Even though the following statements are not necessarily scientifically verifiable and the dates can certainly be debated (along the lines of “we had that much earlier”), the developments in corporate treasury described below are intended to provide inspiration for what lessons can be learned from history for the future.
In the mid-1990s, manual activities predominated in the treasury departments of industrial and commercial enterprises. Financial transactions were recorded in the accounting system, with derivatives only being posted as provisions for contingent losses on the closing date if necessary. Liquidity planning, if it took place at all, was done in Excel. Although payments were still largely made using paper documents such as bank transfers, checks, and bills of exchange, electronic platforms for bank communication already existed. Treasury was either integrated into accounting (governance regulations were not as strict at the time) or was handled by a few exotic individuals with a banking background and without much connection to other corporate functions.
The founding of the Association of German Treasurers in 1997 marked a kind of “awakening” as an independent corporate function and thus the need for a professional association for the purpose of exchanging information and representing interests—especially within one's own company. At the same time, consulting firms were established and independent teams for corporate treasury were created within auditing companies. In view of the events that followed, this was also the order of the day.
The major challenges for treasury began in 1999 with the changeover to the euro. This was followed in 2001 by the introduction of the international accounting standards for financial instruments IAS 39 and FAS 133. Suddenly, derivatives had to be valued and accounted for, accounting and treasury had to communicate with each other, and often surprising transactions with an impact on the balance sheet and income statement emerged that had previously gone unnoticed. At that time, many companies decided to introduce specialized treasury management systems.
Around 2003, the effects on earnings of various recklessly concluded structured products such as constant maturity ladder swaps, target redemption forwards, and other derivatives with embedded options caused astonishment and, in some cases, panic due to the disappearance of large portions of equity capital. This underscored the need to improve valuation algorithms and define hedging strategies.
The detailed disclosures required by IFRS 7 from 2007 led to an expansion of the recording of data on financial instruments and corresponding enhancements to treasury management systems. In many cases, the modules for trading, risk management, cash management, and payment transactions had already been implemented, and now the accounting applications followed.
From 2008 onwards, the financial crisis pushed liquidity planning and liquidity reserves to the top of the agenda. Cash is king was a frequently used phrase at the time, and the system landscape had to be expanded accordingly. It also became apparent that liquidity and credit risk were significant valuation parameters that required adjustments to the valuation algorithms—since then, the term “multicurve framework” has become familiar to every treasurer. The consideration of credit risk in the valuation of financial instruments, which began at that time, was subsequently also explicitly required in IFRS 9.
Four years later, the next big stir: in 2012, the European Markets Infrastructure Regulation “EMIR” was published and implemented in Germany in 2013. The need to prove that only risk-mitigating derivatives were being used led to extensive discussions, particularly with the auditors responsible for checking compliance with the regulation. The risk strategy had to be defined and partially adjusted. Systems for reporting derivatives were set up. The VDT symposium on this topic held at the Frankfurt School was bursting at the seams.
Auch der Zahlungsverkehr unterlag zunehmend der EU-Regulierung. 2014 trat SEPA in Kraft, dem folgten weitere Regulierungen wie 2018 die Payment Services Directive PSD II, welche die Legitimierung von In-House Banken notwendig machte. Der VDT hatte hier gemeinsam mit einigen engagierten Mitgliedsunternehmen maßgeblich die Gespräche mit der BaFin geführt und bei der Bankenregulierung erfolgreich um Verständnis für die Besonderheiten des Corporate Treasury geworben.
Während der gesamten Zeit gab es immer mal wieder Preisschocks durch Währungsschwankungen wie die Aufwertung des CHF nach der Entscheidung der SNB, Abwertung des GBP nach dem Brexit, Verfall des Rubels nach der Krim-Invasion, der USD stieg 2003 um 20% und wertete 2005 um 14% ab. Seitdem hat so mancher Treasurer eine Marktmeinung aus seinen Hedging-Strategien verbannt und sich der automatisierte FX-Handel immer mehr durchgesetzt.
Significant cases of cybercrime, which have become more frequent since around 2016 and have been increasing in scope and methods as a threat since then, have required adjustments to payment transaction processes and systems. Work instructions and employee training, increasing the security levels of systems, automated checks against sanctions lists, and fraud attempts have since been regular topics of projects in treasury.
