AFP 2020 conference: looking beyond Covid

16 November 2020

Among presenters at its first virtual conference, the Association for Financial Professionals had a member of former President Obama’s team outlining developments already underway pre-pandemic. Federal Reserve policy and the rise of blockchain and digital currencies were also on the agenda

Following the lead of EuroFinance and SWIFT’s Sibos, the Association for Financial Professionals (AFP) used the virtual format for its 2020 conference once it was evident that the Covid-19 pandemic would prevent this year’s planned gathering in Las Vegas from taking place.

To accommodate a lengthy schedule of keynote presentations and sessions, this year’s conference was arranged across eight days, commencing on Monday 19 October and wrapping up on 29 October. Although this was several days before the election, the issues set to dominate in the coming years – and in the post-Covid era – were very much to the fore, including the future relationship between the US and China and climate change.

Blockchain and digital currencies

While the impact of the pandemic inevitably featured in discussions it did not dominate them; continuing the pattern of recent years several sessions once more focused on blockchain. In How Blockchain and Distributed Ledgers can combat fraud Sean Stein Smith, Assistant Professor of Accounting in the Economics and Business department of Lehman College discussed trends with Joey Ryan, Co-Founder and CFO of the bitcoin and digital asset based finance platform Gilded and Roberto Cruz, Latin American SVP of the water and waste management multinational SUEZ.

Ryan noted that digital currencies are now growing at a similar rate to that of the internet in its early stages of development and cited forecasts that by 2030 the volume of international payments will have doubled to US$47trn, while digital currencies will have taken a 25% share of them away from national currencies.

He described stablecoins as “a game changer” that started to take off in a big way last year. Being pegged 1:1 to a fiat currency (the US dollar) allows businesses to use them without the volatility risks that attaches to bitcoin and other digital currencies.

However, current legacy systems don’t support cryptocurrencies. Techs such as Gilded are responding by providing a business application layer that enable companies to start using them.

Cruz addressed the uses of blockchain in treasury, which he said gave treasurers “a fighting chance” of keeping fraud perpetrators at bay. In addition to ID fraud prevention, blockchain could be utilised for payment remittances, know-your-customer (KYC), auditability and reconciliation.

At the same time, Salmon Software owner John Byrne last year succinctly expressed the reservations that many still have: “If you ask any corporate treasurer would they use blockchain as an alternative, you would fit their response on the back of a stamp – they’ll avoid it like the plague.

“It has no resonance at the moment in the treasury section where they are taking out big loans, they are going to go with something that they are at least going to be able to wrap their minds around.”

Cruz nonetheless suggests that treasury can usefully leverage blockchain for a wide range of activities and recommended to his audience that they ask what blockchain services are offered by their financial partners and relationship banks. They should also liaise with their company’s IT department and investigate the capabilities of their enterprise resource planning (ERP) system for supporting blockchain technology.

And to evidence its growing acceptance, 11 members of Congress from both main parties recently requested that blockchain was used in delivering Covid-19 stimulus cheques to recipients.

The session Virtual Accounts and In-house Banking Coming of Age in the US brought together Mark Smith, Global Head of Liquidity Products at Goldman Sachs and two treasurers, Lawrence Talep of Volkswagen Group of America and Doug Martin, of the Church of Jesus Christ of the Latter-Day Saints. Both organisations have in-house banks (IHBs). However, the session acknowledged that while virtual accounts have been gaining traction in Europe – as a solution for rationalising bank accounts, driving straight-through reconciliation and enabling on-behalf of structures including IHBs – the US has made rather less progress although both virtual accounts and IHBs are now starting to be more widely used.

An IHB has proved particularly integral to the operations of the Church, which has at least 37,000 congregations across 170 countries and works with 126 different currencies. The lessons that any US corporates should take on board for successfully implementing an IHB are to:

  • Carefully identify objectives;
  • Choose and plan the right technology providers and arrangement;
  • Seek external advice;
  • Recognise that tax planning is critical;
  • Take a phased approach; and
  • Identify the right people resources and ensure they are available

The post-Covid world

Among the highlights of this year’s virtual conference was a keynote speech by Mona Sutphen, who served as Deputy Chief of Staff to President Barack Obama and was previously a National Security Council member for Bill Clinton. She has worked with major US multinationals for more than 20 years on the intersection of geopolitics, policy and markets.

