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Treasury's new systems about to hit the agenda Back  
With Y2K and the euro changeover moving off the agenda, treasury systems are about to gain a lot more attention writes Richard Pike
Over the last two decades, technology has changed the face of treasury
operations. Thanks to such advances as client-server technology,
groupware, instantaneous worldwide communications, real-time market
information and the internet, treasury departments are run more
efficiently by fewer people. They have taken previously purchased
functions in-house. Even smaller companies can execute more
sophisticated functions than they could before. However the pendulum is
swinging back towards the business and treasury IT is about to get a lot
more difficult. The business is changing rapidly and putting in place a
relevant set of applications and infrastructure is becoming an
increasingly complex task.

Gone are the days of trading and hedging foreign exchange risk for most
European currencies as are the days when companies would rely just on
loans from their relationship banks. The European corporate debt market
is developing more variety with sophisticated hybrid structures to suit
all types and sizes of businesses. Corporates are using this and other
alternative funding channels to manage their balance sheets more
effectively and extend their investor base beyond the old coterie of
banks. On the bank's side they are looking to replace the loss of
revenues from foreign exchange trading with new products and increased
bond trading profits.

On the technology side of things, most firms have just completed Y2K and
the Euro changeover and are now putting their heads above the parapet to
see what has been happening in technology for the past year. Distributed
architecture, total cost of ownership and thin client computing are just
a few of the buzzwords and ideas that need to be reviewed. The current
challenge is not, however, keeping pace with changing technology but
changing business. The advent of the Euro is bringing about large
changes in the markets, with higher rate of change of products and
shorter lifespan for products. The emergence of E-commerce and the
Internet technologies is altering the way business is done and blurring
the lines between supplier and customer. In short, treasury business is
changing rapidly and the It products and services are going to find it
difficult to keep up.

In particular a number of business changes will require significant
investment in new applications to ensure that the treasury business is
fully supported by IT, these include:

In the bond market, governments will remain the most important
issuers, but a market for bonds of private issuers is also likely to
develop substantially faster and with greater depth than previously,
which could considerably reduce the share of normal loans in total
credit. If a market for corporate bond develops more quickly- like in
the US - the market will become more difficult for banks offering
traditional loans in this segment, as borrowers start to shop around
rather than always seeking credit from the same bank. This puts
increased reliance on internal corporate treasury systems to manage the
bonds held or issued. Each bond will require a large amount of static
information such as dividend dates and the peculiarities of pricing
structures must be taken into account. Many enterprises have until now
managed bonds on small systems built to cope only with Irish
instruments, these systems will have to be redesigned or replaced by
systems that can store and price bonds such as French OATs and German

The increase in securitisation as a way of generating funding and
freeing up capital will cause IT systems and back office staff to be put
under increased stress from the stringent investor reporting
requirements of these structures. This pressure flows throughout the
organisation as detailed information is required on any assets to be
securitised and all parts of the business will be required to provide
this information in a timely manner.
Greater liquidity and the expected rise in turnover on the Euro swap
market should boost the use of swaps outside the banking sector. Fund
managers and insurance companies are still under-represented in the
European markets. The growing attention being paid to credit risks will
also be important for the swap markets, arousing greater interest in the
use of asset swaps. Today, regulatory restrictions tie the hands of many
groups of issuers and investors but the new Euro should bring changes
here, too. The management and settlement of these products will become
increasingly difficult as structures change and systems have to cope
with a myriad of different issues. Swap systems must now be closely
linked to other systems of the products that they refer to (e.g.
securitisations often have swaps linked to their funding sides and it is
important to see the deal as a whole).

Strong growth is also expected in credit derivatives, especially as a
means of managing creditworthiness risks. The first products were
launched in 1992 and the sector is generally reckoned to have huge
potential as credit risks will become much more relevant in EMU. The
risk of default by state issuers is no longer zero as governments are no
longer able to create money in Euros at will and the Maastricht Treaty
contains a "no bailout" clause. With the increasing number of corporates
issuing bonds in Euros investors will want to understand and/or hedge
the credit risk inherent in the bonds. The initial experience with
credit derivatives shows that a range of new products is emerging which
can be roughly divided into two main groups; firstly, instruments to
hedge default risks in the event that an issuer becomes insolvent, and
secondly, so-called total return swaps. With the latter, the entire
economic risk attached to an asset passes to a third party while the
asset itself is not transferred. In the future, these products will be
combined in many ways. These products will require systems of their own,
but they must be linked to the main risk system to ensure that the
entire credit risk position is monitored correctly. Due to the highly
complex nature of the products and their relative low usage these deals
are often priced and managed using spreadsheets. This approach, while
valid, causes problems with audit trails, risk management, reporting,
settlement and operational risk.

So how does the treasury IT function cope with this business change?

The first and most important thing to understand and convince the
organisation of, is that this change will not be a transitory stage, it
will become a continual state. The most effective IT managers are those
who recognise that changes will happen and have built strategies and
organisational structures to meet them, not those who attempt to be
visionaries, guessing which changes are likely to be first or most
significant to the enterprise.

The second task is to put together an IT strategy that defines how the
function is going to respond to business change and sets out the
infrastructure and procedures that will allow it to do so. The most
important issue for this strategy is to align it to the business
strategy. This alignment will allow for the adoption of technical
strategies that will protect investments, foster inter-operability, and
that are tailored to the business needs and are derived from and
strongly support the institutions' missions and operational plans. The
challenge is to do this while maintaining architectural cohesion,
economies of scale and asset management procedures to offset the cost of
moving between a tactical and strategic standpoint.

This IT strategy has a number of goals and if correctly put together and
followed will greatly benefit the organisation as a whole. Those goals
Define how the IT systems will support the business in the attainment
of their goals
Show what changes need to be made in IT in order for the business to
attain their goals
Allow the business make investment decisions as to IT projects in
light of their effect on the business
Provide the IT function with a base from which to plan resources and
timescales and thus provide realisable IT goals to the business.
Give the business a set of markers by which IT can be measured

As in any business, the strategy is of paramount importance and should
be taken very seriously. Time and effort should be taken over its
formulation, all relevant people should be cognisant of its important
points and it should be reviewed on a yearly basis to ensure that it
stays relevant to the business it supports.

The setting of the strategy and its component parts (application
architecture, IT infrastructure and security architecture) will allow
the IT function to respond to requests from the business for new
functionality such as a securitisation system. Issues such as hardware
platform, required data feeds and security requirements will already
have been decided and a suitable application can be 'plugged' in to the
system. New systems will not suffer from the usual problems such as
reconciliation, unconsolidated reporting or unknown hardware

The third project is to define the tasks and roles of the IT function
and who should be responsible for them. In a changing and difficult
environment it is easy for jobs to be forgotten about or ducked out of
and this will cause immense problems down the line. The main functions
that require ownership and a clear definition of what makes them up are:

IT planning and risk management
Architecture and standards
Resource and skills management
Program and project management
Information and data management
Vendor management
IT asset and financial management

The final stage of putting together a responsive IT function for
treasury is to put in place a relevant reporting structure. Most
organisations are good at reporting on the progress of individual
projects but have no method of reporting on the overall effectiveness of
IT. Regular reports must be produced on the attainment of strategic
goals and on the efficiency of the IT functions mentioned above. The IT
function must be measured by its delivery of real benefit to the
business in terms of increased efficiency, lower costs, better risk
management and increased competitiveness.

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