Facing Regulatory Headwinds: How Cash Management May be Effected by Worldwide Rule Changes

In today's dynamic global economy, treasurers are increasingly focused on financial risk. A Citi Treasury Diagnostic survey revealed that 83% of respondents have put a treasury policy in place to cover liquidity risk and 79% have a policy to cover counterparty and credit risk. When asked how often they assess their liquidity and funding risk, 70% of those surveyed indicated that they review risk at least quarterly. It is considered best practice to have a comprehensive policy in place that is reviewed on a regular basis, putting the company in a strong position to deal with the implications of regulatory headwinds.

Over the past few years, regulators and governments throughout the world have been introducing new regulations with the goal of shoring up the global financial system. Regulations, such as Basel III, FATCA and SEPA, are changing the way banks do business, and in so doing, are impacting multinationals that do business with them.

Adding to the challenge, national regulators are overlaying their own sets of rules and requirements on top of global regulations with the goal of further protecting the local financial systems. So, beyond these global standards, banks now have to navigate different applications of these rules in different jurisdictions. The sheer volume of regulations and the complexity of the environment can be quite daunting. Treasurers are faced with the challenge of understanding the impact of these bank regulations on their cash management and risk strategies.

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To gain a clearer perspective on how regulations may affect their business, treasurers should turn to trusted banking partners, tapping into a wealth of knowledge on how to navigate this complicated landscape. Banks are in a unique position to help their clients evaluate how cash management processes will be impacted by regulatory change, and how those processes might be streamlined using newly developed solutions to achieve greater efficiency.

Basel III: Changing the way banks value deposits

Two new bank liquidity requirements under Basel III are changing the way banks value deposits. The Liquidity Coverage Ratio (LCR) is designed to evaluate whether banks have enough high-quality liquid assets to protect themselves from a 30-day deposit run-off in a stress scenario. The LCR will be phased in from 2015. The Net Stable Funding Ratio (NSFR) accomplishes a similar goal over a one-year horizon, and is scheduled to go into effect in 2018.

What treasurers need to know is that, as a result of the LCR, their deposits will be segmented, with each segment valued differently by their bank. The LCR assigns run-off rates based on the expected behavior of deposits. The assumption is that in a stress scenario, deposits associated with cash management arrangements for operating services, such as payroll and vendor payments, are less easily moved on short notice out of the bank. This is in contrast to non-operating balances, such as short-term time deposits or savings accounts, which could more easily be moved since they are not tied to operating business.

The ramifications of these runoff assumptions is that the rates offered by a bank on a clients' non-operating cash may fall while rates for operating cash should remain unchanged. This suggests that in the future, operating cash may become far more valuable to banks, potentially driving them to offer incentives such as discounted fees or higher rates for those clients who utilize the bank's cash management services.

Most coveted will be deposits with a remaining maturity of 30 days or more. Ongoing product development of new deposit programs is expected to effectively price for the changing value of various types of deposits.

The implications of Basel III for clients is that the better armed they are with information about their cash flows and an understanding of their risk scenarios, the better position they'll be in to work with banking partners to obtain the greatest value for their funds.

FATCA: Expanded bank responsibility for U.S. information reporting on U.S. accounts

Beginning on July 1, 2014, the Foreign Account Tax Compliance Act (FATCA) will require all U.S. and foreign financial institutions (FFI) to report information on their U.S. account holders and substantial U.S. owners of certain Non-Financial Foreign Entities (NFFE) directly or indirectly to the Internal Revenue Service (IRS). This regulation is designed to make it more difficult for U.S. taxpayers to conceal assets held in offshore accounts or in offshore legal entities.

Because FATCA is a major expansion of the definition of U.S.-sourced income, it is important for clients doing business globally to be aware of this new regulation and how U.S. and foreign banks must comply. When opening new accounts or bringing new legal entities onboard an organization's liquidity structure, treasury can expect their financial institutions to collect relevant tax documentation. Failure to comply will result in 30% withholding imposed on any FATCA-eligible interest payments.

Again, it's important to work with your banking partner to understand the implications of this new regulation to your business.

SEPA: Standardizing and rationalizing cash management activities across EU states

Earlier this year, SEPA (Single Euro Payments Area), the payment integration initiative of the European Union, went into effect. Its mission is to simplify bank transfers denominated in euro across the 28 EU member states, four members of the EFTA (Iceland, Liechtenstein, Norway and Switzerland), as well as Monaco and San Marino. SEPA enables customers to make euro payments to anyone located anywhere in the area, using a single bank account and a single set of payment instruments. By harmonizing the payment scheme, SEPA allows clients to standardize processes and rationalize activities, streamlining cash management and delivering greater efficiency. The reduction in accounts made possible by SEPA will in turn help support liquidity optimization, improve working capital and aid centralization efforts.

Though the end date for migration of euro credit transfers and direct debits to SEPA standards was slated to take effect in February, the European Parliament gave an additional transition period of six months during which payments outside of the SEPA format can still be accepted so as to minimize any possible risk of disruption to payments for consumers and businesses.

Understanding the SEPA schemes and opportunities that are available is crucial in determining how best to approach SEPA. Citi has been a leading bank in the formation and promotion of the SEPA schemes, and our unrivalled presence, solutions and expertise enable our clients to get the greatest benefit from SEPA. Citi SEPA Services helps clients leverage and unlock the value of SEPA, so you can achieve your treasury objectives.

Knowledge is Power

In the face of today's regulatory headwinds, it is more important than ever to work with a trusted banking partner to help navigate the complexities of these regulations and understand how their impact on banks will affect your business. Banks, such as Citi, can offer solutions that enable you to be fully prepared, while at the same time becoming more efficient in your processing and allowing you to meet your strategic liquidity objectives.

	Cindy Gerhard Global Head of Product Management, Liquidity Management Services Citi Treasury and Trade Solutions
	Mali Bartlett North America Liquidity Product Development & Balance Sheet Management Head Citi Treasury and Trade Solutions