Treasury and Risk Management: Partnering for Success

Apart from the long-standing attention on financial controls and regulatory compliance, there is now a growing focus on integration across risk, control and compliance functions to manage risks proactively and effectively for better business performance.

To leverage risks for business performance, companies typically consider risk mitigation, cost reduction and value creation. Risk mitigation seeks to identify key risk factors and execute prompt responses to close gaps. Cost reduction seeks to enhance cost efficiencies in every facet of the business. As for value creation, companies look for ways to generate even more business value through innovation.

Leading companies have further established advanced ERM frameworks, which include the following risk management practices:

  • Enhance risk management: Effective risk management begins with the top management and the structuring of risk strategy and governance. Proper oversight and accountability at the board and executive levels have become essential.
  • Embed risk management: Since risk is inherent in every business, an integrated management of risk and performance enables linkage between risk assessment, business planning and performance management.
  • Optimise risk management functions: As a company grows, coordination among multiple risk functions can help to drive efficiency, expand coverage, reduce cost and enhance value to the business.
  • Improve controls and processes: By continuously and consistently enhancing and monitoring critical controls and key risk indicators (KRIs), companies can improve performance and reduce the cost of controls.
  • Enable risk management and communicate risk coverage: Risk dashboards are developed to include governance, risk and compliance (GRC) indicators so as to minimise redundancy, enhance risk coverage and automate controls. Also, this helps to align risk-related IT strategy aligning with broader risk and business strategies.

ERM in Treasury Management

Treasury has come under significant attention following the 2008 financial crisis.

Treasury is subject to continual changes in regulations, compliance and increasing demands from shareholders, and it needs to reveal how financial resources and financial risks are managed. Furthermore, treasurers are faced with rising complexity of financial instruments, highly volatile financial markets, and new regulations and accounting standards. The increasing transparency and control required have led to a trend toward centralisation of treasury activities.

In order to manage risk, reduce costs, and optimize performance, companies may consider enhancing various aspects of these treasury functions:

  • Treasury organisation and governance: With the growing importance of treasury, companies should choose a robust organisational structure based on a forward-looking approach. By developing the most suitable target operating model, the activities within the treasury function and the degree of centralisation can then be determined.
  • Treasury performance assessment: Many facets of corporate treasury require a practical interpretation of relevant performance, where both the level of risks and complexities need to be considered. A complete list of corporate treasury’s roles and responsibilities is required for comprehensive benchmarking against leading practices for a quick insight into potential improvements.
  • Financial risk management (e.g., interest, foreign exchange, credit risks and commodity risks): In this volatile market, the identification of key risk drivers, documentation of risk management policy and implementation of appropriate management tools, including data management and risk reporting, are key aspects in enabling effective financial risk management and achieving compliance with regulations such as Basel III.
  • Cash and liquidity management, including cash forecasting: The capacity to generate liquidity has become a top priority in ERM. Treasury plays a central role in monitoring liquidity risks, setting up liquidity forecasting or planning, and reporting on liquidity risks. Also, stress testing – by taking into account both historical and hypothetical scenarios – is becoming increasingly important to manage potential liquidity risks.
  • Corporate funding and capital management: Achieving an optimal funding strategy by reducing financing costs can help to optimise capital management. In addition, it is important for companies to identify the short-term, medium-term and long-term financing needs so that they have the flexibility to adjust their financial strategy.
  • Valuation and accounting for financial instruments: The valuation of financial instruments serves as the basis for measuring and managing risks. Since the assessment and valuation of financial instruments has become highly complex, it is important to ensure that the accounting results are in-line with hedging strategy.
  • Treasury technology, including treasury management system (TMS) selection and implementation: The TMS plays a critical role in the control environment of treasury as it delivers functionality for front, middle and back office activities and controls. Additionally, the TMS may provide critical information such as forecasting, valuation and reporting. It is therefore crucial to ensure that TMS aligns with the company’s requirements and is adequately implemented.
  • Quality assurance and compliance: It is certainly critical to pay attention to cash, financing and risk management in the quality reassurance, compliance and internal control framework. To accomplish this, it would be necessary to strengthen personnel skills, mobilise competencies and develop methodologies, specifically for treasury management.

CRO/CFO Partnership

In the face of increasing complexity of treasury management, integrating risk and finance is central to driving business growth.

Essentially, the effective partnership between the chief risk officer (CRO) and chief financial officer (CFO) can provide the basis to develop business strategy that is aligned with risk, to optimise data collection, usage and analysis, and to facilitate comprehensive solutions and tools to manage profits and risks.
 
Moreover, regular communication and rotation between risk and finance functions can help to prevent misunderstandings and disputes. In short, a deepened relationship and collaboration between the CFO and CRO is the way to promote more effective ERM and drive higher business performance.

The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organisation or its member firms.

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