this objective requires a comprehensive review of treasury and operating processes, as well
as organization structure
This session explores a strategic roadmap to enhancing global cash efficiency.
The benefits of achieving best practice liquidity management are tangible and measurable and include reduced days working capital, lower cost of funding and processing costs and enhanced returns on corporate assets.
Speakers Elyse Weiner - Global Head, Liquidity & Investments Odette Izquierdo - LatAm Regional Head, Liquidity & Investments Peter Langshaw – Client Management Global Sector Head, Energy, Power & Chemicals
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Global Perspectives
Elyse Weiner
The Financial Professionals Forum 2012
Evolving Economic & Business Landscape… The business and economic environment remains challenging due to slower global growth projections in both developed and emerging markets, continued stress in the eurozone and evolving regulation.
…As enterprises expand across markets, management of business processes becomes more complex
Foreign Exchange Custody Payments Collections Supply Chain
Increased cross-border transactions
EM/DM, EM/EM
Evolving regulatory landscape adds complexity
Oversight and control to address heightened risk profile
1 2 3
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The Financial Professionals Forum 2012
Major Trends Shaping the Financial Services Industry
Technology Innovation
Digitization: Drive to convert from paper to electronic solutions continues. Emergence of digital wallets replacing physical currency for convenience. Data management and mining
Mobility: Opportunities for mobile and kiosk payments, virtual accounts, and electronic receivables services. Banks must answer the call for high-speed, customizable, and innovative solutions
Globalization: Growth and economic decoupling of emerging markets; global companies are going local and local companies are going global
Urbanization: Today, 50% of world’s population live in cities—a figure that will grow to 75% by 2050. Population growth will require infrastructure investment and fiscal constraints in developed markets will require efficient administration
New financial regulations are changing the way we do business
Basel III: Tighter international capital and liquidity requirements; national frameworks
Dodd-Frank Financial Reform: Repeal of Reg Q, unlimited FDIC to 12/31/2012, derivatives clearing, Volcker rule, Durbin
SEPA/PSD
RMB de-regulation
Regulatory Reform
Globalization
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The Financial Professionals Forum 2012
Lessons Learned
Risk triggers are always present, with varying degrees of prominence, e.g. regulatory, political, supply chain, commodity prices and sovereign risks
Increasing importance of due diligence – know your counterparties and suppliers Diversify sources of funding and other critical business drivers Maintain flexibility Develop contingency plans – operations, suppliers, funding Right size buffers to insure against unforeseen and stress events; balance against cost Optimize internal utilization of resources Continuously monitor risk triggers through an enterprise-wide risk management process Leverage local expertise and your banking partners to keep abreast of shifts in operating environments –
both positive and negative
The financial crisis of 2008 heightened awareness of liquidity risk and placed greater emphasis on risk management practices that often ignored inter-related risks.
Review Re-structure Re-deploy
Evaluate exposures Update & enhance policies Document account structures Evaluate organizational structure Identify areas for process
improvement
Centralize & Consolidate Rationalize bank accounts and
providers Deploy COE’s – SSC’s, regional
Treasury Centers, payment factory Automate & streamline processing Improve visibility Supplier/vendor relationships
Invest in yourself Realign limits and counterparties in
view of risk & market conditions and operational requirements
Leverage opportunities to self-fund, e.g. Pooling & cash concentration
Align investments to risk/return considerations
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The Financial Professionals Forum 2012
Achieving Best in Class
Best in Class ▲ Liquidity Management is supported by 95%+
visibility and the use of automated cash concentration and pooling to mobilize cash
▲ Treasury is actively engaged in Working Capital Management, e.g. transactional processes and financing programs to accelerate receipts, manage payment terms and promote control
▲Centralization of both process and positions; use of shared service centers, IHB, regional treasury centers, netting center
▲ Policies and governance structure are in place to address the full spectrum of risks from counterparty to liquidity to FX
Typical opportunities for improvement ► Increase visibility of positions ► Improve timely access to actionable data
for decision support ► Increase proportion of operating accounts
in liquidity structures; highest degree of consolidation
►Automate transactions to the extent possible
►Holistically link liquidity structures to operating and treasury models
►Create discipline around monitoring and measuring exposures on an ongoing and more frequent basis
►Measure and manage performance with metrics and KPIs
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The Financial Professionals Forum 2012
What are others doing? The centralization paradigm continues to underpin risk-aware operating efficiency. Leading global corporates are transferring best practices learned in Europe/North America and Asia to Latam.
