buyer’s guide

Risk Management Systems

2011
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 a buyer’s guide to Risk Management Systems

Analysing the Editor: Ben Poole

[email protected]
Deputy editor: Joy Macknight

Possibility of Loss
[email protected]
Section editor: Anne Petrie
[email protected]
Publishing manager: Mia Leaning
[email protected]
Chief executive: Mike Hewitt
Today when In terms of what risk keeps corporate [email protected]
corporate treasurers awake at night, those Art and design: Donna Jones
treasurers gather polled in the gtnews 2011 Treasury [email protected]
Sales director: Anne-Marie Rice
together at Risk Management Survey, identified [email protected]
different industry liquidity, FX and counterparty risk as Client relationship director: Adela Buglass
events, the the top three risks they will face over [email protected]
Business development manager:
question of risk the coming 12 months. This guide Katharine Christian
and how to protect one’s business from takes a closer look at each of these, [email protected]
the volatile markets quickly becomes a and examines how treasurers can use gtnews, an Association for Financial
Professionals®’ company headquartered in
hot topic for discussion. All treasurers, technology and specialist resources London, is the leading global knowledge resource
no matter which industry they operate to measure, manage, and mitigate the for over 50,000 treasury, finance, payments and
cash management professionals. Online, gtnews
in, have had to cope with the sheer risks they face, and add value to the is updated weekly and provides subscribers
unpredictability of the markets. business at the same time. access to an archive of almost 3,000 global
treasury articles in addition to special reports,
Interestingly, even when companies commentaries, surveys, polls, news, ratings
updates and whitepapers. Access to gtnews.
are not directly impacted by com is free of charge to those who register, and
Joy Macknight we never sell names or e-mail addresses, so our
commodity price volatility or foreign
editor, a buyer’s guide to risk readers’ privacy is assured.
exchange (FX) fluctuations, the
management systems
treasurer is worried about the knock-
on effects.

contents
BUYER’S GUIDE 4  educing Risk in a Volatile World In order to reduce their
R
risk exposure, corporates have to address the volatility in the
marketplace, be it foreign exchange (FX) or commodity price
fluctuations, or political and social turmoil in the Middle East.
Risk Management Systems

9  anaging Corporate Liquidity Risk How can companies assess

M
their liquidity risk, and what business processes and tools they can
put in place in order to manage it?

12
Economic Uncertainty Brings FX Risk Into Focus Managing
foreign exchange (FX) risk is a key responsibility for corporate
treasurers. There are different types of FX risk that require attention,
as well as a variety of regulatory and compliance issues to address.

2011
15 Feeling the Squeeze: Post-crisis Counterparty Risk
Management Issues such as corporate credit rating strength and
regulatory pressures in the derivatives market mean that treasurers
are finding counterparty risk to be one of the most dominant topics
in their overall risk management strategy.

18 Directory of Service Plus a functionality matrix of 13 risk

management systems.

3
a buyer’s guide to Risk Management Systems

Reducing Risk
Volatile World in a
In order to reduce their risk exposure, corporates have to address the volatility
in the marketplace, be it foreign exchange (FX) or commodity price fluctuations,
or as a result of the political and social turmoil that erupted across the Middle
East earlier this year, writes Joy Macknight.

F
or the second year running, liquidity, equal importance to those organisations with Unpredictability: FX, Interest Rates
foreign exchange (FX) and counterparty revenues of US$1bn or more. For the largest and Commodities
risk are the top three risks facing companies - with revenues greater than FX
corporate treasurers over the next 12 US$10bn - counterparty risk is paramount. “One issue that cascades across everything
months, according to the gtnews 2011 Treasury is the volatility seen in the marketplace - and
Risk Management Survey. Operational risk Jeffrey Wallace, managing partner, Greenwich no asset class has been immune to this,”
moved up to fourth place this year, and interest Treasury Advisors, highlights the difficulty says Justin Brimfield, senior vice president
rate risk dropped one place to fifth position. in ranking top risks because companies (SVP) of corporate development at Reval. “The
operating in various industry sectors, and FX market, for example, has experienced
The survey found that top risks differ depending either single or multiple countries, will significant fluctuations. Treasury groups need to
on where an organisation is located. For experience different pressures. understand where their exposures are in order
companies based in the Asia-Pacific, central and to hedge effectively.”
eastern Europe (CEE), and North America regions, “The risks that a technology company such
liquidity poses the most important risk. For as IBM faces are different than those that an Paul Bramwell, senior vice president, treasury
Latin America-based organisations, interest rate oil company such as BP faces. It also depends solutions, SunGard’s AvantGard corporations
risk is paramount. Organisations located in the on the scope of a company’s business: a business, agrees: “FX has been an increasing
Middle East/Africa and western Europe reported utility company in Baltimore, for example, that focus in the past few years, particularly in
concerns regarding FX risk above all others. operates domestically will not consider FX risk 2010 with the global currency crisis and the
as an issue,” he explains. partial meltdown of the euro, with the bailout of
Risk concerns also vary across company size, Ireland and the PIGS [Portugal, Italy, Greece and
as measured by annual revenue. The survey But one aspect that all corporate treasurers Spain] countries. We have not seen that level of
found that FX risk appears to be a major have had to deal with over the past few years interest in FX risk since 2000.”
concern across all revenue classes, although is the sheer volatility in world markets, whether
its rank varies. It is of greatest concern to in FX or commodity price fluctuations or as a In the gtnews 2011 Treasury Risk Management
those small companies with revenues of less result of the political and social turmoil that Survey, the majority (63%) of respondents
than US$10m. FX and liquidity risk are of erupted across the Middle East earlier this year. indicated that their primary hedging strategy

4
 a buyer’s guide to Risk Management Systems

One issue that cascades across

everything is the volatility seen
in the marketplace

objective in managing FX risk is to protect the lie, plus any natural offsets that it might have, need to stress-test their portfolios to understand
organisation from adverse market conditions. and the instruments available to go out and what it means if rates go up by 25 basis points
Only 8% of organisations reported that they hedge those risks,” explains Bramwell. “The [bps] or 50 bps. Treasurers need tools and
hedge at the most favourable levels in order situation is then compounded by the fact that processes that allow them to understand their risk
to gain competitive advantage. One in five these instruments are incredibly complex.” and exposure, and ensure that they are making
organisations indicated that they do not have effective transactions that will allow them to
an FX hedging policy. Interest rates hedge and then report on that over time,” he says.
A market risk that is coming to the fore is the
The sizeable number of organisations without looming interest rate changes. Despite being Commodity prices
a hedging strategy reflects the fact that, held at historically low levels since the onset Since mid-2010, commodities - such as wheat,
until recently, it seemed to be acceptable for of the financial crisis, most countries are now steel, cotton, electricity, or crude oil - have been
companies to report currency fluctuations looking to raise interest rates, which will have experiencing extremely high price volatility.
affecting their profit and loss (P&L) in their implications with regard to borrowing rates and These large fluctuations are causing headaches
earnings statements. However, as those swings associated hedging exposures. for many treasurers. Brimfield uses the example
got bigger, there was an increased awareness of the airline sector. “In 2009, crude oil was
that even if a company had a positive swing, According to the gtnews survey, organisations about US$40 and now it is over US$100 per
this could be a bad thing. are using different hedging tools to manage barrel. This certainly impacts airline companies
interest rate risk in 2011 than they did in 2010. and their need to hedge,” he says.
“This highlighted the fact that a company The share of organisations that used swaps
didn’t know what its risks were and hadn’t increased from 52% in 2010 to 74% in 2011. At the recent gtnews European Treasurers
hedged them,” explains Bramwell. “Any Further, a greater number of organisations Council meeting, held in London on 7 February,
fluctuation is a bad thing: if it goes in a used forward rate agreements (FRAs) in 2011 the treasurers in attendance all agreed that
company’s favour, then it was lucky; but if it (42%) than in 2010 (27%). A modest share of commodity risk was a serious concern.
goes against the company, then it can wipe organisations used bond futures and/or options Interestingly, even corporates that aren’t buying
out an entire quarter’s profit. The underlying (16%); swaptions (10%) and bank-accepted bill raw materials directly, for example those in
rational for a treasury in terms of FX risk is futures (6%). retail and the travel industry, are also feeling
removing any fluctuations from the business.” the impact, as the higher cost is passed on to
“Companies have historically wanted interest them. Those treasurers expressed frustration at
When fully hedged, a company doesn’t need to rates to be fixed so that they could manage the difficulty in hedging against commodities to
worry if cross-currency spreads increase: if its the risk associated with rate changes,” says which their company is not directly exposed.
underlying business goes down in terms of FX Bramwell. “Although this risk has subsided over
value, then the FX hedges will go up in value the past few years, it is now critical to plan out Herbert Broens, head of trade finance, at
and offset the dip in the market. However, many what the cost of cash is going to be in the next pharmaceutical giant Bayer, outlines a
companies do not have people in the treasury several years.” pragmatic approach to commodity hedging,
department that understand FX risk, nor do they and also some concerns. “Companies need to
have the tools available to mitigate the risk. Reval’s Brimfield argues that companies need to determine whether commodity risk will have
“Companies need to have people within the use technology in order to fully understand how a big impact on their annual results. If it is not
organisation that understand where the risks the interest rate increase will impact them. “They comparable in annual reports, then companies

