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Treasurers play a greater strategic role in risk management

Australia’s corporate treasury teams are under pressure to meet growing risk management responsibilities and help their organisations navigate foreign markets. In a series of recent forums held by HSBC around the country, experts said these challenges required treasurers to be risk-savvy and able to implement innovative treasury solutions.


Corporate treasurers face multiple challenges as their organisations expand into new markets and navigate unfamiliar business environments. Understanding how to quantify risk and protect their business against currency fluctuations has become a key skill set for treasurers.

Managing foreign exchange (FX) risk has become more critical for international treasury functions as currency volatility rises amid growing geopolitical and global macroeconomic uncertainty. In HSBC's Risk Management Survey of about 200 chief financial officers (CFOs) and 300 treasurers in large businesses, nearly 60 per cent of the CFOs identified FX risk management as one of the two risk areas that took up the largest proportion of their time. Among treasurers, 72 per cent said FX risk management was one of the most important aspects of their job.

Treasurers are particularly aware of their transactional FX exposure. More than one in four treasury professionals surveyed by HSBC at its forums across Australia identified managing transactional FX as the most important way of optimising risk management.

Doing more with less

Generally, that means you’re doing either a high volume of transactions in small amounts or a low volume of large transactions

GUY DICKINSON HSBC’S HEAD OF GLOBAL MARKETS

According to Guy Dickinson, HSBC Australia’s Managing Director, Head of Global Markets, treasurers are under a lot of pressure to do more with often limited resources. They are expected to proactively identify and manage risks, and ensure their policies and operations are up to speed as their organisations grow internationally.

Either way, treasurers must deal with FX exposure from the impact of currency fluctuations on their payables and receivables. Recent swings in global currencies have made managing currency fluctuations even more challenging – more than one in six of the treasury professionals surveyed by HSBC cited this as their current top challenge in managing risk.

Establishing a link between risk appetite and management

At a broad level, treasurers are expected to adapt their risk management practices to changes in the macroeconomic and regulatory environments in which their business operates. They must also align treasury with business objectives as their organisations set parameters for risk-taking, according to Vic Jansen, Associate Director, Audit, Assurance and Risk Consulting at KPMG Australia.

Recently, the increased fiduciary duty of boards to define the risk appetite of their organisations has encouraged a greater focus on corporates to set their risk appetite, with treasury management policies reviewed and aligned to better reflect the defined risk appetite.

“Historically, the treasury department has driven the treasury policy, on a more bottom up approach” says Jansen. “But what we’re starting to see now is that risk appetite is being formed taking into consideration the broader operational and company risks, with the board defining the appetite for the business.”

Setting risk appetite early is crucial for businesses planning to expand into and operate in new markets. “You really need to define that early because once the business is moving on a fast growth path, the treasury sometimes gets overwhelmed as the volume of trade and transactions accelerate, with the potential for unexpected risk management outcomes” says Jansen.

Reducing risks by setting appetite

We were already hedging three foreign currencies, but for me it was important to know why we were hedging, what we should be hedging, and how we should be hedging

DANE BIRDSEYE GROUP TREASURER AT COCHLEAR

The global business Cochlear has found that going through a process of establishing its risk appetite and parameters for risk management has given it a better understanding of its FX exposures and enabled it to better manage them. The medical device company distributes its products to about 100 markets, and as it deals with 15 currencies, FX is its most significant treasury risk.

To better understand the company’s currency risks and hedging practices, Dane Birdseye, Group Treasurer at Cochlear, worked with HSBC to analyse the company’s FX exposures.

HSBC and Birdseye came up with a framework that identified the right mix of currencies to be hedged so that Cochlear could minimise the volatility of its portfolio. This in-depth knowledge of exposures helped Cochlear set its hedging policy.

“With a clear risk appetite, we have been able to better decide how to minimise our risks,” says Birdseye. “We ended up hedging six of our major currencies, and that has really brought down our overall cash flow at risk.”

Kumar Shah, Managing Director, Head of Corporate Treasury Solutions at HSBC Australia, worked with Cochlear to develop its hedging policy. He says the key part of the analysis was assessing the materiality of the risks identified. “You can then move forward in terms of defining the right strategy and the products that you can use.”

Through the analysis, Cochlear identified FX solutions to reduce its currency risks and improve the efficiency of its treasury processes. It now uses a trading platform for its FX transactions with Australian banks, and the HSBC Evolve platform for its FX dealings in several Asian markets.

Cutting costs and improving efficiency through innovation

It’s been a journey for HSBC – from having a closed platform to an open one to empowering our clients by giving them control over their FX conversion

KUMAR SHAH HSBC’S HEAD OF CORPORATE TREASURY SOLUTIONS

Innovative FX solutions can help businesses reduce their risks and costs by facilitating greater pricing transparency and operational efficiency. By managing FX conversions precisely, a business can also maintain competitive pricing, and as a result increase revenue and market share.

For example, HSBC’s pricing engine, FlexRate, integrates FX conversion directly into each transaction. It enhances control of foreign currency transactions and allows end clients to make purchases in their preferred currency. “More importantly, it improves reconciliation through increased transparency of FX rates on both outgoing and incoming flows,” says Dickinson.

FlexRate is just one example of HSBC’s investment in FX innovations to support Australian businesses as they expand their international distribution and operations. From using technology to benefit its internal processes, HSBC has evolved to focus on helping corporates implement innovative treasury solutions.

“Eventually, we want our clients to also empower their customers and create a better experience for them,” Shah adds.

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