Technological development and the resulting adaptation of IT systems in treasury, as well as the need for automation, have accelerated increasingly, particularly in the last 15 years. Artificial intelligence is used primarily in liquidity planning, and consideration is being given to how the latest hype, ChatGPT, can be used.
Regulation relevant to treasury also appears to be continuing apace. Although the CSRD and thus ESG reporting in Germany were not implemented on schedule in 2024, treasury is likely to be held accountable in this area in the future as well. EMIR 3.0 was published in the EU Official Journal at the beginning of December and will come into force just in time for Christmas. Other current regulatory initiatives by EU institutions concern trading in emission allowances, the issuance of money market instruments, and instant payments.
So there has been quite a lot going on in treasury over the last 30 years, and developments have steadily accelerated over time. But what lessons can be learned from this?
As is so often the case in science and practice, the findings are often trivialities that are nevertheless easily overlooked in day-to-day work.
IT systems are becoming increasingly powerful and the need for automation is constantly growing. The key to keeping pace with developments is, on the one hand, to exploit existing potential and, on the other hand, to standardize existing processes so that the foundation is right before an upgrade is carried out or a new system is introduced. Attempting to implement a standard system on non-standardized processes, or trying to adapt systems to traditional processes, regularly leads to massive time and budget overruns as well as frustration among those involved in the project. Automation requires confidence in the functionality of the systems, which in turn requires stringent quality assurance in the form of sufficient testing during implementation and maintenance. On the other hand, the necessary high level of data availability and data quality means, above all, cleaning up, cleaning up, and cleaning up. If the treasurer still wants to check the generated hedges or liquidity planning in detail due to a lack of confidence in the automatically generated results, little efficiency is gained.
You don't necessarily have to be an early adopter, but you should always be a fast follower. It's worth observing certain hypes, such as blockchain or crypto in the past, and seeing what others are doing before embarking on this path. It's also helpful to first determine whether your own organization is both capable and willing enough to tackle such innovative developments at an early stage. But then you should strive to bring your own treasury up to the current state of the art and methods as soon as possible and not run into a reform backlog due to the ever-present reasons for not doing something.
Treasury as an important partner to corporate management has long been part of the self-image and objectives of treasurers. However, this claim often requires a more holistic approach to the activity than is currently customary. In risk management, responsibility for credit risk management outside of banks is often rejected, and in payment transactions, no influence is exerted on payment terms or working capital management. As a treasurer, one might well ask why many more controllers and accountants are becoming CFOs—could this possibly be because supervisory boards tend to trust them more to take a holistic view of the company?
Regulation is usually seen as a chore rather than something positive that offers opportunities. The biggest boost for treasury systems and methods in 2001 was the introduction of the FAS133 and IAS 39 accounting standards. The introduction of IFRS 9 offered the opportunity – albeit often unused – to further develop credit risk management, as did EMIR for the revision of hedging strategies and PSD 2 for the payment factory. Furthermore, there is no excuse for not complying with a regulatory requirement, so this also improves the argument for a corresponding budget, which can then be used not only to implement the minimum requirements but also to sensibly expand the treasury function.
Expect the unexpected: many black swans have appeared over the last 30 years. Many events cannot be predicted, and forecasts are notoriously uncertain, especially when they concern the future. It is therefore important to prepare for the unexpected by ensuring that the necessary tools are in place. In addition to smooth processes and functional systems, this includes sophisticated and comprehensive risk management, including stress testing and taking precautions, e.g., in the form of sufficient liquidity reserves. It also means keeping an eye on developments and potential risks and gathering information and insights at an early stage by talking to other treasurers – and not viewing consultants as annoying naggers who just want to make money. For almost 30 years now, the Association of German Treasurers has been providing the ideal platform for gathering information, sharing experiences with others, and identifying trends at an early stage without getting bogged down in day-to-day work.
Source: KPMG Corporate Treasury News, Issue 150, December 2024
Guest author:
Prof. Dr. Christian Debus
Chairman of the Association of German Treasurers
