financial risk management – top priorities for corporate treasuries

Financial RiskManagement – Toppriorities for Corporatetreasuries

Aniket Kulkarni

Michiel Mannaerts

March 2014

www.pwc.com

© 2010 SAP AG. All rights reserved. /

Contents

1. Introduction

2. Financial risks in corporate treasury

3. Tools for risk management

2June 2013


PwC

Introduction

3June 2013


What is on the agenda for Treasury – Swisssurvey

0% 10% 20% 30% 40% 50% 60%

Improving visibility and control of cash

Financial risk management / market volatility

Credit and counterparty risk

Enhancing the treasury organisation

Increasing straight through processing

Implementing or replacing a treasury management

system

Refinancing strategy

Regulation and Taxation


PwC

PwC Global Treasury Survey

Slide 5

0% 10% 20% 30% 40% 50% 60%

Weather derivatives

Other, please specify

Outsourcing

Additional regulations following the financial crisis

Webservices

IFRS – US GAAP convergence

Bank industry consolidation

Innovative financial instruments/structured finance solutions

Enterprise wide risk management

Supply chain financing

Commodity risk management

Partnering with the business

Global banking

Shared service centers

SEPA

Credit risk management tools

New technology/systems

SWIFT connectivity

Payment factories

In-house banking

Reviewing/improving risk management policies

Bank relationship management

Working capital management

Cash flow forecasting


The ‘elephant in the room’: EMIR

6

RequirementsDodd-Frank

(commercial End-Users)

EMIR(NFCs below clearing

threshold)

SDR Reporting/Record Keeping √ √

Central Clearing

Exchange/SEF/MTF Trading

Collateral Exchange for Non-ClearedSwaps

√ *

Confirmation * √

Reconciliation * √

Compression * √**

Dispute Resolution * √

End User Exemption(only available to non-financial

companies on trade by trade basis)

* These rules do not directly apply to End-Users/ NFCs-. However, End-Users/ NFCs- might be indirectly impacted as aresult of rules imposed on SDs and MSPs/ FCs** Applicable if NFC has 500 or more derivatives outstanding with a single counterparty


IFRS 13Fair value measurement

7

Uncertainty aboutthe futurepotentialexposure

Assessment of thecounterparty credit

risk and the owncredit risk

Netting- andcollateral

agreements

Impact on theinternal credit

risk managementImpact onHedge

accounting

Allocation of aportfolio CVA on

the single FI


IFRS 9 can be applied, but not yetmandatory

Widespread calls for less complex and more principles-based standard has led to IFRS 9

Some of the key issues resolved:

Treasury Centre Netting

Derivatives hedging combinations of derivatives and non-derivatives

Effectiveness testing

Commodity hedging

Hedging with options

Using these new opportunities will require technological support

8


PwC

Financial risks in corporatetreasury

9


PwC

Financial risks in finance function

10

Financeoperations

Payables andReceivables

Financialrisk

Management

Mid-officeand

compliance

Paymentsand

SettlementsAccounting

Regulatory compliance

Settlement Risk

Liquidity Risk

Market Risk

Credit Risk Counterparty Risk


PwC

Establishing control standards for Treasury

Settlement

Timelypayment

Validation ofinstructions

Dealexecution

Policycomplian

ce

Dealrecording

Timely &accuraterecording

Dealconfirmation

Timelymatching &follow up ofdifferences

Accounting/reporting

Timely &accurate

actiontaken onmgt info

Reconciliation

Timelymatching &follow up ofdifferences

There is significant operational risk in treasury operations

“exposure due to incorrect, or omissions in, processing or settlement of

transactions, whether by human error, fraud or systems failure”

Exposureidentification

Timely &accurate

riskidentification


Increasing visibility and control over cash…

Slide 12

Majority ofCorporates

Sophistication

MaximiseGroup’s return

Ensure liquidity

Control lostopportunitycosts

ManageLiquidity

Control

ManageCash & BankInfrastructure

ManageCommercialPayments

Optimizeduse of cash

ManageWorkingCapital

Integrated Finance SSC & Treasury In-

House Bank

Objectives

Centralized MNC

Typical Large Corporate

Payment Factory, LinkWCM to performance

ManageBankRelationships

Decentralized MNC

CashProjectionEffectiveness

The trend towards greater centralization of cash management processes and cash flows continues with rapid pace. Following the crisis, theawareness of the value that treasury adds to the business has risen. Coupled with technological improvements and bank offerings, we nolonger only see very large multinationals moving up the value chain. More and more mid market corporates are looking into ways how theycan reengineer their banking structure and implement efficient liquidity management structures and centralize the execution of the Group’sfinancial and operational payments.


