Davidson01 - Progetto Corporate risk management

Scheda pubblicazione

Identificativo

Davidson01,

Tipo di record

Autore/i

Davidson C

Anno

2001

Titolo

Tailoring Risk Systems

Articolo

Pubblicazione ospite (in)

Altre Informazioni

in Risk, vol.14, nr.11, November

Keywords separare key1:key2

Abstract

Corporates, as a group, are far more diverse than banks, and their risk management needs are more idiosyncratic. As sophisticated companies move to centralise their risk management, what do they need from their technology?

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Ericsson and Ford are in the vanguard of corporates seeking to improve their risk management by taking a centralised and integrated approach to managing their exposures. It is not a new idea: many banks have embraced enterprise-wide risk management to greater or lesser degrees. But while banks tend to have many risk management challenges in common – and can therefore use many of the same tools – the diversity of corporate risk exposures often forces companies to seek more tailored technology.

This means technology aimed at supporting corporate risk management must be flexible – systems must serve the unique requirements of a company’s business. Even so, there are issues – such as the introduction of international accounting standards and the emergence of foreign exchange trading portals – where corporates would like to see more standardised tools.

Ericsson, the Scandinavian communications technology multinational, recently established a group financial risk management department within its corporate treasury in London. It is responsible for setting risk policies and managing exposures, funding, assets and liabilities at group level. This is part of a general centralisation of treasury functions at the company, says Maria Dirtoft (pictured), head of risk management and business control at Ericsson Treasury Services. The company is also centralising within its internal bank in Stockholm risk control activities previously carried out by its regional treasury centres in Stockholm, Dallas and Singapore.

“Risk management is becoming more important to the group overall,” says Dirtoft. Ericsson is planning to introduce a new limits structure for the group, the evaluation of capital allocation on a risk-adjusted-return basis and other risk measures, she says.

To achieve its global financial risk management ambitions, Ericsson Treasury Services must upgrade its treasury system. It currently uses version 4.3 of the Finance Kit system from Stockholm-based Trema, but will have to upgrade to 5.0 because it provides “a technical structure for handling different time zones, different entities and portfolio structures for a global treasury/trading organisation”, says Dirtoft.

The company’s Swedish subsidiaries also use a version of the Finance Kit system to manage their cashflows and hedging transactions. Outside of Sweden, subsidiaries use either in-house built applications, spreadsheets or the risk module of the integrated business application suite from Germany’s SAP, on which the Ericsson group is standardising across its global operations.

US car giant Ford Motor Company is moving in the same direction. Although it had already centralised the management of its risks in its group treasury, individual units handled the various exposures such as currency, commodity, interest rate and corporate insurance (hazard). It has now pulled these units together as a single team covering all risks.

“The objective is to begin looking at our risks, both financial and hazard, on a more integrated basis and to drive the information that comes from this into the business decision-making process,” says Freeman Wood (pictured), director of global risk management at Ford.

Bringing the managers of the various risks together allows them to discuss their different approaches and transfer best practice where appropriate, says Wood. In addition, the team will examine Ford’s various business units and build up profiles of their risks, looking at correlations and calculating how much the company’s performance is exposed to the risks.

This centralised and integrated approach requires technology that can bring the underlying data together and consolidate it for analysis. Ford has built a system using Web and server software that links to its various trading systems to capture transaction data. The first application to run on the system is a derivatives counterparty risk analysis system that Ford created with New York-based risk software specialist RiskMetrics using its RiskServer technology, launched earlier this year (Risk May 2001, page 6). The application consolidates exposures to a counterparty across instruments, and looks at the overall exposure both from a Ford viewpoint and that of the counterparty.

“[The application] gives us a better perspective on which counterparties would be willing to trade with us and what type of transactions reduce risk for the counterparty and should therefore be priced more competitively,” says Wood.

The developments at Ericsson and Ford are representative of a trend towards a more centralised and integrated approach to risk management among corporates, says Robert Wennerström, director of corporate sales at Trema. Many larger companies have for some time operated centralised in-house banks, which handle funding and gather in the risks of the business units and take them to market.

