Treasury Centralisation Proposition for MENATTransform your Treasury

Global Liquidity & Cash Management

Table of Contents

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What is Treasury Centralisation? 04

Objectives met by Centralisation 05

Models with varying degrees of Centralisation 06

Role of POBO in Centralisation Models 07

Considerations for Location 08

UAE as the Region’s HUB 09

Case: Selecting UAE as the Regional Treasury Centre 10

Case: Optimising idle liquidity across the region 11

Next Generation (ng) Virtual Accounts 12

Liquidity Management Portal 13

Global Disbursement 14

Multi Currency Receivables 15

Introduction

operations is also on the rise. To cater to these challenges, corporates will typically evolve to put in place some degree of treasury centralisation either through Shared Service Centres (SSC), Payment Factories (PF), In-House Banks (IHB) or a combination of two or more.

This automatically leads to the need for technological enhancements such as the implementation of a single ERP system, a treasury management system (TMS) or bank-agnostic connectivity to SWIFT as well as standardisation of message formats across banks, geographies, entities and banking services.

HSBC has invested decades of effort into understanding the evolution of treasury models and has simultaneously rolled out increasingly enhanced treasury solutions to match the growing needs. These dovetail seamlessly into the upgrading work that treasuries are taking on by themselves.

Treasury is a recently formed profession that came into being just over half a century ago. Whereas there are various activities that come under its ambit, a Treasury’s overriding objective, put in very simple words, is to ensure that there is the right amount of money at the right place at the right time. A corporate can face serious consequences if a treasury fails to complete this objective resulting in a financial obligation going unmet.

Every treasury has its own unique requirements depending on the business model of the corporate. A few challenges commonly faced by most are cash repatriation, better and timely visibility of transactions and bank balances, mitigating exposures arising due to fluctuations in currency exchange rates, interest rates and commodity prices, and management of capital structure while optimising net interest expense.

With businesses going more and more international, complexity of treasury

Upgrading the treasury models

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What is Treasury Centralisation?

As companies grow their businesses, the complexity of their cash management needs also increases. In order to maintain proper oversight of their treasury function, companies need to find ways to work more efficiently. To this end, the aim of treasury centralisation is to centralisepayments and liquidity by implementing standards and optimising processes, thereby ensuring greater visibility and control of cash and, ultimately, working capital.

When would you use this?

♦ If you are looking to simplify and harmonise cash and banking processes to gain greater visibility and control of cash flows

♦ If you are managing FX exposures and hedging policies across various group entities

♦ If you have liquidity concerns arising from inefficiencies in management of working capital and funding requirements

Best fit for?

♦ a multinational corporate with operations across multiple jurisdictions

♦ A multi-entity corporate with lack of common standards leading to inefficiencies in payment processing, investment decisions and capital structure

What are the benefits?

♦ Optimal capital structure and minimised net interest expense

♦ Netted intercompany invoices ♦ Common standards across various legal entities and

banking partners leading to enhanced reconciliation and straight through processing

♦ Better controls on payments and related risks e.g. cybersecurity, fraud, financial crime

Helping the treasury meet its financial obligations as they fall due by controlling banking processes, maintaining liquidity, and mitigating financial risks of the corporate using a centrally aligned structure with common standards across various entities and jurisdictions

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1 Standardisation

♦ Standardised messaging, file formats, banking processes, accounting systems

♦ Ease of reporting and reconciliation♦ Cost savings and other soft benefits

StandardisationLeveraging use of common standards, policies, formats leads to straight through processes, ease of reconciliation, soft benefits through cost savings

VisibilityGreater and timely visibility results in quicker decision making around cash flows and investments as well as rationalisation of bank fees

ControlMaintaining integrity of controls to be able to tackle issues of fraud, financial crime and cybersecurity

EfficiencyThrough technological as well as structural changes, efficient management of working capital, inter company lending and netting off of invoices, paying down debt at parent level

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Objectives met by Centralisation

