Why a corporate treasury centre (CTC) is vital to facilitate cash management and visibility
Due to inflation since the Covid-19 pandemic, geopolitical tensions, as well as a food and energy crisis triggered by war in Europe, the global economy has weakened. There are more uncertainties that have been added to the macroeconomic environment.
Many treasurers feel the pressure, particularly those who are currently running or establishing large multinational corporations. With wide business scope and geographic coverage, they contend with difficulties such as foreign exchange (FX) risks. An increasing number of corporates are starting to focus on enhancing internal cash and liquidity management. Against this backdrop, setting up a corporate treasury centre (CTC) is an effective solution to address these difficulties by centralising corporate treasury functions.
What is a CTC and how can it help?
A CTC works as an in-house bank in a multinational corporation. The two main focuses are centralised management and usage of global funds for the group. Its functions include intra-group financing, cash-and-liquidity management, centralised payments, supporting capital raises, risk management, and financial advisory.
Besides helping corporates live through uncertainty, CTCs aid their expansion with the following:
Providing better risk control by having visible real-time global cash position: With a real time view of cash positions globally, the CTC can respond to a surplus or deficit easily and instantly, by reallocating funds or making value-added investments. With superior monitoring on cash position and faster response, corporates can reduce risks surrounding interest rates, exchange rates, and liquidity.
Improving treasury management efficiency: By gathering all scattered funds from member entities, the CTC plans and reallocates available resources. Cash allocation will be optimised and funds can be used more effectively. Digital treasury management tools can be deployed to replace manual labour in some cases, which assist corporates to better allocate human resources and mitigate operational risk.
Reducing external finance and interest expenses: With the CTC taking charge of fund allocation, the group can manage its funds in a more flexible manner, which results in a reduction of overall financing and operational costs. FX expenses can also be lessened when the CTC manages FX positions for the group.
The key drivers to set up a CTC
There are several reasons why corporates should review and revamp their treasury operations.
Firstly, increasing uncertainties and emerging risks across the globe would precipitate the corporate to evaluate its treasury management methodology. Risk aversion is rampant in the market. Particularly for clients with a global presence and a relatively scattered treasury management system, there is an urgent need to enhance internal cash and liquidity management efficiency to overcome huge challenges. Such clients set up CTCs and form a centralised management system with digital methods.
Secondly, many clients are improving payment security and liquidity management by digitalisation, usage of technology innovation and financial infrastructure upgrades. These technologies include application programming interface (API), global payments innovation (GPI), cross-border interbank payment system (CIPS) and instant payment systems.
For example, an API enables corporates to connect banking services to their internal systems. In comparison to traditional host-to-host connectivity, the API is more lightweight, easier to implement and economical. Moreover, an API has advanced technical structure and security standards, allowing banks to provide faster, highly secured and real-time services. Many of our institutional customers choose to replace old channels with API as they accelerate the digital transformation of treasury management.
Another example of financial infrastructure is an instant payment service in Hong Kong. In 2018, the Faster Payment System (FPS) was launched by Hong Kong Monetary Authority. Banks in Hong Kong have started to provide a ‘FPS Web-to-App’ service. This allows merchants and non-bank financial institutions to collect instant payments through Hong Kong’s FPS system via their own websites.
When a payment is made, an immediate notification and report will be sent to merchants for monitoring and reconciliation, simplifying their collection process.
CTC can also help a corporate adhere to ESG principles. On one hand, investors, especially those with long-term capital, have raised their requirements and expectations for corporates’ ESG performance. On the other, more companies have made ESG part of their corporate values and take it into consideration when making decisions on daily operations and investments.
In treasury, corporates can embrace ESG by adopting green cash management, including consideration of green elements when making business decisions and managing funds.
Customers not only invest in green bonds, loans, and deposits, but also examine treasury management to observe whether the system complies with these principles. For example, going paperless by using online channels, or establishing a CTC to optimise treasury governance.
The guidelines to setting up a CTC
With the decision made to opt for a CTC, the corporate must perform a comprehensive internal analysis, set up objectives, and conduct a cost-benefit study. A corporate must determine the extent of its centralised treasury management.
Selecting a suitable location is critical, taking legal and regulatory environments into consideration — foreign exchange control or tax incentives for instance.
In Hong Kong, some CTCs can enjoy a 50% reduction on the profits tax rate on certain specified activities. Basic infrastructure and talent are also important, as is a mature banking and financial system that can support a variety of products.
Multinational corporates choose to set up treasury centres in international financial hubs with free flow of capital and mature financial infrastructure like Hong Kong. Finally, a corporate must consult with banking partners, lawyers, and accountants for professional advice.
A CTC created adhering to these guidelines can help a corporate navigate and manage an increasingly complex, uncertain global economic environment.