5
a buyer’s guide to Risk Management Systems

don’t feel any pressure to hedge. It is also

important to understand how your competitors
are behaving. If you hedge your commodity
exposures but your main competitor doesn’t
and gets lucky, then you have incurred an extra
cost that affects your bottom line.”

Country Risk: The Rising Threat of Instability

The world is in a state of flux on many fronts,
be it political turmoil, a global economic crisis
or natural disasters. The recent upheaval in
the Middle East - particularly in Egypt, a major
regional economy, and Bahrain, a global financial
centre - has negatively impacted the trade flows
to and from the region.

Even though the general scope of a treasurer

doesn’t normally extend to being an expert in
investment management or insurance, they
do need to leverage country risk intelligence.
In pensions and related investments, such
as sovereign bonds, it is critical to ascertain
whether those governments are likely to be
stable in future.

Kevin Franklin, director at Maplecroft,

says: “There are many issues that would
not be typically covered in a standard
risk assessment, which often focuses on
currencies/exchange rates as a means of
informing country risk intelligence when it
relates to pensions or investments. However,
our research shows that a company can’t
solely look at these ‘lagging indicators’, but
needs to be proactive and look at the leading
indicators of potential risk in a country.
Leading indicators are things such as civil
liberties and freedom - the underlying issues
Not all corporate treasurers have an expanded at the companies within that country to
that influence political stability in a country.”
remit at this stage, according to Franklin, but get a balanced view of counterparty risk
the more proactive companies are beginning to exposure, according to Antony Beckley, order
Maplecroft analyses political risk in two ways: ask for this type of information. For example, a management system (OMS) channel leader, Dun
dynamic political risk issues such as terrorism, large multinational oil company that Maplecroft & Bradstreet (D&B). He has seen an increase
which would be on the forefront of most has worked with over the past five years is now in treasurers’ interest at both the macro- and
companies’ risk log; and underlying issues, such systematically using country risk intelligence micro-economic levels. “There could be a good
as those relating to more fundamental human throughout the business, including treasury.
rights, which are issues surfacing in the Middle company in a bad country, or bad company in a
East and other regions. good country. These things need to be balanced
“A number of companies are now asking for out when taking a full view of overall risk
country risk intelligence for the Middle East. Most
“Environment, social and corporate governance exposure,” he explains.
of them are in the oil and gas sector but many
[ESG] issues are becoming a more relevant other industries as well, such as IT and others
issue for corporate treasurers. In addition, from D&B rates country risk in 132 markets and
that have suppliers in the region, are seeking
an insurance point of view, issues such as regional information. They are not looking so its global commercial database holds data on
climate change are going to be highly relevant much at Egypt, mainly because they understand 188 million businesses around the world. The
for certain corporates,” Franklin explains. “Our the impacts there, but at the surrounding company uses a dynamic risk assessment
clients are approaching this from different countries such as Saudi Arabia. Some are even methodology that drills down into the socio/
angles: some are looking at country and talking about the turmoil cascading through to political, economic and commercial risk of
sovereign bonds, while others are looking at China, which would have a huge impact on the dealing with specific companies in certain
specific issues such as climate change and global economy, oil prices, etc.” countries. It looks at company risk and the
its impact on insurance. Many are beginning likelihood of a company failing, for example due
to look at their suppliers’ exposure to human To obtain information at country level to bankruptcy, or if a company is going to slow
rights issues.” is one thing, but it is also vital to look or cease paying its bills.

6
 a buyer’s guide to Risk Management Systems

“Treasury departments are much more visible then

ever before. Over the past few years, they have
emerged from a back office function to one where,
during troubled financial times, they are having to
give frequent updates, not just to the CFO [chief
financial officer] and CEO [chief executive officer]
but also the board members, on counterparty risk,
liquidity, controls, and compliance with regulatory
issues. This area has received much more attention
over past few years and is taking treasurers beyond
their area of expertise.”

In order to be able to quickly respond to these

demands, a treasurer must have policies, tools
and a good team in place, so that they can
measure, track and report on their risk strategy.
“The lack of resources has led to optimising
what was already in place,” says Reval’s

The three ‘M’s Brimfield. “But now companies are hiring people
to help understand risk policy, and then bringing
in technology to help report and manage it.”
of risk - measure, Bramwell agrees: “It is a very volatile market

manage and and an area where treasury faces a shortage of

expertise to manage the risks. We have seen an
uptake in corporates hiring staff from banking

mitigate - are core backgrounds and complex financial engineering

backgrounds, to map out where the risks lie
and put in place hedging strategies.”
to a risk strategy He is also seeing an increased interest in
technology. “Companies are beginning to
realise that to go back to basics and identify
where their cash is to avoid liquidity risk, and
to be able to report and adequately manage
FX and interest rate risk, they need a solution
rather than spreadsheets.”