More recently, some companies have been using Web technology to allow subsidiaries to enter their hedging deals directly into the treasury’s trading applications and to monitor these via a browser, says Wennerström.

But this still relies on the subsidiaries identifying their risks themselves using traditional approaches. Now, some corporate treasuries want to use Web technology to collect the underlying data – cashflows, forecasts, etc – directly from the business units and to undertake the risk analysis centrally. Alternatively, some are looking to give their subsidiaries access to the sophisticated risk analysis tools that until now have only been available to the central treasury because of their cost and complexity. Either way, the aim is to avoid missing exposures that lie out in the field, says Wennerström.

Capturing and analysing operational information directly from the subsidiaries is potentially a major undertaking, as it means interfacing with all the various business units’ systems and standardising and consolidating their data. Like banks with similar enterprise-wide risk management ambitions, few corporates are very far down this road. Many corporate treasuries’ first priority is not linking directly to subsidiaries, but putting their own houses in order and consolidating the systems they currently have for their various activities, such as cash management, foreign exchange hedging and interest rate and commodities risk management, and so on, says Donna Smith, managing director for North America of Chicago-based Integrity Treasury Solutions. Many corporates are in the process of replacing their multiple, incompatible applications with a single, integrated treasury system, she says. Motorola and Compaq, for example, have recently carried out such projects by using Integrity’s Integra-T system.

Systems
Corporates take differing approaches to risk management and have varying priorities, so designing systems for the corporate market can be a challenge. Scott Coffing, risk business manager at California-based SunGard Treasury Systems, says that while banks tend to have a similar approach to risk management, there is little commonality among corporates. They want to report on widely different things, from projected cost of funds under different interest rate scenarios, to the impact, under different foreign exchange spot rate scenarios, of subsidiaries not reaching forecasted revenues that the treasury has hedged fully. This puts a requirement on software suppliers to offer broad but highly versatile systems, says Coffing.

“Banks’ [risk management] requirements are so similar that you can almost hard-code them, and their emphasis tends to be on speed, whereas although corporates want something fast, their emphasis is on flexibility,” says Coffing.

This flexibility must now include support for the new international accounting regulations. The US Financial Accounting Standards Board’s FAS 133 and the International Accounting Standards Committee’s IAS 39 require that companies apply fair market value accounting to their derivatives and test the effectiveness of their hedges. They restrict what corporates can net prior to hedging, allow them to group only similar exposures together, and make them be more specific about the instruments they use to hedge the exposures. This is forcing many companies to review the way they hedge their foreign exchange risks, and even those, such as Ford, that were already taking this approach, are having to make considerable efforts to meet the new monitoring and reporting requirements.

“Documentation requirements, previously minimal, now take on a much more important role in order to substantiate the legitimacy of the exposure/hedge relationship,” says Bob Richardson, managing director of Pennsylvania-based foreign exchange exposure management software supplier FXpress.

Supply challenge
Supporting these requirements has proved challenging for software suppliers. “We had to completely rebuild the exposure management portion of the [FXpress] program in order to help our clients link individual groups of similar exposures to the hedging trade and use that unit to calculate effectiveness,” says Richardson.

His company also added a new section to its program that enables users “to tie all the pieces together from exposure to hedge to documentation and finally to the specific mathematics of the fair value and accounting process”.

But meeting customer requirements in the light of evolving disclosure standards is like trying to hit a moving target, says Integrity’s Smith. As corporates implement the new regulations, they are discovering additional functionality that they want from their software. “As soon as we get a module that we think addresses all the needs of corporates, we find a new thing that we must cover,” says Smith.

Companies must also choose the technology to execute their hedging trans-
actions. Connecticut-based Applera, the parent company of Celera Genomics (which has been sequencing the human genome) and Applied Biosystems (which supplies life science technology) is among the many companies looking at using the emerging forex trading portals, such as Atriax, Currenex and FXall, for their hedging transactions. Applera is not rushing its decision on which portal to use, as it is wary of backing a loser in a likely shakeout of the portals at some point in the future. Furthermore, because portals such as Atriax and FXall are sponsored by banks, the choice of platform will determine which banks the company deals with, so Applera wants to ensure that it makes a choice in its best economic interests, says Jim Portalatin, manager of foreign exchange and treasury systems at the company.

