Corporates look to make regulation pay

Kimberley Long
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It is not common to hear about the positive side of financial market regulation. But corporate treasurers are finding ways to turn the new rules to their advantage.

The post-financial crisis regulatory assault on the banking industry has had many unintended consequences. Corporates have been far from immune, not least when it comes to the impact of new rules that affect transaction services.

Regulation is the one issue that keeps treasurers awake at night, according to the Association of Corporate Treasurers (ACT). Its latest survey produced dramatically different results from the previous year, when 41% of respondents said they thought the level of regulation was about right. Now respondents are most concerned about the amount of time they are spending on meeting regulations, with very little apparent benefit to their businesses.

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It is not difficult to identify what is creating the problems. This year has seen the arrival of the Single Euro Payments Area (Sepa) and the European Market Infrastructure Regulation (Emir). Sepa requires that all transactions now take place in standardized XML messaging format, presenting a big challenge when this has to be implemented across every single bank and corporate making payments in euros across the European Union.

Emir requires every derivative contract to be entered into a trade repository, that risk-management standards are implemented for all bilateral over-the-counter derivatives, and that all OTC derivatives subject to mandatory clearing obligations are cleared through a central clearing counterparty.

The first wave of Emir regulation was imposed in 2013; the rest of the measures were implemented from the spring of 2014 – coinciding directly with the arrival of Sepa.

These regulations have brought one upside: the opportunity for the savvier corporate treasury teams to shake up operations and simplify processes.

Juggling accounts

Corporate treasurers will often find they are juggling numerous bank accounts just to keep day-to-day operations moving. The legacy of these accounts grew in response to a conflicting and changing banking environment.

The financial crisis led many corporates to expand their banking networks to avoid placing all their focus and finances with just one institution. The various requirements across different nations sometimes demanded multiple accounts in some countries, which, depending on the size of the company, could mean dozens of banks and accounts for treasurers to deal with.

The arrival of Sepa has imposed a single payments system across all European countries, removing legacy formats left in place from before the implementation of the single currency.

Bruno Demonie, deputy director of finance at Cigna Global Health Benefits, one of the world’s largest health insurance companies, explains that his company previously had to hold several accounts to meet the requirements of its European operations, with one central pooling account. Through the Sepa payments rules, the company has been able to consolidate to a single account held in its native Belgium. For him, it has been a value-adding regulation.

There is a big saving to be made on the reduction of transaction fees between countries. Rather than paying the cost imposed from each country, it is now based on the amount from the country of origin, which adds up to a big sum when multiplied across the whole business. As Demonie notes, fees in Belgium are already relatively low.

The company made the decision to consolidate to just one account with ABN Amro. "It becomes a significant number when you think of all the transactions completed in France, Italy and Spain where transactions are priced relatively high," says Demonie. "If you could switch to an ordering account in Belgium, that could bring a huge saving."

Managing a bank account from a logistics perspective takes
a lot of time and there are a lot of things to consider

Michelle Price

Estimates from the European Commission suggest the implementation of Sepa will produce savings of €123 billion across the region over six years through the reduction of bank charges and improved transfer times of payments.

Michelle Price, policy and technical director at the ACT, says reducing the number of accounts brings about savings beyond the cost of each individual transaction.

"The banks charge not just for the transactions, there are also other associated costs like the bank’s fees for holding accounts," says Price.

"Managing a bank account from a logistics perspective takes a lot of time and there are a lot of things to consider," says Price. "Are the signatures up to date? Is the account still in use? These accounts all have to be reviewed, and there is a multiplier effect if this is spread across a number of countries."

All the cash saved suddenly becomes an added boost to cash flows.

Demonie says that while his company decided to pay out the initial additional funds as a dividend to shareholders, it can be as easily pumped back into the business and reinvested in other ways.

The implementation of Sepa is also enabling companies to develop greater autonomy from their banks.

"A full review of each account would need to be done before the decision was made to close it. It would not be a difficult process, but it would take time," says Price. "Corporate treasurers are inherently short of resource, and this would need to be done on top of day-to-day functions. If a company is only operating with two or three accounts, they need to work out if it is worth their effort to close them down."