The new essentials: 5 critical functions for financial risk management technology

1. Automating exposure management

Ensuring a complete, accurate, and detailed exposure dataset is key to running an effective risk management program. However, gathering exposures can prove time-intensive with treasury pulling information from multiple business units, systems, and even paper-based sources, around the world. That’s why your financial risk management system should offer automated exposure management. This enables you to pull data from your ERP systems and consolidate exposures from your business units, so they can easily feed exposure data to the centralized team. Once exposures are centrally aggregated, you can ensure data accuracy, identify outliers and forecasting discrepancies, and confidently assess your hedge coverage. You can then use this insight to make more informed decisions, better align with your business units, and stay on top of your program’s evolving needs.

2. Enabling hedge flattening

Global organizations with complex FX hedging programs historically faced trade-offs between achieving maximum hedge efficiency at the parent level and maintaining good P&L coverage at the subsidiary level. This can cause tension between the Board and corporate financial leadership, who value the parent company financials and US GAAP accounting, and the subsidiary CFOs and controllers, who are concerned with optimizing their P&L. With hedge flattening, your organization can net street trades across currency pairs and through your functional currency, while still booking internal trades that meet subsidiary P&L objectives. This multi-currency netting approach enables you to minimize the total notional traded and significantly reduce execution fees. It creates a win-win scenario where your subsidiaries have the hedges they need via internal trades while the parent company executes minimal notional to maximize liquidity.

3. Supporting long-haul hedge accounting

Organizations increasingly rely on long-haul quantitative effectiveness testing in an environment of geopolitical and market disruptions because these methods may allow for hedge accounting application even when mismatches exist at inception or arise during the trade lifecycle. While simplified approaches, such as Critical Terms Match (“CTM”) or Shortcut, help ease the administrative burden, they are inappropriate to apply, such as utilizing the spot method or rolling exposure windows. Although long-haul methods were once viewed as burdensome, automating the process makes it more achievable by increasing controls and minimizing the operational requirements. For example, automating inception testing and designation workflows enables users to enter all the proper attributes only once, allowing for seamless documentation concurrent with trade execution. Ensuring your financial risk management platform can automate long-haul hedge accounting is increasingly essential because it can expand the strategies available for managing financial risk.

4. Connecting with key systems

Today’s advanced treasury systems go beyond automating the cash, banking, and risk management functions; they leverage company-wide data integration, enabling your ERP, cash management, risk management, FP&A, forecasting, and supply chain platforms to share data for strategic analysis and high-level decision-making. With APIs and other solutions facilitating easier movement of data, your financial risk management system should support integration with a wide array of operational and financial platforms. This connectivity is key to empowering your treasury team to incorporate new systems as technology advances and your organization’s needs evolve.

5. Assessing program performance

Your financial risk management platform should offer tools for capturing and quantifying your program’s results, so you can clearly communicate them to the senior leadership team, other business units, and the Board. These tools should enable you to view a holistic overview of your program, dive into critical details, and take appropriate next steps. For example, you might leverage a dashboard to assess the current value of your trades across various criteria or conduct a forecast trend analysis to inform future planning and decision-making. By leveraging enhanced management reporting, your treasury team can provide accurate, relevant answers to senior management within minutes.

Continually reviewing your financial risk management processes and technology to maintain leading practices requires time and resources, but it can transform your treasury organization for years. A streamlined process from exposure gathering through reporting gives your team better insight and more time to engage in value-added activities. 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.

Manage financial risk confidently with 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 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. Register below for our upcoming webinar to learn more.