Cash Management: Professionals' Advice
10/12/2009
On December 9, 2009, the British Council in Ukraine hosted the Cash Management Conference organized by MTD Audit and MP Technologies under the support of the Ukrainian Construction Association (UCA).
Vasil Kisil & Partners Law Firm as an official legal partner of the UCA was represented at the Conference by Mrs. Natalia Dotsenko-Belous, Senior Associate of the Real Estate and Construction Practice Group.
While discussing the subject in question, speakers shared professional insight into cash management by scrutinizing the role and competencies of finance professionals, their influence and importance for business success, discussed the choice of the cash flow management strategy and offered their experience of using cash forecasts in the company's operating activities.
The conference organizers made the materials of the Cash Management Classes offered by the Construction Financial Management Association, CFMA available to the public. These guidance materials that were developed in 2009 by CFMA's leading financial experts are of keen interest to finance management professionals, and not only those from the construction industry alone. They contain a range of proposals to ensure corporate liquidity and solvency amid market recession. The UCA is CFMA's only partner in the CIS sharing skills and professional experience of practical application of theoretical knowledge. The CFMA granted the UCA an exclusive right to make freely available the materials of the foregoing classes to the target audience on a one-time basis, which was the case at the conference.
The speakers separately considered cash management risks and risk minimization options, payment control procedures and policies (cash flow separation, negligence and/or abuse identification procedures), financial process audit, and bankruptcy procedure as a financial risk related to corporate obligations.
This conference module featured the Foreign Exchange Risk Hedging Techniques Report of Natalia Dotsenko-Belous that consisted of a detailed review of the legal aspects and practical application of such techniques. According to Mrs. Dotsenko-Belous, such techniques may include the use of foreign exchange derivatives and REPO transactions.
The use of foreign exchange derivatives for risk hedging purposes is governed by NBU Resolution No. 281 "On Approval of the Regulatory Legal Enactments of the National Bank of Ukraine," dated August 10, 2005 ("Resolution No. 281"). The foreign exchange risks are hedged using foreign exchange derivatives thanks to forward transactions performed by banks and foreign economic entities (in this connection, as per Resolution No. 281, there is an express prohibition on futures, options and swaps). Unfortunately, this instrument is currently used with a great number of restrictions, including and not limited to the following:
Vasil Kisil & Partners Law Firm as an official legal partner of the UCA was represented at the Conference by Mrs. Natalia Dotsenko-Belous, Senior Associate of the Real Estate and Construction Practice Group.
While discussing the subject in question, speakers shared professional insight into cash management by scrutinizing the role and competencies of finance professionals, their influence and importance for business success, discussed the choice of the cash flow management strategy and offered their experience of using cash forecasts in the company's operating activities.
The conference organizers made the materials of the Cash Management Classes offered by the Construction Financial Management Association, CFMA available to the public. These guidance materials that were developed in 2009 by CFMA's leading financial experts are of keen interest to finance management professionals, and not only those from the construction industry alone. They contain a range of proposals to ensure corporate liquidity and solvency amid market recession. The UCA is CFMA's only partner in the CIS sharing skills and professional experience of practical application of theoretical knowledge. The CFMA granted the UCA an exclusive right to make freely available the materials of the foregoing classes to the target audience on a one-time basis, which was the case at the conference.
The speakers separately considered cash management risks and risk minimization options, payment control procedures and policies (cash flow separation, negligence and/or abuse identification procedures), financial process audit, and bankruptcy procedure as a financial risk related to corporate obligations.
This conference module featured the Foreign Exchange Risk Hedging Techniques Report of Natalia Dotsenko-Belous that consisted of a detailed review of the legal aspects and practical application of such techniques. According to Mrs. Dotsenko-Belous, such techniques may include the use of foreign exchange derivatives and REPO transactions.
The use of foreign exchange derivatives for risk hedging purposes is governed by NBU Resolution No. 281 "On Approval of the Regulatory Legal Enactments of the National Bank of Ukraine," dated August 10, 2005 ("Resolution No. 281"). The foreign exchange risks are hedged using foreign exchange derivatives thanks to forward transactions performed by banks and foreign economic entities (in this connection, as per Resolution No. 281, there is an express prohibition on futures, options and swaps). Unfortunately, this instrument is currently used with a great number of restrictions, including and not limited to the following:
- The use of only the 1st group of the NBU's foreign currency classifier in respect of the foreign currency;
- The use of the instrument only in the case of export/import transactions performed by foreign economic entities; and
- The term of the transactions should not exceed 1 year.
Natalia expressed hope that the foregoing restrictions would be lifted and this, in turn, would enable the market participants to more actively and efficiently use this instrument.
A REPO transaction may become the second efficient foreign exchange risk hedging instrument. The Ukraine's financial market evidences the growing popularity of REPO transactions with securities in spite of lack of special legislative control of such kind of transactions.
Such transactions actually consist of two parts: first, firm А sells its assets to firm B and, then, firm B should sell them back to firm A at the price fixed at the moment of the REPO transaction.
The REPO transaction is intended for temporary provision of funds to firm A in exchange for possession of its assets, rather than the sale and purchase of the assets (the subject matter of the transaction).
