Last year, Toyota Financial Services (TFS) transformed its collateral-exchange procedure with 23 bank counterparties, which used to take five days at the end of the month, to meet a new two-hour daily processing requirement. The effort took seven months, five months less than expected, and an investment of only $100,000, which was 50% under budget.
With these changes, TFS, a wholly owned subsidiary of Toyota Motor, eliminated $1 billion in unsecured counterparty risk exposure and saved more than $100 million via lower funding costs, while also avoiding the use of credit default swaps and decreasing its credit value adjustments.
"The way our monthly [credit support annex agreements] were designed, there were cushions within them," says Nishant Rohatgi, treasury business solutions manager at TFS. "Because of our daily interactions, we have removed those credit thresholds, so now we have very little unsecured exposure in the portfolio."
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The new workflow also slashed the time required to complete these tasks by 98%. What previously took eight employees 50 hours over five days at month-end now takes one hour a day, which is split among three employees. And it can scale to support another 17 counterparties if necessary, TFS executives say.
"The greatest return has been our ability to improve continuously and strengthen our competitiveness ahead of the changing regulatory environment, in addition to significant financial benefits and reduction in counterparty credit risk," says Wei Shi, vice president of treasury and financial planning and analysis.
The company achieved its goal of managing margin calls by 7 am (PST) and completing collateral exchanges by 9 am (PST) by using the "Toyota Way" management philosophy, which includes Kaizen continuous improvement methodology and lessons learned from Toyota Motor's just-in-time (JIT) manufacturing practice.
"The Kaizen methodology helped us view the entire process flow," says Rohatgi. "It has you look at the people and the processes and identify the right strategy for this solution."
TFS assembled a team of 24 employees from treasury systems, legal, operation excellence, treasury operations, treasury risk, treasury cash management and corporate IT.
"The first thing we did was go to 'gemba,' or where the work is really being done, which means you actually have to sit down with the people and watch as the work moves from location to location," says Rohatgi.
The team found an exceedingly manual and batch-oriented process that involved an overabundance of Excel spreadsheets.
To speed up the workflow, the team developed the Receipts and Payments Interactive Database (Rapid), a Microsoft .NET application that automates portions of the workflow, generates margin calls and valuation statements, and sends forecasts to TFS's funding desk. The centralized platform integrates with the company's Wall Street Systems treasury workstation, Bloomberg Valuation Services and SWIFT connections to provide users with data necessary to complete their tasks and alerts to notify them when work and data are available.
"There will always be a push toward automation, but there will always be a human element in the process, and that's where JIT gives you the capabilities to provide the information that the person needs to know in order to make it straight-through processing," Rohatgi says.
The team also helped improve treasury's performance by using its internal valuation system to identify valuation and trade population errors in real time.
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