Treasury Centres

Treasury centres typically operate at multiple levels, such as:

1. Transactional: taking intercompany deposits and making intercompany loans, offering intercompany derivatives for hedging, and the resultant transactions with banks to offset net positions,
2. Organisational: acting as a centre of excellence, setting policies, and managing bank relationships, and
3. Process: running payment factories, netting systems, hedge accounting, and similar processes to capture economies of scale and to ensure process consistency.

 
Treasury Centres vs Shared Services Centres

Treasury centres are often confused with shared service centres (SSCs). Indeed, many treasury centres are in effect treasury shared services for operating companies. Nonetheless, it is helpful to draw a distinction between treasury centres which are primarily booking centres for treasury transactions and SSCs which are primarily processing operations.

Typically, SSCs focus on high-volume, low value, routine commercial (as opposed to treasury) transactions, which comprise of receivables, payables, accounting, reporting, payroll, fixed assets, etc. Treasury centres, on the other hand, focus on low volume, high value transactions such as loans, deposits, and derivative transactions.

SSCs are typically processing on behalf of operating entities, while treasury centres tend to transact as a principal. For this reason, SSCs do not need to be tax efficient (because they are not processing across their own books), whereas treasury centres need to be tax efficient (because they are booking high value treasury transactions in their own books).

SSCs often seek low labour costs because they require large numbers of talent resources, and SSCs are  evolving in the area of process automation over time. Treasury centres typically employ a small number of highly skilled treasury professionals. Therefore, these human resource requirements impact the treasury centre and SSC's location.

In practice, treasury centres normally work very closely with SSCs on the high volume aspects of treasury, such as payments (and the overall procure-to-pay (P2P) process) and collections (and the overall order-to-cash (O2C) process). Some treasury centres actually do commercial payments and collection processing, and thus subsume a part of SSC activities.

Treasury centres often outsource their own processing activities to SSCs. Treasury centres will typically execute loans, deposits, foreign exchange et al., and then rely on their SSC to do the back office activities (confirm, settle, reconcile) and accounting G/L postings.

Treasury Centre vs In-house Banks

The term In-House Bank (IHB) is often used to mean treasury centre, in the sense that a treasury centre acts as an in-house bank where operating entities can  makes loans to, take deposits from, and transact foreign exchange with.

IHB also refers to a very specific treasury technique centered around intercompany current accounts and executing flows on behalf of operating entities.

For the sake of clarity, it is preferable to use the term treasury centre when refering to making loans, taking deposits, and transacting foreign exchange with operating entities; and IHB when refering to executing flows on behalf of operating entities and posting them to intercompany current accounts.

It is possible that one treasury team in one location or legal entity does all or a part of the treasury centre, SSC, and IHB's activities. Nonetheless, it is helpful to keep these definitions separate because they refer to distinct and separable activities.

Treasury Centre Activities

Typical treasury centre activities include:

1. Intercompany deposits and loans: treasury centres typically concentrate intercompany cash using intercompany deposits and loans - operating entities with excess cash place deposits with the treasury centre who then recycles the deposits into cash (via foreign exchange swaps where necessary) to make intercompany loans to operating entities who are short of cash. As a result, this saves the bank interest margin and balance sheet costs, and this process can be automated with ZBA / Sweeping and or notional pooling
    
2. Foreign exchange: treasury centres typically transact foreign exchange with operating entities with a view to concentrate foreign exchange exposures in the treasury centre, and to minimise the volumes traded with banks and save spreads
    
3. Bank relationships: treasury centres typically manage bank relationships which include arranging banking services and facilities for operating entities, as well as setting up liquidity management and similar arrangements
    
4. Process: treasury centres often facilitate or manage treasury related processes such as payments, collections, hedge accounting, cash flow forecasting
    
5. Policy: treasury centres often set and implement treasury policies and monitor cash balances and flows

Treasury Centre Requirements

The primary requirement for a successful treasury centre is to find experienced treasury talent. Since corporate treasury is a very niche field, such talent is hard to find, and they tend to be concentrated in a handful of locations where treasury centres are located.

Other important requirements for a successful treasury centre include:

1. Market access: treasury centres need access to broad and liquid financial markets with a deep pool of support professionals like bankers, lawyers, and other advisors
2. Open regulation: since most treasury centres cover multinational operating entities, treasury centres need to be in locations without capital controls and other financial constraints
3. Tax: onerous withholding taxes and to a lesser extent high corporate income tax will make treasury centres less cost effective

Treasury centres generally need to work closely with the company's core business, so, once the above requirements have been satisfied, they are often co-located with important business entities such as its global or regional headquarters.

Treasury Centre Organisation

Treasury centres are typically organised into the three classic layers for efficiency and control purposes:

1. Front office: interaction with operating entities and market execution (primarily with banks),
2. Middle office: process and risk control, and
3. Back office: confirmation, settlement, and reconciliation.

 
Together these three layers will cover the three pillars of treasury: funding, cash management, and risk management.

Since many companies do not have sufficient scale to staff up all these activities within the treasury centre itself, it is common that treasury centres implement a segregation of duties across peer organisations within finance. For example, back office may be undertaken by colleagues in an SSC or in the accounting team, and middle office may be handed to operations control colleagues.

In the case of regional treasury centres, it is common to have shared support functions like middle and back offices globally. Sometimes risk management is globally centralised. Normally, group level funding and capital markets activities are concentrated in one entity, usually at the head office.

Treasury Centre Incentives

Some markets offer special incentives to attract treasury centres, because treasury centres can bring financial flows to the local market and thus contribute to a thriving financial centre.

Most incentive packages include reduced corporate income tax for qualifying activities (typically 50% of the normal CIT rate) and waivers from withholding tax on interest. Some regulated markets offer regulatory waivers to attract treasury centres, but such markets do not normally make good treasury centre locations because regulations like exchange controls inhibit financial markets.

Within Asia, Singapore and Hong Kong are competing fiercely to attract treasury centres.

In summary, both markets have open and deep financial markets, as well as a good infrastructure that is suitable for treasury centres.

The table below compares the two.