Cash, Treasury and Technology

Over the past 12 months, treasurers of Asia Pacific-based, buy- and sell-side financial institutions and corporations have faced new challenges in terms of risk and treasury management. Throughout what continues to be a volatile and uncertain market, treasurers need to understand the rapidly changing markets and associated risks, and ultimately have the right tools on hand to stay afloat and navigate their firms safely through the shock waves. In order to successfully assess financial risk and manage their organizations’ cash and treasury operations, treasurers need to manage the cash, find the liquidity and see a clear view of their risk exposures.

Unearthing Liquidity, Mitigating Risk
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.  


Technology Solutions

The more informed treasurers understand that the shockwaves of the crisis are yet to come and they have begun researching centralized, end-to-end platforms that integrate treasury and risk management functions to help them forecast cash needs, find liquidity, monitor risk and mitigate counterparty exposures upfront, without stalling existing operations. Solutions must be:
  • Rapidly implemented: System implementations tend to be lengthy, costly and resource-intensive, while budgets are constrained. There is a belief among CFOs that investing in a new system is a strategy that pays on the long term, while they have needs for short and midterm solutions. However, today, a good technology vendor is able to deliver a quick system implementation and bring immediate benefits.
  • Responsive to changes: Systems must be future-proof and flexible to adapt to market changes and new regulations. Technology solution providers need to be ahead of the curve to provide the tools at the right time for managing risks and cash supply chain. In addition, they also have to provide flexible, multi-currency cash flow analysis systems and maximised straight-through-processing. Liquidity and risk reporting tools must flexibly handle complex scenario analysis for both market and counterparty risk. Lastly, systems must be able to support the full range of OTC derivatives, whether through bilateral agreement or through central clearing, including capture, risk and collateral management.
  • Real-time risk management: In order to better mitigate risk, treasurers need systems that can measure settlement risks, daylight exposures, mark-to-market exposures and also more sophisticated metrics such as potential future exposures. Treasurers need comprehensive risk management tools to identify, assess, price and control, limits, market, liquidity and counterparty risk across their organization.
  • Enterprise-wide: Treasurers need centralized systems. In some cases, they need to replace siloed treasury systems with integrated platforms. But in the majority of cases, the need is to move out of spreadsheets, which are source of opacity on where and when cash is available. In a cash management survey last year by gt news, 67% of the 212 respondents said that they still use spreadsheets for cash flow forecasting; 50% said that the lack of internal systems integration hampers their cash flow forecasting. The solutions should enable treasurers to monitor and manage cash flows, and to have an optimal visibility of liquidity across their whole organization in multiple geographic locations, in real-time. When the credit crisis hit, many treasurers discovered costly hidden exposures that would have been transparent had the company invested in some kind of consolidated holistic view of risk.
In Asia Pacific as in the rest of the world, 2010 will be a year of challenges for corporates in terms of treasury and risk management strategy. Companies will continue to deal with tight lending conditions, requiring a strong focus on short term liquidity and maintaining operating stability within the organization. They will also remain focused on ensuring they are not squeezed into a liquidity event where they are unable to secure refinancing; the goal being to avoid a refinancing crisis at all costs. This means that companies will have to choose certainty over ambiguity and make sure they have secured their long term liquidity.
What are the lessons learned in the fields of liquidity and market risk management? There is certainly still a contradiction between the immediate needs that treasurers have for financial hedging, cash flow forecasting and funding activities, and the idea that technology will only deliver its benefits in the long term. Even though the current economic climate has forced many companies to consider best practices such as monitoring exposures in real-time, some remain slow to look outside traditional credit practices to assess their risks or analyze risk on a regular basis.
Because technology has evolved with the markets, in the new financial landscape, survivors will be those who invest in fully integrated systems, spanning cash management, risk management, hedging and accounting, that will help them reduce risks and maximize the value of scarce liquidity.
About the Author
Sean McDermott is general manager, Asia Pacific, of Calypso Technology.


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