FIS Blog

What’s Your Corporate Treasury Costing the Business?


Andrew Bateman | Tuesday, May 3, 2016

Once the worst effects of the global financial crisis and the subsequent euro crisis had receded, it was tempting to think that unprecedented currency volatility, and skewed interest rate conditions would be relegated to history. It is more apparent than ever how crises in one market cause shockwaves globally, with the stock markets, commodity and currency markets in a high state of alert, with an impact on corporations, financial institutions and governments around the world.

For corporate treasury, the issue is not whether the company is benefiting or suffering from these extreme market conditions. Rather, the objective is to create certainty and confidence from uncertainty and confusion. Failing to do so can have a dramatic impact on the business.

As growth in key markets slows, volatility persists and interest rates continue to bump along the bottom, this is neither sustainable nor acceptable to stakeholders. Few treasurers would dispute their responsibility to identify, monitor and manage treasury risk, but many lack the treasury risk management tools to do so effectively. While an appropriate treasury policy is one element of this, therefore allowing treasurers to take preventative or remedial action to limit losses resulting from financial risk, it is rarely sufficient in itself. The key is to have the right information available, and in a usable format.

Marking the portfolio to market (i.e., measuring the value of assets and liabilities against current rates and prices) is typically considered the first step in measuring treasury risk, but as FIS’ 2015 Treasury Risk Management Study demonstrates, only one third of companies are able to do so routinely. A second step is sensitivity analysis (i.e., assessing the potential impact on the value of the portfolio as a result of changes to market conditions) which is undertaken by a similar number of companies.

Without the ability to deploy these two key techniques based on a complete and timely view of the portfolio, accurate market rates and reliable calculations, treasurers cannot form an accurate view of treasury risk, let alone manage it effectively. On this basis, it is not surprising that 28 percent of companies contributing to the Treasury Risk Management Study do not have a defined hedge accounting risk management program to manage treasury risk in a systematic way. In fact, it is more surprising that the figure is not higher given that relatively few companies can measure treasury risk effectively.

The ability to use these techniques is just the start of an effective treasury risk management strategy, which can then be expanded to more sophisticated techniques such as cash flow at risk (CFAR). Before even considering this, however, the right technology platform that presents, calculates and allows manipulation of data in a consistent, reliable and timely way is critical.

Treasurers without this capability are costing their business money, while those that have are in a position to protect financial assets, limit liabilities and create certainty and confidence.

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Tagged in: Risk Management Treasury, Corporate Solutions

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