“Cash inflow is a key issue in cash stress, so they use this information to target Bramwell believes that the value lies with
management,” says Andy Craven, head of financially sound companies,” he says. solutions that normalise and aggregate data
payments at D&B. “Our mantra is that to across the multiple platforms housed within
be forewarned is to be forearmed. We can Risk: Measure, Manage, Mitigate any business. “Most corporates have at least
highlight to a treasurer which companies are one ERP [enterprise resource planning] system
The three ‘M’s of risk - measure, manage and
less likely to pay on time. D&B provides an - more likely two or three. But even if they have
mitigate - are core to a risk strategy, but for most
early warning before the event happens, so a one, they probably have several versions of
treasuries it proves to be difficult to incorporate
company is prepared in advance, instead of the system. Therefore the data is in a different
all three. This is mainly due to the lack of
reacting to a negative event.” Many companies format and needs to be normalised,” he explains.
resources allotted to this area of the company,
are re-evaluating their business partners and “In a 2010 SunGard study, it was apparent that
whether in terms of technology or staff. corporations didn’t trust the data they were
assessing whether they are going to be in
business next year, what the potential risks are getting - it wasn’t timely and was inherently
and what they can do to mitigate those risks. Greenwich Treasury’s Wallace explains: “The inaccurate. If a treasurer doesn’t believe their
basic problem is that treasury is not a core information flows or where their exposures
In addition, Beckley believes that the credit function for a non-financial company. As a lie, then what are they going to hedge? They
management department and treasury are result, it is generally starved of resources will create exposures by hedging something
becoming increasingly involved in the front end because it doesn’t appear to be adding value. that fundamentally doesn’t fit. Therefore, it is
of the business, as opposed to just managing This means that it hasn’t been able to change critical to identify what they have, and without
risk in the existing customer base. “The credit that much in response to increased volatility.” a technology solution, it is almost impossible to
management department/treasury is now do that.”
being called on to provide insight for sales and And yet treasurers’ responsibilities and oversight
marketing teams for when they are prospecting has increased, effectively compelling them to The following features will take a more in-depth
for new customers. These teams don’t want to become more strategic. Dan Miner, general look at the top three risks facing treasurers:
waste time on companies that are in financial manager, treasury services at 3DeltaSystems, says: liquidity, FX and counterparty risk.

7
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 a buyer’s guide to Risk Management Systems

Managing Corporate
Liquidity Risk
Anne Petrie looks at how companies can assess their liquidity risk and what
business processes and tools they can put in place in order to manage it.

T
he increased cost and scarcity of Identifying Liquidity Risk Areas
liquidity in the past few years brought Identifying potential areas of liquidity risk -
liquidity risk to the top of the corporate either internally or with the help of external
agenda. This was evident in the consultants - is the first step towards
gtnews Treasury Risk Management Survey managing it. James Phillips, head of
2011, which found that liquidity risk was the regulatory strategy at compliance
top risk corporates were focusing on - and solutions provider Lombard Risk,
the percentage prioritising liquidity risk had says that treasurers should
risen by three percentage points, to 28% from analyse both firm- and
the previous survey in 2010. This reflects market-specific risks. “First,
the increased focus on cash. “Right now, they need to look at the core
companies are hoarding more cash since it market-wide areas that could
reduces their risk significantly, even if it does introduce liquidity risk such as the
hurt the bottom line a bit. Running lean and potential impact on import, export or
mean is not as popular as it used to be,” says oil manufacturing,” he says. “The
Azmi Özünlü, financial markets tutor at training second test is: will this cause risks
provider 7City Learning. that are specific to the firm?”

Despite this, many corporates have not yet put Sources of liquidity risk can be:
formal procedures in place to manage liquidity • Intra-day: International time
risk. Banks have changed their approach due to zone issues could prevent
the liquidity buffers being imposed by regulators a company from calling
to ensure they have adequate capital to meet
their obligations. Although not compelled by
on funding from
elsewhere in the
Running lean
regulation to address liquidity risk in the same
and mean is not
group, or a human
way that banks are, corporates can still take a or technical ‘outage’
lead from banks in terms of the methods they could prevent it from
use, such as stress testing and putting in place
the appropriate buffers to deal with the worst-
case scenarios. “Banks have typically taken the
meeting an intra-day
demand for funds as popular as it
quickly enough.
leading role in managing liquidity risk, because
for them it’s much more crucial than for a non- • Intra-group: This
used to be
financial corporate,” Özünlü adds. will affect larger
firms, which are
Jouni Kirjola, liquidity management product potentially going to
manager at OpusCapita, notes that how much have to offer support to, or call
companies consider liquidity risk depends on support from, other parts of the
on the geographical areas they operate in. “I group.
doubt many corporates operating solely in an
economically mature area such as Europe do it. • Cross-currency: Does the firm
If they are working globally, in my experience, have sufficient quantities of required
they are more likely to have put the processes currencies available? “It’s all well and
in place.” good to have plenty of funds in another >>

9
a buyer’s guide to Risk Management Systems

currency, but if you can’t swap them out

because of the closure of FX markets, for
example, you’re still going to have a significant
exposure,” Phillips notes.

• Sales revenues: Companies should consider

how quickly this could dry up. Firms that are
heavily reliant on one sales strategy, either
repeat business or many one-off clients could be
forced to change their business model in a hurry.

These tests highlight certain exposures that

could affect the company’s liquidity. With this
knowledge, a company can adjust its business
model, for example to focus on different areas of
business or strengthen banking relationships.

Stress Testing
Historically, cash flow forecasting has been
forward-looking, focused on identifying
projected cash flows over, for example, one day,
10 days and one month, to ensure that where
net cash outflows exceed net inflows on a given
days, the company has enough cash on hand
to cover the shortfall. “The treasurer is always
looking forward. What happened yesterday is
interesting, but he can’t change it. He needs to
know what is going to happen tomorrow, next
week, next month or next quarter,” says Chris
Rowlands, consultant at financial IT services
firm CSC. However, as delays in payments and
the possibility of a collapse in supply chains
have increased, this is not enough.

Companies are increasingly supplementing this

method with considering worst-case scenarios.
Özünlü explains: “It is about finding the survival
period: how long they can withstand if all the
payments to them stop.” Phillips adds: “Firms
need to look at the tests that are plausible but
not ludicrous. There are plenty of potential
actions and scenarios that could bring down
the firm but you need to look at those just
inside the ludicrous ones.”

Özünlü believes that more companies should

Ideal Balance the culture of the firm is key. “This need to be
be focusing on stress testing in greater detail:
Another tool borrowed from banks to mitigate done, not on an annual basis or on the back of
“If anything, we have seen that emergencies
do arise more frequently than people thought, liquidity risk is the ideal balance. This depends a fag packet, but as part of the discipline of the
so it is a good idea for more corporates to on the daily volatility of cash inflows and firm. Senior management involvement and an
see how long they can withstand one of outflows. More cash should be placed in the enterprise risk management culture [are key],”
those situations and what they can do about buffer if the balance falls below the acceptable Phillips says. For example, monthly board packs
it.” He adds that although larger FTSE 100 minimum, and any excess should be invested. should have an entry covering the current liquidity
companies are already stress testing, among risk situation as well as short-term forecasts.
smaller and medium-sized enterprises (SMEs) Using the Asset Buffer
it remains the exception rather than the rule. Once a firm has identified the level of liquidity Using stress testing tools allows the firms to
OpusCapita’s Kirjola cautions against using risk it is exposed to, it can determine the size evaluate changes in its acceptable level of risk
backward-looking information in place of stress of the liquid asset buffer required. The level of and address them accordingly. If risk indicators
testing. “Corporates need to consider the worst risk a firm is prepared to accept and the size change to red, firms need to consider whether
and best case cash flow scenarios, instead of of the necessary liquid asset buffer are directly this is due, for example, to a change in the
relying solely on the forecast,” he says. correlated. In fact, making liquidity risk part of business model, or the level of external risks.

10
 a buyer’s guide to Risk Management Systems

ad hoc way of gathering information, getting

different departments in the organisation,
for example sales, cash collections, or even
logistics and purchasing, to communicate their
cash or liquidity requirements directly to the
treasury function. Although using spreadsheets
to record and analyse cashflow forecasts and
liquidity planning may seem rudimentary, it
is, as Rowlands notes, quite effective in some
ways. “But if you’re relying on large ERP
systems, you can’t often get that information
in a timely way,” he says. “The treasurer needs
all the information he can get his hands on, as
quickly as possible - and at the highest level,
not just the operating level,” he adds.

Using the Tools

Many treasury systems have asset liability
management (ALM) tools designed to model
the overall shape and size of the balance sheet.
However, they are not as useful for analysing
cash flow over a relatively short period of time.
“If you are looking at the criticality of survival
periods for the next weeks and few months, we
are really looking at short-term impact tools
here rather than necessarily business modelling
tools for the longer term,” Phillips says.

