Improving Performance with a Regional Treasury Centre in Asia
As an increasing number of global and Asian-headquartered multinationals (MNCs) begin to manage cash out of Asia rather than New York or London, developing the right structure for their regional treasury centre (RTC) is essential and setting up the RTC in a business-friendly location such as Singapore, offers a multitude of advantages.
RTCs Shift to Asia
In the past, setting up a RTC in Europe rather than Asia was a straightforward decision, as corporates could take advantage of better controls and advantageous tax rates in places like Luxembourg or Belgium. Since there was more fixed income trading expertise in Europe and North America than in Asia, the RTC in Europe concentrated on using intellectual capital while operations in Asia focused more on execution.
As these MNCs have begun to generate a rapidly-growing percentage of their cash from Asia, however, they have started looking at how to set up a RTC in Singapore or Hong Kong so that they can have faster access to their cash rather than sweeping their funds to London and New York, and also take advantage of attractive investments in the region.
While Asia-headquartered MNCs tended to be decentralized or have their RTCs located in London or New York, a more recent trend is for these MNCs is to step up to the next level of financial management and look at developing RTCs in Asia so they can manage cash better, enhance risk management and improve controls by operating in a central location in their home region.
Setting the Right Objectives for RTCs
As they look at shifting their focus to setting up their RTC in Asia, there is a tendency for some corporates to consider factors such as location or structure first. For more strategic corporates, however, the optimal starting point is to concentrate on aligning the RTC structure to support the company in achieving its key objectives of expanding their customer base, increasing revenue and growing the business. While treasury clearly has a far more strategic role than in the past, it provides a support function and should focus on preserving corporate assets and driving a satisfactory return within a specified risk framework.
For the RTC itself, the key objectives are to increase control and visibility, improve regulatory and internal compliance, enhance yield and reduce financing costs, and improve operational efficiency. As businesses continue to expand in countries throughout the region and become more entrenched locally, corporates are also considering how to set up a structure to deal with an increasing number of diverse and internationally-focused counterparties in each market.
While some corporates are starting to target a higher yet riskier return, especially as risk appetites grow larger in a more benign market, more strategic corporate treasurers are adopting a cautious approach whereby they assess treasury risk scenarios fully and make decisions that optimize their business. This more cautious approach does not mean that corporates ignore solutions that work well, but working to maximize the potential of their funds despite operating in Asian markets where currencies are restricted.
The Optimal Location for the RTC
Once a MNC has decided to shift its RTC to Asia-Pacific and has established its goals, Singapore and Hong Kong stand out as optimal locations to be considered. Both offer well-established tax and legal structures, a solid business environment, competitive banking services and effective netting and pooling regulations that can be more attractive to many other locations in Asia-Pacific.
For companies based in Northeast Asia, Hong Kong may be preferred because of its closer proximity to their counterparties.
For many corporates throughout the Asia-Pacific, however, Singapore is becoming the preferred location because it is considered very business-friendly, has the most freely regulated market in the region, offers strong tax incentives, delivers fewer surprises in financial regulation, has a legal structure in line with English law, uses English as the common business language, and receives support from government agencies such as the government's Economic Development Board (EDB). In addition, it has developed an experienced and broader talent pool, due to MNCs having set up their RTCs in Singapore.
The net result is that many companies consider Singapore the more strategic location in the region to locate their RTC.
Establishing an Effective RTC
Along with employing standard practices such as efficient cash and balance sheet exposure management in the RTC in the location they select, corporates need to design their RTC so that they have the right skills for oversight functions. To increase their talent pool and manage these activities better, corporates would in the past, bring in expertise from outside the region to manage investments and knowledge transfer to regional staff in the management of a RTC. Now, leading corporates are increasingly tapping into Asian talent and benefiting from hiring staff who have received training abroad and are returning to apply their expertise in Singapore or Hong Kong.
As they set up the RTC, corporates will need to develop strong processes and procedures that include an effective credit risk management structure, as well as to set up the systems and information management practices that fully support the business. Treasurers are also assessing whether to centralize funds in a single location, or alternatively to use sweeps or pooling to generate a comprehensive view of their funds and optimize yields.
While some corporates prefer to work with a fund manager in Asia with a strong portfolio management expertise, others set up their own cash management structure internally so that they can manage funds in a corporate environment that leverages internal management, accounting and investment expertise. Locating the RTC in the Asia-Pacific offers easier access to investments such as commercial paper, structured notes or fixed income that provide attractive returns, as the Treasurers allocate the cash into different buckets of investments.
As they establish the RTC structure, corporates can also work towards rationalizing accounts by consolidating funds in fewer accounts by using sweeps, pooling or other practices that generate better returns and ensure a strong risk management process.Taking Full Advantage of a Global Bank
Firstly, corporates can tap into the bank's global expertise so they can identify best practices from around the world quickly and benefit from leading-edge developments in the United States, Europe or other locations immediately, rather than waiting for months. A small number of global banks have been working with multinationals to set up RTCs for many years, and corporates can take advantage of the lessons they have learned in Asia as well as other regions to develop better models and an optimal framework for their RTC.
Secondly, corporates can benefit from assessing the key functional currencies they will use and selecting a bank with expertise and connections in those currencies. A corporate with a majority of their operations in US dollars, for example, can benefit from selecting a bank with a strong US dollar framework and liquidity platform, as well as an extensive correspondent bank network that enables them to move cash more quickly.
Finally, a global bank can provide Treasurers with the core products or services that are central to their profitability and help them to preserve the firm's capital. While high-return opportunities may look attractive, they come with risks and corporates can benefit from working with a bank that focuses on standard products such as fixed income products or commercial paper rather than risky new ones, and taking the time to understand details of these investments fully.Conclusion
Abdul Raof Latiff
Head of ASEAN
J.P. Morgan Treasury Services
Head of Fixed Income Sales – Singapore Corporates and Vietnam
J.P. Morgan Asia Emerging Market