2 Visibility

♦ In-time knowledge allows speedy decisions♦ Transparency across entities, easily traceable flow

of funds and cash flow forecasting

3 Control

♦ Consistent controls and policies across entities, which allows better management of risks arising from cyber and financial crime

4 Efficiency♦ Reduce country and currency exposures♦ Optimise capital structure and more efficient use

of self-funding and intercompany solutions

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Models with varying degrees of Centralisation

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Regional Treasury Team

This team acts as an extension of Global / HQ Treasury, usually handling middle-office and back-office treasury activities. It is normally located in the company’s regional HQ office. The creation of regional teams will pave the way for more sophisticated structures in the subsequent phases and also ensures the right level of talent to achieve success.

This stage primarily delivers ‘soft’ financial benefits to the organisation through a more responsive, and ideally pro-active, Corporate Treasury. At this stage, a corporate may choose to implement a single bank connectivity gateway to pave the way for subsequent phases of centralisation.

Regional Treasury Centre or In House Bank

This is formed as a separate legal entity taking advantage of incentives available in some key markets and enables a corporate to further centralise its financial activities.

This model allows the treasury to deliver ‘hard’ financial benefits to the organisationthrough more efficient management of cash, FX and overall bank fees. To this end, under this set-up the entity can become the header account to consolidate cash positions. Note that this model also requires significant investment in technology (ERP / TMS), administration, processes and, potentially, people. It is crucial to determine the location(s) and scope of the Regional Treasury Centre (RTC) / In House Bank (IHB), which could involve cash pools, intercompany borrowings, netting, reinovicing and payment factories.

Shared Service Centre

A Shared Service Centre (SSC) is a special entity supporting operational activities across various business functions including some or all of the following: treasury services, marketing, HR, legal, tax, procurement, finance etc.

For finance, it usually covers bank reconciliation, accounts payables and accounts receivables, perhaps using e-invoices. It can be comprehensive or limited to a few functions depending on the target model. SSCs can potentially deliver ‘soft’ financial benefits through cost-savings. Whilst a successful SSC set-up will likely require significant organisational change, stakeholder buy-in and extensive planning, it can be achieved with minimal involvement from banks relative to the other phases.

Payment Factory

The Payment Factory (PF) will be in direct communication with the bank by preparing the files and submitting these to their partner banks for processing.

In most cases a PF will use a Payments on Behalf of (POBO) model (usually in tandem with an IHB). As mentioned above, this is one of the functions that can be supported by an RTC / IHB set-up.

Whilst centralising payments under a PF affords treasury greater visibility and control over its payments, it will require significant investment in technology (TMS / ERP), administration, processes and potentially people; most of these however would have been already put in place from the completion of the previous phases.

Role of POBO in Centralisation Models

Payments / Receivables On Behalf Of (POBO / ROBO) is a tool that can help a treasury function to achieve the centralisation of payments.

POBO is a payment that one legal entity, often a treasury entity, makes from their bank account to a beneficiary on behalf of another legal entity.

How you deploy a POBO structures will depend on the sophistication of the centralised model, the sector of activity, the general corporate culture on the delegation of authority and specific payment types, since some may require the maintenance of local in-country accounts.

The corporate that moves into a centralised payments and receivables model has the potential to generate numerous benefits:

From a cash management perspective this would allow for the simplification of banking processes, the implementation of common standards (e.g. ISO 200022) across the organisation and the rationalisation of bank fees. An immediate benefit would be the reduction in the number of accounts, thereby reducing any relevant administrative costs.

Operationally, the sharing of the same organisational tools across the business would allow the corporate to standardise and ensure the integrity of processes and controls, allowing for new risk tools to be easily implemented

From a liquidity perspective by centralising cash and investments, a more systematic approach to investment management can be carried out

From a reconciliation perspective, POBO can help in the reconciliation process, dependent on payment instruction format

The tool dovetails into centralisation models achieved through Payment Factories running on Global Disbursement or next generation Virtual Account Management, explained later in the document

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Considerations for Location

Staffing the Treasury Centre

Availability of high-quality treasury expertise is critical. At times, not just the lack of technical expertise, but language barriers can also make a location unsuitable for purpose.