Benchmark your Performance: Citi Treasury Diagnostics
My scorePeer scores (average)Universe scores (average)
My scorePeer scores (average)Universe scores (average)
Performance
Top 25% of responsesCore 50% (25-75%) of responsesBottom 25% of responsesAverage response
My Score Top 25% of responsesCore 50% (25-75%) of responsesBottom 25% of responsesAverage response
My Score
Benchmarks
Risk Management
3.2
3.4
BetterBetterInterest rate risk
My Relative Performance+/-
BetterBetterForeign Exchange (Transactional)
BetterBetterLiquidity/funding risk
Against UniverseAgainst Peer GroupProcess Area
BetterBetterInterest rate risk
My Relative Performance+/-
BetterBetterForeign Exchange (Transactional)
BetterBetterLiquidity/funding risk
Against UniverseAgainst Peer GroupProcess Area
Identify where you stand relative to peers - Learn what counts as best in class
Systems & Technology
Policy & Governance
Subsidiary Funding & Repatriation
Risk Management
Cash Management – Working Capital
Management
Cash Management – Liquidity
Celent Model Bank Award
Alexander Hamilton: Silver Winner, Solution of the Year, Treasury & Risk Winner, Innovative Product
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Working Capital Treasury Treasury Involved in Working Capital Management – 64% Operate Netting Center – 56% Have Centralized Payments Processing – 61% Deploy single or minimal number of ERP systems – 54%
Centralized Treasury Policies - 92% Centralized Risk Management Processes - 74% Cash Concentration to Global or Regional level – 59% Utilize TWS – 66%
Only 6% of the survey sample represents LatAm parented names. Within that subset, we see greater emphasis on centralized payment processing, but less progress on centralization of treasury policies and
risk management processes than respondents in other regions.
The Latin America Environment
Odette Izquierdo
The Financial Professionals Forum 2012
Argentina more restrictive on FX transactions & more regulations on banks regulatory lending
Ecuador changes cross border transfer tax to 5%
Ecuador raises cross border transfers tax to 2%
Venezuela implements monetary re-conversion
Argentina establishes limits/restrictions on currency exchange
Ecuador central bank limits bank charges on transaction costs
Elimination of transaction tax (CPMF) in Brazil
2012
Changes in Regulations are Constant, but Trends are Mixed
2011 2010 2009 2008 2007 2006
Brazil defines rules that make offshore banking more flexible to residents
Brazil removes limit to hold process from exports to 10 days offshore
Argentinian export proceeds cannot stay more than 10 days in exporters offshore accounts
Brazil IOF .38% on FX transactions for imports and Financial F/X transactions.
Colombia changes rules on debit tax (4/1000)
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The Financial Professionals Forum 2012
Currency and Sovereign CDS Volatility
LatAm Sovereigns Credit Default Swap are highly volatile
Dealing with currency volatility is a challenge
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The Financial Professionals Forum 2012
Drivers Description
Three types of countries
Totally or highly dollarized economies – Ecuador, El Salvador, Puerto Rico, Panama
Freely exchangeable currencies & limited central bank reporting – Chile, Costa Rica, Guatemala, Honduras, Jamaica, Mexico, Peru, Uruguay,
Paraguay and Trinidad Controlled currencies and central bank reporting requirements
– Argentina, Brazil, Colombia, Venezuela
Three regulatory constraints
Currency controls: convertibility and transferability Limits on inter-company lending Different tax regimes
Three building blocks
Bank account Domestic concentration Cross border concentration
Widespread Regulatory Controls
Controls can be barriers, but can also present opportunities.
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The Financial Professionals Forum 2012
3 Areas of focus Details
Local Structures
Resident Structures – Same currency Intra Entity structures can be implemented across the region – Inter Entity structures available in selected countries (Mexico, Caribbean and
Central America). Main restriction – debit tax (Argentina, Colombia, Peru) Non Resident accounts: Not available in all markets
Convertibility and Transferability
FX controls – LCY – different regulations per country (More controls i.e Venezuela,
Argentina; less control: Costa Rica, Mexico) – USD as main currency in Central America and Caribbean
Regional Structures
NY is the standard hub to concentrate funds: Time-zone – NY facilitates operations
USD concentration currency for most of Latin American Companies Physical pooling is the standard vs. Notional pooling
– Notional Pooling is generally very challenging due to tight regulations
Most important Trends Latin America can be a complex region to extract value from regional liquidity structures. Understanding the latest regulatory landscape as well as the market environment allows you to be the opportunistic towards these goals.
