Research guide - Corporate treasurers: Taking risk in hand


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Corporate treasurers are increasingly expected to understand and manage not just financial risks but risks across the whole enterprise. New software tools can help them do this. By Jack & Wolfi Large.

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Taking risk in hand

Although the primary role of finance directors and corporate treasurers is to minimize financial risk, increasingly they are also being required to manage risk throughout the organization. This expanding role, plus the ever-growing need to comply with a host of new regulations, is putting corporate treasury departments under great pressure. Fortunately new technologies, systems and services are becoming available to help them carry out these new responsibilities.

Information risk management

Data and computer system risk is on the increase as the level of on-line, internet-based operations grows and fraudsters become ever more sophisticated. The level of information risk depends on the value of the information stored and the security procedures and infrastructures in place. Phil Huggins, chief technical officer at Information Risk Management (IRM), one of the world’s leading information risk management companies, says, "Corporate treasury departments need to understand that they need to estimate the value of their information assets and only then can we determine the level of risk they are exposed to." But information risk in corporate treasury and finance departments cannot be considered in isolation, as they are only a part of a much larger organization. Information risk managers need to consider the organization as a whole. IRM has found the ideal information risk management model covers information management throughout the company with self-regulating information management processes. It has also found the most important information asset by far in some departments is the knowledge of the members of staff rather than the information held in computer systems.

Hedging and compliance risk management

The suppliers of specialist risk management systems for managing foreign exchange (FX) and other hedging risks, including commodities, and for compliance in hedging accounting continue to thrive. This is primarily because many corporate treasurers now accept they need combinations of ‘best-of-breed’ systems and web-based services rather than a single system. Reval, a leading provider of treasury and risk management solutions and services, reports major growth from around the world for its specialist web-based services, which can be integrated with existing in-house systems and enable users to comply fully with the hedge accounting requirements of the accounting authorities.

In FX exposure it has long been understood that risk management and hedging decisions are only as good as the data on which they are based. FIREapps, a US-based software and services company, claims to have turned the art of FX exposure management into a science by focusing on the pre-trade portion of the FX exposure management value chain, as shown in Figure 1. It believes there are serious deficiencies in most organizations’ FX exposure management strategies, which are frequently based on inaccurate data, typically:

  1. incorrect general ledger system configurations for FX exposure management
  2. incorrect postings on inter-company transactions, improper transaction postings and the lack of appropriate controls and monitoring
  3. the absence of systems to evaluate and correct the integrity of data continually.

Inaccurate data can be traced to all the G/L and ERP systems providing FX information, so it is not surprising that FIREapps has found that most treasury departments have significant integrity issues in the data they use for FX exposure management.

Figure 1: FX exposure management value chain

FIREapps’s risk management analysts work with clients to identify the sources of data integrity issues and then install its web-based service to clean up the data and ensure that subsequently only fully accurate data is used in FX exposure management. The FIREapps solution is used by large corporations such as Yahoo. Andy Gage, vice president at FIREapps, says, "The role of FIREapps is to help companies improve their FX exposure management decisions and strategies by enhancing the quality of the underlying data on which their FX decisions are based."

A new service to manage derivative hedging and compliance was launched in 2007 by SuperDerivatives, the US-based derivatives solution provider generally regarded as setting the benchmark for such services and used by almost all banks worldwide. Its new web-based cross-asset derivatives pricing and risk management platform includes full functionality for corporate treasury departments, as shown in Figure 2, enabling them to manage their exposures in foreign currency, interest rates, commodities, energy and employee stock options, plus other asset classes using derivatives, at the same time complying with accounting and reporting regulations. David Gershon, president and CEO of SuperDerivatives, says, "I believe that the launch of our web-based SD-Corp is a major step forward in helping corporates manage multi-asset classes easily and effectively."

Figure 2: SD-CORP derivatives management system

The management of derivatives and ensuring compliance with hedge accounting standards is now well under control and attention is turning to managing other types of risk.

Enterprise risk management

The Aon 2007 Global Risk Management Survey of 320 large organizations in 29 countries shows that senior management and risk managers now not only have to deal with operational and financial risk but also a whole range of other issues including reputation crises, sustainability, unrest in the workplace, pandemics, the impact of new regulations and global warming, so-called enterprise risk management (ERM). ERM takes a comprehensive view of the risks affecting the whole of the organization, including the four main types: credit, operational, market and business.

