• Provide a clearly defined risk management framework for those responsible for treasury operations to frame the organisation’s risk appetite and setting a coherent roadmap to identify, control, manage and report the subsequent risk responses
• Which risks should be managed, for example, the risk of default by a bank or other counterparty where funds have been deposited
• The extent to which risk may be taken, reflecting the company’s own attitude to risk, for example, the maximum amount and tenor of any deposit with a particular counterparty
• Which risks should be managed, for example, the risk of default by a bank or other counterparty where funds have been deposited
• The extent to which risk may be taken, reflecting the company’s own attitude to risk, for example, the maximum amount and tenor of any deposit with a particular counterparty
• Which risks should be managed, for example, the risk of default by a bank or other counterparty where funds have been deposited
• The extent to which risk may be taken, reflecting the company’s own attitude to risk, for example, the maximum amount and tenor of any deposit with a particular counterparty
• Risk Assessment: assessment of the likelihood of each risk occurring & its potential impact
• Risk Evaluation: comparison of risk exposures against organisation risk appetite
• Risk Response: Planning & implementation of responses, including the design of treasury policies
• Risk Aggregation: Risks should be evaluated cumulatively so that any connection between the risks, if they exist, can be evaluated effectively. For example, the response to a risk may have to be adjusted if it is negatively correlated to another risk faced by the organisation.
• Risk reporting: ensure risks are managed as stipulated in the IPS
• Feed back reporting: continual review of risk management outcomes is a vital part of risk management to ensure the process evolves, keeping at pace with both business & market developments
• Current and future risk exposures will flow from the strategy adopted by the organisation. Where, for example a company is looking to expand overseas, foreign currency exposures will arise which need managing. Examining the current and future profile of the company will help to identify the risk exposures that need to be managed and whether local currency balances should be held locally or in local currency, remitted centrally or converted into the functional currency
• The Board’s attitude to risk is key to formulating corporate strategy and hence, an important factor in producing risk policies, for example through the articulation of risk appetite statements. Treasury objectives should be aligned with the overall organisation strategy and these subsequently determine the scope of the risk exposures that are to be managed by the treasury function. For example, some treasury functions are responsible for managing equity investments and this area of risk needs to be included in the investment policy. The expected contribution of the treasury function to the profits of the organisation need to be clearly set out as this will determine the attitude to the treasury risk exposures. There are three common approaches:
1. A cost centre is a treasury which acts as a centre of excellence managing operational risks, at a cost. A cost-centre treasury can add value by using techniques such as cash-balance aggregation to reduce costs or improve interest income, whilst not adding to risks.
2. Treasury value-added centres are a more risk-tolerant variant of a pure cost centre. A value-added centre is a treasury which – like a cost-centre treasury – acts primarily as a service function/centre of excellence, but which is allowed a degree of discretion about actions that can be taken and when with a view to adding value to the organisation by reducing net costs. Hence a value-added treasury can add value in a way which is beyond the authority of a cost-centre treasury. However, value-added treasury centres are not allowed to take speculative positions in the financial markets.
3. A Profit-centre treasury may actively create market positions with a view to earning profits, as well as hedging. Profit-centre treasuries require sophisticated treasury operations and systems with very strong internal controls and management reporting.
The board must fully understand, and decide which approach fulfils the objective of aligning the treasury’s risk-management policy with the wider strategic objectives and risk propensity of the organisation. Risk appetite will be reflected in the detailed policies covering how the treasury will react to identified financial exposures and mitigate those exposures. The importance of performance measurement applies to all approaches equally.
“For most public companies, the treasury function is a value-added centre or cost centre, but that will depend on the corporate culture. Early 2021, Tesla for example, announced that they had invested significantly in Bitcoin. Tesla has an entrepreneurial corporate culture, where they are constantly exploring the new, and is hence not surprisingly reflected in their views on investment risk & reward. Similarly, for most FTSE100/FTSE20 companies, their risk appetite is for treasury not make a profit or take positions, opting rather for profits to arrive from corporate success as opposed to financial assets. These decisions are simply a consequence of governance framework and where that sits within the corporate culture”