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The Financial Professionals Forum 2012
Latam’s Regulatory Environment Summary
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Local NR R
LCYLCY
OnshoreLCY
OffshoreLCY FCY LCY FCY LCY -> FCY
LCY Debit Tax
Argentina ARS 2 5 4 4 4 4 4 YBahamas BSD 2 4 1 1 1 1 2 NBarbados BBD 1 5 1 1 1 1 2 NBrazil BRL 5 5 4 5 4 5 3 YChile CLP 4 5 5 2 2 2 2 NColombia COP 1 5 1 1 1 5 2 YCosta Rica CRC 1 1 1 1 1 1 1 NDominican Republic DOP 1 1 1 1 1 1 1 NEcuador USD 1 1 1 1 1 1 1 NEl Salvador USD 2 1 1 1 1 1 1 NGuatemala GTQ 2 5 1 1 1 1 1 NHaiti HTG 1 1 1 1 1 1 1 NHonduras HNL 2 5 1 1 5 1 2 NJamaica JMD 1 5 1 2 2 2 1 NMexico MXN 2 1 2 2 2 2 1 NPanama USD 1 1 1 1 1 1 1 NParaguay PYG 1 1 1 1 1 1 1 NPeru PEN 2 1 1 1 1 1 1 YPuerto Rico USD 1 1 1 1 1 1 1 NTrinidad and Tobago TTD 1 1 1 1 1 1 1 NUruguay UYU 1 1 1 1 1 1 1 NVenezuela VEF 1 5 1 5 1 5 4 N
N.B. 1 - Allowed, No Material Restrictions2 - Allowed, Straightforward regulations, approval, or license3 - Allowed, Challenging regulatory approval or license4 - Allowed, subject to a complex set of rules5 - Disallowed, Strictly prohibited
Operating Account Intercompany Lending FX ControlR -> NR NR -> R
The Financial Professionals Forum 2012
Type 4 e.g. Mexico
Type 1 e.g. Brazil, Argentina
Type 2 e.g. Peru, Costa Rica
Type 3 e.g. El Salvador,
Panama
Ons
hore
Invest Invest Invest Invest
USD Non-Res
USD Non-Res
USD Non-Res
USD Non-Res
LCY Non-Res
Pool
Invest Invest Invest Invest Invest Invest
LCY Resident
LCY Resident
LCY Resident
LCY Resident
LCY Resident
LCY Resident
LCY Resident
LCY Resident
LCY Resident
USD Resident
USD Resident
USD Resident
USD Resident
USD Resident
USD Resident
USD Resident
Offs
hore
LatAm Regulatory Environment – Complex And Evolving The LatAm regulatory environment poses unique challenges and continues to evolve. Need to assess on a case-by-case basis to implement an optimal solution.
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Client Perspectives
Peter Langshaw
The Financial Professionals Forum 2012
Vale: A Global Leader in Creating Long-term Value
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The Financial Professionals Forum 2012
Rationalization
• Consolidate banks and bank accounts
• Rationalize credit providers
• Reduce banking client service contacts
• Select best-in-class banks with full service offerings
Optimization
• Reduce overall costs
• Implement integrated pooling structure, where feasible
• Centralize local FX operations
Standardization
• Standardize XML format across all banks
• Increase system integration and security
• Standardize platforms
Case Study – Summary of Client Objectives
S
R
O
A Latam Regional Treasury Center wanted to rationalize banks, standardize operational processes and optimize internal “organic” liquidity.
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The Financial Professionals Forum 2012
Integration and Straight-through-processing Liquidity, Investment and Risk Management
Portal – Treasury Vision Centralized FX management - FXPulse Flexible Global Liquidity Management
infrastructure – Optional linkages to global Multi-currency
Notional Pool managed by global treasury in Europe
– Efficient Cash Concentration Services mobilization and local currency funding
– Streamlined inter-company loan tracking – Automated and manual Multi-banking tools
Local on-balance sheet Investments as well as Money Market Funds depending on jurisdiction – Investment channels including OnLine
Investment (OLI) platform and placement desks
At the “top of the house” regional treasury leverages the scale of their banking provider to execute locally and optimize across the region.
