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P&L Talk Series with Drew Douglas

20:34 May 18th 2016 in p-l-talk-series

P&L Talk Series with Drew Douglas

Drew Douglas, regional head of payments and cash management at HSBC North America, explains why there’s no “one size fits all” solution for treasurers trying to improve their cash management workflows.


Profit & Loss: When you talk to corporate treasurers about managing cash flows, what’s the biggest concern they have from an FX perspective?

Drew Douglas: It depends on a number of factors, such as what that company wants to do in a particular market, how long they plan on investing there, whether it’s a buyer/supplier relationship or whether they’re going in and investing in a market on a more long-term basis and whether they actively manage their FC exposure or not. So there’s no one size fits all solution.

For example, if you look at RMB, one of the first questions could be whether that company plans to pay its suppliers in RMB or in USD, and what the benefits are in each case. To what degree can they potentially discount what they pay suppliers if they take on the currency risk and how will they then manage that currency risk and hedge?

There’s a gamut of solutions, especially in the emerging markets, where there are sometimes capital or investment controls. But it depends on what those payment types are for, whether there are ongoing cash requirements for that particular client and then how they plan to manage that overall FX exposure. 

P&L: Do most corporates actively or passively manage their exposures?

DD: Again, it depends on the firm. Some choose not to hedge out currency risk and not actively manage it. Others will have a passive FX strategy, which means that they’ll just hedge out the bulk of that risk, and then some of the more advanced treasury outfits will have an active management strategy, whereby they will actually take positions.

P&L: What’s your role in helping the firms that do decide to hedge their FX exposures? 

DD: The treasurer will have a view of what he or she wants, based on his or her specific business needs and then we construct a forward looking hedge so that he or she can hedge out the bulk of that currency risk. The cost of that hedge will obviously depend on how forward the hedge is, the size of it and the currencies involved. 

Although I’d want someone from our FX desk to determine the structure of a forward transaction for a corporate, where we can help from a treasury solutions or cash management perspective is getting a line of sight on their exposures. Because some firms might have payables and receivables that offset themselves and so why would you hedge them differently? 

So from a global treasury perspective if you are able to understand your inflows and outflows better, then there is the potential to net your activity in a particular market and therefore reduce the amount that you have to hedge.

P&L: Do you think that the technology available to corporate treasurers has kept pace with the increasing globalisation of businesses? 

DD: I think there’s a lot financial technology available to a corporate client. Some of the global banks offer technology through our own networks, providing visibility of cash accounts on a global basis, working capital solutions and visibility of FX exposures. 

Then as a client expands into a multi-bank environment, often they’ll turn to a treasury management solution (TMS) platform, and there are heavy lifting versions of this and some that are lighter.

I think that as technology has advanced, some of these solutions are much easier to implement. For example, firms can use a cloud-based solution rather than having to put all the hardware in the ground. But the investment that a company is willing to make in its treasury department depends on a variety of factors, and sometimes the treasury environment simply won’t be the investment priority of that firm.

P&L: Has this ease of access to technology had significant benefits for corporates?

DD: I think that technology is definitely a facilitator and any automation around processes is going to be a big advantage because it creates efficiencies. The ability to execute over a TMS platform as opposed to over a desk allows treasurers to conduct reconciliation on a day-to-day basis and therefore become that much more efficient.

Having visibility of when your FX forwards are going to roll in your overall cash management and forecasting environment is another example of a big positive that technology can provide.

P&L: When it comes to managing cash management, what determines whether firms take a globalised or localised approach? 

DD: There are a number of different factors, but two of the big ones are the size of the company and the geographies that they’re operating in.

If you’re a newly launched company, you might be more likely to take advantage of fintech solutions allowing you to easily globalise your treasury on day one. Years ago, if a firm went into a new market, it might transact with the local bank due to local need for delivery of notes. But now the rules of the game have changed and technology and the networks offered by the larger banks can really assist clients in achieving their goals in new markets up front. 

Some firms might reach a critical mass, at which point it might make more sense for them to take a globalised approach. One should note that there is a cost to building, maintaining and migrating to a new system and so those firms will look at their return on investment and weigh that against other opportunities and projects within their business. They may want to prioritise against other programs and then make a decision about whether it makes sense to take a global approach today or at some point in the future. 

More often than not, what we see is that firms will choose their battles, they will pick particular items that they want to see done from a global perspective, but for certain markets they still allow that local flexibility.