The treasurer needs all the information Data quality is also key for ensuring an agile
response to changes in levels of liquidity risk
he can get his hands on, as quickly exposure - its usefulness will be negated if
the company has to wait a week for someone

as possible to cross-check the data. Ensuring data quality

requires discipline in the operational end of the
firm, to capture data in the right way, as well as
good tools to be able to extract and normalise
and transform the data into a standard format
that can be put into a stress testing engine.

Sourcing the data from different systems within

the business is also an issue. “That is one of
the big challenges firms will have if they look to
put improved automation around liquidity stress
testing - the non-commonality of different
bits of data relating to the same type of cash
exposure, Phillips says. “There may well be
vertical warehouses associated with supply
Or its risk tolerance could have changed, and chief financial officers (CFO) of small
chain, with money flow, funding, supply of
requiring an increase in the size of the buffer. companies and global treasury functions alike.
ingredients or whatever it may be but is there
“Treasurers are constantly looking for tools to fundamentally one set of information that can
Achieving Cash Flow Visibility enable them to get cash flow information more give a true picture over time?”
Good cash flow is essential for managing liquidity quickly and more accurately. And that enables
risk. As Rowlands points out: “If you have a them to handle their liquidity risk - and all their Conclusion
good strong cash flow, you can survive most other financial risks,” says Rowlands.
Liquidity risk has only recently come to the
downturns in the economy. Ensuring you have top of the corporate agenda, with mitigation
enough cash to survive and pay creditors and Technology
techniques still in their infancy. But the
suppliers and make wage payments is driving a So what technical solutions can companies put continued focus on cash flow means that
lot of treasurers today. Without cash, they can’t in place to get the necessary information in a putting a strategy in place to manage it is
function as a business.” But how can cash timely way? The way the information can be crucial. As Lombard Risk’s Phillips summarises:
flow visibility be achieved? Having real-time, gathered varies, with some treasurers using “The speed with which liquidity impact can
accurate information about their cash flow their enterprise resource planning (ERP) system occur is dramatically quick and having funding
is a perennial challenge faced by treasurers to capture the data, while others have a more available in short order is critical.”

11
a buyer’s guide to Risk Management Systems

Economic
Uncertainty Brings
FX Risk Into Focus
Managing foreign exchange (FX) risk is a key responsibility for corporate
treasurers. There are different types of FX risk that require attention, as well as
a variety of regulatory and compliance issues to address. Ben Poole examines
these challenges and the variety of tools and techniques available for treasurers
to mitigate and manage FX risk.

T
he importance of FX risk management is Translation risk receives less focus, according to but then it is correspondingly more difficult to
accentuated over periods of uncertainty, Kevin Lester, director of risk management and hedge balance sheet items in a cost-effective
which is a reason for its rise in prominence treasury services at Validus Risk Management, manner,” Murarka notes.
of the past few years. But what constitutes and gtnews contributing editor: “Translation
FX risk? For the purposes of this feature, FX risk is risk is an area that is often overlooked, at least Economic risk is also an area which deserves
made up of the following elements: in terms of the implementation of FX hedging more attention, as it represents the long-
• Transaction risk: The risk of value changes when strategies, largely due to the fact that it does term risk that currency volatility poses to the
a transaction executed in foreign currency is not directly impact cash flow, and as a result value of the company, and “is arguably the
measured in the functional currency. hedging translation risk can lead to cash flow most important category of FX risk,” says
• Translation risk: When a company has mismatches between hedging instruments and Lester. As the impact of economic risk goes
subsidiaries with assets or liabilities underlying exposures.” far beyond the reporting of FX gains and
denominated in a functional currency other losses, and can relate to more fundamental
than the reporting currency of the holding Despite its low profile, translation risk can have strategic issues such as competitiveness and
company. Most multinational companies important repercussions, particularly in terms geographic expansion, the more abstract nature
(MNCs) are heavily exposed to translation risk. of lending covenants, which are measured of economic risk can pose a challenge for
• Economic risk: The future impact on cash using accounting metrics that are impacted corporate treasurers. However, the significance
flows and earnings of a company as a result of by currency volatility. As such, it is often the of economic risk to commercial strategy can
long-term changes in FX rates. case that the issue of translation risk deserves also mean it is an area in which the treasurers
greater focus than it currently receives in many can add considerable value to the business.
Typically, the management of transaction risk companies, particularly in situations where a
has been the main focus of corporate treasurers. high degree of leverage is employed and there is Tools for Treasurers
Transaction risk tends to be comparatively easy significant risk of breaching lending covenants. When it comes to the tools available to treasurers
to identify and manage using traditional hedging to help manage FX risk, these can be divided into
instruments, and often generates a high degree Vikram Murarka, founder of Kshitij Consultancy two main categories:
of management focus due to its visibility in terms Services, agrees, but sounds a note of caution. 1. Internal risk mitigation tools.
of creating profit and loss (P&L) volatility. “Translation risk can be given more attention, 2. External hedging tools.

12
 a buyer’s guide to Risk Management Systems

Every company has a unique set of circumstances

and different market views

Internal risk mitigation tools involve minimising “Such products seem to be slowly re-emerging hedging programmes will often be judged on
the exposure or impact of FX risk on the as FX volatility has begun to decrease, and this the basis of whether or not the hedge made
company by adjusting internal business trend will likely continue as long as volatility money, thereby ignoring the original hedging
processes. These tools include intercompany remains contained,” says Lester. “This could objectives, as well as the performance of
netting programmes, risk-sharing pricing or be a dangerous trend, and treasurers should the overall portfolio (including the underlying
supply contracts, and developing natural hedging ensure that hedging products are robust exposure). Such an approach will often lead
opportunities (either through capital structure enough to manage risks effectively in highly to hedging activities that actually increase
adjustments or commercial adjustments). volatile markets.” FX risk, rather than decrease it, as the focus
According to Lester, companies are becoming becomes the hedging P&L, rather than the
more focused on maximising the use of internal Looking at strategies treasurers are currently achievement of risk management objectives
risk mitigation techniques (and this trend will employing in this area, André de Klerk, which are aligned with overall corporate
likely continue over the next 12 months), as it financial risk manager at Moneycorp, suggests strategy.” In this case, it is essential to have
allows them to: corporates are using of a blend of financial quantifiable risk KPIs that are regularly
• Minimise hedging costs. products with different weightings over monitored, and used to recalibrate hedging
• Maximise credit availability (through a different periods. “Most of the companies we activity as necessary to meet the company’s
reduction in FX credit line usage). advise use a combination of spot, forwards and risk management objectives.
• Reduce the complexity of hedging FX options to achieve an appropriate result for
implementation (e.g. hedge accounting a particular requirement,” says de Klerk. “Every Kshitij’s Murarka adds: “We think that
requirements). company has a unique set of circumstances treasurers need to re-look at their preference
• Eliminate risk substitution (i.e. exchanging FX and different market views - using the right for the ‘natural hedge’. They can increase
risk for counterparty risk or liquidity risk). products at the right time is important.” the profitability of their companies - without
changing the risk profile - by asymmetrically
External hedging tools (FX forwards, options, FX Hedging Strategies hedging both payables and receivables.
structured products, etc) remain essential tools With these tools in place, treasurers need A natural hedge is a lazy hedge, producing
for managing residual FX risk (after internal tools to ensure that they have efficient hedging lazy results.”
have been fully exploited). “The popularity of strategies in place. The main areas that
structured products, particularly those involving treasurers need to pay attention to include: Mark Warms, general manager, Europe, Middle
complex derivatives or leverage, has certainly • Establishing clear hedging objectives. East and Africa (EMEA) at FXall, suggests that
waned since the onset of the financial crisis,” • Establishing quantifiable and visible risk key the main area for treasurers to pay attention
explains Lester. A key reason for this is that many performance indicators (KPIs). to in their hedging strategies is assessing
of these structured products contained ‘short • Ensuring hedging performance is regularly which trading methods they are using for a
volatility’ components, in the sense that they benchmarked against KPIs. specific situation. “Electronic trading provides
involved writing options to subsidise the cost of treasurers with a choice of execution strategies
hedging. As such, they were disproportionately “The setting of risk KPIs and hedging and it is important that choice is based on a
impacted when volatility spiked as a result of the performance measurement is an area which thoughtful process that is appropriate for the
financial crisis, and many hedging programmes could often be improved,” comments Lester. “In specific trading situation,” Warms explains.
did not perform well as a result. the absence of such benchmarking activities, >>

