Achieving automation and efficiency in treasury

As a treasury professional, your main objectives are clear and unchanging: You need to preserve liquidity and minimize your organization’s exposure to financial risks. The avenues for achieving that objective, and the roadblocks you encounter trying to get there, however, continually evolve. Market shifts, geopolitical events, and regulatory developments constantly introduce new risks and opportunities for your team to address — a dynamic that has only accelerated in the post-pandemic economy. And even as your role grows more vital within the organization, your team is expected to do more with less while maintaining controls in a rapidly changing environment. Fortunately, harnessing your organization’s data and increasing process efficiency can empower treasury to become even stronger strategic partners to your organization and each business unit you support.

What does it take to reach this level of operational agility? You need information at your fingertips so you can quickly analyze it, act on it, and synthesize it for your leadership team and other partners. You need better insight into your exposures so you can make informed decisions. You need to keep pace with industry changes, such as evolving hedge accounting standards and auditor requirements. And you need a flexible technology infrastructure that provides access to risk analytics, better information on exposures, and support for complex hedge accounting.

Streamlining a complex risk management program

So how do you get there? Start with an objective look at your current processes and platforms. From gathering and analyzing exposures, to executing and confirming trades, to settling trades and accounting for them, the risk management process includes numerous touchpoints where manual processes can introduce errors and delays. Understanding each of the functions in your treasury program, along with the multiple systems and processes that support them, such as enterprise resource planning (ERP) systems, trading portals, cash management platforms, and even spreadsheets and phone calls, serves as a first step in identifying processes that you can streamline and automate.

Capture, validate, and analyze risks

Job 1: Capture exposures

The first job to think about when seeking to modernize operations is exposure aggregation and validation. Ensuring a complete, accurate, and detailed set of exposure data is paramount to running an effective risk management program. Your organization’s exposures are likely going through frequent changes, especially in a volatile market. Building an efficient process for dealing with those changing exposures and making sure you continually address them is critical. However, gathering exposures is often time-intensive with treasury pulling information from multiple business units, systems, and even paper-based sources, around the world. Taking a deep dive into how your organization collects data, understanding where manual errors and logjams creep in, and determining where automation can make this part of a standard, optimized process represents a critical first step in improving operations. Exposure aggregation technology can enable you to pull data from your ERP systems and consolidate exposures from your business units so your practitioners around the world can feed exposure data to your centralized team.

Job 2: Validate exposures

Once exposures are aggregated in a central place, your focus should turn to ensuring data accuracy and identifying outliers that might signal areas of concern or changing business trends. Access to timely, complete, and accurate information is crucial, especially if your organization maintains hundreds of business units. Armed with this data, you can identify forecasting discrepancies and enable better, more informed conversations with your business units.

Job 3: Analyze risks

Once data is aggregated and verified, you can confidently assess your exposure positions and hedge coverage and compare them against the targets set in your financial risk management policy. Pulling your validated data into relevant reports and dashboards enables you to answer key questions about your existing exposure and the effectiveness of your risk mitigation programs, such as:

• Which of my entities has the largest exposure?
• Which currencies have the greatest trade notional?
• How are my derivative transactions spread across counterparties?

Using business intelligence tools, you can see a holistic overview of your program, dive into critical details, and take appropriate next steps. You can assess the current value of your trades across various criteria and filter the view to display exactly what you need to assess. You can also conduct a forecast trend analysis to inform future planning and decision-making.

Key questions to ask when reviewing processes for gathering, validating, and analyzing exposures:

• What are the key data points to aggregate, validate, analyze, and distill down for stakeholders?
• Where do we gather our exposure data from, and can we streamline the process?
• How do we ensure the exposures gathered make up the complete data set?
• Are there better ways to track historical forecast trends?
• How can we mitigate our risk with uncertain forecasting?
• How confident are we that trends we see in the data are changes in the business environment rather than errors keyed into the system?

Job 4: Make hedging decisions.

Automation can also add rigor and efficiency to your hedge decision-making process, enabling you to adapt to changing markets and act swiftly to minimize volatility. For an operational FX program, you can aggregate exposure data for an at-a-glance view of your exposures at both the currency and operational level. Workflow and analysis tools can automatically recommend hedges based on your pre-defined hedging policy targets.

Approve, execute, and confirm trades

Job 5: Recommend and approve trades.

Automating the review and approval process speeds decision-making so you can execute hedges more quickly. By queuing trade requests as part of your approval process, you can consistently provide local entities with the hedges they need. Additionally, as volatility prompts increased scrutiny of FX hedging, maintaining a clean audit trail becomes critical for both executives and auditors. The ability to handle trade approvals and confirmations in one system, even when they are executed outside the system, creates more robust management of the approvals and confirmations, which improves controls and audit preparation.

Job 6: Execute trades

No matter which system you use to execute your hedges, consider integrating your trading portal with your financial risk management platform, which can save significant time and reduce errors. Creating a straight-through data flow means your team no longer needs to key information into the trading system, execute trades, pull information out of the system manually, and then upload them into another platform. This eliminates key areas prone to human error and ensures robust controls.