Technology and financial effectiveness

Quality and cost of office spaces, as well as access to telecommunication networks and other inputs can play an important role in the selection.

Moreover, due consideration must be given to the availability of competitive foreign currency and money markets for cost-effective hedging.

Time zone and proximity

Ideally, a treasury center should be located in the region it supports and close to key business operations within the region. Most multinationals are focusing on ‘nearshoring’ as the better form of ‘offshoring’ when it comes to shared service centers. Same time-zone makes same day value transactions more manageable hence preserving the time value of funds

Regulatory aspects

This is a broad category, where each of tax regime, educational and banking system reforms, comprehensive legislation, strong regulatory and supervisory frameworks, and central bank reporting requirements have a vital role to play.

Banking infrastructure

An established banking infrastructure and network with robust clearing systems is just the start. A well thought-out transformation journey must take in to account the availability of efficient liquidity and investment options. Notional pooling and cash concentration arrangements are, more often than not, the cornerstone around which the centralisationframework is designed. A stable and omnipresent banking partner, however, can make this decision easy.

Country initiatives

Some countries have initiatives to attract establishment of treasury centers. Companies often consider tax-efficient environment as an important factor but not the sole driver, as the country’s political and economic stability and the cost of operations also need to be considered.

Key drivers of setting up a centralised treasury include taking advantage of regulation, automation, standardisation, risk mitigation and enhanced controls, with an overarching enabler in the form of technological innovation

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UAE as a hub for the region

Rise of the Middle East

The Middle East and North Africa market plays an increasingly important role in the global economy.

There are 4 countries that rank in the top 12 globally when it comes to GDP per capita1. Through a mammoth contribution of its sovereign wealth funds, the region contributes to just over one quarter of the world’s economy.

Infrastructure development continues to be the way forward. More than a trillion dollars worth of projects are underway, driven by the state governments under strategic initiatives to diversify and reduce dependence on oil revenues. Moreover, fiscal prudence has also begun to show its mark for most of these economies.

UAE’s relevance

UAE leads from the front in most of the technological initiatives. Boasting the easiest of regulations coupled with highly developed infrastructures for banking as well as telecommunication and logistics, this place says it is “open for business” like no other country in the Middle East and North Africa region.

UAE also occupies a central place in trade between China and the Middle East, with its ports acting as reshipping centres for Chinese products to the Middle East, South Asia and Europe. The Belt Road Initiative has renewed the focus on this commercial relationship.

With World Expo 2020 and UAE Vision 2021 just on the horizon, and UAE coming out 19th globally and 1st

regionally in ranking for global talent competitiveness2, it should be no surprise that it is attracting highly skilled human capital. 85% of the population3 is expat, with more friendly regulations related to residence expected in the near future.

With first-world infrastructure, a highly skilled human capital and a sophisticated banking sector, UAE is home to the largest number of corporate treasuries in the region. Friendly tax regime as well as foreign currency controls make it a natural choice for regional HQs as well as Treasury / Supply Chain Centers.

On the innovation front, UAE has already distinguished itself as the regional hub for fintech collaboration. Dubai International Financial Centre (DIFC) has established a $100m fintech-focused fund. The FintechHive is a first-of-its kind accelerator in the region, with banks and fintechs coming together to collaborate for advancements impacting all spheres of life.

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1 - World Bank (2017)2 - 2019 Global Talent Competitiveness Index3 - https://www.globalmediainsight.com/blog/uae-population-statistics/

Case: Selecting UAE as the Regional Treasury CentreChallenges

Our customer is a leading player in the FMCG sector, globally headquartered in the UK and regionally headquartered in UAE, with subsidiaries and OpCoentities spanning 23 countries, of which 8 are in MENA.

Each entity had assumed responsibility for their own Accounts Payable / Accounts Receivable (AP / AR) processing. There was a lack of visibility and control due to multiple banks and limited integration between either of the ERP, the TMS and the various internet banking systems under use.

