Cash & Liquidity Management
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What Matters Today #1: Risk Management

by David J Aldred, Managing Director, Regional Corporate Sales Executive, EMEA Treasury Services, J.P. Morgan and Jeremy Shaw, Managing Director, Regional Trade Executive, and EMEA Emerging Markets Corporate Sales Executive, Treasury Services EMEA, J.P. Morgan

In this first article in a series by J.P. Morgan, we look at some of the key issues affecting treasurers today and offer insights into ways of addressing them. In this edition, we look at risk management, which has become an integral element of every decision made in treasury. While treasury has always been tasked with managing risk, the profile of the risk management function has been elevated over the past two years, with the board now seeking a closer involvement in risk identification and mitigation. This is leading to heightened visibility of the activities that treasury undertakes, and increased recognition of its value to the enterprise.

Payment and counterparty risk

As with other forms of risk managed in treasury, counterparty and payment risks are not new, but over the past year or so, treasurers have needed to evaluate contingency risk more fully, e.g., how the company would deal with a potential bank failure. There are various issues associated with this. For example, although the risk that a bank will discontinue its business is far lower than a few months ago, companies need to have confidence that their banking partners have the balance sheet and business strategy that will stand it in a good stead over the long term. This is particularly the case in emerging markets, such as in Russia, where economic issues continue to threaten the stability of the banks, leading treasurers to seek alternative solutions of making payments should it ever prove necessary. Treasurers are re-evaluating the location in which they clear currency payments as well, particularly currencies which are traditionally considered problematic, such as the Russian ruble; for example, they may prefer to settle these currencies in London rather than in Moscow.

Banks and corporates alike have recognised that risk extends beyond the organisation itself.

However, while the risk of a complete bank failure may seem generally less likely to treasurers, contingency plans are required to deal with more subtle but damaging eventualities. For example, the burden of compliance with regulatory requirements, technology investment etc. is becoming ever higher, and not every banking institution today will be able to justify this ongoing investment. Furthermore, with a number of banks now supported by their home governments, there is increasing pressure on these banks to focus on their home markets as opposed to investing in their international network. Corporate treasurers therefore need to look at reducing their reliance on individual banking partners so that they are not exposed in the event that their banks refocus their business. Providing payment services creates a major liquidity overhead for banks as capital is required to support the daily movement of liquidity, such as through CLS. Treasurers are increasingly seeking greater transparency over their banks’ ability to support daily settlement requirements.