From Cash Visibility to Mobility: Microsoft Treasury’s Strategy on Counterparty Risk

Since the depths of the financial crisis in 2008, much has
been written about resulting changes in economic conditions around the world and
the health of the banking industry. At Microsoft, corporate vice president and
treasurer, George Zinn, orients the treasury team around the reality that
today’s macroeconomic and geopolitical forces present challenges for companies
seeking to conduct business efficiently in multiple geographies and time zones.
His perspective is that having a clear view of all operational and counterparty
risks, and a plan to mitigate those risks, is vital.

A treasury team
faces considerable risk when acting as a global in-house bank to business
operations in over 250 country subsidiaries, particularly when best practices
include the adoption of just-in-time cash management on a global basis.

It is standard for a treasury to rely on its partner banks for the
timely execution of essential transactions. With numerous recent examples of
financial market uncertainty and geopolitical crises, the need for a proactive
stance on counterparty risk management has come to the forefront. Consider the
2008 Icelandic banking collapse, sovereign debt issues in Greece and Cyprus, and
recent unrest in the Middle East as prime examples.

Addressing bank
counterparty risk requires an approach and solutions on three levels:

  1. Streamlining reporting to gain visibility into global cash and portfolio
    positions in nearly real-time.
  2. Developing business intelligence (BI)
    tools to gain insights and analysis into quantitative and qualitative
    counterparty risk.
  3. Executing operational strategy based on risk
    analysis.

Streamlining Reporting from Banks

Microsoft
group treasury acts as an in-house bank to over 250 country subsidiaries. To
streamline reporting, the company implemented SWIFT ISO-XML 20022 for bank
statement reporting, covering over 99% of global cash. This standardised format
improved efficiency and enabled delivery of auto-reconciliation and auto-posting
capabilities.

Our goal was reduce cash held in high-risk locations,
so we more effectively structured our bank account structure in order to achieve
electronic cash visibility and mobility. A second step in the process was to
leverage the same infrastructure and the ISO-XML 20022 formats for delivering
payment instructions from treasury to banking partners. This was an important
step in creating mobility in cash operations, which enabled us to increase the
efficiency of working capital and manage counterparty risk.

Gaining
Insight and Analysing Counterparty Risk

Once treasury gained
electronic visibility into cash balances in real-time, the next step was to
implement business intelligence (BI) tools to analyse and interpret the data.
Real-time visualisations can show cash positions and risk profiles dynamically
over time – this view makes it much easier to see and assess risk, and determine
appropriate mitigating actions. Figure 1 below shows cash balances by
counterparty, currency and geography over time.

Figure 1: Microsoft Group
Treasury Bank Balances Summary.

Microsoft Counterparty Risk Figure 1
Source: Microsoft.

As
those dashboards are an integral component of standard Office desktop
productivity tools, treasury teams will already be very familiar with deployment
and user experiences. Latest generation BI tools and decision engines are a huge
focus for George Zinn and his team. They allow treasuries to dynamically ‘slice
and dice’ data by multiple variables, enabling treasuries to be more nimble in
making risk management decisions based on changes in the risk environment.

In the example shown in Figure 2 below, Microsoft’s treasury team can
track type of foreign exchange (FX) trade (spot, forward or options),
counterparty used and size of trades.  In addition, late confirmations for FX
trades are tracked by counterparty. This helps Microsoft assess which
counterparty is delayed in confirming the type of FX trade and performance
overtime. This ability is increasingly critical with Dodd-Frank regulations that
require daily collateral exchange. A delay in confirming trades implies that we
may not be able to post or receive collateral, which leaves the company exposed
overnight to counterparty risk.

 Figure 2: FX Late Confirmations.
Microsoft Counterparty Risk Figure 2
Source: Microsoft.

Executing Strategy

The third
step of a cash and counterparty risk strategy is to ensure that treasury is
equipped to quickly act on insights being delivered. The return on investment
(ROI) of risk management solutions is reduced unless the company can act
swiftly. By implementing the ISO-XML20022 standards consistently among major
banking partners, Microsoft’s treasury team has the ability to quickly execute
funding payments and cash concentrations into and out of subsidiary accounts to
maximise use of working capital.

A further benefit is the ability to
reduce exposure to transactions with any given banking partner in times of
crisis. Payment flows and cash balances can easily be diverted through
alternative counterparties should the risk assessment deem it advisable. This
may be due to geopolitical risk concerns, potential failure of a bank, or
cessation – temporary or permanent – of banking operations in a country.

Anticipated Benefits

The following benefits may be found by
undertaking a ‘big picture’ strategic project to generate cash operation
efficiencies and manage bank counterparty risk:

  1. Immediate,
    graphical representation of complex data.
    This view allows the treasury and
    corporate executive officer (CXO) leadership team to make strategic decisions,
    which establishes treasury team as a strategic partner in corporate strategy and
    operations discussions.
  2. Real-time risk mitigation solutions. With the
    ability to slice the data by country, currency and counterparty, a treasury is
    able to review and identify solutions in all these dimensions. For example, if
    over 50% of cash at banks is with counterparty A, the treasurer can take steps
    to reduce that exposure and bring the number in line with corporate counterparty
    exposure guidelines. If there are concerns about geopolitical risk in a country
    the treasurer can very quickly ascertain how much cash is in that country and
    with which counterparty.
  3. Improved working capital. Due to real-time
    cash forecasting and position analysis, treasuries should expect improved
    forecast accuracy and can feel more confident implementing just-in-time funding
    for subsidiary operations. This will minimise idle cash balances in bank
    accounts across the globe.
  4. An increase in invested cash and investment income.
    With the ability to review cash balances by various dimensions and have improved
    cash flow forecast, a treasury should be able to transfer cash in non-interest
    bearing accounts to an investment portfolio. This approach will allow better
    risk-adjusted return on the cash.
  5. Counterparty risk and performance
    assessment.
    A treasury can quickly identify the ability of counterparties to
    settle complex FX trades. Any delay or errors in settlement will become
    increasingly expensive as treasuries enter the daily collateral exchange regime
    under Dodd-Frank regulations.
     

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