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How Treasury Interacts with Third Parties

  • By Staff Writers
  • Published: 11/16/2020

treasury management

To fulfill their role effectively, treasury departments are required to interact with a broad range of internal and external parties. The 2020 AFP Asia-Pacific Treasury Management Handbook, sponsored by Kyriba, explores the ways in which treasury interacts with a range of third-party organizations, within a regulatory framework set by a number of legislators and regulators.

Understanding both the nature of the organizations with which treasury must interact and the rules around those interactions is critical to achieving an efficient treasury operation.

REQUIREMENTS AND COUNTERPARTS

Treasurers interact with third parties for the following reasons:

  • To make payments to suppliers, employees, government authorities and lenders, often in multiple currencies
  • To collect payments from customers, sometimes in multiple currencies
  • To borrow funds from lenders
  • To hold funds with banks and with investors
  • To manage any associated risks.

To meet these requirements, treasurers rely on the support of a range of external providers, including banks, payment service providers, brokers, asset managers, and institutional investors. To operate efficiently, treasurers also rely on the support and advice of tax and accounting specialists and lawyers. Technology, too, provides support, from bank-provided solutions offering balance and transaction reporting, and automated sweeping, to specialized treasury management software.

Dory Malouf, senior principal value engineer for Kyriba, advises treasury departments to maintain very strict controls and policies around its relationships with third parties. Reflecting on his previous experience as a treasury practitioner, he explained that his company had stringent checklist that any third party it worked with had to pass. “If they didn’t pass that checklist, we had detailed conversations with them around why we weren’t looking at a different third party,” he said.

REGULATORY FRAMEWORK

Understanding the regulatory framework in which treasury operates, and how this governs its interactions with other parties, internally and externally, is critically important to achieving an efficient treasury operation. Although much regulation, such as banking regulation, may only affect corporate treasury indirectly, it will determine what treasury is able, required and not permitted to do.

Treasurers also rely on a clear regulatory framework for two reasons. First, having clear regulatory and taxation rules helps treasurers plan and implement a treasury structure that allows the department to operate as efficiently as possible. Second, clear regulations, and consistent application of those regulations, provide stability for the financial system. A stable financial system makes it easier for treasurers to manage volatility and therefore risk. Clear regulations also help treasurers understand the level of scrutiny that banks and other financial institutions are under, again helping them to manage counterparty risk. Furthermore, having a consistent legal system will support treasurers to achieve recourse in the event of something going wrong. 

FINANCIAL SYSTEM

Corporate treasury departments are an integral part of the financial systems in the countries in which they operate. They are vital partners for commercial and investment banks, and act as both issuers and investors in the money and capital markets.  

Commercial banks provide companies with bank accounts through which payments are processed and are an important source of short-term funding. Moreover, commercial banks often act as informal advisors to corporate treasurers seeking to understand the nuance of local regulations and banking practices in order to help companies operate as efficiently as possible.

To maintain good credit relationships, Malouf’s former company required that and financial institutions it worked with had to be in its syndicate. Treasury was not permitted to even talk to banks that weren’t part of that group. Obviously, not every company can follow that strict of a bank policy, particularly when entering new regions where there may not be any banks that are part of their syndicate. But even in those instances, treasury should maintain tight controls over any relationships it enters into.

“If one of our entities is doing business in a country where there aren’t extended branches of our bank syndicate, we would have to loosen those restrictions and do deeper dives into those credit relationships,” Malouf said. “But at the same time, that should be 100% centrally managed with strict adherence to the policies in place.”

For more insights, download the 2020 AFP Asia-Pacific Treasury Management Handbook.


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