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.'