13
a buyer’s guide to Risk Management Systems

Treasurers have often required complete end-to- analysis, making it very difficult for a third
end workflow solutions that encompass all aspects party system to meet the diverse needs of the
of trading and reporting to meet global compliance corporate treasury market,” he adds.
standards and thus manage their risks. “Execution
quality analytics tools are becoming increasingly Murarka agrees that the spreadsheet model is here
important for treasurers, providing them with to stay, but that technology providers can look at
a comprehensive trade performance overview, that as a starting point for the more complicated
as well as metrics to measure the effectiveness solutions they develop. “The most important
of their trading strategy, while at the same time technology that treasurers need is a software that
enabling regulatory compliance. End-to-end can track and collate all their FX exposures on the
integration of treasury management and hedge one side and all their hedges on the other side.
accounting systems with trading and settlement The software should look and feel like Excel, but
tools is a best practice for both risk management should work internally as a supercharged database
and operational effectiveness,” notes Warms. management system,” he says.

The Role of Technology Regulatory Environment

FX risk management technology can be divided Looking to the future of FX risk management,
into five main categories: regulation is a key ‘unknown’ that corporates will
have to pay particular attention to, according to
1. Market data. Moneycorp’s de Klerk: “The greater regulation of
2. Dealing systems. OTC [over-the-counter] derivatives is certainly a
3. Transaction/position management. concern for corporate treasurers. The biggest fear
4. Risk analytics. is that it will make hedging more expensive.”
5. Risk reporting/accounting technology.
New rules outlined under the Dodd-Frank Act in
According to Lester, there is significant overlap the US and the European Markets Infrastructure
among providers within these categories. Legislation in Europe, are placing new
“Most of the major TMS [treasury management requirements on OTC derivatives to be secured
systems] vendors do incorporate FX risk with cash collateral. Although corporate users
management functionality within their core of hedging instruments thus far secured an
systems, which facilitates everything from exemption from both regulations, they will still be
operational process management, such as required to report their hedging activities, monitor
deal capturing and basic reporting, through positions and provide detailed information to
to more analytical functionality, such as risk prove that their hedges are constructed to cover
measurement and sensitivity analysis.” commercial risk as allowed by the rules.

There are also specialised technology Over the past few years, the credit crisis
providers who focus on specific aspects of illustrated some of the limitations of current hedge
the risk management process, such as hedge accounting regulations, and accounting bodies are
accounting, deal life cycle management, working on replacement standards. Unfortunately,
exposure visibility and risk management accounting rules have been one of the things that
dashboard development. “The current trend is caused treasurers to avoid hedging. “When these
moving away from ‘all-in-one’ providers, where accounting regulations were first introduced, they
a single system is used for all aspects of FX risk became so important that they superseded the
management from operational to strategic, and business rationale for hedging. I am glad to see a
towards an integrated solution where best-of seismic shift after the financial crisis and rightly
breed providers are selected for their specific so,” says de Klerk. Economic and financial drivers
core competencies,” suggests Lester. are now far more important in determining a
hedging policy than the accounting implications.
When it comes to the more analytical or strategic
elements of FX risk management, the preferred Conclusion
tool for many corporate treasurers is still the FX presents a highly visible risk that treasurers
traditional spreadsheet (ideally populated need to manage as part of their daily
with data extracted directly from their TMS responsibilities. These challenges come in a
or accounting system to minimise data entry variety of forms, and with the OTC regulations
requirements and errors). Lester suggests that looming, it is a risk that will remain of critical
this is likely to remain the case, despite the importance in the future. There are tools and
advancements made by systems providers, due techniques available for treasurers to mitigate
to the need for flexibility when performing FX risk and manage FX risk, and it is important for
analysis. “Different corporate treasuries have every treasury department to give a thorough
very different approaches and requirements evaluation of what their needs are in this area,
when it comes to risk measurement and and to select the appropriate tools for the job.

14
 a buyer’s guide to Risk Management Systems

Feeling the Squeeze:

Post-crisis Counterparty
Risk Management
Issues such as corporate credit rating strength and regulatory pressures in the
derivatives market are meaning that treasurers are finding counterparty risk to
be one of the most dominant topics in their overall risk management strategy.
Ben Poole examines the current challenges, plus the solutions available to help
corporates mitigate and manage their counterparty risk.

T
raditionally, treasurers dealt with financial counterparties and only occasionally managed risk
exposures relating to business customers. This is something that has changed since the credit
crisis, according to Frank Wendt, director at KPMG Financial Risk
Management: “In the post-crisis reality, companies have learnt
that counterparty risk must be managed in a holistic way. A proper
counterparty risk framework identifies all material counterparties
which, for example, should also include suppliers.”

In order for this holistic approach to be successful, Wendt points out, the
treasury department cannot work in isolation. “Different functions - such as
purchasing, credit and collection, treasury and risk management - have
to work together to share practices, internal and external data, people’s
expertise and systems. Additionally, companies need to develop
and implement policies and procedures around counterparty risk
and have adapted them to changing regulatory and market
conditions,” notes Wendt.

Supplier risk continues to rank as one of the biggest

challenges that companies face today. Dan Reid,
vice president, credit risk division at Triple Point
Technology, says: “Suppliers are caught in the
middle between high and volatile commodity prices
and costly, scarce liquidity from banks. Prices and
volatility are in the biggest swing since 2008, and
treasurers need to evaluate the credit worthiness and ability
to deliver of their entire value chain so they can deliver against
their own objectives.”

Another striking change in counterparty risk management in recent years

is the fact that corporates now have to conduct serious counterparty risk
analysis on current and potential banking partners, caused by the series of
collapses and massive losses experienced by the banking sector during the
crisis. Christopher Finger, head of research and communications at MSCI,
says: “What has changed since the financial crisis is that banks, even
the large broker-dealers, can present material counterparty risk. Rather

