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Treasury risk management

Welcome to our Treasury Risk Management Site

Treasury risk management – A definition

“Treasury risk management (or treasury operations) includes management of an enterprise’s holdings, with the ultimate goal of managing the firm’s liquidity and mitigating its operational, financial and reputation risk.

Treasury Management includes a firm’s collections, disbursements, concentration, investment and funding activities. In larger firms, it may also include trading in bonds, currencies, financial derivatives and the associated financial risk management”. (Wikipedia. The Free Encyclopedia).

Market risk

The management of the numerous kinds of market risk has been the primary reason that Treasury departments were created as a specialist function reporting to the Financial head of the Organisation,

The financial crisis that struck in 2008, made more and more companies realise  that a part of protecting working capital, profits, earnings and financial asset values involved investing in more powerful resources to manage the market risks relating to liquidity, foreign exchange and interest rate risk exposures.

Technology and Market risk management go hand in hand;,  supporting the IT database, information imports from various sources, and checking the calculations and reporting that are needed for effective market risk management. Treasuries  are looking for solutions that address risks according to laid down policy, those that adhere to the  company structure and analysis of business patterns.

Liquidity risk

  • is based upon achieving complete and accurate cash visibility, which depends on utilising effective and timely bank communications to obtain current balance and transaction statements from domestic and international cash management banks, including intra-day updates.

    • Modern treasury technology combines the bank positions with the future committed cash flows of open treasury FX and interest rate deals, and with payable and receivable flows that can be extracted from ERP and accounting systems to provide an accurate projection of multi-currency cash positions out to several weeks or even months.

    • Such reporting means that treasury is no longer flying blind with respect to future liquidity needs, and is therefore much better placed to anticipate and manage future funding requirements.

    • The most sophisticated treasuries look further ahead, by importing operating subsidiaries current forecasts of future income and expenditure, to build a more precise view of future liquidity.

    • Treasuries that effectively manage liquidity risk are better placed to minimise external borrowings by funding shortfalls in one place with any available surpluses in others, through inter-company lending operations.

    • They improve the organisation’s performance with efficient funding, minimising the high cost of external funding.

      Effective liquidity risk management  protects the companies’ abilities to keep to the required level of commercial activity when credit and profitability are squeezed.

Foreign Exchange (FX ) risk management

  • is a familiar activity for all South African companies with significant overseas exposures, and especially for those dependent on the profitability of export operations. The volatility of the FX market seems to be a standard fact of life, and treasurers and finance departments continue to invest in technology to support FX exposure capture and analysis, and the related hedging operations. More and more companies are looking to support their core business expertise by seeking expert outsourcing services for FX risk analysis, hedging strategy design, and for optimal market execution.

  • Interest rate risk management is important for leveraged companies, and for cash rich organisations looking to maximise interest income from financial investments. Forthcoming risk exposures, and maturities of existing borrowings and investments, are areas of interest rate risk that need effective technology to generate the necessary reporting, and for the execution and administration of the resultant market operations.

FX and interest rate risk management share common ground through periodic market-to-market revaluations. Best practice now requires the use of independent market rates, often automatically sourced from specialist suppliers to ensure objectivity. Risk management and accounting effectively converge with the calculation and posting of unrealised FX gains and losses.

Additionally, IFRS 13 compliance now requires the application of CVA (‘credit valuation adjustment’) in the calculation of derivative valuations.

Effectively, this means that derivatives must be priced taking into account the counterparty’s probability of default – which links naturally into discussion of counterparty risk management which follows.

Contact us if you have any Treasury Risk management needs that need to be managed by a proesional comany within-house expertise.