Risk Management

Top Risk for Treasurers: Volatility

Treasurers want to keep earnings level over time, says a global survey. One of their biggest concerns? Counterparty risk.
Andrew SawersAugust 7, 2012

Reducing earnings volatility is one of the top three risk-management objectives for 92% of corporate treasurers in Europe and around the world, according to a new survey. For 41% of treasurers, it is the top risk-management priority. Contributing to shareholder value is the second-ranked corporate risk-management objective, being on the agenda for 70% of treasurers.

The research, by the Association of Corporate Treasurers and Barclays, reports the risk-management practices and views of more than 100 treasury chiefs in the United Kingdom (55% of respondents); the rest of Europe, the Middle East, and Africa (24%); Asia-Pacific (12%); and North America (9%). Respondents come from a wide range of industries, with almost two-thirds having revenue in excess of $1 billion (€800 million).

Comments from research participants suggest that treasurers want to reduce credit risk and exposures; protect economic value, liquidity, and cash flow; and put in place protection against volatile debt costs.

Concern about counterparty risk has increased very sharply during the past year, making it the third-biggest risk-management concern. Fully 57% rank this as their first, second, or third concern. Liquidity/funding risk is ranked second (65%), with foreign-currency transactional risk taking the top spot (66%). Both of these are also significantly greater concerns than they were a year ago.

Interest-rate risk is a “top three” concern for 57% of treasurers, though with rates continuing to be subdued, treasurers say it is slightly less of an issue than it was a year ago.

Are You Worthy?
Just over three-quarters (76%) of treasurers say creditworthiness is a requirement for banks in their core banking group, making that the second most-important criterion after banks’ lending capabilities (81%).

Corporate-banking capabilities (75%) and geographical presence (66%) are the third and fourth most-important criteria in bankers’ eyes. Less than a third say investment-banking capabilities are a requirement, and only 3% care about their banks’ positions in league tables.

The additional services banks offer their clients are not generally a factor in helping corporate treasurers choose their company’s risk-management services provider. Market information (including economics commentary) is a factor for 47% of corporates for foreign-exchange risk management, and for 36% interest-rate management is a factor.

Tailored solutions are a factor for 35% in the case of foreign exchange, 22% for interest rates. And accounting support — providing guidance on the proper financial-reporting treatment of risk-management tools — is a factor for 28% of treasurers looking for forex risk services, but just 11% for those seeking out interest-rate services.

Of those companies with annual forex volumes of more than $1 billion a year, 86% hedge forecasted transactions. But just 48% hedge balance-sheet translation risks. Earnings translation is hedged by 36%, while 29% hedge contingent risks such as bids and M&A deals.

Just over 80% of companies actively hedge G10 currencies, with forwards and swaps the most commonly used instruments. But only about half of the companies that actively hedge use options. A little under 40% of all companies hedge emerging-market currency exposures. Just under two-thirds of companies use an e-commerce platform to execute their foreign-exchange deals.

For interest-rate hedging, 60% of companies use vanilla swaps, with just a third using cross-currency swaps. Only 18% use vanilla options (caps and floors, for instance) and just 6% use structured, exotic instruments. The exotics have decreased in importance for treasurers over the past year.

Hedge accounting has some impact on hedging activity. Yet only 26% say all hedging solutions used must meet the financial-reporting rules for hedge accounting. About a third say they try to achieve hedge accounting on most solutions, while almost a quarter say hedge accounting is not applied.

Almost half do not expect the incoming IFRS9 financial-reporting standard to change their approach to hedge accounting. But about a third think the new standard might result in some increase in their use of derivatives.

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.