FXRisk Management

A Fresh Look: Refining Financial Risk Management Programs

By May 13, 2021No Comments

Streamlining a hedging portfolio can seem daunting, but there are advantages for corporates that take the plunge.

There’s a growing trend among corporates to take a new look at existing financial risk management programs. Some of the triggers for review are explicit events, such as financial reporting results or restatements, or changes in key personnel.

  • But many companies are finding that longstanding hedging programs may just no longer meet the original program objectives, or may have grown in silos and created pockets of cost inefficiencies throughout the supporting processes.
  • At a recent meeting of NeuGroup for Large-Cap Treasurers, one member, along with Amanda Breslin from meeting sponsor Chatham Financial, walked those at the meeting through the experience of streamlining the company’s hedging portfolio.
  • “Operational FX hedging can involve daily activities across the globe, triggering exposures, visible and hidden costs throughout the process, a wide range of stakeholder interests, complex accounting, and multiple technology tools,” Ms. Breslin said.
    • “It’s not surprising at all that program mechanics can get dislocated from objectives over time as a company evolves.”

Streamlined. After a holistic program review, the company went into action, making its risk management process more efficient by:

  • Reducing its portfolio trade count to less than 20% of its prior size, while maintaining risk reduction levels.
  • Using strategic layering to dollar cost average more efficiently.
  • Simplifying products and currency pairs within the portfolio to eliminate premiums, simplify settlements and reduce trade volume.
  • Integrating all workflows from exposure gathering through trading, accounting designation, and reporting, through ChathamDirect, Chatham Financial’s financial risk management platform.

Tech benefits. Technology often plays a key role in a hedge program review for a number of reasons, Ms. Breslin said. They include:

  • Manual workflows increase errors and limit the effectiveness of program controls.
  • Manual interventions take time and resources.
  • Data aggregation allows for real-time reporting through business intelligence tools.

Next steps. The member who successfully overhauled the process said she is “really happy with it,” and is now able to look ahead. “The next steps are really then to keep getting more visibility into our exposures, to add value by reducing exposures, and partner with procurement and FP&A to reach a full FX view of our financial statements for a cohesive conversation.”

  • The treasurer said her primary takeaway from the project is learning that treasury at her company doesn’t really own anything specific—”capital, currency, anything really”—but it owns the story. “We own the end-to-end process and the conversation around it,” she said.
  • “The CFO loves the fact that we’re digging in and we’re making a difference,” she said. “But it takes a lot of work, it takes thinking differently.”
Justin Jones

Author Justin Jones

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