Mona Sutphen, former White House Deputy Chief of Staff

Mona Sutphen, former White House Deputy Chief of Staff

Sutphen’s speech was advertised as focusing on the “weaponisation” of the financial markets through the increasing use of financial sanctions and investment restrictions as the ‘go to’ US policy tool. However, it opened with a consideration of when and how the world will return to some semblance of normal after Covid-19. As in the aftermath of 9/11, which took the airline industry a full five years to recover from, the pandemic has changed levels of risk perception. The lack of readiness – evidenced for example by the lack of PPE kit – revealed that the US’s national emergency response is designed more for natural disasters such as hurricanes and also that Asia’s economies have dealt with the crisis far better thanks to their experience with previous pandemics such as SARS.

Sutphen suggested that Covid-19 had served to accelerate four megatrends that were already underway before the pandemic:
Dealing with climate change and funding more resilient infrastructure:
The cost of shoring up the US’s ports infrastructure and keeping supply chains open alone had been estimated at US$60bn-70bn;
Shifts in the global economy: Generating solid economic growth was becoming increasingly difficult even before 2020, due in part to growing income inequality over the past 30 years. The post-pandemic era offers a “huge opportunity” to re-skill much of the workforce;
The US-China relationship: While the trade war has quietened this year it has not gone away and is reflected in the absence of any multilateral effort to deal with the pandemic. The years ahead could see greater collaboration, escalating competition or even a mix of the two. Much depends on discovering what exactly China wants in its demands for greater political space as Asia was already on course to account for 60% of global GDP by 2030, and this could now happen even sooner; and
Technology and tech innovation: The coronavirus crisis has already triggered rapid tech adoption, but also created distinct winners and losers.

Turning to the then-imminent US election, Sutphen noted that around 50% of the electorate is expected to have placed their vote by 3 November and voter turnout was expected to be the highest since 1908 (a prediction that came true). Yet while the outcome will be “hugely consequential” – with a strong possibility of recounts, litigation and even a re-run of the constitutional crisis that followed the 2000 election – both parties are already focused on who will succeed their candidate in 2024. Regardless of whether Trump or Biden wins, the focus next January will still be on limiting the spread of the pandemic, distributing a vaccine and rebuilding the economy. The US must focus on fixing its healthcare infrastructure, deciding on the nature of its trade relationships (not only with China, but also Europe and Japan, said Sutphen) and ensuring that it does not cede leadership to China in development of the knowledge economy.

Moving on the theme of the financial markets’ “weaponisation”, Sutphen noted that the Federal government had stepped up its enforcement action in the financial sector and there was “a lot more intrusion and scrutiny in the pipeline” as it ramps up both major sanctions and secondary sanctions. The “huge spike” in tariffs that has taken place in the past four years is set to continue should Donald Trump secure a second term in office.

The digitisation of finance over the past 15 years has at least made it easier to apply sanctions in a more nuanced way by singling out the “bad actors” and isolating them, Sutphen suggested. At the same time, some countries are resentful that the US should be setting the rulebook and are developing their own parallel, but separate systems for trade and payments. This could prove a challenge in years to come for financial companies navigating financial risk.

The Fed’s crisis toolkit

The Federal Reserve’s changed policy strategy since the 2008 global financial crisis was assessed in Building Confidence in Liquidity Management: Understanding the Fed Toolkit, in which Laurie Brignac, chief investment officer at Invesco discussed the Fed’s move to a more accommodative stance with Alex Roever, Head of JP Morgan’s US interest rates strategy team and Julia Lebedeva, Treasury Manager, Americas investments at Intel.

They noted that in contrast to the era of Alan Greenspan, when markets needed to guess what the Fed’s thinking was, the introduction of forward guidance has made its thinking much clearer. It had also reacted much more swiftly to the Covid-19 pandemic by cutting rates within 11 days in contrast to the 65 days taken back in 2008. However, current Fed Chair Jerome Powell has worked to discourage market expectations of a negative interest rate policy (NIRP) said Roever, suggesting that it is highly unlikely given the structure of US banking and also money market funds, added to which the policy has been adopted by both Japan and Scandinavia and hasn’t proved that successful.

However, it does appear likely that money will remain easy for some time to come, reflecting a policy of Flexible Average Inflation Targeting (FAIT) and interest rates will only begin moving higher once more once the impact of the pandemic fades and US unemployment begins to come down.

The panel’s concluding thoughts were that

  • The Fed remains proactive in providing liquidity and credit in order to limit financial stress and disruption of the flow of credit to those who need it;
  • Lower-for-longer interest rates and a larger balance sheet are likely – ergo a ‘FAIT accompli; and
  • The money markets will remain quite technical as supply shrinks and demand remain high for short-dated, safe liquid instruments.

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