seven signs you’ve outgrown your treasury …...seven signs you’ve outgrown your treasury...

© 2015 Calypso Technology inc.

Seven Signs You’ve Outgrown Your Treasury Management System

SEVEN SIGNS YOU’VE OUTGROWN YOUR TREASURY MANAGEMENT SYSTEM

Growing Banks Grapple With Complex Treasury Challenges

April 2015

www.calypso.com



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Executive summary ...................................................

The new importance of an integrated treasury management system .................................................

2.1 Too many solutions; None that address all needs ..........

2.2 Expanding from cash into new asset classes ..................

2.3 New regulatory demands .................................................

2.4 Your back-office has edged out your front-office ............

2.5 Lack of real-time data ......................................................

2.6 You are still using spreadsheets .......................................

2.7 Liquidity buffer requirements and stress testing ............

Conclusion .................................................................

Contents

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Executive Summary

eismic shifts in global regulation and a more complex banking landscape are leaving treasurers vulnerable. Legacy treasury management systems cannot meet increasing national and cross-border demands, or provide the real-time

decision support tools needed to optimally monitor and control risk. No longer is it adequate to simply manage cash and capital; the treasury management systems of today must encompass critical enterprise-wide risk functions, such as funding, liquidity, ALM and portfolio management.

The stakes are high. As banks expand their regional and global footprint, they are facing increasingly diverse challenges. Regulatory compliance, the growing use of derivatives, and more sophisticated risk management and reporting are placing higher demands on technology.

In many cases banks are using multiple legacy treasury management systems. This patchwork approach is increasingly ineffective. A consolidated approach will reduce operational and market risk, while often lowering costs.

If your bank lacks real-time data or you are still using spreadsheets, it is another warning sign.

By upgrading to a unified treasury management system, banks can better manage funding and risk, respond more quickly to market and regulatory challenges, and generate significant operational efficiencies. For many banks, it could be time to make a change.

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SEVEN SIGNS YOU’VE OUTGROWN YOUR TREASURY MANAGEMENT SYSTEM1. Too many solutions; None that address all needs2. Expanding from cash into new asset classes3. New regulatory demands4. Your back-office has edged out your front-office5. Lack of real-time data6. You are still using spreadsheets7. Liquidity Buffer requirements and stress testing



elying on multiple outdated systems to perform a variety of everyday functions impedes growth and can lead to serious business problems

including higher funding costs, lost revenue, missed investment opportunities and distracted management. Even worse, banks are exposed to major strategic risk, such as an unannounced devaluation of a bank’s local currency.

Managing rapid growth and cash inflows is another challenge for growing markets like Africa, Southeast Asia and Latin America. Each region, and the banks within them, has its unique immediate and future needs. But there is a common thread: all banks need technology to better handle their daily operations and provide access to real-time data.

A treasury management system that enables banks to manage funding, liquidity, trading, balance sheet hedging and collateral on one platform is a game-changer. For that reason alone, it is worth investigating.

R Integrating customer front-office and bank back-office is often hampered by multiple legacy systems which aren’t equipped for real-time decision support

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THE NEW IMPORTANCE OF AN INTEGRATED TREASURY MANAGEMENT SYSTEM

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1. TOO MANY SOLUTIONS; NONE THAT ADDRESS ALL NEEDS

Using a number of legacy systems to manage treasury and other functions wastes time and impedes your ability to focus on the most important and lucrative areas of your business, such as trading and portfolio management. It also hurts your bottom line. Replacing each

one of the outdated systems would be costly and futile. Finding a single platform that performs all functions will reduce compliance risk, make your enterprise more profitable by enabling greater focus on core businesses, and provide the big picture that positions your bank for ongoing growth and profitability. Banks should have about 80% of their activity on a single real-time treasury platform, using other systems only for specialized activities.

Banks should simultaneously have a real-time enterprise-wide view across the banking and trading book. This enables them to monitor liquidity, along with funding and hedging execution, and be able to perform stress testing and behavioral scenario analysis on assets and liabilities. In a competitive and rapidly evolving marketplace, all banks must be able to invest, monitor and manage their investments on one platform. Established and rapidly growing banks must also be prepared to respond quickly to internal and external demands for more eff icient liquidity management.

Treasury management system that enables banks to manage funding, liquidity, trading, balance sheet hedging and collateral in real-time on one platform is a game-changer

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Diagram 1: Outdated Treasury Management System



2. EXPANDING FROM CASH INTO NEW ASSET CLASSES

Treasury has evolved considerably over the past decade, and banks must be ready to hedge and manage an ever-broadening use of derivative instruments to maximize returns and reduce risk exposure.

Successfully trading in derivatives requires a consistent picture of your risk and return. Having your exposures on one system while hedging on another system poses a major problem - you can not automate hedging or calculate your basis risk in real time. Banks must demonstrate that their positions are fully hedged to benefit from favorable capital treatment; that can be very expensive to perform without an integrated system. With counterparty risk being more important than ever, banks active in money markets and derivatives need a system that can show counterparty exposure and the collateral used to mitigate it on one platform.

