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Futureproofing Treasuries - Is it Possible? During an era where technological developments are taking place at a rapidly increasing rate, strategic planning is essential to anticipate how corporates can futureproof their treasury functions.

Futureproofing Treasuries: Is it Possible?

Futureproofing Treasuries: Is it Possible?

By Tamsin Freemantle

“The world has changed” is a statement that will only surprise you if you have been oblivious to events in the last 100 years. A whistle-stop tour of development milestones shows that despite the proclamations of a certain president during his nation’s Independence Day celebrations recently, commercial and military aeroplanes didn’t exist in the latter part of the 18th century and in fact the American army only purchased its first aircraft in 1909. Do you remember having to go into the bank to draw money - I do! - and I remember my aunt in about 1977 telling her friends that the ATM was a wonderful machine – “You put your card in and money comes out!” My uncle looked decidedly nervous. Forty years ago, the internet was the province of computer geeks; now everyone uses it, and 15 years ago mobile money was money you transported from one place to another. Life without aeroplanes, ATMs, the internet and mobile phones now seems inconceivable. I suspect that 100 years ago, the future seemed to be very far away but the speed with which developments take place now means that if you ask yourself “When is the future?” the answer will be that it is much closer than you think.

The world has become very connected and the pace of life has increased dramatically in a short space of time. We are exposed to so much information and the speed and availability of communication means that events in other parts of the world affect our domestic environment quickly. This means that our immediate futures, never mind our longer-term futures, become less predictable. In words usually attributed to Benjamin Franklin, “Nothing is certain but death and taxes”. I would like to add a third certainty to these two and that is uncertainty.

We live in a volatile age by almost any metric you care to name; political, social and economic. The time of being able to manage or mitigate your risks, as an individual, as a business or even as a state has passed. As a result of our increased connectivity, risks are systemic, endemic and global. They are also largely exogenous, which makes them extremely difficult to anticipate and to manage. As businesses, we need to be able to anticipate and understand some of our risks, in order to mitigate them more effectively. Part of understanding these risks is also understanding that like air travel, risks change over time, and quickly.

The changing treasury function

Historically, the company treasury was a part of the accounting function. The treasury function then evolved into a unit of the business that was expected to be not just a cost centre, but actually to make money. Strategies were employed by corporate treasurers to manage risk in various ways, and an objective was to make these strategies profitable as well. In the brave new world that we live in, this too has changed and the treasury function is now about managing the company’s risk. The problem is that the risks that treasuries now face are big hairy risks, not just at company level but also at industry, country and global levels. They have become much more difficult to manage. These risks are amplified when dealing with a company that operates in more than one jurisdiction.

Risks can broadly be classified as external and internal, although there are some that fit into both categories. The risks that are commonly faced by treasuries the world over have much in common and in considering external risks, these are most often related to foreign exchange related matters, liquidity factors and macro-economic risks such as interest rates. They don’t exist independently of each other, but are interlinked. These external risks are understandably often beyond the control of treasurers.

Risk management strategies

Particular strategies have been created to deal with these risks; foreign exchange risk, for instance, can be managed by hedging. This speaks to the evolution of the mandate of treasuries from being a profit centre to managing risk – the hedge should try and maintain the status quo and any profit that may be made should not be an objective. Different entities employ different hedging strategies which are sometimes determined by geography. An example of this is that Japanese corporates generally tend to use a natural hedge, by borrowing a dollar for every dollar that they invest. Other corporate treasuries use futures, forwards and derivatives, both regulated and over-the-counter (OTC) instruments, depending on their location. Risk management strategies have also been created for liquidity issues and macro-economic risks.

Another significant risk area is operational risk, and this speaks to the changed function of treasuries. Risk management is now their prime function which means financial risk management across the various functions of the business. Efficient management of this risk depends on the robustness of the systems that are employed by the treasury. The high number of risk management solutions available from banks, auditing and consulting firms and specialised service providers is testament to the demand for them. Ironically one of the greatest threats faced by treasuries is that the executive function of the company doesn’t understand that in order to manage the risk appropriately, a commensurate investment needs to be made in risk management systems that will be able to appropriately manage the increased risk spectrum. You won’t win a grand prix in a donkey cart.

The vital question of cybersecurity

Cybersecurity risks are present and increasing. Denmark’s Nordea bank recently published an insight note entitled ‘The biggest cybersecurity threats facing corporate treasuries in 2019 [1], that was aimed at the Nordics, but due to our connectivity the threats identified are applicable globally. Nordea identified increased digitisation and an increase in the types of attackers as contributing to the increase in attacks. Literally “botnets are readily available for purchase on the darkweb, complete with instructions”, so the cyber threats are not just from professionals or crime syndicates. Another contributing factor is the changing payments landscape. Globally, organisations are seeking to speed up payments into real time, both at an institutional level and at a central bank level. The inherent risk is that although T+3 may be slow in our speedy world, it is safer from a cyber threat point of view. Faster payment cycles mean less time to respond to hacked payment systems and the risk of financial loss to treasuries is increased.

Another factor recognised by many commentators as a prime risk factor is the human element – our staff. People are frequently the target of cyber criminals, either by phishing or social engineering in order to get individuals to divulge confidential company information.


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