Early adopter or fast follower?

Of course, the following account is not necessarily scientifically verifiable and the dates can certainly be discussed (along the lines of ‘we had that much earlier’). That said, the developments in corporate treasury described below will hopefully inspire you to draw lessons from history for the future.

In the mid-1990s, manual work dominated in the treasury departments of industrial and commercial companies. Financial transactions were recorded in the accounting system, with derivatives only being posted as provisions for impending losses at the closing date if necessary. If liquidity planning took place at all, it was done in Excel. While payments were still largely made by bank transfer, check or bill of exchange, there were already electronic platforms for banking communication for these purposes. At that time, treasury was either integrated into accounting (governance regulations were not as strict back then) or was performed in isolation by a few specialists with a banking background.

The founding of the Association of German Treasurers in 1997 marked a kind of “awareness” of treasury as an independent corporate function and, with that, the need for a professional association to exchange information and represent interests – especially within one's own company. In parallel, consulting firms were established and auditing firms set up independent teams for corporate treasury. It was the right thing to do at the time, given the events that followed.

The big challenges for treasury began in 1999 with the switch to the euro. In 2001, international accounting standards for financial instruments IAS 39 and FAS 133 were introduced. Suddenly, all derivatives had to be valued and recorded in the balance sheet. The accounting and treasury departments found themselves having to communicate with each other, and often astonishing transactions emerged that had an impact on the balance sheet as well as the profit and loss statement that had previously gone undetected. It was at this point that many companies saw the benefits of introducing specialized treasury management systems.

In 2003, the effects on earnings of various carelessly concluded structured products such as constant maturity ladder swaps, target redemption forwards and other derivatives with embedded options caused consternation and even panic in many cases due to the disappearance of large portions of equity. All this underscored the need to improve the valuation algorithms and to define hedging strategies.

From 2007, the detailed information required by IFRS 7 in the notes to the financial statements led to an increase in the data collected on financial instruments and to corresponding extensions of the treasury management systems. Trading, risk management, cash management and payment modules were often already implemented, and accounting applications were now following suit.

In the wake of the 2008 global financial crisis, liquidity planning and liquidity reserves moved to the top of the agenda. Back then, the term “cash is king” was frequently used, and the system landscape had to be expanded accordingly. It also became clear that liquidity and credit risk are significant valuation parameters that necessitate adjustments to the valuation algorithms. Ever since then, the term “multicurve framework” ought to be familiar to every treasurer. Incorporating credit risk into the valuation of financial instruments, which was started at that time, was then explicitly required in IFRS 9.

Four years later came the next big thing: In 2012, the European Markets Infrastructure Regulation “EMIR” was published and implemented in Germany in 2013. There were extensive discussions, particularly with the auditors appointed to check compliance with the regulation, regarding the need to prove that only risk-mitigating derivatives were used. Risk strategies had to be defined and partially adjusted. Derivatives reporting systems were set up. For this reason, the VDT organized a symposium on this topic at the Frankfurt School, which was packed to the rafters.

Payment transactions were also increasingly being subject to EU regulation. In 2014, SEPA came into force, followed by further regulations such as the Payment Services Directive PSD II in 2018, which more than ever necessitated setting up in-house banks. The VDT, together with a number of committed member companies, played a key role in negotiations with BaFin and successfully promoted an understanding of the special features of corporate treasury in banking regulation.

All the while, there were occasional price shocks due to currency fluctuations, such as the appreciation of the Swiss franc following a decision by the Swiss National Bank, the devaluation of the pound sterling after Brexit, the collapse of the ruble after the invasion of Crimea, the US dollar rising by 20% in 2003 and depreciating by 14% in 2005. Since then, many treasurers have abandoned market opinions in favor of hedging strategies, and automated FX trading has become increasingly prevalent.

A growing number of significant cases of cybercrime since around 2016, which have increased in scale and sophistication as a threat since then, have made it necessary to adapt payment processes and systems. Since then, work instructions and employee training, increasing the security levels of systems, automated checks for sanctions lists and fraud attempts have regularly been on the agenda of treasury projects. 