Other corporates have already taken the plunge. ABB is one (see box), although it refuses to identify which portals it is using, claiming that it is sensitive commercial information akin to the identity of the banks the company deals with. Ericsson owns up to already using Currenex and says it is in negotiations with Atriax and FXall. Ford also uses Currenex, and says it is exploring all Web-based trading platforms, including those for foreign exchange and fixed income.

“If you can develop straight-through processing from trade execution all the way through to settlement, that is beneficial from the standpoint of operational efficiency as well as reducing operational risk,” says Ford’s Wood.

The treasury systems suppliers are starting to provide interfaces to the various portals. Trema already offers links to Currenex and FXall, while Integrity has an interface with Currenex and is developing others. FXpress says that now it has almost completed its work on FAS 133 it has turned its attention to trading portal connectivity and straight-through processing.

And with operational risk at the forefront of many companies’ concerns following the events of September 11, it is no surprise to hear that corporates have been talking to their software suppliers about disaster recovery. Integrity says customer interest is such that it is seriously thinking of developing a disaster recovery service in the near future.

One area where the treasury system suppliers are finding a relatively slow uptake is with credit derivatives. Smith says customers have shown interest in the new instruments, “but we have yet to see a concrete example of a credit derivatives contract”. Ericsson’s Dirtoft says her treasury needs to do more research before introducing them. Johan Jonson, head of risk control at the ABB Financial Services AB Treasury Centre, says the centre is “conservative on credit risk” and does not do any credit risk trading.

The challenge for corporate treasuries is to embrace those innovations in risk management that are relevant to their unique needs. Technology has a key role to play in this, especially where a company is moving towards centralised exposure management. But software suppliers must offer flexible tools if they are to meet the needs of the corporate market.

ABB: A decentralised approach
While many corporates are integrating their technology infrastructure, not all treasuries are using this to centralise their operations. ABB Financial Services AB Treasury Centre supports industrial giant ABB’s business in the Nordic region, apart from Norway, by providing professional risk and cash management, as well as funding through medium-term debt and commercial paper programmes. It acts as a stand-alone profit centre, optimising its captive customers’ flows to manage risk, using a wide array of instruments. Its approach to managing risk is decentralised, says Johan Jonson, head of risk control at the centre. It does not operate an in-house bank but acts more like a market maker for the company’s industrial businesses when they want to hedge their exposures, which are mostly in foreign exchange.

The Stockholm-based treasury centre also trades on its own account in the commodities markets, mainly base metals and oil and gas, as well as in the Nordic electricity market and the interest rate derivatives markets. The energy trading (electricity, oil and gas) is done through a separately licensed entity, ABB Financial Energy, with its risk control outsourced to ABB Financial Services AB Treasury Centre. The centre manages the market, credit, operational and settlement risks of these exposures. Since 1998, it has focused particular attention on the settlement risk of its deals. It believes that many companies are taking a far too relaxed attitude to this issue.

“If there is something that might sink a company it will be settlement problems, because that’s where you have the biggest exposures,” says Jonson.
The treasury centre has a raft of measures to reduce its settlement exposures. In times of market stress and high systemic risks, it has strict limits on outstanding settlement amounts, and closely monitors the flows to and from its correspondent banks. It also has netting arrangements with counterparties and, if necessary, tries to ensure that it closes positions with the same counterparty with which it opened them.

ABB has built its own applications to monitor and report its settlement exposures. Although there are third-party tools available, the treasury centre wanted to make sure it based its application on its own procedures and methods, says Jonson. It also believes in developing applications in-house, where in doing so the company will learn valuable information. Otherwise, it buys off-the-shelf systems. It has an options trading system from Paris-based Murex, an energy trading system for its activities in the Nordic electricity market from London-based KWI, and uses Trema’s Finance Kit not only for treasury but also for monitoring commodity price risk.

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