Treasury Today Country Profiles in association with Citi

Gaining a full view of risk

Back view of two business partners looking out an office window

It has never been more important for treasurers to have a full view of risk across the business. But how can treasurers achieve this, and how can technology help them manage their risks more effectively?

From political upheaval to high-profile cyber-attacks, the events of 2016 underlined the importance of expecting the unexpected. In this environment, what steps can treasurers take to manage their risks as effectively as possible?

Understanding the risks

First and foremost, treasurers need to have a full view of risk across the business. “It is critically important for treasurers to have transparency into their financial exposures and the risks that could affect them,” says Bob Stark, VP Strategy at Kyriba. “Making decisions without a full view of risk is like only looking one direction before crossing the street.”

Paul Taylor, Head of Global Corporate Sales and head of EMEA Sales for GTS at Bank of America Merrill Lynch, says that it is important to be as precise as possible when understanding the risks to the business. He points out that almost all forms of risk impact the treasurer, whether directly or indirectly. “A good example of that would be technology risk or cyber-security risk,” he explains. “I’m not sure that in most companies this would fall to the treasurer to manage, but clearly technology and cyber-security risk have a massive bearing on the role of the treasurer.”

In some cases, this responsibility will be shared with other parts of the business. “There are some risks that treasurers manage alone – such as liquidity, currency and interest rate risk,” observes Stark. “There are others that treasurers support in collaboration with other teams – such as the impacts of regulatory change on tax or the impacts of globalisation on the supply chain, and sovereign risk impact to top line financial KPIs of their organisations.”

Managing volatility

“As a treasurer, we have to worry about two kinds of volatility: the ones we know about and understand, and the ones we are not aware of,” says Damian Glendinning, the Singapore-based treasurer of Lenovo. “For the first category, once we are aware of the issue, it is usually possible to collect the data on the underlying exposure, and take the necessary risk mitigation actions. These will usually be some form of hedging.

“Of course, it is better if the awareness of the risk does not come from a bad experience: we always try to get out ahead of these problems. The sad fact is that many organisations are only willing to make the necessary investment in gathering the data and enforcing the disciplines after they have learned the lesson the hard – and expensive – way.

“By definition, it is hard to prepare for the risks and the volatilities we are not aware of. This will often take the form of unexpected consequences: the funding crisis and the dramatic spike in overnight interest rates during the global financial crisis is a prime example. It might have been possible to foresee the collapse of a single bank – but no-one expected the chain reaction which ensued.

“For these cases, it is always best to make sure we have something in reserve. It is also very good to challenge your own assumptions. In many cases, our actions are based on an implied assumption that something cannot happen – it very often can.”

Role of technology

Treasury management solutions can play a key role in helping treasurers understand their risks and manage everything from interest rate hedging to liquidity risk. Functionalities such as business continuity and the ability to enforce segregation of duties can enable businesses to mitigate their operational risks.

“Treasury technology allows treasurers to centralise global foreign exchange exposures, track hedging instruments, automate risk analytics and reporting,” comments Steve Wiley, VP Treasury Solutions at FIS. He notes that treasury technology can also protect company assets through access to the strongest levels of cyber security by specialised treasury technology providers.

In conclusion, understanding and managing risks is a higher priority than ever for corporate treasurers. As innovation continues, treasurers should welcome any developments that might enable them to manage risks more effectively – while also leveraging the full range of functionalities offered by existing solutions.