15
a buyer’s guide to Risk Management Systems

than focusing mainly on smaller institutions and indicator that gives you a complete view, so effort and investment, as a commercial customer
considering bank risks as minimal, it is now it’s important to pull information together that, can be a commercial supplier and a financial
necessary to scrutinise exposures to banks, and to taken collectively, gives you a more complete counterparty at the same time,” says Wendt.
be proactive in managing those risks.” view,” says Williams. This credit spectrum would
include market-driven views of credit risk and The Role of Credit Ratings
Counterparty risks on all sides are greater than more fundamentally driven indicators of credit in Counterparty Risk
they were five years ago, meaning that corporate worthiness, alongside the traditional credit Credit ratings are a way to express the underlying
treasurers need to be not only vigilant, but ratings provided by the ratings agencies. “You probability that a counterparty might not perform
proactive in managing and mitigating these risks will also need this view across unrated entities, to expectations. According to Chris Dias, partner
through modern solutions. so you will need to make sure you include at KPMG Financial Risk Management, some
ways to look at the credit worthiness of unrated ratings tend to be reactive and treasurers should
Using Technology to Gain entities,” Williams adds. consider rating methodologies that are proactive
Visibility Over Counterparty Risk (mostly option and equity-based expected default
Technology can help corporate treasurers gain Additionally, technology can help treasurers frequencies). “However, the probability is essentially
visibility over their full exposure to any of the look at hundreds or thousands of entities. “Use a given and cannot be influenced, so a treasurer
counterparty risk sources previously mentioned in technology to do all of your legwork, such as has to manage the exposure and severity of a non-
a number of ways. David Williams, senior director monitoring for early warning signs of trouble and performance event. This fact leads the treasurer to
- head of fixed income architects at S&P Valuation providing a score across several indicators. Find manage the expected and non-expected loss from
and Risk Strategies, outlines some of the ways the hot spots, and then use your precious human counterparty risk,” explains Dias.
technology can assist: “First, you need a complete capital to dig deeper into where you really need
database that links individual companies to their to focus,” advises Williams. There are a number of strategies that a
ultimate parent obligor. Tying in a security-to-entity treasurer can employ to react to negative
view as well is helpful when looking at individual Taking a critical look at the technology offerings credit rating changes, including:
securities. Technology can be used to take a available, KPMG’s Wendt cautions: “The systems • Reduce the exposure by reducing trade limits
list of entities (or securities) to which you have around ERP [enterprise resource planning] and or adjust contractual terms and conditions (on
exposure and build several views on your ultimate financial supply chain management offer several single obligor level).
exposure,” explains Williams. “It’s interesting to solutions to deal with counterparty risk. However, • Diversify the risk by trading with more
do this analysis and see that your actual exposure the degree of integration to provide, for example, counterparties or distribute trades more
to individual entities or sectors is greater than one holistic counterparty risk dashboard is not intelligently through assessing credit risk
originally thought.” yet fully available.” correlations (on portfolio level).
• Transfer risk by buying risk protection from
Technology can also allow a treasurer to Currently, corporates have to work through data an external party (on single obligor and/or
generate a view across several credit indicators. warehouse and data mart structures. Online portfolio level).
“You may have several tools or solutions that analytical processing (OLAP) reporting software • Self-insure counterparty risk by anticipating
you use to put together your credit management is then able to identify the total exposures toward losses that potentially can be incorporated in the
framework. It’s hard to point to a single any counterparty. “This is an important one-time firm’s pricing (risk based pricing approach).

16
 a buyer’s guide to Risk Management Systems

• Using all of the above in combination.

Proactive Steps for Large Corporates to Mitigate Counterparty
S&P’s Williams agrees, pointing out that as credit Risks in Their Supply Chain
worthiness degrades, credit policies typically call Counterparty risk can be context-sensitive and the risk elements react differently in different
for increased monitoring, reductions in exposure situations. Solutions exist that help large corporates mitigate counterparty risk in the supply chain
to the entity, or potentially triggering risk mitigation by generating real-time alerts in an easy-to-understand graphical representation. Charu Kirti Jain,
strategies such as moving to all cash transactions. senior business consultant at Information Mosaic, outlines some of the considerations such a
solution could include:
“What’s important here is to do your best to catch
signs of trouble early, and have a clear policy on • Assessing concentration and overall exposure with a specific counterparty in the supply chain.
how to respond to deteriorating credit worthiness. • Monitoring rating agencies’ views of the counterparties and using these in conjunction with
Credit ratings provide one entity’s opinion internal intelligence and views to help maintain internal benchmarks and standards.
regarding the credit worthiness of a company. • Adequately measuring a variety of factors such as geo-political conditions, exchange rates,
For example, long-term issuer credit ratings taxes and duties to assess counterparties and associated risks.
are designed to reflect a particular credit rating • Checking on counterparty dependencies, links and entity-level relationships, to identify any areas
agencies’ opinion of credit worthiness over the of vulnerability.
long term,” says Williams. • Simulating what-if scenarios and gauging the impact on the underlying transactions
and linked products.
• Simulating strained scenarios for counterparty and identifying alternate routes in the supply chain.
But what else can treasurers use? There are other
• Tracking any changes in counterparty attributes outside defined tolerances.
indicators, such as market-implied ratings based
• Leveraging historical data of past activity, default behavioural patterns, transactions, and
on either the credit default swap (CDS) market
performance to support the decision making process while choosing a counterparty.
or equity markets (through equity-driven credit
models), or fundamental driven models, which
are based on inputs from the company financial clearing and reporting requirements. Surveying topics. “In our experience, many corporate
statements such as revenue, interest coverage, the landscape, Triple Point Technology’s Reid treasurers are uncertain about the relevance and
leverage, etc, that will generate probabilities of notes that regulators are attempting to stabilise implications of new global accounting standards
default or estimates of credit worthiness that are and strengthen the markets by legislating less to their treasury operations,” explains Chris Duffy,
typically mapped to ratings scales. risky market rules, while commodity companies director at KPMG Financial Risk Management.
are in a mad scramble to avoid being labelled as
“Using a holistic view across these indicators, you a speculative trading company and the attendant However, in less than two years, treasurers
can start to formulate a view on where there may reporting and capital requirements. will have to address the financial reporting
be trouble. For example, is one of the market- requirements of IFRS 9 (covering financial
implied ratings indicators diverging significantly “Companies need to prepare for this evolving and instruments), the final IFRS standard on hedge
from the long-term issuer credit rating? What fluid regulatory landscape by consolidating and accounting, and the new FASB Accounting
has been the trend in probability of default? This automating their data and systems so that they Standards Updates (ASUs) on the same topics.
can be examined both by using structural models can avoid onerous reporting/capital requirements, And there’s more: “Treasurers will need to respond
driven by equity price, as well as those generated respond quickly to rulings and directives, and take to the outcome of the SEC’s determination of
by models that are more fundamentally driven,” advantage of international regulatory arbitrage whether to incorporate IFRS into financial reporting
explains Williams. opportunities as different geographies apply requirements for US public companies, and the
against different timetables,” advises Reid. potential timetable for IFRS conversion,” says Duffy.
Another important point in this regard is to check
that the correct indicators are in place for unrated Unfortunately, however, accounting standards
or even private companies. “The spectrum of While the dust is still to settle on this rather
suffer from inconsistencies within the financial fragmented regulatory landscape, it is clear that
indicators is wide for companies that are public markets, particularly in the area of derivatives
and rated, but this narrows rapidly as you move treasurers need to be paying close attention to
valuation and risk exposure methodologies. what the future may have in store, and to plan
from public-rated to public-unrated, and on According to Bipin Patel, principal consultant
to private companies,” cautions Williams. It is accordingly to ensure that they are prepared for
at Rule Financial: “It will take many years for
therefore important to have an integrated set of whatever comes their way.
accounting standards to approach the current
tools that degrades nicely as the set of available best practices used in the derivatives markets
information is reduced. Conclusion
to manage counterparty risk. However there are
a number of accounting standards initiatives - Counterparty risk is particularly prominent for
Best Practice Counterparty Risk Mitigation such as FAS 157 and IAS 39 - that do address treasurers in the post-credit crisis environment.
Strategies in the Derivatives Market derivatives pricing and valuation methods.” Relationships with banks, suppliers, customers
The derivatives market is a key area where and other business partners all need to be
regulators are attempting to tackle counterparty A number of the challenges that treasurers are under scrutiny, and all the while the regulatory
risk head-on. The Dodd-Frank Act and the EU faced with in the accounting area are due to movements pertaining to counterparty risk
September 2010 proposal, including Markets in uncertainty over the ultimate outcome of the also need to be scrutinised. But by showing
Financial Instruments Directive (MiFID) and the Financial Accounting Standards Board’s (FASB) vigilance and forward planning, corporate
Market Abuse Directive (MAD) reviews, aim to and International Accounting Standards Board’s treasurers are capable of mitigating and
increase transparency and oversight, provide more (IASB) deliberations over financial instruments managing these risks, and adding value to
stringent collateral and capital requirements, and and hedge accounting, as well as the degree of the business while doing this. The key is to be
reduce operational and counterparty risk through convergence between the two bodies on these proactive in your strategic planning.

