The Basics: About Corporate Treasury

Introduction to Corporate Treasury

If you were to ask what a corporate treasurer was back in 1970s, most people would not have an answer. Fast forward today, the corporate Treasury has evolved and has taken on a life of its own.

From banks to institutions to corporations, it is almost quintessential to find a Treasury department in these setups now as compared to during the 1990s. Post the Great Financial Crisis in 2008, today Corporate Treasurers are gaining more importance and visibility in the Boardrooms.


What is a Corporate Treasury?

It is relatively easy to identify the Human Resource (HR) Department and define its roles and responsibilities to matters related to HR. And usually, the definition does not change much from organization to organization.

However, for the Corporate Treasury, sometimes it might not be that straightforward - the roles and responsibilities of one Treasury department might differ from another setup in a different organization.

In general, the Corporate Treasury manages the organization’s liquidity risks, financial risks, banking relationships, working capital and supporting management and business units.

In some organizations, the Treasury department might also include the mergers and acquisitions team, corporate finance, corporate planning, pension fund management, economic analysis and fintech.


What is the Typical Setup of a Corporate Treasury?

The Corporate Treasury department can cover a large area of responsibilities and arguably is becoming an important part of any organisation.

In current years, the Treasurer is gaining more recognition in the board rooms with Treasury advice being more sought after by senior management.

Treasury topics ranging from standard issues in Working Capital, FX risks, Funding costs to complex issues in Tax, Banking relationships, Fintech are now gaining notice from senior management.

Depending on the level of requirements and needs of each organization, the sophistication and size of the Treasury department can vary.

There are many articles written on the different stages of a Treasury setup in relation to its roles, organization, growth path, value. In our opinion, we can classify the stages as follows,

  • Standard - Transactional focused with Basic Coverage in Products and Geography.
  • Advanced - Strategic thinking with Regional Coverage staffed with Treasury specialists.
  • Leader - Sophisticated management with Global Coverage and Well Developed Teams in different functions that can rival the Banks.

Below is a good summary that shows the different stages of the Treasury, and how corporate treasuries at different stages can add value to organizations.  

Stage 1: Shorten working capital cycle, optimizing cost of borrowing, ensuring liquidity across business value chain.

Stage 2: Improve business margins, risk management and mitigation through hedging

Stage 3: Unlock liquidity from idle cash, reduce cost of financing across value chain, i.e. channels and vendors, structuring M&A transactions

Stage 4: Enhance shareholder value through dividend and share buy backs, manage cost of capital through banking and credit rating relationships


What are the Main Functions of the Treasury Department?

Most Treasury setups will cover the following functions,

  • Cash and Liquidity Management
  • Financial Risks Management (FX, Interest Rates, Commodities, etc)
  • Working Capital Management
  • Long Term Funding
  • Bank Relationship
  • Management and Business Units Support
  • Tax and Treasury Accounting
  • Company Credit Rating Management
  • Company Capital Structure

Based on a 2014 survey done by PWC, the functions of financial risk management, cash and liquidity management and funding rank as the most important roles of a corporate treasury in large organisations.

For small organisations, supporting management and business units, maintaining bank relationships and financial risk management rank as the most important for a corporate treasury. 


Where is the Corporate Treasury usually Located?

It is common to find the Corporate Treasury located at the Head Office of the organization.

And, depending on their size and geographical presence, corporate treasuries may also locate their regional or country Treasury offices around different parts of the world.

Usually, these regional or country offices will be responsible for Treasury issues in their geographical areas. It is possible to find certain setups performing specific functions regardless of geographical boundaries.

There are many reasons and considerations when choosing the location to setup a Corporate Treasury office. The notable factors are,

  • Geographical proximity to operations
  • Tax incentives and benefits
  • Maturity of financial and capital markets
  • Availability of skilled treasury staff
  • Regulatory environment and Political stability

Increasingly, on top of business related concerns, factors like quality of life, healthy living conditions and even clean air are some of the reasons affecting the choice of the location in setting up Corporate Treasury offices.

There are a couple of well-known cities that are attracting Corporate Treasury offices,

  • Asia       -      Hong Kong, Singapore, Shanghai
  • Europe -      London, Amsterdam, Dublin, Luxembourg


Corporate Treasurers Should Have Mandates from Senior Management on Treasury Matters

In most setups, the Corporate Treasury falls under the Finance Group in the organization with the Treasurer reporting to the CFO. The organizational structure does vary in some setups but usually the Corporate Treasury is closely related to the Finance arm.

Most Treasurers have mandates from their senior management and for treasury specific matters:

  • Cash and Liquidity Management
  • Financial Risks Management
  • Banking Relationship Management
  • Funding and Debt Management
  • Proprietary Trading Limits

With the mandates, Treasurers will be required to present and report to senior management on a regular basis. The reports can range from a macro overview to detailed metrics in several key Treasury areas.

In some Treasury setups with proprietary trading mandates, daily reports with live trading positions and up to date performances are delivered to their respective management.


Treasury Policies and Governance Will Define How Treasury Activities are Carried Out

Based on the mandates, Treasurers will need to formulate a set of corporate treasury policies for the organization on,

  • Bank Relationships Management (Counterparty Limits, Cash Bank, Wallet Sharing)
  • Financial Risks Management (FX, Interest Rates, Commodity Risks)
  • Cash and Liquidity Management (Cashpool, In-House Bank, Internal Dealing)
  • Debt and Credit Ratings (Debt Ratios, Credit Ratings, Public Relationships)
  • Proprietary Trading (Profit Targets, Loss Limits, Trading Products)
  • Operational and Settlements Standard Operating Procedures

Depending on the organization and its setup, the list of policies can be more than above. 

Treasury policies should: 

  • Reflect the Corporate Treasury’s mandate
  • Show the reporting and responsibility structure
  • Explain the Treasury’s definition on different Treasury risks
  • Outline the risk management methodologies and risk monitoring processes (i.e FX exposures, Cashflow reports, Counterparty limits, Debt monitoring)
  • Specify clearly the different risk management limits (i.e FX limits, Interest Rate coverage, Debt ratios, Trading limits, Cash end of day balances, Settlement cut-offs)
  • Include standard operating procedures guidelines on different risk management processes

Corporate Treasurers need to have a robust framework on risks monitoring and setup to ensure timely reporting and alert escalation.

Depending on the level of sophistication and organizational needs, normally such tasks fall under the Treasury Risk Controllers/Analysts desks. We tend to call them the middle office, their roles are to identify, measure and monitor the different treasury risks metrics on a regular basis.

The middle office will also ensure that the Treasury dealers, traders or managers act within their mandates and assigned trading limits. Usually, such monitoring reports are distributed to the Treasury team along with the senior management. 

So far, we have painted a high level overview on the roles, setups, policies and mandates in the industry.

Now for the next article, let us now zoom in on the specific areas of responsibilities of the corporate treasurer, discussing about the expectations and common issues faced by corporate treasurers.