PwC

Centralized payments

Slide 13

IHB current accounts

Payments

Payments

Cash Settlements Centre

In-HouseBank

Corporate Treasury

Reporting

Operating Parameters

SWIFTNetinterface

Bank B

Bank A

Treasury A/C

Country A

Treasury A/C

Country B

Vendor A

Vendor B

Vendor C

Vendor A

Vendor B

Vendor C

Reduce number of bankaccounts even further


8

Market risk from operations – financial riskexposures

Currently area of focusfor the largest clients

Though perhaps moreneeded by smaller co’swith limited resources

Improvement benefitsfrom larger co’stechnology investmentswill trickle down toMME’s

FX Risks

Commodity PriceRisks

Interest Rate Risk


Market risk - responsibility for commodity risk andassociated FX risk is changing

10%

11%

14%

33%

34%

38%

52%

49%

43%

5%

6%

5%

0% 20% 40% 60% 80% 100%

Before crisis

During crisis

After crisis

Growing move towards treasury or a specific commodity risk mgtdepartment to have responsibility since 2008

Specific CRM department Treasury department Purchasing department Sales department

Page 15

Source - PwC Treasury Survey 2010


Regulatory compliance

11

Multiple Regulatorycompliance requirements

Requires multipleoverlapping:

•Reporting,•Workflows•Calculations•Interfaces

Intelligent regulatory compliance:

Efficient - Comply with multiple regulations efficientlyBeyond Compliance - Capture the risk and operational benefits via smarter processes & technology


PwC

Tools for financial riskmanagement

17


PwC

Straight through processing

18

ERP Accounting

ERP / Frontoffice systems

Exposuredata

Exposurecapture and

managementFront Office

Back officeand

Accounting

Mid-office /Risk

Management

Market data

Confirmations

Payments

Requests

Deals

Exposures


Evolution of Bank Connectivity & Standardisation

Payments Integration

Interoperability, Integration and Automation

?


PwC

Risk Monitoring - Dashboards and reporting

20

Cash Management Trade Management

Complainace Risk


PwC

Summary

21


PwC

In addition, the latest PwC Global Treasury Survey*shows that Technology is one of the key priorities ofour clients globally....

0 10 20 30 40 50 60 70 80

Global banking

Accounting

Cash flow forecasting

Reviewing/improving risk managementpolicies

FX

Enterprise wide risk management

Liquidity

New technology/systems

Cash management

Funding

What is on the top of your treasury agenda right now?

* PwC Global Treasury Survey 2010/11 - 583 IndividualResponses - 34 Countries - All Continents

Slide 22


“Treasury has to become an enterprise wide processrather than a corporate department”

This publication has been prepared for general guidance on matters of interest only, and doesnot constitute professional advice. You should not act upon the information contained in thispublication without obtaining specific professional advice. No representation or warranty(express or implied) is given as to the accuracy or completeness of the information containedin this publication, and, to the extent permitted by law, PricewaterhouseCoopers AG, itsmembers, employees and agents do not accept or assume any liability, responsibility or duty ofcare for any consequences of you or anyone else acting, or refraining to act, in reliance on theinformation contained in this publication or for any decision based on it.

© 2013 PwC. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopersAG which is a member firm of PricewaterhouseCoopers International Limited, each memberfirm of which is a separate legal entity.

PricewaterhouseCoopers AGAvenue Giuseppe-Motta 50Email: [email protected]: +41795804362

Aniket Kulkarni

Treasury and Commodity trading

Consulting

PricewaterhouseCoopers AGAvenue Giuseppe-Motta 50Email: [email protected]: +41796385164

Michiel Mannaerts

Treasury and Commodity trading

Consulting

financial risk management – top priorities for corporate treasuries

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