Balancing Digital Aspirations While Addressing Risk Management Fundamentals

FX Risk Management Solutions Quarterly | Issue 132 | October 2021 | The Hedger 4 The findings presented in this article are based on a comprehensive review of survey results gathered from over 475 CTD participants. The respondents come from organizations representing a diverse range of sizes, industries, and geographies. Participant companies varied in turnover size — ranging from less than 2 billion USD to greater than 25 billion USD — and represented all sectors of the economy and all regions across the globe. Risk management fundamentals: opportunities remain While the advent of new digital technologies and the evolution of financial services have prompted corporate treasury to rethink people, technology, and processes deployed to manage risk, the fundamentals of treasury best practice remain. This study shows that effective treasury policies, delivered through processes and procedures, managed through key performance indicators are the foundation for achieving financial risk management objectives and a best-in-class treasury function. • Centralization of cash and risk remains the mantra with 63% of companies concentrating cash at global or regional level, 80% of companies concentrating cash on a daily basis, but only 61% having over 75% participation where allowable. • Despite the availability of advanced cash-forecasting technologies, only 34% utilise statistical analysis of previous patterns to predict forward and 80% remain reliant on MS excel as a component of the tech stack supporting the forecasting process. • 77% of companies report more than 75% daily visibility of their cash position. Yet despite the availability now for auto-matching technologies, only 41% of survey participants report greater than 75% auto reconciliation levels. • While 62% of companies report reducing earnings volatility as a key risk management objective, the number of companies that actually directly hedge earnings translation exposures is quite low (12%). • Companies surveyed continue to follow a rolling, static, layered, or opportunistic approach to hedging forecasted exposures. However, short-dated hedging continues to be the preferred tenor with forecasting error a primary cause. • 43% reported option-based strategies as being permissible with 43%, citing exposure uncertainty as the primary reason for their use. • While 79% of respondents report having exposures to currencies outside the G10, 66% report either hedging EM and G10 exposures the same or not EM at all. Costs, market liquidity, and local regulatory considerations were cited as the primary challenges when managing EM currency risk. Digital aspirations exist but infrastructural challenges remain We find that there is broad client interest in the digitalization of treasury and finance, including the utilization of emerging technologies for process automation and data-led insights. • 57% of respondents are examining transformative opportunities across both their core business and treasury function. • Driving efficiency within treasury and augmenting decision-making are now the top two expectations for investing in emerging technologies. However, many companies need first to focus on the treasury infrastructural fundamentals. The report finds low levels of automation and connectivity with bank systems, highlighting the inability of some companies to effectively integrate with their technology ecosystems. • 64% report that their treasury management system (TMS) is either not integrated or only partially integrated with their enterprise resource planning (ERP) system, a likely root cause for the significant use of manual processes to support cashflow forecasting. • 79% report that they do not have a fully integrated TMS/ERP platform with their banks, again explaining the need for manual reconciliations. • On the plus side, less than half (49%) report multiple e-banking platforms at each location, which seems to indicate a shift to a better use of data provided by banking partners within company infrastructure. Playbooks for treasury emerging Depending on factors such as treasury maturity, legacy infrastructure, appetite to automate, and aspirations for the role which treasury will play, new playbooks for treasury are emerging. This report introduces the Citi Digital Treasury Index, which assesses companies’ digital aspirations and preparedness expressed in their Citi treasury diagnostics responses. The index provides tangible guidance to treasury on how to commence its journey to digitalization. Each playbook is dependent on current levels of treasury maturity, digital effectiveness, and future digital aspiration.