Cash & Liquidity ManagementFXRisk management the top priority for treasurers, report finds

Risk management the top priority for treasurers, report finds

Benchmarking study also reveals some worrying trends around the use of technology by treasury and the solutions available to treasurers.

A new report from Citi has revealed that risk management is the top focus areas for corporate treasurers thanks to an increasingly complex trading environment.

Citi’s latest Treasury Diagnostics Report, Managing Risk and Opportunity through Uncertainty, highlights that robust risk management remains a priority for corporate treasurers. Otherwise, treasury objectives remain broadly unchanged and the aspiration for most continues to be the concentration of cash and risk through constructs such as in-house banks.

Respondents, 400 large companies from a diverse range of industries and geographies, shared their views and methodologies pertaining to operational and financial risk management processes, as well as technology.

TMS and financial risk management

Worryingly, nearly half (45%) of participants reported that their treasury management system (TMS) does not fully support financial risk management processes. This observation comes despite the increasing recognition of technology as an important enabler to meet risk management objectives (72%). Meanwhile, 63% report that their TMS is either not integrated or only partially integrated with their ERP. This is a likely root cause for the large number of participants supporting their forecasting processes manually.

Also of concern is the fact that 77% of clients reported that they don’t have a fully integrated ERP/TMS platform with their banks, again driving the need for manual reconciliations.

Respondents identified cost and integration of technologies as the biggest challenges in optimizing their treasury and financial technology core infrastructure. Corporates who are engaged in treasury transformation projects are focusing on RPA (58%) technology to automate repetitive manual tasks and APIs (54%) to improve integration within their own systems, but also how they connect into banks and other vendor platforms.

Corporates look to trusted partners

The report predicts that as new treasury technology capabilities come to market, corporates will look to their trusted partners where a pre-existing relationship exists to bring them the latest technology innovation. While 79% and 58% of respondents identified banking solutions and ERP/TMS providers, respectively, as potential drivers of treasury transformation, a coherent roadmap for adopting these new technologies, developed through dialogue with trusted advisors will be essential for successfully navigating a rapidly changing landscape.

Duncan Cole, EMEA Head of Treasury Advisory Group at Citi said: As corporates increasingly recognize technology as an important enabler to meeting risk management objectives, they are searching for ways to effectively integrate their ecosystem and, while doing so, automate repetitive tasks. Trusted partners with long-standing relationships are well placed to provide critical support and help corporates navigate the rapidly changing landscape.”

Need for a robust FX policy framework

The survey results also highlight the need for a robust FX policy framework.

On risk management objectives, while 63% of companies reported reducing earnings volatility as a key risk management objective, the number of corporates that actually directly hedge earnings translation exposures is quite low (12%).

With respect to treasury policy, 91% of companies surveyed reported having a formal written FX policy in place. Overall, 71% of respondents also indicated that policies are reviewed at least annually and/or during significant market movement or M&A transactions.

On the risk assessment front, 94% of companies surveyed reported assessing FX risk, of which 73% indicated doing so at least on a monthly basis. Over threequarters (79%) of respondents indicated that FX risk decision-making and execution is centralized.

The report has highlights on FX transaction risk, FX translational risk, FX instuments, Net investment hedging FX bduget rates and emerging markets risk with the following findings:

  • 81% of the companies follow a rolling, static, layered, or opportunistic approach to hedging forecasted exposures.
  • 78% of companies reported hedging less than 100% of net monetary FX-denominated assets and liabilities. Apart from costs,
    another commonly cited reason for hedging less than 100% of existing FX-denominated assets and liabilities was the difficulty in accurately tracking exposures.
  • 46% of survey participants reported optionbased strategies as being permissible.
  • 25% of survey respondents reported hedging net investment in foreign operations.
  • 45% of corporates surveyed reported that FX budget rates impact corporates risk management decisionmaking and hedging practices.
  • 82% of respondents reported having exposures to currencies outside the G10 and highlighted cost, lack of liquidity and local regulation as key challenges and 78% of respondents do not differentiate between emerging market and developed market hedging practices.

Erik Johnson, Global Coordinator CitiFX Risk Solutions at Citi added on this: “In a market marked by low volatility and high geopolitical uncertainties, there is an opportunity for corporates to take a step back and use informed data and analytics to optimize currency risk. This implies the use of more sophisticated tools and the implementation of differentiated strategies between emerging and developed markets.”

Navigating the changing landscape

Ron Chakravarti, global head of Treasury Advisory Group at Citi commented: “Against an uncertain global environment, corporate treasurers face many challenges around visibility, efficiency, and controls. However, the industry is now at a tipping point. Emerging technology and solutions are accelerating the centralization and digitization of treasury, presenting a huge opportunity for the treasury function to reinvent itself successfully and navigate the changing landscape.”

The interactive Managing Risk and Opportunity through Uncertainty report can be viewed/downloaded here.

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