Inspiring a Global, Connected View of Risk

Managing risk is a priority for every treasurer, but the way in which they do this is changing. Markets continue to be volatile, with a high degree of sensitivity to political events globally. Furthermore, new technologies and disruptive business models are having, and will continue to have a fundamental impact on internal business strategy and external market trends. Consequently, we observe that treasurers are moving away from the more formulaic, often siloed risk management approach of the past to a more responsive, global way of thinking. To do so, however, often requires closer alignment of treasury, finance and the wider business, and the challenge and inspiration of a trusted business partner.

Making connections

Many treasury functions have established detailed and sophisticated risk management policies, but processes and decision-making have tended to be relatively linear i.e., in a certain situation, treasury would hedge the resulting risks in a particular way. This has often had a narrow focus, taking a specific view of FX or interest rate risk in particular, often by region or individual currency, as opposed to taking a global view across a range of variables. However, a treasurer’s role is to be forward-looking, preparing the business for known and unknown situations ahead. Consequently, it makes better sense to take a more dynamic approach to risk management that reflects the global nature of business and the interconnected nature of the markets.

As treasury has become more closely integrated with the wider business, it has become better able to anticipate and prepare for changes not only to market conditions, but also the impact of technological advances, emerging business models and new competitive pressures. For example, how will the growth of electric cars and self-driving cars affect oil prices in the future, and, depending on whether a company is a producer or consumer, what could the impact be? Even companies that do not have a direct exposure to oil and gas need to consider second-order or wider trends: many currencies are closely correlated to oil prices, so companies that buy or sell in these currencies will also be affected. Brexit is another useful example. The impact is likely not only to extend to the value of GBP, but the UK and European economies could be reset. A company that manufactures in Germany and sells in the UK, compared with a company that manufactures in the UK, may be at a cost disadvantage, so it may need to consider where it locates its manufacturing in the future, or where to target sales.

Reassessing the treasury and risk organisation

By taking a more integrated, forward-looking approach to identifying, modelling and managing risk, that takes into account not only how markets may change, but also why, treasurers can make a greater contribution to the business strategy. To achieve this, they may need to take a step back to analyse their current treasury and risk management organisation, risk strategy and technology in order to determine how well equipped they are to assess this broader range of scenarios. In particular, treasurers need to be able to identify correlations and model the impact of situations that may appear to be outliers today, but that might  become the new norms, and prepare accordingly. The aim is not to predict the future, but to look at the possibilities, what the direct and indirect effects might be, and to model how changes to business strategy, investment and divestment plans and capital structures may help to mitigate risks or leverage opportunities. This involves moving away from the siloed approach of many risk management functions today to take a more integrated approach. This not only applies to looking at different risks, such as FX, interest rate and commodity risk together, but also involves forming a more connected view of the business operations, strategy, capital structure, financing, risks and hedging.

Challenging, inspiring and transforming 

In this context, HSBC’s thought leadership team within the Global Markets business is working increasingly closely with treasurers and CFOs, not to focus on products, but to act as a trusted, strategic partner to inspire new conversations on the challenges, opportunities and risks ahead. Interest in this thought leadership approach is growing strongly and we are seeing client organisations become more connected, enhancing their internal communications and taking a more strategic view of risk. In some cases, clients have found that taking a global, more integrated view of risk has revealed that natural hedges and correlations on which they have relied no longer apply, leading to double exposure, and adjusted their risk management policies, hedging strategies and choice of hedging instruments accordingly. A frequent area of interest for treasurers and CFOs is to benchmark their treasury activities with peers, so the bank leverages its wealth of insights derived from working with an extensive global client base to help clients to evaluate their performance and identify areas of focus.

HSBC’s thought leadership team is well positioned to engage in this trusted partnership with clients. The team offers a wide range of expertise, from PhDs in finance and economics, chartered accountants and treasury specialists through to experts in specific market risks and asset classes, therefore providing both depth and breadth. The team is also distinguished by its global focus, which is rarely the case for bank advisory functions. Team members are located in three global centres which are closely connected and operate interchangeably, so they are able to engage in a cohesive and consistent fashion with global corporations with multiple treasury centres.  With a hectic day-to-day schedule and constrained staffing, few treasury groups have the time to step back, assemble the necessary expertise, and conduct the analysis necessary to meet these new challenges.  

Leveraging experience

The shift from a department-led approach to an interconnected view of treasury, finance and the wider business amongst corporate clients in many respects mirrors the transformation that HSBC has undertaken in recent years. In particular, the different areas of global markets now work in tandem, on a global rather than regional basis. Many of the experiences that the bank has undergone are relevant to clients at an earlier stage of their global treasury and risk transformation, and many clients are seeking to leverage these insights and experiences as they connect and align their business and treasury strategy more closely.

What is becoming clear is that the business environment – and therefore the risks inherent to it – will play by different rules and require new approaches than in the past. Periodic risk measurement and risk discovery are becoming an important input to capital structure and business strategy.  Treasurers and CFOs can no longer think of managing risk as a defensive strategy, but must also look proactively at grasping new opportunities. The development of new ecosystems, whether in consumer marketplaces, B2B services or the mobility revolution will impact on every industry. By asking the right questions and engaging in debate, HSBC’s thought leadership team can help treasurers and CFOs to influence the strategic and risk agenda, and shape new ways of identifying risk, managing exposures and driving opportunity.

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