In a recent survey by EuroFinance, where 1,600 corporate treasurers and bankers were asked to identify their main concerns, counterparty risk received the highest number of votes from 25% of the respondents. This was followed closely by the availability and cost of credit (22%), and forecasting cash flow and the state of the economy (18%). Regulation received the fewest share of votes on just 8%.

The treasurers’ increased concern about counterparty risk comes as a consequence of countless bank and corporate bankruptcies over the past two years. Counterparty risk, otherwise known as default risk, is the risk that a counterparty defaults on a trade operation due to bankruptcy or a lack of liquidity.

 

In order to hedge risk exposures and manage volatility and price fluctuations, corporates commonly use derivative instruments; typically foreign exchange, interest rate, cross-currency and commodity swaps. Facing an increasing concern among banks and corporates, regulators have been pushing towards more central clearing of standardized credit and interest rates derivatives with the US and Europe leading the way, and Asia following suit.

 

However, many of the derivatives transactions will continue to be made over the counter (OTC) and no clearing house will be involved to absorb the shock in case one party defaults. It is thus not an option for organizations to be able to set counterparty risk limits in their OTC derivatives portfolios. Corporate treasuries, most of which still manage counterparty risk with spreadsheets, need to invest in tools enabling them to measure and set limits based on current exposures, as well as potential future exposures against multiple counterparties.

Prior to the financial crisis, liquidity and treasury management were regarded as relatively low priority items. Today, liquidity and treasury management are a crucial focus for corporates, as well as for banks, in market conditions where credit is no longer an easy source of liquidity. As they also run low on internal cash reserves, corporates with insufficient cash monitoring, forecasting and liquidity management, have to think of new strategies.

 

Although Asia Pacific was less severely hit by the crisis, treasurers in the region continue to experience tight lending conditions and express concerns that re-financing alternatives have been significantly diminished. As a consequence, they have increased responsibilities in terms of controlling and managing finances closely, while exploring various strategies to preserve cash flow. However, because there is still a belief among treasurers that investing in a new system is a strategic long term vision, these short-term strategies include reducing capital expenditures and delaying new projects, while an integrated system can bring immediate return on investment.