Increasingly CFOs and corporate treasurers are taking responsibility for ERM and company boards, regulators, and rating agencies are also increasingly focusing attention on enterprise-wide risk. Standard & Poor’s, for example, has just issued a ‘call for input’ as to whether it should consider the overall ERM of a company in its ratings. Companies are slowly beginning to appreciate exactly what is involved in quantifying their overall risk profile. Christopher Bohn from Aon Global Risk Consulting says, "Most organizations currently rank their risk exposures with only qualitative assessments. Unfortunately, this inhibits decision-making as quantitative business cases are preferred when making decisions about how to address risks and opportunities. A rigorous quantitative approach towards risk measurement will not only help organizations better understand the risks they face but will also, and perhaps more importantly, provide them with a framework to determine how best to allocate their resources." Inevitably a wide variety of systems and services are becoming available to enable organizations to quantify the many aspects of ERM.

CEOs and company boards have long dreamt of having a single risk register of all the risks to which they are exposed. The problem lies in the development of such a register. Risk Reasoning, a UK-based enterprise risk management consultancy and software house, found that this is best achieved by carrying out a series of separate risk assessments using the same software and methodology. Only when all the major areas in an organization have been covered and the risks for each project, operation or service and each business function have been aggregated can an executive summary of the overall risks with a set of key indicators be developed.

Using its RiskAid Enterprise web-based software, Risk Reasoning’s clients are able to create hierarchies of the risks they are exposed to, as shown in Figure 3, which enable senior management to see, often for the first time, the relative importance and impact of the different types of risk in relation to the organization as a whole. Managers are able to identify the risks of any proposed action and establish the potential contingency costs of delays.

Figure 3: Risk assessment hierarchies

On the horizon

The management of all kinds of risk exposure continues to increase and, over the next few years, companies will increasingly be carrying out risk management across the whole organization. This is hardly surprising, since research shows that the benefits of implementing ERM not only include demonstrating compliance and reducing the cost of risk but also a wide range of other benefits, most importantly improved overall performance.

Euromoney asked the suppliers and consultancies featured in the review for their predictions of the three main developments in risk management over the next two to three years, given in Figure 4. Not surprisingly all predict increasing levels of risk management and ERM. New accounting standards are predicted to continue to cause problems and all the participants expect risk management services to be web-based.

Figure 4 : Consultancy and supplier predictions for the development of risk management in next 2-3 years

Company & Respondent

Aon Global Risk Consulting, USA

FIREapps Corporation, USA, USA

Risk Reasoning, UK

SuperDerivatives, USA

Prediction 1

S&P will be adding an ERM evaluation to its rating, as a result many companies will begin implementing Enterprise Risk Management programs

Companies will go beyond market volatility to manage FX exposure as an enterprise risk, focusing on accounting accuracy and automated processes

Liquidity and credit risk management are top issues as banks tighten credit

Growing awareness of the business benefits of shared collaborative tools supporting risk management throughout the whole organisation

Risk management required to support multi-asset derivatives portfolios of increasing complexity

Prediction 2

Refinement of risk modeling to incorporate risk inter-relationships and their impact on Enterprise value, enhancing risk-adjusted strategic planning

Companies will adopt new approaches to increase collaboration across departments, improving visibility, data integrity & management of financial risk

Drive for commodity hedging for manufacturers and producers

Gradual conformance of risk management disciplines, e.g. project, health & safety, IT Security, Business Continuity etc. to ‘holistic risk management’

IFRS7 compliance will require more detailed risk analyses than portfolio revaluation such as stress-testing

Prediction 3

Greater management attention to risks which are considered unlikely but of very high impact should they occur

FX risk management will increasingly rely on a combination of accurate accounting and effective economic strategy to meet financial & compliance goals

Independent valuations will be a bigger focus of the Big 4 post sub-prime fall out

More business process support tools offered as thin-client solutions to maintain business data security & integrity and to enforce data protection

Larger portfolios and fast moving markets will demand a real-time, automated revaluation solution at increasing frequency 

A whole range of new risk management systems and services are under development to be launched over the next two to three years, though the most important elements in the development of risk management policies and strategies will continue to be the integrity of the underlying data and the need for good basic management skills.