Historically, Microsoft’s risk exposures have been tracked and reported separately by different areas of the business. Direct investment exposures were reported by the capital markets team; counterparty risk exposures were reported by the compliance team and accounts receivable exposures were reported by the credit and collections team.

The systems used to track these exposures were separate and not integrated. It was therefore difficult to obtain a clear overview of all the exposures relating to a particular counterparty.

In light of the global financial crisis and economic downturn, it was clear that a more comprehensive solution was required in order for the appropriate hedging decisions to be made. “As the crisis started to unfold, we became increasingly concerned that we needed a holistic view of our risk exposures,” says Doug Hoch, Director, Risk Management. “This led to the creation of our ‘360 Degree Exposure Report’, which was developed internally over the course of a few months by quantitative analysts in the Financial Risk Management Group.”

For each counterparty, the 360 Degree Exposure Report compiles information relating to Microsoft’s exposures and displays the data graphically in a user-friendly format. This includes exposures relating to accounts receivable (AR) and the company’s $20 billion investment portfolio, together with financial health scores sourced from a number of third parties.

“We have already had one instance where this reporting led us to reduce our exposure to an entity which later went bankrupt.”

For financial institutions, collateral positions, derivatives exposures and bank balances are also reported. As a result, the tool is able to combine a comprehensive view of the size and nature of all exposures to a particular counterparty with up-to-date information on their creditworthiness.

“With this information in hand, the treasurer can take informed decisions around hedging or reducing our investment portfolio holdings in a given name if Microsoft Corporation’s total exposure to that name is deemed to be too high,” says Hoch.

Actions that might be taken to mitigate these exposures could include altering direct investment exposure, tracking error in the company’s investment portfolio (ie tracking the divergence between price behaviour of a position/portfolio versus price behaviour of a benchmark), tightening AR policies and renegotiating ISDA (International Swaps and Derivatives Association) agreements.

However, the solution is not intended simply to enable exposures to be addressed once they have arisen. “Several of the metrics we have introduced, in particularly the financial health scores, are designed to be proactive in nature,” says Hoch.

“These should allow us to identify trouble spots earlier, which should hopefully allow us to modify our exposures before they actually become problematic. We have already had one instance where this reporting led us to reduce our exposure to an entity which later went bankrupt. This saved us $105,000.”

The problem of having key data spread across disconnected systems is not unique to Microsoft, but Microsoft has been proactive in its approach to resolving the issue, recognising the importance of obtaining a holistic view over risk in the current market. “We have worked hard to ensure that Microsoft Treasury remains at the cutting edge of financial innovation and this new integrated 360 Degree Reporting is one example of how Microsoft continues to remain ahead of the pack,” Hoch concludes.