In domestic terms, the REPO transaction is only possible for securities. The Securities Sale and Purchase Agreement on REPO terms is not a separate type of financial service with a limited number of subjects. This transaction may well be used by both a securities issuer and any securities holder whatsoever provided that the requirements are met for participation of the securities trader as a professional securities market operator. The urgency of REPO transactions is determined by the unique potential of this instrument, which is reflected in the following specifics:
1. This instrument enables to reduce credit risks since it may serve as a lending alternative amidst the drastic bank lending cutbacks. As a rule, the price of the initial sale of securities (by firm А to firm B) is less than its repurchase price (from firm B to firm А). In this case, firm A actually receives a money loan from firm B and repays it later with interests accrued thereon. A REPO transaction also enables to overcome certain risks since the lender (asset purchaser) is not a pledgee but a rightful owner of such asset. Therefore, should the borrower refuse to repurchase such asset, the lender may sell it at fair market value without additional agreements with the debtor and have its expenses reimbursed out of the proceeds received from such sale. In addition, loans may be made available through REPO transactions to those borrowers who do not meet traditional requirements of banks to the borrowing capacity or have a short credit history.
2. REPO transactions result in some non-registrable lien over assets in the form of an obligation of their further repurchase, making it difficult to accomplish a further takeover of such assets.
3. The instrument enables to hedge currency risks when the national currency is forecasted to fall. In this case, a party concerned acquires a securities holding under a bank’s / other party’s obligation to repurchase them on a fixed future day at the current USD/EUR exchange rate.
4. A REPO transaction may be seen as some sort of a tax-planning instrument enabling to create an expenditure on securities made by the purchaser on a particular fixed date. Moreover, if the issuer acts as a seller in such a block trading, the issuer will not have any income from such transaction (either securities or gross income).
5. A REPO transaction enables to have securities in “temporary use” for current business purposes, by which it is similar to lease or temporary use transactions (concealed lease).
In summary, Mrs. Natalia Dotsenko-Belous pointed out: "A wide and successful use of foreign exchange derivatives for foreign exchange risk hedging purposes, in particular, in Russia, proves an indubitable efficiency of such instruments. The fact that the conceptual amendment of laws and regulations for extending the list of similar instruments is currently considered in Ukraine opens up new opportunities for practicing finance professionals."
The concluding module of the conference considered the methods and instruments of the operational financial control. In particular, the speakers focused on the planning and control of settlements with contractors in an investment project, the practice of information system application, and peculiarities of an intra-group cash flow management.
The conference was particularly valuable because practicing experts who are engaged on in the cash management operations a daily basis covered practical matters, which are already highly relevant for every financial director and can be applied by virtually every business entity.
A REPO transaction may become the second efficient foreign exchange risk hedging instrument. The Ukraine's financial market evidences the growing popularity of REPO transactions with securities in spite of lack of special legislative control of such kind of transactions.
Such transactions actually consist of two parts: first, firm А sells its assets to firm B and, then, firm B should sell them back to firm A at the price fixed at the moment of the REPO transaction.
The REPO transaction is intended for temporary provision of funds to firm A in exchange for possession of its assets, rather than the sale and purchase of the assets (the subject matter of the transaction).
In domestic terms, the REPO transaction is only possible for securities. The Securities Sale and Purchase Agreement on REPO terms is not a separate type of financial service with a limited number of subjects. This transaction may well be used by both a securities issuer and any securities holder whatsoever provided that the requirements are met for participation of the securities trader as a professional securities market operator. The urgency of REPO transactions is determined by the unique potential of this instrument, which is reflected in the following specifics:
1. This instrument enables to reduce credit risks since it may serve as a lending alternative amidst the drastic bank lending cutbacks. As a rule, the price of the initial sale of securities (by firm А to firm B) is less than its repurchase price (from firm B to firm А). In this case, firm A actually receives a money loan from firm B and repays it later with interests accrued thereon. A REPO transaction also enables to overcome certain risks since the lender (asset purchaser) is not a pledgee but a rightful owner of such asset. Therefore, should the borrower refuse to repurchase such asset, the lender may sell it at fair market value without additional agreements with the debtor and have its expenses reimbursed out of the proceeds received from such sale. In addition, loans may be made available through REPO transactions to those borrowers who do not meet traditional requirements of banks to the borrowing capacity or have a short credit history.
2. REPO transactions result in some non-registrable lien over assets in the form of an obligation of their further repurchase, making it difficult to accomplish a further takeover of such assets.
3. The instrument enables to hedge currency risks when the national currency is forecasted to fall. In this case, a party concerned acquires a securities holding under a bank’s / other party’s obligation to repurchase them on a fixed future day at the current USD/EUR exchange rate.
4. A REPO transaction may be seen as some sort of a tax-planning instrument enabling to create an expenditure on securities made by the purchaser on a particular fixed date. Moreover, if the issuer acts as a seller in such a block trading, the issuer will not have any income from such transaction (either securities or gross income).
5. A REPO transaction enables to have securities in “temporary use” for current business purposes, by which it is similar to lease or temporary use transactions (concealed lease).
In summary, Mrs. Natalia Dotsenko-Belous pointed out: "A wide and successful use of foreign exchange derivatives for foreign exchange risk hedging purposes, in particular, in Russia, proves an indubitable efficiency of such instruments. The fact that the conceptual amendment of laws and regulations for extending the list of similar instruments is currently considered in Ukraine opens up new opportunities for practicing finance professionals."
The concluding module of the conference considered the methods and instruments of the operational financial control. In particular, the speakers focused on the planning and control of settlements with contractors in an investment project, the practice of information system application, and peculiarities of an intra-group cash flow management.
The conference was particularly valuable because practicing experts who are engaged on in the cash management operations a daily basis covered practical matters, which are already highly relevant for every financial director and can be applied by virtually every business entity.