Developments in technology and the resulting adjustments to IT systems in treasury, as well as the necessity for automation, have accelerated considerably, most notably in the last 15 years. Artificial intelligence is used primarily for liquidity planning, and thought is being given to how the latest hype, ChatGPT, can be put to use. 

Treasury-related regulation also seems to be continuing unabated. Although CSRD and thus ESG reporting in Germany was not implemented on schedule in 2024, it is likely that treasurers can expect to be made responsible for this in the future. EMIR 3.0 was published in the EU Official Journal at the beginning of December and will become effective just in time for Christmas. There are also other current regulatory initiatives by EU institutions concerning the trading of emission certificates, the issuance of money market instruments and instant payments.

As you can see, it has been quite a ride in the treasury over the last 30 years, and the pace of progress picked up steadily over time. But what lessons can be learned from this?

As is so often the case in science and practice, we often find that the insights are quite trivial, but they can nevertheless make a difference in our day-to-day work.

IT systems keep getting faster and more powerful, and the need for automation is also constantly increasing. The key to keeping pace with developments is, on the one hand, to make full use of the existing potential and, on the other, to standardize existing processes so that everything is in place before an upgrade is carried out or a new system is introduced. Any attempt to impose a standard system on non-standardized processes, or to adapt systems to traditional processes, typically results in massive overruns in both time and budget, as well as in frustration among those involved in the project. Any automation relies on trust in the systems' functionality. In turn, this requires stringent quality control in the form of sufficient testing during implementation and maintenance. The need for high data availability and quality means an inordinate amount of data sorting and cleansing. Trusting the automated results is a necessary condition for efficiency gains. If treasurers still feel the need to check the generated hedges or the liquidity planning in detail because they don't trust the automatically generated results, the efficiency gains are minimal.

You don't necessarily have to be an early adopter, but you should always be a fast follower. Before going down a particular path, it's wise to monitor some hypes, such as blockchain or crypto, and see what others are doing. To do this, a company first needs to determine whether its own organization is both willing and able to tackle such innovative developments at an early stage. Once this has been established, however, efforts should be made to bring the company's treasury up to date with the latest technology and methods as quickly as possible.

Treasurers have long understood their role as important partners to company management, and this has been in line with their self-image and objectives. However, this understanding often requires a more holistic approach to the role than is currently the case. In risk management, they often reject responsibility for credit risk management outside of banks, and in payment transactions, treasurers do not influence payment terms or working capital management. This raises the question for treasurers as to why so many more controllers and accountants are becoming CFOs – could it be that company boards tend to trust them more to see the big picture?

Instead of thinking positively and seeing the opportunities, regulation is usually seen as a tiresome obligation. One of the biggest boosts for treasury systems and methods in 2001 was the introduction of the accounting standards FAS133 and IAS 39. The introduction of IFRS 9 offered the – though often unused – opportunity for improving credit risk management, just as EMIR did for revising hedging strategies and PSD 2 for the payment factory. There is also no excuse for not complying with a regulatory requirement, so this also strengthens the argument for a corresponding budget, which can then be used not only to implement the minimum requirements but also to expand the treasury function in a meaningful way.

Expect the unexpected: we have already seen many black swans over the last 30 years. We cannot possibly foresee every conceivable event, and forecasts are notoriously unreliable, especially when they relate to the distant future. And so, it is vital to prepare for the unexpected so that we are equipped to tackle it when it happens. Alongside smooth-running processes and functional systems, this includes highly developed and comprehensive risk management, including the performance of stress tests and the taking of precautions, e.g. in the form of adequate liquidity reserves. To do this, treasury professionals need to stay on top of developments and potential risks, and regularly exchange information and ideas with other treasurers. The Association of German Treasurers (Verband Deutscher Treasurer, or vDT) has been providing the ideal platform for this for almost 30 years.

Source: KPMG Corporate Treasury News, Edition 150, December 2024
Guest Author:
Prof. Dr. Christian Debus
Executive committee Verband Deutscher Treasurer