Corporate treasury leaders discuss hot topics at Chatham’s Financial Risk Management Summit
Against a backdrop of accelerating inflation and a hawkish Fed, corporate clients gathered in Chatham’s headquarters for our annual Financial Risk Management Summit. During 10 collaborative educational sessions over two days, treasury and hedge accounting professionals from leading U.S. corporations shared challenges and successes managing financial risk in today’s market environment.
Below we share a few key takeaways:
Volatility triggers hedge program reassessment
As the inflationary environment, hawkish Fed, and strengthening U.S. dollar threaten corporate earnings, corporate treasury teams are monitoring markets and evaluating current hedging practices to ensure they continue to achieve the objectives. In an attendee poll, 62% of attendees responded that non-routine market or organizational changes impacted their hedging programs within the last six months.
These external market triggers, changes to corporate risk profiles, and shifting organizational priorities led many corporates to review their risk programs and make tactical adjustments. Attendees discussed actionable levers treasury teams can use to improve the cost-benefit equation of their hedge programs, including the selected products and indices, hedge tenor and horizon, program mechanics, process management and automation, reporting and monitoring, and hedge accounting.
The digital transformation accelerates
As financial reporting increases in importance and employee turnover stretches them thin, treasury teams are increasingly seeking to automate manual processes, integrate disparate systems, and improve controls.
“Our goal is to create more time, eliminate manual work, and reduce the touches on data to minimize risk,” said one treasury manager. “Rather than working in a spreadsheet and reaching out for approvals via email, it all lives within the system. ChathamDirect makes it more robust, creates the record that this is the data, and no one else needs to touch it. We eliminate the extra steps that take time and create risk from missed keys. We are fortunate that our CFO was very much involved in wanting to have a technology transformation."
Communicating hedging performance to stakeholders increases in priority
In volatile markets, treasury teams face the challenge of quickly 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. Attendees discussed how leadership is more frequently asking detailed questions about the financial risk management program.
One FX manager noted, “When there’s FX gain/loss noise, everyone wants to know what’s driving the exposure.” Different stakeholders, however, require different levels of information. “We have two distinct segments: executives and the project team. The executives want to know where the rates are compared with last week, last month, and last year. The project team looks at where are hedges are versus the exposure and where at the GL level is driving the exposure changes. We use a lot of the ChathamDirect business intelligence (BI) reports to provide this information. They’re simple to pull down and ChathamDirect is our system of record,” she added.
Automation fills the headcount gap
Treasury teams also rely on technology to handle mundane processes and “create time for the value-add strategic functions,” according to one treasurer. “We have challenges hiring talent and don’t see headcount increasing significantly, so we’re leveraging technology to eliminate gaps. We put in straight-through processing for cash-flow hedging and house our exposures within ChathamDirect. We also build our trades within Chatham. Touching them one time and having those processes in place has been great for us. It definitely saves us a couple of days each month,” he added.
Commodity hedging requires a new playbook
As volatility roils the commodity markets, more treasury teams are considering new hedging programs to manage commodity risk.
Key trends identified include:
- Increased frequency of steel and base aluminum hedges
- Increased agricultural hedges, such as corn, wheat, and soybean derivatives, due to concern over geopolitics in Eastern Europe
- Backwardated commodities, including CBOT Corn, CBOT SRW Wheat, ICE Brent, NYMEX ULSD, NYMEX Natural Gas, and CRU Steel
Several attendees noted that starting a commodity hedging program requires aligning stakeholders and systems across the organization.
“We tried to mitigate some commodity prices with our own prices, but you can’t keep passing it along. We started a commodity hedging program about a year ago. It required a mindset shift around how we think about sourcing and rewarding individuals. We engaged the finance side and the COO to communicate the purpose of our policy, get everyone on board, and start mitigating risk,” one treasury manager explained. All stakeholders needed to understand the goal was to narrow the band of risk and understand “we could face extreme high prices if we didn’t put a program in place.” This required partnering with procurement to expose the different types of contracts and handshake agreements to preserve strong supplier relationships. “We did work extensively with Chatham to come up with that policy and strategy, showing [the procurement] group that we aren’t trying to take anything away from them but this is a great tool to mitigate risk.”
Key takeaways for managing commodity risk
Another treasury manager commented, “Our commodity hedging program is fairly new. We’re working with procurement to get a good understanding of what was in [our supplier] contracts and what we’re trying to accomplish. On the treasury technology side, we’re working with our financial reporting team to understand what’s coming out of that system after moving from [a previous platform] to Chatham.”
According to an assistant treasurer, “Going to the CFO and saying, ‘There’s a better way to look at this. We can lock in some budget savings,’ that’s what turned it at the end; we’ve got a mechanism to realize some savings.”
Economic and accounting strategy alignment poses challenges
While economic priorities often drive a hedging strategy, treasury teams also seek to align the accounting results with the economic objectives. Selecting the appropriate hedge accounting approach can maximize the flexibility and capacity of a hedging program while minimizing P&L impact.
Attendees discussed net investment hedge accounting strategies and situations where the forward method or spot method is the preferred hedge accounting treatment.
They also shared challenges applying hedge accounting for commodity exposures since commodity hedging strategies may not perfectly match underlying exposures. This adds complexity as many organizations face compressed margins due to rising commodity prices.
Financial teams must balance accounting treatment against economic risk reduction
Treasury is more visible and valuable within the organization
Across all sessions, participants shared that the forecast uncertainty, liquidity concerns, and volatility experienced over the past year raised treasury’s profile and value within the organization. Now, more than ever, treasury teams add measurable value to the business and provide key strategic input.
“There has been an uptick in senior management interest in what we’re doing [in treasury]. Leadership is very focused on what we’re doing,” said one treasury manager.
Another treasury manager added, “It has been great to see that treasury has been a respected area. Treasury is a lot more valued and [leadership has been] a lot more focused on what treasury does and the importance of our roles has grown.”
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Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.22-0173
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