FIS Blog

Are Your Treasury Risk Management Policies Up to Par?


Andrew Bateman | Thursday, February 18, 2016

FIS's recent Treasury Risk Management Market Studyillustrates that one third of treasury functions do not have a formal policy for managing risk. Even though smaller and mid-cap companies are less likely to have a documented risk policy than their larger peers, every organization, particularly those that operate internationally, need a defined treasury risk management framework within which treasury can manage financial and credit risk in line with shareholders’ risk appetite. Furthermore, policy needs to be translated into practice, with the right skills, processes and technology.

Is there more value you can add?

Shareholders, bondholders and rating agencies are likely to be concerned if treasury has no structured framework for managing risk. While the industry, strategy and business model may appear to reflect one set of risks, this risk profile may be skewed if counterparty credit, FX, commodity and interest rate risk are not being managed in line with shareholder expectations.

This is not to say that a treasury risk management policy will necessarily: a) need to be a lengthy, impenetrable document that takes months to define; b) seek to eliminate all financial risks, or c) imply that treasurers need to stop using simple instruments in favor of the more exotic. In fact, the opposite is more likely to be true. By clarifying shareholders’ risk appetite, and a framework for managing risk in line with this risk appetite, treasurers can be more confident in taking a simpler, more transparent approach.

Is it time for a review?

Those who have a treasury risk management policy should not be complacent. A policy document that has sat in the drawer for five years is probably no more useful than no policy at all. As the company’s strategy, business activity, geography and shareholder appetite evolves, and the market conditions in which it operates change, the treasury risk management policy needs to be reviewed regularly to ensure that it remains valid.

How valuable is your policy?

A policy is only effective if it is executed and managed correctly. This requires the right skills and clear, documented processes. Technology also plays an important role. It is perhaps ironic that even amongst those that have a documented treasury risk management policy, more than half are adding to, rather than reducing their operational and financial risk by using spreadsheets rather than professional treasury solutions.

The inherent risk of error, reliance on one or two key individuals, lack of security and auditability, automation and integration is arguably at odds with a credible risk management strategy. In contrast, using a specialist treasury management solution, scaled appropriately to the organization, is a vital step in translating policy into practice, providing the automation, control, visibility and analytical tools to protect the business against negative volatility and create greater confidence amongst the board and stakeholders.

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Tagged in: Treasury Risk Management, Corporate Solutions

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