With interest rates at an all-time low and where some market rates can be negative, corporate treasurers are facing new challenges.

This is a new market paradigm affecting front and back offices, and yet despite promising economic indicators, it is a situation which is likely to last. Alarm bells will ring if treasury and risk management systems are not adjusted to tackle the challenges.

Indicators suggest that the period of low interest rates is coming to an end, and treasury teams may be unfamiliar with working in such an environment. The impact of rising rates will affect covenant triggers and any organisation’s interest rate policy which should be under constant review.

Around the world, treasurers will be looking at the announcements from the newly appointed chair of the US Federal Reserve, Jerome Powell. He has indicated that despite stock market volatility Fed governors still plan to hike rates during 2018.

Developments

With US inflation remaining below 2%, the Federal Open Market Committee seems to believe that rate increases will be necessary in order to meet targets. Treasurers will be keeping a close eye on developments in interest rates and what influence they may have on calming the current struggle between bonds and equities.

The recent nudge upwards of interest rates, albeit by the smallest of margins, means that corporate treasurers need to look closely at their cash-management strategies. Recent small increases in interest rates have, however, had little impact on decision making. It has, nonetheless, proved to be an indicator for treasurers that they need have few concerns as to the underlying direction of the monetary cycle.

Small though the increases around the world may be, they reflect a general upward movement in interest rates which have been at historic lows. The debate now seems to have moved to the pace of the upward curve rather than whether it is about to turn into a roller-coaster. Certainty is the treasurers best friend, and all indicators suggest the movement of interest rates is on the right course.

Years of stagnation has meant that corporates are only just now beginning to think about the consequences of an end to low interest rates if that is really the case. For the first time in many years, companies are beginning to examine how they should place their cash. Term deposits, dormant for many years, are now providing a significant return. Treasurers are aware, however, that these are not long-term positions and instead are looking at short-term benefits from the rate-hikes which are currently evenly spaced and conservative.

Margins

The introduction of Basel III in Europe is an indication as to how regulators around the world are concerned about the fall-out of the banking crisis, with an impact on treasury professionals in all major markets. The legislation is aimed at ensuring that banks have the resilience to absorb economic shocks and the strength to finance economic growth. With the backing of this resource, treasurers can be more confident about where they place their cash.

Despite the upward turn in interest rates, treasurers must still be aware of the possibility of negative rate values within their organisation, given the small margins on offer. As a result, it is important to determine the negative interest values on all financing, investment and interest rate derivative transactions. Here, back-office costs can influence processes such as fixing and maturity processes. Management systems must be able to generate interest expenses on investments and incomes on financing and their accounting impacts such as when an investment’s interest generates a payment instruction.

With margins so narrow, accounting systems must also be able to challenge the assumption that interest on an asset is necessarily positive, or that a liability is not generating a positive interest value. Derivative transactions also create the same problems with back office and accounting costs to be taken into consideration.

These slender margins will also have an impact on current account calculations, involving pre and post-margin negative interest values, particularly when looking at cash pooling and related costs.

Many corporates will be running valuation algorithms which were never designed to accommodate negative or low rates with a negative impact. Here, all the risk indicators for front and back office transactions must be taken into consideration.

With interest rates still at all-time lows around the world, investment policies require painstaking monitoring of positions and counterparty risks. As such, the role of the corporate treasurer is more important than ever – and of course increasingly difficult.

Simon Lynch is the owner of Treasury Talent

Treasury Talent is a specialist treasury talent provider solely focussed on the treasury market with offices in Sydney covering Australia, Singapore covering Asia, and San Francisco covering California and the USA. To make contact simon@treasurytalent.net