Treasury and Risk Management - J.P. Morgan

1 Treasury and Risk ManagementThe treasurer s expanding role in global business is revealed in this review of cross-border concerns and Chakravarti, Treasury Strategies, , Treasury s involvement withrisk Management has been focused on identify-ing and hedging such financial exposures asforeign exchange and interest rates . The treas-urer s classical responsibilities were to estab-lish policies for financial risk Management ,execute related practices and track and reportthe results of the was then. A recent survey by our firmrevealed a considerably broader scope of con-cerns, as shown in the accompanying Figure priorities are actually linked to man-aging an increasingly broad range of risks , fi-nancial and operational, which confront con-tenders for global growth in today s complexand volatile environment. Significant issues re-quiring attention include: (i) liquidity mainte-nance; (ii) counterparty risk; (iii) operationalrisk; (iv) country risk; and (v) properly organiz-ing the overall risk Management research indicates that CFOs are placingprominence on the effective measurement andmanagement of risk.

2 In part, this is a recognitionthat risk levels have increased across the board,as companies operate in an increasingly globalenvironment. This is impelling a rapid evolutionin focused corporate risk Management pro-grams, under the stewardship of the of these programs include: integration with strategic planning forglobal growth of the business; focus on adding shareholder value togroup operations; and continual expansion of the categories ofrisk exposure for which the treasurer as-sumes responsibility for oversight article explores some of the principalrisk-related issues with which the Treasury isconcerned. It also offers insights into how world-class multinational companies are Concerns for Global CompaniesWhen a group makes the decision to operateacross borders, it enters an environment inwhich individual markets vary greatly. Distinc-tive factors include size, stability and maturity ofthe national infrastructure in terms of economic,political and financial from domestic to global opera-tions implies a giant step in comprehension of how things work.

3 The decision to invest orotherwise commit corporate resources acrossborder is no longer spontaneous; it drags a longtail, in terms of sovereign, exchange and relatedrisks of international multinationals have come to termswith the core challenges of international busi-ness. Their incremental response to increasinglevels of risk and responsibility is integratedwithin the overall Treasury function. However,many companies are relatively new as interna-tional players; for these, a relatively higher in-vestment of resources would be required on theinternational side of the Challenges for the TreasuryExpansion of international trade and in-vestment creates new challenges for the treas-ury. Although these are diverse, they share acommon factor of financial risk exposure thatneed to be incorporated in the group s policiesand and funding: Going international means that the continuing Treasury challenge toprovide adequate liquidity and cost-effectivefunding to group operations is complicated interalia by introduction of foreign exchange range of exposure measurements ( ,transaction, translation and economic) andchoosing the right Management technique fromFigure 1 Current Priorities in Corporate Treasury Maintaining adequate access to liquidity Increasing effectiveness within headcount con-straints Improving working capital utilization Leveraging technology for greater efficiency Tightening global control and coordination Balancing financial provider relationships Enhancing cash flow forecasting/monitoring Refining hedge strategies/processes Improving operational risk controls Increasing functional/systems security and recov-erabilitySource.

4 Treasury Strategies 2002 Global TreasuryManagement Survey the extensive toolkit available to managethem represent a substantial additional in-vestment of Treasury effort and and Management : Usually, op-erating in a multinational context implies work-ing with affiliated corporations as well asbranches or divisions (in many companies, off-shore operations may be grouped under an In-ternational business governance structure).Such a multi-corporate structure inhibits Treas-ury flexibility, even as it isolates individual cor-porate hurdles can be encounteredwhen coming to grips with Management stylesand organization structures peculiar to the for-eign areas in which the group is doing business;a good example would be the managementboard/executive board structure, common innorthern Europe, which is completely alien toNorth American : A major exposure exists in termsof potential conflicts between tax codes of vari-ous jurisdictions in which a multinational groupoperates and the corresponding code of thecountry in which it is resident.

