This counterparty risk management solution allows the treasurer to rest easier at night knowing the company’s $2bn plus in assets are allocated appropriately.

The challenge:

The counterparty risk management approach at Dow Corning had historically fallen short of industry standards. The management approach involved a considerable amount of manual monitoring, was primarily reactive vs proactive and was limited in scope. “Treasury realised that this approach was not acceptable and protecting our $2bn+ in cash and investments from counterparty default was the main deliverable of this project,” says John G. Coon, Global Treasury Manager at Dow Corning.

In 2014, the Dow Corning Global Cash and Investments Committee was created to address this need. This committee consists of a cross-functional team with members from Customer Financial Services (CFS) and Treasury. Their mission statement is: ‘to ensure that the risks associated with the company’s global cash and investments are monitored and are made transparent, leading to best in class practices supporting our investment objectives as defined in the Dow Corning Corporation Investment Policy.’ The Committee’s 2014 objectives were to:

• Develop and implement a counterparty risk limit model.
• Create a monitoring system in which risks could be quickly identified and remedied.
• Meet quarterly to review the model, assess bank limits and adjust accordingly.

The solution:

Upon completion of the counterparty risk model, Dow Corning created a counterparty risk dashboard, tailored to the treasurer. The dashboard resides in their TMS and includes key data for monitoring their financial parties. The dashboard is a fully automated one-stop-shop for the treasury department to have access to:

• Limit usage by financial institution – real-time monitoring with an alert notification system from breaches.
• Breakdown of limit usage by cash type (for example bank accounts, time deposits).
• Credit ratings.
• Credit default swap (CDS) activity for financial institutions and sovereigns.

“The solution we implemented provides layers of security and resembles the Swiss cheese model of risk analysis,” says Coon.

Best practice and innovation:

Unlike most companies’ counterparty risk management solutions that tend to use one or two limited sources of data to monitor their risk, Dow Corning developed a comprehensive limit model to protect them from counterparty default. The limit model incorporates in-house quantitative measures and market leading credit risk measurement tools with real-time updates to a dashboard residing in their TMS.

As Coon explains: “our counterparty risk management process includes a forward-looking, scalable model to assess the risk of our banks by using the following inputs and weightings, as well as an automated monitoring tool:

• In-house quantitative measure utilising bank financial statements – 40%.
• Short and long-term credit ratings from multiple rating agencies – 25%.
• Probability of default – third-party tool with real-time market data – 25%.
• Dow Corning Intangible – incorporates scale of bank service offerings and other relationship criteria – 10%.
• A multifaceted dashboard for daily monitoring.

“What is the value of a solution like this? Like any risk management solution, it is difficult to place a figure on an event(s) that you avoided by having the necessary safeguards in place; however, what we can say is our ability to rest easier at night knowing our $2bn+ in assets are allocated appropriately is worth a lot to us,” says Coon.