International treasuries - finding their niche 3 International Risk limits Structured approach Derivatives Cost load and benefits Staggered investment Niche markets Resources Centres of excellence ISSUE 33/19 SEPTEMBER 1994 In recent months, a new A, B and C structure has been introduced into the bank's treasury operations. It defines the role, responsibilities, aims and targets of each individual operation. Raboband International looks at the thinking behind the new structure and what its implications are for the future. At first sight, the ABC concept may seem to say something about the quality of the bank's treasuries worldwide, but this notion is soon negated by everyone concerned. 'You may wonder what's in a name. But it's true we didn't like the labelling,' says head of treasury management Bram Kruimel. 'Rik van Slinge- landt was especially against it because it ap- peared to grade operations. We tried out Red, Yellow and Green to get round the problem, but in the end we opted for ABC simply be cause it's not about the labels, but about the concept behind them.' The concept emerged almost two years ago when it became clear the Central Banking Sec tor was continually requesting increased risk limits. 'This generated a discussion, also at management committee level, on how high limits should be, and on how much might be at stake, especially overnight,' Kruimel con- tinues. 'We did a lot of calculations and de- termined what the risk was worldwide, and how high it should or could be in the future.' However, while this was ongoing, new requests for higher limits ffom all the treasuries were ar- riving on an almost weekly basis. 'And not only that,' recalls Kruimel, 'but many of them were asking for the same type of limits. At that time, it was very popular to ride the US yield curve. At some point, we feit we needed some kind of structured approach which would define everyone's parameters and goals.' Besides the risk factor, there was also another point of consideration. 'The derivative busi ness has become more and more important' Dealers from all over the network visiting the Netherlands for an introductory pro gram. 'Going to a memher bank and then to a customer really helped me identify with Rabobank,said Sanjiv Garg, capital markets dealer, whojoined the London branch two months ago. Kruimel explains. 'But derivatives require not only a lot of knowledge, both in the front and back offices, but also the systems to handle it. At this point in our development, we don't have either the people or the systems in place to do derivative business in all treasuries. So the logical decision was to concentrate this ac- tivity on a number of treasuries which are equipped or will be equipped for it.' Essentially, these treasuries have been des- ignated as As. But in addition they have a lot of other responsibilities, not only to their own bottom lines, but also to B and C operations in the network. 'Maybe the best way to des- cribe these is to teil you a story,' says former Singapore treasury chief Theo van Konings veld, now back in Utrecht. 'When the concept was launched, a senior manager came in and said: "my branche has been designated a B treasury. What do I have to do to get it upgrad- ed to A". I asked him why he wanted to be an A, and he told me it was so he could sell all products to his customers. So I explained that he could do that anyway. His regional A treas ury, which is Singapore, is obliged by its A status to provide market prices for products. In fact, it's advantageous for him to stay a B be cause it means Singapore has to do all the in- vestment in human resources, systems and new products. They bear the cost load, and he reaps the benefits. That has always been the basis of the A treasury concept, but people sometimes tend to forget it because they're con- centrating too much on status.' Equipping a treasury to handle business like derivatives is an extremely costly investment. 'The systems alone cost a lot of money,' says Kruimel, 'and it's not only the systems it's also making them work and finding the right people. There are off-the-shelf packages, but you have to understand them. These systems take time to implement and require a con- centration of manpower. So, investment of this kind has to be staggered.' In the first instance, the A treasuries will be fully equipped to handle all products. 'But both the B and C operations will be provided with all the facilities they need to do their busi ness,' Kruimel adds. 'Bs will have everything necessary to cover the regions they are work- ing in, and they will also have the opportun- ity to develop market niches. In fact, you can already see that happening, both in B and C treasuries, although the latter are targeted pri- marily at their own local funding needs. But Milan is already very good in the Italian bond business, Frankfurt is specializing in special security type investments, and Antwerp is moving into the Belgian bond market. So, it is more that we want to try and keep some of the more risky business, like derivatives which require not only very stringent controls, but also big back offices, very qualified staff and a lot of capital, in the large treasury operations.' In other words, the ABC designation is con cerned primarily with levels of resources and has little to do with the quality of the actual operation. 'That's absolutely right,' says Van Koningsveld. 'Okay, a C treasury is not sup- posed to deal 10-year currency options, but the reason is not that the people there don't know how to do it. The reason a treasury is des ignated C is because the markets are probably not there, or they don't have the manpower or the systems, which is increasingly crucial now. In fact, there's a real challenge there for people in the Bs and Cs. They will have to stay in touch with the markets in the broadest sense, while concentrating on improving internal quality of the business they do now. 'So, if you try to be a centre of excellence in your own niche market, which is a heil of a big job in its own right, and at the same time fol- low developments in the market, then you have your work cut out for you. And when the prices of systems come down and we have more people with sufficiënt knowledge, then product expansion will filter down automat - ically. I'11 actually make a prediction here. In five years time, I can see what is now a C treas ury doing more products than some of the As do today. Everybody's going upstream and upmarket, so the challenge is already that big.' And the As in five years time? 'They'11 be doing things like hybrid options and stuff that is so "rocket scientist" we can't even image what it will be yet. But we'11 have to be prepared any way, and that's the real challenge for every- body, whichever treasury they work in.'

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