Rapidly-growing national and regional banks with a major influx of cash face new and unique obstacles, just as global banks find it harder to manage their liquidity centrally amid local constraints that limit movement of liquidity. Basel III requirements aff ect all banks, with varying degrees of oversight, and the industry is forcing changes in business models and organizational structures. This cannot be done without a centralized platform that examines all functions and positions the bank for future growth and expansion into new instruments.

Real-time data is critical for coordinating overall treasury funding strategy. Banks need to know net asset values and liquidity positions in real-time with centralized access to liquidity gap analysis, modeling of survival horizon and market stress analysis

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Diagram 2: New Collateral Process for Derivatives Trading



3. NEW REGULATORY DEMANDS

In the wake of the 2008 financial crisis, new regulations rained down on banks, increasing their need for more sophisticated technology. The Dodd-Frank Act in the U.S., MiFID II/ MiFIR, EMIR in Europe and other global regulations require more reporting from banks, including

additional information that is risk-based and predictive.

Aft er the financial crisis, executive management at banks became focused on the risks inherent in treasury and how quickly they can turn into a liquidity crisis. Group treasurers and their supervisory boards at banks expect flexible and timely reports, preferably in real-time. These reports, which can be easily created from data compiled using a modern treasury system, confirm that the treasury of the bank is performing within its mandate.

U.K. regulators are demanding that global banks ring-fence their local operations, limiting banks’ ability to move capital around and racking up billions of dollars in compliance costs, which are undoing eff iciency gains. The proposal aims to ring-fence what is essentially the retail business of U.K. banks from the remainder of its operations to determine whether they could function independently if forced to operate as separate entities.

This will create strategic and operational obstacles for many banks, including third-party contracts, litigation, and changes in competition. A modern treasury enables a bank to view and evaluate its diff erent businesses across the enterprise, making it better equipped to fend off any material impact on customer experience and perception resulting from ring-fencing requirements.

Dodd-Frank and EMIR also imposed wide-ranging changes on derivatives trading, including mandatory electronic trading of standardized instruments and client clearing. The scope of those changes is a key driver for investment in sophisticated treasury technology that can comply with the new market realities.

While the U.S. Commodity Futures Trading Commission completes derivatives regulations mandated by Dodd-Frank, the European Union continues to develop its own derivatives regulations. Both regulatory bodies aim to meet the G20 derivatives reform agenda by regulating dealers, clearing and trading (including trade reporting), mitigating systemic risk and protecting against market abuse. Banks need access to real-time data as it pertains to all existing and evolving global regulations.

U.K. regulators are demanding that global banks ring-fence their local operations, limiting banks’ ability to move capital around and racking up billions of dollars in compliance costs, which are undoing eff iciency gains

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By better understanding the broad-reaching reforms imposed by G20 leaders and carefully structuring their OTC derivatives business, institutions can seize new opportunities. All players in the derivatives space must be ahead of the curve as swaps markets transform from bilateral, unregulated OTC markets into an environment where participants must register, transactions and trade data must be publicly reported, standardized swaps must be electronically cleared, and counterparties must meet new requirements for documentation and margins. More than ever, the business models, operations, data and technology of any business for derivatives must be fully integrated. Market participants in areas where global standards are not yet imposed must prepare for the future and understand cross-border concerns and ways to work with international regulators.

4. YOUR BACK-OFFICE HAS EDGED OUT YOUR FRONT-OFFICE

In the hyper-regulated post-crisis environment, the back-off ice has outgrown the front-off ice at many financial firms. Functions once relegated to the back-off ice are now as key to a bank’s survival as lending and trading institutions. Without constant monitoring and

awareness of what’s happening throughout your own enterprise, as well as movements among rivals and the overall markets, you cannot compete. A treasury system that balances all back and front-off ice functions is paramount to ongoing operations.

Integrating customer front-off ice and bank back-off ice functions is oft en hampered by legacy back-off ice systems which are not equipped for real-time feeds and providing data to the customer. This is an especially important function for emerging and fast-growing banks that struggle to meet new customer demands along with regulatory and marketplace pressures. With any banking function, manual processing is expensive and incurs additional costs from ineff iciency and a high rate of error. By integrating all functions from the front and back-off ice onto a single platform, banks quickly increase straight-through processing, save money, reduce the number of solutions, reallocate staff and increase risk controls.

Dodd-Frank and EMIR impose wide ranging changes on derivatives trading, including mandatory electronic trading and clearing of standardized instruments. New regulation is a key driver for finding sophisticated treasury technology that can comply with the market realities

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Diagram 3: New Market Structure Under Dodd-Frank and EMIR



5. LACK OF REAL-TIME DATA

Real-time data is vital to everyday operations and survival in any banking environment. Without clear access to intraday liquidity information, banks cannot comply with regulations and ratios. Real-time intraday data is critical for coordinating overall funding strategy

and planning with centralized access to liquidity gap analysis, modeling of survival horizon analysis and market stress analysis. Banks need to know net asset values and liquidity positions in real-time.

