Over the past several weeks we have seen predictions suggesting that advanced business intelligence will be the number one priority for CFOs in 2017, predictable analytics will effectively replace hedge fund managers, and that blockchain is ready to emerge as the next coming of the internet for finance—in 2017. None of these things are going to happen in 2017, or maybe at all.
To be more realistic, 2017 will present many challenges for those of us in treasury—and equally, many opportunities for treasury teams to add value to their organizations.
In 2016, we saw key regulatory changes such as money market fund reform, but 2017 will see several new areas where regulatory compliance will likely consume even more of our time.
IFRS 9: Hedge accounting is usually a treasurer’s least favorite topic. But with the implementation of IFRS 9 coming in early 2018, treasury and accounting teams must implement solutions this year. The good news is that IFRS 9 (or ASC815 in the U.S.) actually makes hedge accounting easier in some cases. While this is especially the case for commodities, benefits are also seen for FX and interest rate options. The net result: there is an opportunity to hedge more effectively with less back office complexity.
Lease accounting: IFRS 16/ASC842 may not be fully in effect until 2019, but that does not absolve corporates from ignoring it until next year. Leases held in 2017 will need to be reported on, which means that understanding the lease provisions and potential effects on future reporting and accounting are important. Some organizations may choose to change the types of leases they use to minimize effects of future compliance, meaning that some of this decision-making will have to occur in 2017. This is a good opportunity to have a seat at the board room table in order to discuss the most strategic approach to avoiding lease accounting issues in 2018 and beyond.
PSD2: The Revised Payment Services Directive isn’t in effect until Jan 1, 2018, but the preparation to comply with the new regulations will consume much of 2017. While banks and payment service providers are those burdened with compliance, the effects (such as required two-factor authentication) will be felt by corporates.
GPII: While SWIFT’s Global Payment Innovation Initiative isn’t technically a regulation, it is an opportunity to increase transparency of payment tracking and quicken the settlement of cross-border payments. As more corporates adopt SWIFTNet for some or all of their global payments, these are welcomed benefits that will begin to be realized later in the year.
Greater effects of Basel III: While Basel III doesn’t affect corporates directly, banks must comply, and thus have begun to refine their services in order to optimize their balance sheets. This means that banks will continue being more selective about which deposits they want (i.e., operational cash) and will tighten the extension of credit, increasing the cost to borrow. The opportunity for treasurers is to more efficiently pool and mobilize internal cash to better predict borrowing requirements; and similarly identify more diverse, low-risk investment opportunities that don’t rely on leaving operational cash in the bank.
While interest rates remain low in North America and Europe, we are starting to see a divergence in monetary policy between the U.S. and other countries. Stimulated by post-election financial optimism, U.S. markets continue to perform well, which has led to one—with the expectation of more—interest rate hikes. Relatively higher U.S. interest rates and interest rate hike speculation drives FX volatility, creating more challenges for corporates who are underhedged.
At the same time, in the U.S. especially, there is an opportunity to gain more yield as even incredibly safe investments will return slightly more interest. Those that chose SMAs as a means to escape prime money market funds last year will see greater returns—and it is conceivable that the attraction of higher returns from prime funds will be a carrot too big to ignore for those who are completely invested in government funds or have left money sitting in bank accounts.
Fraud and cybercrime
Banks continued their investments in preventing fraud and cybercrime in 2016, which may unfortunately make corporates appear as the low hanging fruit. Thus far, corporates have been exposed to the relatively obvious (in hindsight, of course) business email compromise (BEC) schemes. That said, there are more sophisticated hacking examples we saw in the banking community last year that most corporates are ill-prepared for.
This year should be a year of convergence between treasury controls and the rest of their organization’s information security policies. It is when treasury’s protections differ from the CIO’s policy that problems will arise. Collaboration is the key opportunity for treasury to lead the organization along with the CIO to defend against fraud and cybercrime attempts.
Bob Stark is vice president of strategy for Kyriba and recently spoke at the 2016 AFP Annual Conference. Stark also provided key insights on how treasurers can secure bank connections in AFP's latest Treasury in Practice Guide, Putting Your Connectivity on Lockdown.