17
 a buyer’s guide to Risk Management Systems

Why Choose Reval?

Some of the most prestigious and successful multinational corporations, • Regulatory compliance: We help you minimise the risk of financial
financial institutions and accounting firms in the world have chosen Reval restatement resulting from auditors questioning your valuation of
to manage and automate the complex business process of mitigating and derivatives or hedge accounting and documentation.
managing financial risk.
• Independent market data: We provide market data that enables you to
All of them recognise the key strengths that Reval offers - the award- use an independent source to value and account for your derivatives.
winning ability to:
• Profit and loss (P&L) volatility: We provide financial risk management
• Support all areas of financial risk: market, credit and liquidity. tools that allow you to better manage your hedging programme and
minimise its effect on your bottom line.
• Provide best practice exposure aggregation, evaluation, and derivative
execution tools. • Strategy evaluation and reporting: We allow you to integrate forecasts
and exposures among business units to report on the performance of
• Provide independent and accurate valuations of derivatives.
your hedging strategy to the board level.
• Evaluate and optimise hedging strategies.
• Cost and productivity: We deliver a proven, cost-effective solution that
In today’s financial climate, managing financial risk is no longer a concern replaces error-prone spreadsheets and integrates with other financial
- it is a strategic focus. This focus requires highly specialised talent, and systems to automate the handling of your derivative portfolio and gives
Reval delivers. you the ability to close your books on the first day of the month.
Reval is powered by expert financial and risk professionals and award- Website: www.reval.com
winning software-as-a-service (SaaS)/web-based technology that supports Tel: N
 ew York +1 877 993 3330
all stages of financial risk management associated with the use of Toronto +1 416 622 2338
derivatives. Our powerful combination of derivatives expertise, accounting London +44 (0) 207 469 4282
insight, and technological prowess addresses the need for derivatives to Germany +49 (0) 179 910 1591
comply with all global financial regulations and accounting standards, Sydney +61 (0) 2 9004 7196
including ASC 815/FAS 133, ASC 820/FAS 157, IAS 39, IFRS 7 and more. India +91 124 4168200
As a fully scalable solution, Reval is delivered in two ways: Hong Kong +852 2273 5528

Reval Email: [email protected]

Reval’s SaaS/web-based clients deploy our single version of SOX compliant,
SAS-70 Type II audited software to gain secure, 24/7 worldwide access to
Reval’s hosted database and application platform. We deliver daily market

About Reval
data that’s independent, transparent, comprehensive and covers major asset
classes. Our SaaS platform uses a modular structure that allows clients to
configure the application to best suit their unique needs.
Reval provides an award-winning web-based platform that automates
Reval Centre: Treasury Outsourcing Services corporate financial risk management for a wide range of interest rate,
Reval Centre is an outsourced straight-through processing (STP) provider. foreign exchange (FX), commodity and credit derivatives. The world’s
Clients retain Reval Centre to perform derivative valuations and hedge leading corporations and financial institutions use this Sarbanes-Oxley
accounting for their hedging strategies. Reval uses its experts in financial (SOX)-compliant software-as-a-service (SaaS) to support and execute
engineering, derivative valuation, and accounting to provide timely and hedging strategies from exposure capture through performance
accurate mark-to-market and hedge accounting services to clients who are measurement and to comply with international and domestic
not able to manage the programmes internally. accounting standards, including ASC 815 (FAS 133), ASC 820 (FAS
Top reasons why companies choose Reval: 157), IAS 39 and IFRS 7. Reval deploys rapidly and integrates easily
• Exposure identification and quantification: We help you to capture and with treasury management and enterprise resource planning (ERP)
analyse your exposures from a business unit and corporate level so you systems. The company’s SaaS platform and team of financial experts
are also available on an outsourced basis through Reval Centre. Reval
can make hedging and risk decisions with the best available information.
was founded in 1999 and is headquartered in New York, with regional
• Implementation and execution of hedging strategies: We provide a centers based in Philadelphia, Chicago, San Francisco, Toronto, London,
critical array of tools that allow you to execute hedging strategies - from Frankfurt, Graz, Sydney, Hong Kong, and Gurgaon.
capture of derivative transactions through all stages of trade execution
For more information, visit www.reval.com or email [email protected]
and confirmation.

19
 a buyer’s guide to Risk Management Systems

SunGard’s AvantGard Risk

SunGard’s AvantGard is a leading liquidity management solution for corporations, insurance companies and the public sector. AvantGard provides chief
financial officers (CFOs) and treasurers with real-time visibility into cash flows and increased operational controls around receivables, treasury and payments.
AvantGard helps companies drive free cash flow and reduce inefficiencies across the ecosystem of suppliers, buyers, banks and other trading partners.
SunGard’s AvantGard suite of liquidity management solutions for corporations helps organisations model enterprise risk around foreign exchange (FX),
market, interest rate and commodity risk, counterparty risk and corporate trade credit. AvantGard Risk is an integrated treasury management solution that
provides comprehensive dealer desktop, risk management and performance measurement capabilities across a full range of physical and derivative treasury
instruments. This comprehensive functionality helps companies to better manage their exposures across the enterprise.
Detailed forecast and hedge analysis, portfolio modeling, real-time compliance reporting with alerts and a dealer desktop, all combine to provide powerful
treasury functionality. Trading credit limits can be monitored and validated prior to deal capture, helping treasurers to better calculate market prices and
sensitivities, determine pricing matrices and solve rates and zero-cost option and structures.
For position management and other reporting, the user has full control over the data elements and presentation. The level of detail/aggregation and drill-down
can be customised by the user for individual queries. The solution offers extensive analysis for the management of interest rates, FX rates and volatilities.
Furthermore, functionality for ‘what-if’ scenarios on market rates allows for comparison and profit/loss analysis.
With AvantGard Risk, treasurers are able to maintain individual cash flows for all transactions, which facilitate detailed liquidity analysis. Cash flows can also
be imported from external sources for consolidation of the liquidity position. Additionally, the solution’s seamless integration of bank account balances, along
with the ability to group cash flows into customised time profiles, provides a comprehensive liquidity management framework.
Website: www.SunGard.com/AvantGard
Tel: +1 800 825 2518
Email: [email protected]

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 a buyer’s guide to Risk Management Systems

