Regulatory change is a major challenge for treasurers in 2014. The sheer volume of measures currently in the pipeline makes compliance a daunting prospect, particularly given the disparate scope and timelines.
“The dynamics of regulatory changes impacting the treasury are challenging,” says Matthias Heiden, senior vice president and head of global treasury, at software corporation SAP. “At the same time, however, managing such regulatory challenges can also create additional efficiency and turn compliance management into an area of added value for an organisation.”
While some of the new market regulations apply across the board to all users, most of the major structural reforms are on banks, although these may also have consequences for corporates.
“A subset of the new regulations is directly applicable to corporates, such as the risk mitigation and transparency requirements of Dodd-Frank [Wall Street and Consumer Protection Act], EMIR [European Market Infrastructure Regulation] and MiFID II [Markets in Financial Instruments Directive], but the biggest impact comes from the solvency and liquidity regulations on banks,” says Nick Burge, head of OTC (over-the-counter) Clearing at Lloyds Banking Group. “These drive changes in the price, tenor and availability of all capital and balance-sheet consumptive products.”
Understanding the impact of regulatory change is made all the more difficult with many reforms yet to be finalised
One such regulation is Basel III, a regulatory standard governing adequate bank capital, which could lead to higher capital costs when corporates raise funds from banks, as well as affecting the returns companies receive on shorter-term deposits. In addition, Basel III may make liquidity structures, such as notional pooling whereby balances on multiple accounts are offset against each other, less attractive.
Understanding the impact of regulatory change is made all the more difficult with many reforms yet to be finalised. For regulations which are already being implemented, or are due to be implemented imminently, the implications for corporations are relatively well defined. Examples include the European Market Infrastructure Regulation and the Foreign Account Tax Compliance Act in the United States.
Other regulations are still being developed. In March, the European Parliament postponed a vote on proposed money market fund reform which would have seen the introduction of a 3 per cent cash buffer for constant net asset value funds, widely used by corporate treasurers to manage short-term liquidity. Across the Atlantic, meanwhile, the Securities and Exchange Commission is still considering its own proposed money market fund reforms.
Yann Umbricht, the partner leading professional services firm PwC’s UK treasury group, argues that the regulations treasurers should be most concerned about are the ones they are not yet aware of. “For example, with the Financial Conduct Authority’s changes to the banking regulations, there is the possibility that treasury transactions could be affected,” he says. “Transactions, which would have been seen as exempt in the past, may get caught in the legislation, meaning that companies may need a licence to do these transactions.”
Other more distant changes include the proposed Financial Transaction Tax (FTT), which has been supported by a number of European countries, but opposed by others including the UK. While the FTT has yet to get off the ground, a new proposal is expected later this year.
Despite the challenges presented by the evolving regulatory environment, it’s important to look for the silver lining. “Compliance for the mere sake of compliance always remains a costly ‘check the box’ exercise,” SAP’s Dr Heiden concludes. “Treasurers need to see where the implementation of new regulations allows for simultaneous process improvements through automation and standardisation.”