Replacing your legacy system allows you to integrate disparate banking and trading functions onto a single platform in order to attain greater eff iciency across all businesses. An integrated end-to-end treasury management that unifies the banking and trading book enables real-time monitoring of reporting of cash positions, funding requirements and liquidity. A single real-time platform enables banks to manage Basel III liquidity reporting, automated Dodd-Frank/EMIR compliance, more eff ective balance sheet hedging, reduced reconciliations, and optimized funding.

Immediate access to real-time data is paramount for all banks, whether they are moving beyond cash into new instruments or simply need to assess and monitor their own operations in a changing marketplace. Any bank engaged in trading requires real-time data for pre- and post-trade risk analytics and financial liquidity analytics. Better data helps banks to improve decision-making and customer service.

6. YOU ARE STILL USING SPREADSHEETS

Having your back-off ice enter data manually is ineff icient, error-prone and incurs high overheads. Moving from traditional banking into the derivatives and repo markets leaves you with highly complex instruments that cannot be managed on spreadsheets.

If a bank expands via acquisitions, relying on spreadsheets slows the integration process. It is diff icult and time-consuming to load data manually aft er an acquisition where a rapid understanding of the combined position is vital to early success. Relying on spreadsheets could jeopardize your initiative to expand into new markets as well as your ability to stay competitive in your own market.

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Moving from traditional banking into the derivatives and repo markets leaves you with highly complex instruments that cannot be managed on spreadsheets

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7. LIQUIDITY BUFFER REQUIREMENTS AND STRESS TESTING

Liquidity requirements set by the Basel Committee have become as great a challenge for banks as capital requirements. Capital can absorb loan losses, while liquid assets can be used to absorb funding and liquidity risk. For this reason, there is an immediate and ongoing need

for banks to have a simultaneous view of liquidity and capital on a single platform.

The Liquidity Coverage Ratio (LCR) was implemented in January 2015 and will take full eff ect in 2019. Banks must have 60% of the liquidity buff ers set by the LCR in place for 2015. Liquidity, which previously had been considered a second-order risk, has developed into a major risk amid uncertainty and volatility.

All banks, regardless of size or location, are facing the uncertainty of global risks such as Greece’s financing woes, China’s downtrend and the possibility of inadequate market liquidity. Stress testing now includes an assessment of how a bank’s leverage ratio - which measure equity to total assets, would emerge from a crisis, as well as its capital ratio - which measures equity to risk-adjusted assets. A centralized platform allows banks to manage ratios and better prepares them for the next round of stress testing.

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Banks must have 60% of the liquidity buff ers set by the LCR in place for 2015. Liquidity, which previously had been considered a second-order risk, has developed into a major risk amid uncertainty and volatility

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CONCLUSION

reasurers are under growing pressure as they face unprecedented complexity in their daily operations. The increasingly regional and global footprint of

many banks in growth economies, as well as business and regulatory demands for real-time, cross-asset risk, capital and liquidity management are at the heart of this industry-wide challenge.

Against this backdrop, there is no room for legacy or under-performing technology, spreadsheets or other maverick approaches to managing capital, liquidity and risk. While smaller banks might have survived with a base-level approach to managing cash and capital in years past, the array of risks associated with this approach is simply untenable today for growing banks.

Successful banks have little choice but to implement an integrated system for managing funding, liquidity, trading, balance sheet hedging and collateral. The good news is that once it is in place, the treasurer can focus on the decisions that help drive bank profitability – such as trading and portfolio management – knowing that the operational aspects of the department are under control.

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Diagram 4: Integrated Treasury Management Target Operating Model

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ABOUT CALYPSO

alypso Technology, Inc. is a leading provider of software solutions for the financial markets. It provides customers with a cross-asset, front-to-back scalable, single platform for

consolidation, innovation and growth. With 17 years experience delivering software and services for trading, risk management, processing and accounting, the Calypso solution helps bring simplicity to complex business and technology challenges. Calypso solutions address needs for the capital markets, investment management, clearing, collateral, treasury and liquidity. Clients can benefit from greater efficiency, improved risk management, better allocation of capital, faster regulatory compliance, faster time to market and reduced Total Cost of Ownership (TCO).

Calypso is used by over 34,000 market professionals in over 60 countries representing more than 180 financial institutions across Asia, Americas, Europe, Middle East and Africa. Calypso Technology has over 800 staff in 22 global offices, with headquarters in San Francisco, California. “Calypso” is a registered trademark of Calypso Technology, Inc. in the United States, the European Union and other jurisdictions. www.calypso.com

Other parties’ trademarks or service marks are the property of their respective owners and should be treated as such.

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seven signs you’ve outgrown your treasury …...seven signs you’ve outgrown your treasury...

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