Misys Sophis Moody’s Analytics

Misys Sophis is the most comprehensive cross-asset and front-to-back-office Moody’s Analytics, a subsidiary of Moody’s Corporation, helps treasurers,
coverage in the market. In capital markets, Misys solutions are used by more risk managers and finance professionals worldwide respond to an evolving
than 500 leading financial institutions worldwide supported by an unrivalled marketplace with confidence. Our integrated solutions include leading-edge
level of expertise with 1800 domain specialists. software, advisory services, data and research to enable corporations to
improve credit risk management decisions.
Our solutions offer the most comprehensive cross-asset, front-to-back
With Moody’s Analytics, you can:
coverage available in the market including interest rate, credit, equity and
• Qualify and monitor customers, partners and vendors using Moody’s
foreign exchange (FX) derivatives, FX, futures and options, fixed income,
Analytics world-renowned probability of default, the Expected Default
commodities, structured products and lending. Our customers include
Frequency (EDF) Measures.
19 of the top 20 capital markets firms and 13 of the top 20 syndicated
loan bookrunners. • Evaluate probability of default for public and private companies and sovereigns.
• Detect credit deterioration early and focus on your riskiest exposures.
Misys Sophis VALUE is our award winning buy-side solution used by 13 of • Measure repayment risk and loss given default (LGD).
the top 20 asset managers. Find out why 22 new buy-side customers chose • Understand portfolio performance using stress scenarios.
VALUE to support their investment banking operations in 2010. • Collect and store counterparty’s financial data.
• Monitor limits by geography and customer.
For further information visit www.misys.com and www.sophis.com. • Accurately and consistently price credit risk.
• Manage and finance receivables risk more effectively.
Website: www.sophis.com • Distil financial data at scale to improve efficiency and consistency.
Tel: +33 1 4455 3773 • Understand the impact of default and avoid over-concentration.
Email: [email protected]
Contact us to learn how Moody’s Analytics can help you establish better risk
management practices in your organisation.
Website: www.moodysanalytics.com/gtnews
Tel: + 44-20-7772-5454
Email: [email protected]

Murex OpenLink’s CTS

Building on over 25 years of successful presence in capital markets, Murex OpenLink’s Corporate Treasury Solution (CTS) has been designed and developed
has developed an unmatched competence in the design and implementation to help treasurers maximise efficiency, streamline business processes, minimise
of integrated trading, risk management and processing solutions for top operational risk, and to help to reduce internal and external costs. CTS provides
financial institutions, clearing houses, corporations and utilities located across front-to-back straight-through processing (STP) with easy access to all
the globe. transaction lifecycle events and critical decision-making information.
Ranging from leading market makers to large-sized or medium-sized buy- OpenLink’s CTS provides clients with a scalable IT infrastructure to
side and sell-side institutions covering all their capital markets activities on help support today’s challenges, as well as the ability to capitalise on
MX.3, the latest Murex platform, Murex clients rely on our strong market tomorrow’s opportunities.
knowledge to support their businesses and keep pace with new practices
Key System Features
induced by market evolution and regulatory changes.
• Fully integrated: Front, middle and back office functionality.
Implementations powered by the MXpress approach leverage the wealth of • Visual drag-and-drop business process management (BPM) builder.
business content accumulated by Murex over the two decades through pre- • Accounting and hedge accounting.
packaged components of the platform while offering an accelerated process • Cash management.
of delivery. • SWIFT alliance.
• Cash flow forecasting.
Website: www.murex.com
• Foreign exchange (FX).
Tel: +33 14405 3200
• Debt and capital markets.
Email: [email protected]
• In-house banking and bank.
• Credit and market risk.
• Real-time risk positions
• Workflow management.
• Commodities and emissions.
Website: www.olf.com
Tel: +44 20 7382 1929
Email: [email protected]

21
a buyer’s guide to Risk Management Systems

Risk Management Systems Functionality Matrix 2011

Insight Risk KGR (Kondor
SYSTEM NAME ERMAS Findur Kondor+
Intelligence Global Risk)
Thomson Thomson
COMPANY Prometeia OpenLink Temenos
Reuters Reuters
Market Risk
Foreign exchange
Transaction ● ● ● ● ●
Translation ● ● ● ● ●
Economic ● ● ● ◗ ●
Interest rate ● ● ● ● ●
Commodity price
Generic ● ● ● ● ●
Specific ● ● ● ◗ ●
Equity price ◗ ● ● ● ●
Weather ● ◗ ● ● ●
Inflation ◗ ● ◗ ● ●
Securities
Systematic ● ● ● ● ●
Unsystematic ● ● ● ◗ ●
Liquidity Risk
Funding risk ● ● ● ◗ ●
Long-term funding ● ● ● ● ●
Short-term funding ● ● ● ● ●
Credit lines ◗ ● ● ● ●
Contingent capital ● ◗ ● ● ●
Credit Risk
Counterparty ◗ ● ● ● ●
Commercial ◗ ● ● ◗ ●
Sovereign ◗ ● ● ● ●
Pre-settlement ● ● ● ● ●
Default ● ● ● ● ●
Recovery ● ● ● ● ●
Operational Risk
Systems ● ● ● ● ●
Controls ● ● ● ● ●
Data quality ● ● ● ● ●
Natural disaster ◗ ● ● ● ●
Regulatory ● ● ● ● ●
Fraud ● ● ● ◗ ◗
Are the risk measures defined? By the user - By the user By the user By the user
What company size is the RMS targeted at?
Small (US$500m and below) ● - ● ● ●
Medium (between US$500m and US$1bn) ● - ● ● ●
Large (greater than US$1bn) ● - ● ● ●
How many companies have deployed your RMS? 200 - 5 210 450

22
 a buyer’s guide to Risk Management Systems

l full functionality w some functionality l no functionality

Moody’s MX Risk RiskVal Fixed Sophis SunGard

Reval RiskView TopOffice
Analytics Manager Income VALUE AvantGard
Moody’s SunGard Thomson
Murex Reval RiskVal Validus Sophis
Analytics AvantGard Reuters

● ● ● ◗ ● ● ● ●
● ● ◗ ● ● ● ● ●
◗ ● ● ◗ ● ● ◗ ●
● ● ● ● ● ● ● ●

◗ ● ● ◗ ◗ ● ● ●
◗ ● ● ◗ ◗ ● ● ●
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◗ ● ● ◗ ● ● ● ◗

● ● ● ● ◗ ● ● ●
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● ◗ ● ● ● ● ● ●

◗ ◗ ● ◗ ● ● ● ●
◗ ● ● ◗ ● ● ● ●
● ◗ ● ● ◗ ● ● ●
● ◗ ● ● ● ◗ ● ◗
● ◗ ● ● ● ● ● ●
● ◗ ● ◗ ● ● ● ●
By the user By the user Generically By the user By the user By the user By the user By the user

● ● ● ● ● ● ● ●
● ● ● ● ● ● ● ●
● ● ● ● ● ● ● ●
1000+ 100 400+ 30 50 130 1250+ 15
Only those vendors that filled out the gtnews RMS Functionality Survey between February 2011 - April 2011 are included.

23
 Training

Essential treasury skills training

programme from gtnews
As a leading authority in treasury best practice, gtnews extends this knowledge through our training
courses to delegates from across the globe. Knowledgeable course tutors deliver lively, interactive
training programmes, incorporating case studies and real-life examples of best practice. This invaluable
insight from the ‘coal face’ of corporate treasury ensures that delegates leave better prepared to add
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Courses include:
An Introduction to Treasury – Essentials of International
A Day in the Life of a Treasury Cash Management
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Corporate Risk Management
This two-day training provides treasury skill set.
In-house Training
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This one-day course provides Please contact:
Trade Finance Training participants relevant tools for a holistic Diana Henderson, Director of
This comprehensive two-day course is approach to enterprise wide working Training, [email protected],
designed to provide an overview of the capital management and the potential +44 (0)20 7079 2808
risks of doing cross-border business. role of treasury.

Contact Us
If you would like to attend any of our training courses, or would like to receive more
details, then visit: www.gtnews.com/training.cfm, e-mail [email protected] or call
Diana Henderson on +44 (0)20 7079 2808.