5 The danger isthat transactions may accidentally be structuredin such a way as to attract double or or not the Treasury has direct re-sponsibility for tax matters, the treasurer needs aworking understanding of international will allow the Treasury to recommend li-quidity Management and financing structuresthat allow efficient use of tax credits and other-wise minimize exposure to double considerations: Regulations af-fecting convertibility and transfer of local cur-rency, among other Treasury -related aspects, canimpede an efficient global liquidity managementprogram. This is relatively more critical inemerging markets, where many of the perceivedgrowth and investment opportunities regulatory consideration involvesproliferation of disclosure, accounting and cor-porate governance requirements in a number ofjurisdictions, following last year s misadven-tures of various and offshore cash Management standards: Theexhibit on this page indicates the broad range ofcash Management standards that apply to globaltreasury operations.

6 Areas in which substantialdifferences can be encountered include: (i)banking and payment systems; (ii) trade collec-tion and payments practices; and (iii) vehiclesfor investment and business in or among several re-gions requires flexibility and ingenuity on thepart of Treasury staff, since a one size fits all approach will not adapt well to radically differ-ent to International ChallengesThe most effective response to the challengesof an international Treasury function is to man-age them within the context of a global, princi-ples-oriented set of Treasury and risk manage-ment policies. and Canadian dollars Well-established and provencash Management techniques Limited numberof currencies Evolving pan-regional cashmanagementtechniques Many currencies, some withhigh volatility Limited pan-regional cashmanagement techniques Many currencies, allwith high volatility Limited pan-regionalcash managementtechniquesRegional State-of-the-Art forInternational Treasury OperationsThis implies a centrally-managed and cen-trally-coordinated Treasury function.

7 However,vehicles such as regional Treasury centers, sharesservices centers and in-house bank work welland have their place, as long as vision and di-rection comes from the central integrated Treasury communicationsnetwork among widespread business units andthe Treasury is an essential part of an efficientagenda for Treasury and risk Management , as is aprogram of close coordination with in-house andindependent tax and legal flexibility and innovation, opti-mizing liquidity throughout the group is bestachieved by keeping up to date with local prac-tices and using state-of-the-art national and re-gional solutions for collections, payments, trans-fers, on core competencies andlean staffing has become the cornerstone of thevalue-added Treasury of the 21st century. Thistenet has its applications in international treas-ury as well: an accurate and timely global cash fore-casting system should be in place for allunits of the group; multilateral netting is an invaluable toolfor minimizing physical transfers ofcash, with their accompanying FX andother costs; outsourcing labor-intensive back-roomoperations to financial institutions orvirtual treasuries, on a regional or globalbasis, is worth considering as a measureto enhance cost-effectiveness; significant slack can be removed fromthe financial supply chain by simplify-ing the group s banking network, but itis unrealistic to expect to arrive at a sin-gle, full-service provider for global with a Global Treasury ReviewThe most well-organized travel arrange-ments are those in which both the starting andfinishing points are accurately charted.

8 This isequally true of the journey to an efficient, inte-grated function for international Treasury andrisk this context, it can be extremely helpful toengage the services of an objective Treasury ex-pert to benchmark current procedures, ascertaingoals and advise regarding the measures that arenecessary in order to achieve them. Some of thetypical goals and benefits of a global treasuryreview are indicated in the accompanying Treasury function within a multinationalgroup should apply coordinated, consistenttreasury and risk Management practicesthroughout the enterprise. This can often be ex-pedited by an objective review of the Treasury ,perhaps conducted by an independent of financial services should be se-lected and managed on a strategic, rather thanan ad hoc, basis. Indeed, all aspects of treasuryand risk Management will produce more value ifthey are integrated with the group s Chakravarti is a principal of Treasury Strate-gies, Inc.

9 , based at its New York office. TreasuryStrategies is a Management consulting firm thathelps corporations and financial institutions attainmaximum value from Treasury operations. Ron's 18-year career includes senior Management positions intreasury and international banking based in the ,Europe and Asia/Pacific. He may be reached by e-mailat This articleis adapted from a presentation at the 2002 New YorkCash Exchange 2 Goals and Benefits of a Global Treasury ReviewGoals Streamlining and automation of processes Improving cash forecasting and positioning Optimizing liquidity throughout the organization Simplifying bank structures Improving foreign exchange / and interest expo-sure Management Establishing consistent global Treasury manage-ment practicesBenefits: Reduced net financing cost, or improved marginson liquid asset investments Reduced bank fees Elimination of unnecessary foreign exchangetransactions and improved trading margins Reduced internal process costs Significantly improved internal controls and riskmanagement.