Customized Latin American Banking Structure
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The Financial Professionals Forum 2012
Rationalization
• Innovative regional solution to reduce borrowing costs and improve yield – in this case $500,000+ in savings
• Real-time visibility on all balances using TreasuryVision
• Local and regional pooling, where regulations allow
Optimization
• Local unique liquidity and working capital management solutions - e.g. Prestação, Receivables Discounting Mexico
• True end-of-day cross-border cash concentration
– Multi-banks extensions • Money Market Fund options for additional earnings power
• FX Pulse for delivering institutional spreads and streamlined local currency funding/concentration
Standardization
• Fully integrated liquidity solution in all nine markets
• Regional controls, visibility (to Citi and third-party banks) and enhanced security
• Standardized and integrated liquidity platforms and technology
Best in Class Regional Liquidity Benefits Delivered
S
R
O
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Conclusion
The Financial Professionals Forum 2012
Recognize the complexity and volatility in the region
In consideration of the tax and regulatory environment, primary goals are Visibility & Control
Trend to regionalize processing and financial operations
– Partial solutions may be proposed based on local and international cash cycles of each company
Where markets allow, various schemes to concentrate and pool funds
Localized solutions for more regulated environments
Information delivery is a key requirement for decision support and management
Consideration of regulatory and tax implications specific to Latin America is critical to implementing a successful Liquidity & Investments strategy for the region.
Key Takeaways
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The Financial Professionals Forum 2012
Treasury Evolution
• Cash Visibility • Cash Pooling • Bank Relationship • Interco Funding
Decentralized Treasury
Treasury Centers
Commissionaire Structure
Re-invoicing Center
Netting Center
Shared Service Center
Payments Factory
Global Pools
In-House Bank
• Internal Bank Accounts
• Accounts Receivable • Accounts Payable • Accounting
• Interco Payments • Interco Collections • Interco Netting
• FX Management • Interest Management • Long-term Funding
Treasury Flows Commercial Flows Treasury & Commercial Flows
Degree of Centralization
Functions Centralized
Overlay Structures
Treasury/Trading Models
Integrated Processing Centers
Multinational companies adopt varying degrees of centralization to bring efficiencies to their organization. The path towards an optimized structure is evolutionary and not always linear.
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The Financial Professionals Forum 2012
Client Requirement Liquidity and Investment Capabilities
Visibility ► Real-time actionable visibility on cash positions and flows for accurate cash positioning and risk mitigation
► Treasury Vision - state-of-the-art capability that aggregates real-time financial information from Citi and third party banks; analytics & workflow tools
► Citi Treasury Diagnostics – web-based survey and evaluation of current practice
Mobilization ► Automated movements to mobilize accessible cash for centralized access and control
► Customized to regulations and tax rules
► Advanced rules-based movement
► Global Cash Concentration Services - Extensive feature and functionality, including: choice of periodicity; intra-day & EOD, multi-bank services; multi-currency, interest reallocation, intercompany tracking and reporting; specialized structures for regulated environments and IHB support
► Specialized domestic “pooling” & optimization structures for more regulated environments
Optimization ► Options for cash deployment for optimal return to the company
► Alternative channels to streamline operational requirements
► Multi/Single-Currency Notional Pooling to provide internal offset and self-funding opportunities; centralized investment
► Citi Interest Optimization provides enhanced return on liquidity that cannot be consolidated into a commingled structure
► Citibank® Online Investments with investments in 28 countries and 19 currencies, access to 150+ money market funds (offshore and domestic) from 14 premier fund providers.
► Citi Liquidity & Investment Desks in New York, Dublin, HK and Singapore in addition to 20+ local desks
► Directed Agency Investment Services
► Automated Investment Sweeps
n b r y n l p t v c n b r
Treasury Challenges: Increasing Complexity
Multiple countries and currencies of operation
Proliferating number of bank accounts to support international activities, with varying local banking practices / standards
Multiple systems and data formats
Insufficient global visibility into liquidity and risk
Challenges in consolidating critical information for senior management decision-support
Aligning with Treasury Requirements Citi’s product offering and capability development is aligned to three basic client requirements -- with the objective to deliver integrated, comprehensive liquidity and working capital management solutions.
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