Managing counterparty risk, from cash visibility to mobility
It is vital for treasuries to adopt the right approach and solutions to help mitigate risk in the current financial climate, says Anita Prasad, General Manager of Treasury and Capital Management at Microsoft.
Since the depths of the financial crisis in 2008, much has been written about the changes in global macro-economic conditions and the health of the banking industry. Perhaps a little less has been written about the risk and impact of financial system instability on the daily operations of a multinational treasury. For a treasury supporting the banking needs of global business operations in over 250 country subsidiaries, the risk is considerable, particularly when best practices include the adoption of just-in-time cash management on a global basis.
The reliance on partner banks for the timely execution of essential transactions is a cornerstone of treasury operations. In recent times of financial market uncertainty and geopolitical crises, the need for a proactive stance on counterparty risk management has come to the fore. Consider the Icelandic banking collapse, the banking issues in Greece and Cyprus, and the unrest in the Ukraine as prime examples.
Addressing bank counterparty risk requires an approach and solutions that work on three levels:
- Streamlining reporting to gain visibility into global cash and portfolio positions in as near to real-time as possible
- Developing business intelligence tools to gain insights and analysis into quantitative and qualitative counterparty risk
- Executing operational strategy based on risk analysis.
Microsoft group treasury acts as an in-house bank to over 250 country subsidiaries. To streamline reporting, the company implemented SWIFT ISO-XML 20022 for bank statement reporting, covering over 99% of global cash. The implementation of a standardized format using BizTalk Server helps improve efficiency and deliver auto reconciliation and auto-posting capabilities thanks to the standardized data structure.
Microsoft placed priority on achieving electronic cash visibility and mobility by effectively managing the company’s bank account infrastructure, with the end goal of reducing cash held in high-risk locations. The second step in the process was to leverage the same BizTalk Server infrastructure and the ISO-XML 20022 formats to deliver payment instructions from treasury to global banking partners via SWIFT. This was an important step in creating mobility in cash operations in order to increase the efficiency of working capital and to manage counterparty risk.
After implementing ISO-XML 20022 to gain electronic visibility into cash balances at any given moment, the next step was to implement Microsoft business intelligence (BI) tools to analyze and interpret the data managed in a SQL Server database. Real-time visualizations that show cash positions and risk profiles dynamically over time make it much easier to see and assess risk, and determine appropriate mitigating actions. Because these dashboards are an integral component of standard Office 2013 and Office 365 productivity tools, the deployment and user experiences are something treasury teams around the world will already be very familiar with.
The Microsoft treasury team uses the same BI capabilities in Excel PowerView to track the type and size of foreign exchange (FX) trades, as well as the counterparty used. Late confirmations for FX trades are tracked by the counterparty. It helps Microsoft assess which counterparty is delayed in confirming FX trades and helps evaluate their performance over time. This is increasingly critical with Dodd Frank regulations requiring daily collateral exchange. A delay in confirming trades implies that the company may not be able to post or receive collateral, leaving the company exposed overnight to counterparty risk.
The third step of a cash and counterparty risk strategy is to ensure the treasury is equipped to act on the insights delivered in a timely manner. By implementing the ISOXML20022 standards using BizTalk Server consistently across major banking partners, the treasury team has the ability to quickly execute funding payments and cash concentrations into and out of subsidiary accounts to maximize the use of working capital. A further benefit is the ability to reduce exposure to transactions with any given banking partner in times of crisis. Payment flows and cash balances can easily be diverted through alternative counterparties should the risk assessment deem it advisable. This may be due to potential failure of a bank, temporary or permanent cessation of banking operations in a country, or based on geopolitical risk concerns.
Undertaking a strategic project to generate operational efficiencies and manage bank counterparty risk should result in the following benefits:
- Immediate, graphical representation of complex data in a form that allows the treasury and chief experience officer leadership team to make strategic decisions. Self-service BI using the visualization capabilities of Excel PowerView empowers decision makers and allows IT to focus on data management. The role of the treasury is elevated to that of a strategic partner in corporate strategy and operations.
- With the ability to slice the data by country, currency and counterparty, a treasury is able to review risk in all these dimensions and find risk mitigation solutions in a timely manner. For example, if more than 50% of cash at banks is with a counterparty, the treasurer can take steps to reduce that exposure and bring the number in line with corporate counterparty exposure guidelines.
- Improving working capital. Due to real-time cash forecasting and position analysis, treasuries should expect improved forecast accuracy and feel more confident implementing just-in-time funding for subsidiary operations, thus minimizing idle cash balance in bank accounts.
- Increase invested cash and investment income. With the ability to review cash balances by various dimensions and the ability to have improved cash flow forecast, a treasury should be able to transfer cash in non-interest bearing accounts to an investment portfolio, allowing better risk adjusted return on the cash.
Counterparty risk and performance assessment. Quickly identify the ability of counterparties to settle complex FX trades. Any delay or errors in settlement will become increasingly expensive as treasuries enter the daily collateral exchange regime under Dodd-Frank regulations.
