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Indexing contracts for CPI

In many contracts, amounts paid are indexed by CPI, or some sub-variant of it. I was recently speaking with my colleague, Tim Devine, about a way to make it easier to calculate indexing over time in order to ensure that invoicing amounts are correct. Some companies have people who do this full-time, but all you really need is Excel.

Tim is the most Excel-capable lawyer I have ever met, so it makes sense to implement this solution in Excel. He will be right at home.

So, if you’re looking to find out what you should be charging, or being charged, after 1 or more periods of inflation indexing, you can now do so with this Excel sheet:

CPI Adjustments

If you have any suggestions for changes, let me know!

Thanks again to Tim for this one.

A Haiku

Here is a little Haiku I wrote. I’m not sure if it quite conforms to the Haiku style guide, but I am claiming it as a Haiku all the same. Interested in thoughts/suggestions/improvements!

The Amateur’s Ego

Rates sell off, bond launch

Tight margin makes client happy

Closing dinner, expensive.

 

You’ve got to fight for your right to …

You’ve got to fight for your right to …

… roll 1 month.

If you’re a Beastie Boys fan, I apologise for the click bait.

Just prior to me starting my first stint at Macquarie Bank the PUMA treasury team had begun issuing their securitised bonds on a 1 month roll. It was 2005, the market was strong, and the investors didn’t even flinch – no increased margin was requested or offered. Maybe they didn’t even notice. It was a genius move.

Why? Because the 1/3 basis swap was trading at 2 points. In fact, as I recall it was stuck at 2 points for years. So the PUMA team had just snuck through a 2 point discount in their margin. On a A$20bn book, that was the equivalent of $4M – per year.

As the spread graph below indicates (source: Bloomberg), there seems to be a systemic move in the 1/3 basis, that peaked in December 2015.

HS BBSW

 

As illustrated above, in the context of the last 5 years, the spread between 1 and 3 month BBSW is in the 90th percentile. Whilst I am a believer in mean reversion, in this case I believe that the mean will increase to the new normal, rather than the other way around.

I have heard on the grapevine recently that there is some chatter from some banks about cutting the 1 month roll option from the companies’ facility agreements because the basis has blown out. The reason for that movement, as I understand, relates to the treatment of 1 month money under Basel III liquidity rules. As always, the banks have all interpreted the rules differently, but there certainly seems to be a systemic move despite the different interpretations.

Whilst this is all well and good, the reality is that the banks source funding from many sources. I certainly don’t see them giving more on my cash because they’re picking up extra margin on companies who continue to roll for 3 months!

So, for the sake of your corporate treasury peers please resist any call to remove or penalise 1 month rolls in your loan documents. We don’t want this to get any momentum!

Hacking fintech hackathons

Here are the winners from the fintech hackathons held in Australia over the last couple of months:

  • June 2016: BoQ Hackathon, Brisbane: Start Young, teaching financial management to kids
  • July 2016, Fintech Startup Weekend, Brisbane:Kids bank,an app that helps put the fun back into saving by incorporating savings goals in an attempt to capture the ‘pocket money economy’
  • August 2016, CUA Hackathon, Brisbane: CUAngels, solutions to assist people in leaving domestic violence
  • September 2016, Fintech Startup Weekend, Sydney: Tap4Change, a social welfare payments platform

Notice a trend here?

If you want to win a fintech hackathon in Australia, prioritise a social outcome.

Your fintech startup is not a disruptor

I tend to keep my ear to the ground a lot in the fintech space. I enjoy learning about new things and learning about new ways of solving old problems. Australia has a lot happening in the fintech space, which is really awesome. In fact, in the space of 3 months in Brisbane (not exactly a financial capital) there were 3 startup weekends dedicated to finance.

With all that is happening, I see a lot of people throwing around the d-word. Disruption. Specifically, everyone is looking to “disrupt” the banks. The only problem is, almost none of them are actually disrupting anything.

I read an article a couple of days ago which has finally helped me to reconcile in my head how to categorise the fintech startups and their effect on the ecosystem. They’re not disrupting, they are displacing.

Peer-to-peer lenders andFX payments providers for instance… they are not disrupting the banks, they are merely displacing them (or part of their profits).

Peer-to-peer lending, as a model, doesn’t really work in my opinion. Many offshore companies in that space are now raising trusts to fund loans. That’s not peer-to-peer, that’s securitisation delivered through an online portal. Aussie John Symond was first to take it to the banks – the result was a significant shift in the home lending landscape. But the banks are still here – he didn’t disrupt them, he displaced them. The result was a decrease in margins, and at best that is what the peer-to-peer lenders can hope to inflict on the banks. At the rate they are going at the moment, I’m not hopeful.

In the end, the Australian banks are some of the most profitable in the world. The fintechs that are in the market at the moment, that I am aware of, are displacing some of the banks’ business and will probably chip away at their profitability. It is unlikely that any will cause more than an annoyance. If you know of any fintechs that have true disruptive capacity, shoot me an email I would love to learn about them.

 

Treasury Today article

I was recently interviewed by Treasury Today regarding an article I wrote on LinkedIn. It was an interesting process, both internally at work and with Treasury Today. Whilst the article didn’t necessarily come out exactly as I had envisioned in my head, I thought James from TT did a great job. Reading the article, the theme fundamentally reads as “technical skills should not be forgotten on Treasury’s march to become strategically relevant”. That is something I totally agree with, and was a sub-theme of the LinkedIn post.

However, the over-arching theme to the original LinkedIn post was really, “The difference on the bottom line between a good and a bad treasurer is many times your CEO’s salary. So choose your treasurer thoughtfully.”

Here is the article on Treasury Today’s website. A big thanks to James Hayward for his flexibility and for thinking that anyone would be interested in what I had to say!