E-trading at Philip Morris´ Treasury
E-trading at Philip Morris’ Treasury
Philip Morris International Inc. (PMI) is the leading international tobacco company, with seven of the world´s top 15 brands, including Marlboro, the number one cigarette brand worldwide. PMI´s products are sold in approximately 180 countries. In 2010, the company generated net revenues of USD 67.7bn and held an estimated 16.0% share of the total international cigarette market outside of the US, or 27.6% excluding the People´s Republic of China and the US. The company has a workforce of more than 78,000 employees. Treasury is a highly centralised function within PMI and managed on a global basis at headquarter level in Switzerland. As far as possible foreign exchange, money market and commercial paper funding activities for the group are conducted from PMI´s treasury subsidiary in Switzerland. Central treasury is expanding its ‘trading on behalf’ activities for PMI´s major subsidiaries to hedge their commercial risks.
Could you describe the FX risks you run as a business?
The largest foreign exchange transactional volumes arise from hedging the in-house bank´s multicurrency intercompany loan portfolio through currency swaps. Other transactional exposures resulting from the purchase of raw materials or international sales activities are hedged on a selective basis at headquarter level. The same goes for net investment hedges.
Could you describe your FX hedging policy?
Certain hedge activity, for example foreign currency funding related hedging, is mandatory. Hedging decisions for other transactional or net investment hedging are taken at headquarter level by the Treasurer and CFO. Any hedging activity must be related to an underlying commercial exposure: speculation is strictly forbidden. The company´s objective is to achieve hedge accounting wherever possible.
What other initiatives have you undertaken within treasury to automate your transactional and operational risk processes?
Ninety-eight per cent of all foreign exchange and money market transactions are dealt over the e-trading platform and subsequently automatically booked via an interface into PMI´s treasury application. Confirmations are electronically exchanged and matched with all counterparties through the Misys CMS engine, which also handles the CLS (Continuous Linked Settlements) messaging to our CLS thirdparty settlement agent.
What was your motivation for etrading?
To achieve straight-through processing (STP) from dealing into treasury; confirmation and settlement; accounting systems; the ability to share business with all relationship banks; identifying the best pricing through competitive bidding among a larger banking group; audit logs; elimination of errors and misunderstanding on amounts; direction of trades and exchange rates. Also the ability to introduce stricter controls and approval levels in the trading process through access rights management in the e-trading platform.
Why did your treasury decide to use 360T?
360T was tested against another major platform for a couple of months. The main reason that users and management chose it was that the system doesn´t limit the number of banks to which a pricing request is sent. The other feature we liked was the pre-execution cost benefit analysis, i.e., a trader can see the opportunity cost of trading on the second or third best offer by moving the mouse over the other quotes. If you are doing a two-month swap you might be willing to sacrifice $100 and trade with a stronger-rated counterparty.
What have been the main benefits of e-trading to your business?
STP, ability to find the best pricing opportunities, fairer volume distribution among our group of banks and last but not least, the performance and volume reporting provided by 360T.
What instruments do you commonly trade?
We trade swaps, spots, forwards and money market deposits over the platform. Currency options are still traded over the phone, but the delta hedge is performed by us through the platform. We plan to look at the option trading features of the application to collect the option quotes from our banks.
Has e-trading affected your relationship with the banks?
E-trading introduced a level playing field for our relationship banks which compete for our transactional flow business. As mentioned earlier, e-trading resulted in a fairer volume distribution among our group of banks.
Do you think that e-trading is a ‘must-have’ for corporate treasuries?
The cost benefit for an organisation is driven by the number of transactions and average deal size. It should be fairly easy for larger, highly centralised treasury organisations such as ours to make a business case to support the required investments in systems interfaces etc.
What are the future plans for Philip Morris´ treasury?
As far as e-trading is concerned we would like to expand the scope to affiliates in larger emerging markets such as Brazil, Turkey, the Philippines and Indonesia. Other major company-wide projects sponsored by treasury are SWIFT integration into the company´s SAP environment and CLS (continuous linked settlements) for the in-house bank.
John Jacob, Director Treasury, Philip Morris Finance S.A.
A Treasurer’s Guide to Corporate Treasury in Germany 2011