Job 7: Capture, confirm, and value trades

Once trades are executed, automation can simplify the process for matching executed trades, calculating valuations, and creating shock reports. Creating a consistent process for handling trade confirmations, adjustments, and settlements — and streamlining that process through automation – can ensure consistency with program objectives, avoid key-person disruption, and ensure proper documentation and control validation.

When assessing your post-trade program, consider your day-to-day processes and requirements. For example, does your team want to access frequent valuation data, not just at month-end or during the reporting periods? Do they want to access it proactively or receive it in their inbox in an automated fashion? By thinking through these practices, you can set up smart systems to notify your team of any changes in value or other triggers that you establish at specific thresholds.

Manage the trade lifecycle and hedge accounting

Job 8: Hedge accounting

Although hedge accounting has long been a major focus for automation, bringing this process online has grown more urgent in today’s economy. Many of the prevalent approaches for managing missed forecasts and FX volatility require a transition from the Critical Terms Match (CTM) method to the Long-Haul method of hedge accounting. At the same time, auditors now place increased scrutiny on program inception, ensuring appropriate accounting setup. The trend is moving toward automating inception testing reports and designations so that all the proper attributes are entered only once and, even before the trades are executed, organizations know they will qualify for hedge accounting. A technology platform can also save significant time and effort by streamlining workflows, providing predefined treatments, and automating period-end processes.

Key questions to ask when reviewing processes for hedge accounting:

• How can our company validate eligibility for hedge accounting?
• When adding new currencies or exposure types, do our new trades have the same accounting characteristics as our previous ones in terms of the hedged item, instrument, and tenor?
• What can we do to make sure every new trade qualifies for hedge accounting?
• Can we link the accounting documents, such as designation memos and regression tests, to each executed trade?
• Are we monitoring each trade to ensure it complies with our risk management policy and accounting designation memos?
• If we miss forecasts, how can we ensure continued hedge accounting eligibility?

Job 9: Trade lifecycle management

For many companies, managing the trade lifecycle can be an ongoing challenge requiring manual interventions and communication between multiple systems. For example, the cash or instructions may happen in one system while the trade settlement occurs in another one. You can begin to streamline these practices by outlining your process for managing confirmations, inter-company trades, valuations, settlements, and EMIR and Dodd Frank reporting. Document the procedural steps and dataflows from trade settlement through data submissions to DTCC. Identify the individuals responsible and the time spent on each step. This can serve as a road map for connecting systems, eliminating redundancy, and gaining efficiencies.

Assess and communicate results

Job 10: Reporting

Many treasury professionals face the challenge of capturing and quantifying their financial risk management program’s results so they can clearly communicate them to the senior leadership team, other business units, and the board of directors. In the post-COVID world, we’ve seen boards and leadership asking detailed questions about the financial risk management program, including:

• Where is the noise in our P&L coming from?
• Is our company hedging the right currencies in the right tenors and ratios?
• How exposed are we to each counterparty?
• How accurate is our forecasting?
• As forecasts change, how can we determine if we are over hedged or under hedged?

Today, business intelligence and enhanced management reporting can enable you to answer these questions and provide a concise, compelling overview of the economic and accounting implications of your program. Importantly, they go beyond answering yesterday’s questions to anticipate tomorrow’s so you can stay ahead of the game.

How Brunswick Corporation streamlined its financial risk management program

Company goals

• Improve the treasury process and cost-effectively reduce time spent on manual, repetitive tasks.
• Increase program transparency and controls
• Reduce reliance on Excel models and gain the ability to provide prompt answers to senior management

Key activities

• Assessed activity hours associated with hedging to identify where technology solutions could be cost-effectively applied
• Implemented straight-through processing, from exposure gathering to journal-entry generation and MTM calculation, through the ChathamDirect platform
  
• Instituted additional controls, including dual approvals on trades placed. Eliminated the use of the corporate shared drive for trade confirmation
• Documented processes to decrease key person risk, support cross-functional training, increase leverage of junior resources, and provide increased program visibility and controls

Results

• Saved 35 hours a month by implementing more streamlined, automated process
  
• Improved accuracy, controls, and audit trails
  
• Increased the ability to engage in value-added analytics to make data-driven recommendations and help senior management make better decisions.

Making informed decisions

Overhauling your processes and selecting the right technology to automate them requires time and resources, but the benefits can transform your treasury organization for years to come. A streamlined process from exposure gathering through reporting gives your team better insight and more time to engage in value-added analytics. As you work to assess your current operations and determine a course of action, access to expertise and technology is essential. As the world’s largest and most experienced independent financial risk management advisor and technology provider, Chatham Financial can empower your team to make informed decisions that achieve your objectives.

About ChathamDirect

ChathamDirect is a groundbreaking financial risk management and hedge accounting platform that supports foreign exchange, interest rate, and commodity hedging programs. ChathamDirect provides a clear view of your entire hedging program, including cash flow forecasts, balance sheet exposures, and hedge requests — all securely available on a leading SaaS platform. ChathamDirect is backed by Chatham Financial, an employee-owned, independent market leader with a global team of capital markets experts, risk management advisors, CPAs, lawyers, quantitative analysts, and technology developers who serve more than 3,500 clients annually.