Canadian Risk: Same Instruments, Faster Settlement Time
Vancouver-based practitioner and former Treasury Management Association of Canada (TMAC) committee member Anne Murdock no longer needs to rush to work by 6am each day as she did years ago. While risk management tools and techniques still employ much the same strategies and instruments, technology has made the process much faster and more efficient. Electronic settlements are indeed a much appreciated technological advancement over the old-fashioned physical method of manually producing a settlement so it could be picked up and processed by 8am – putting east coast and west coast Canadian treasury departments on a much more even playing field. “The banks used to enforce an earlier cut off time each day for businesses needing to transfer money. Now I can do it up until 2.30 Pacific time, and that gives me plenty of time within a normal business day,” says Anne Murdock, co-ordinator, cash management at Teck Cominco.
Since so many Canadian industries export their goods, many deal more in US dollars than Canadian dollars on a daily basis. They may report in Canadian dollars, but their functional currency is US dollars. Calgary, Alberta is known worldwide as an oil hub; while British Columbia is known for forestry, mining, biomedical and high-tech. Ontario is home to many multinational manufacturing corporations, and of course, Toronto, Ontario and Montreal, Quebec are home to a large number of corporate headquarters and financial institutions.
Risk managers in Canada deal largely with the same tools and techniques as any other international company – both in terms of generic tools, such as basic forward transactions and option transactions, and sophisticated tools, such as barrier options and more complex risk-reward scenarios. But, in fact, the complexity of corporate risk often has more to do with the industry a company operates in rather than their corporate headquarters’ location.
Certain industries use hedging strategies more than others, or prepare settlements in a similar way based on commodities directly related to their business. “Some industries are inherently more risky, so their hedging strategies may reflect a more sheltered approach, depending on other factors, such as long-term contracts, set prices, steady cash flow and the risk tolerance of the company,” Murdock says.
Risk management tools and techniques in Canada are largely unchanged from other first-world countries in terms of the currency and interest rate hedging instruments that are available. Institutional investors have access to a variety of exchange-traded instruments, such as equity, interest rate and index derivative securities through the Montreal Exchange. With regard to interest rate derivatives, corporates that use the over-the-counter (OTC) markets have experienced more dynamic growth. Not surprisingly, both are heavily influenced by technology and benefit from electronic communication and settlement processing.
All businesses walk a line between making a sale and securing payment. Risk managers utilize common tools to ensure payment, especially in the case of international clients. Letters of credit, letters of guarantee and bills of exchange are some of the tools used to limit the risk of non-payment (or receivables risk). Companies with high levels of internal communication can balance sales while minimizing the risk of not getting paid by determining the risk upfront and adjusting sales requirements accordingly. Risk is inherent in all business, but while the tools for trade finance haven’t changed, with more companies having real-time access to the central treasury, access to better risk strategies have been beneficial in giving companies a better check on the price of various tools available before a deal is made.
There is a certain level of consistency in risk management that hinges on the instruments involved, but technology certainly plays a role in enhancing the efficiency and effectiveness of the overall treasury process. When the technology is more sophisticated, end users can fine-tune models used to calculate risk, forecast the expected cost with more accuracy, and therefore price a hedge accordingly to the client. More sophisticated technology provides a greater breadth of products and more efficient delivery to the client.