This was creating the challenge of resource drainage in management of large number of bank accounts and different payment processes, frequent intercompany settlements, and cash flow and funding requirement forecasts. This was exacerbated by the lack of connectivity and limited support from banks in managing the liquidity and working capital at an HQ level.

Our customer was looking at centralisation through host-to-host seamless connectivity, integration of systems and standardisation of AP / AR processes, and enhanced visibility as well as control of liquidity.

Our Solution

UAE was established as the Regional Treasury Center(RTC) for their Middle East, North Africa and Turkey operations. Bank account rationalisation followed, with integration of host-to-host setup with SAP and an interface with the TMS. Coupled with the creation of a Shared Service Center in the UAE to consolidate and carry out payables processing centrally, the customer was able to focus its payments and liquidity management with one global banking partner, increasing efficiencies across its own network.

The Result

♦ Increased visibility, control, risk management♦ Enhanced returns – Efficient liquidity structures

help the corporate with better returns♦ Intercompany netting – Reduction in Foreign

exchange and transaction costs♦ Standard global processes and reduced overheads♦ Consolidated purchasing power to obtain the best

global prices for goods and services♦ Created an environment which is scalable and

flexible to broaden the scope of the project for future phases

Moving to a centralised structure with a regional payment factory - using SWIFT and SAP to capitalise on synergies and efficiencies arising out of creation of a common technology environment across multiple entities in various jurisdictions

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Case: Optimising idle liquidity across the regionChallenges

Our customer is a global leading provider of professional services to the energy, resource and complex process industries. It operates through 40 entities in the UAE as well as joint ventures around the Middle East region.

Fast paced acquisition led growth had created a lot of fragmented controls and practices. There were heterogeneous technology platforms in use with the Treasury and Finance functions, moreover treasury related activities were also inconsistent across the entities. Standardisation was also hampered by the legal implications deriving from joint venture operations in certain jurisdictions.

The company was looking to create greater visibility of cash for the Group Treasury, consolidate where possible their cash surpluses into one liquidity managing bank, and simultaneously enhance returns from their deposits across major operating entities in the region.

Our Solution

For liquidity consolidation, all 100% owned entities were set to sweep funds into the parent entity. By having funds consolidated at a master level, delivered through a simple cash concentration structure, efficient decision making was made possible for the Group Treasury.

For joint venture entities, where inability to comingle funds prohibited any liquidity related benefits, these balances were included in a notional aggregation in an interest enhancing structure to receive preferential rates on their deposits.

The Liquidity Management Portal was deployed for real-time visibility of cash, as well as efficient controls and oversight of pooling arrangements and interest calculations.

The Result

♦ Increased visibility and control♦ Easy to implement structure that provides

incentives and benefits at a participant level and allows full or partial legal ownership participation, with and without funds comingling

Consolidating liquidity to increase control of funds, while enhancing domestic yields by riding on the liquidity bank relationship

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Important Notice

This document is issued by HSBC Bank Middle East Limited, UAE Branch (“HSBC”). HSBC does not warrant that the contents of this document are accurate, sufficient or relevant for the recipient’s purposes and HSBC gives no undertaking and is under no obligation to provide the recipient with access to any additional information or to update all or any part of the contents of this document or to correct any inaccuracies in it which may become apparent. Receipt of this document in whole or in part shall not constitute an offer, invitation or inducement to contract. The recipient is solely responsible for making its own independent appraisal of the products, services and other content referred to in this document. This document should be read in its entirety and should not be photocopied, reproduced, distributed or disclosed in whole or in part to any other person without the prior written consent of the relevant HSBC group member.

Issued by HSBC Bank Middle East Limited, UAE Branch, P.O. Box 66, Dubai, U.A.E., regulated by the Central Bank of the U.A.E. for the purposes of this promotion and lead regulated by the Dubai Financial Services Authority.

Copyright: HSBC Group 2019. ALL RIGHTS RESERVED.

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