Risk exposures outpacing hedging programmes for corporates

The rising rate environment in 2022 disproportionately and negatively impacted smaller companies with less robust interest rate hedging practices, according to Chatham Financial’s State of Financial Risk Management Report. The independent study of more than 1,500 US public companies found that smaller companies are less likely to have an interest rate hedging strategy. The industry hedging the lowest proportion is natural resources and mining, with 27%.

Exposure to foreign currency risk was recorded in the research as being up year-over-year. While a smaller percentage of companies are exposed to foreign currencies relative to interest rates, a larger percentage of companies with FX exposure are hedging their risk relative to interest rate risk.

Relative to interest rate and foreign currency, commodity exposure is the least prevalent, with 37% of companies in the study being exposed to at least one commodity. This is a 5% increase from the previous year’s findings as commodity prices generally rose throughout 2022. Larger companies are more than twice as likely to hedge their commodity exposures.

The report found that recently public companies (those that filed an S-1 within the last three years) are less likely to have a hedging strategy than mature companies that have been public for over three years. The most significant disparity is among hedging FX exposure, as 56% of mature companies with FX exposure are hedging compared to just 32% of recently public companies.

“As noted in the report, 2022 was a year of change, with interest rates rising post-pandemic, and dollar strengthening we haven’t seen in 20 years,” said Amol Dhargalkar, Chairman and Managing Partner at Chatham Financial. “As companies are gaining exposures faster than hedging programmes are being implemented, the analysis confirms the idea that most firms intend to let exposures grow until key thresholds are met before considering hedging programmes.”

 

78% of FP&A professionals plan to improve technology and data skills in the next year

The majority of FP&A professionals worldwide are optimistic about advances in technology, automation and AI, according to results from the 2024 AFP FP&A Benchmarking Survey: People Strategies and Development, underwritten by Workday. In fact, 78% of respondents stated they would be pursuing the advancement of their knowledge and skills in technology and data over the next 12 months.

This data shows that finance views technology as an opportunity to improve their work lives. Respondents also believe that their human ingenuity cannot be replaced by technology and that they are prepared to adapt to the changing work environment.

The survey also found that companies have increased their support of professional development for FP&A professionals. Three factors likely drive this trend: FP&A has become a known, defined entity; the demand for FP&A talent remains high; and employers recognise the need for reskilling.

The evolution of the FP&A function has also resulted in increased specialisation. While FP&A originated as an extension of the accounting team, the discipline has matured into a distinct entity, complete with its own recruitment designations, conferences, certifications and skill specifications.

What companies are most interested in gaining from an increase in FP&A staff depends on the company’s size, for the most part. The survey found that the majority of smaller companies (< US$500m annual revenue) are looking for an increase in financial analysis. In comparison, most of the largest companies (> US$5bn annual revenue) seek greater digital transformation.

“The results of this year’s FP&A Benchmarking Survey reflect a growing recognition of the invaluable contributions of FP&A professionals,” said Jim Kaitz, President and CEO of AFP. “The forward-looking nature of FP&A is underscored by the willingness of FP&A professionals to embrace emerging technologies as a tool that will enable them to work more effectively.”

“I share the optimism reflected in the survey results that technology will help uplevel FP&A professionals,” added Kae Arima, vice president of finance, Workday. “At Workday, we believe AI will augment – not replace – human workers. By embracing innovative technologies like AI to manage tasks ripe for automation, FP&A will increasingly become a more strategic partner to the business.”

 

ESG and employment are key dispute risks in 2024 

Environmental, social and governance (ESG) is the most significant dispute risk to organisations in 2024, according to research from Baker McKenzie. The survey of 600 senior legal and risk leaders from large organisations (annual revenue greater than US$500m) based in the UK, USA, Singapore and Brazil, saw ESG identified by 73% of respondents, with employment replacing cybersecurity and data disputes as the second most significant disputes risk to organisations in 2024.

The seventh annual edition of 'The Year Ahead: Global Disputes Forecast’ also highlights that 81% of respondents expect the number of disputes in 2024 to either stay the same or increase in 2024. Furthermore, the report also showcases disputes volumes in a variety of industry sectors: 89% of respondents in the industrials, manufacturing and transportation (IMT) sector, 84% of respondents in energy, mining and infrastructure (EMI), 83% of respondents in healthcare and life sciences (H&LS), and 82% of respondents in the consumer goods and retail (CG&R) sector expect disputes volumes to stay the same or increase in 2023.

“The past year has been characterised by economic stagnation and geopolitical conflict,” commented Claudia Benavides, Global Chair of the Dispute Resolution practice at Baker McKenzie. “These trends look likely to continue. Despite these headwinds, most developed countries have not tipped into recession. However, in our survey, 30% of respondents expect the number of disputes in 2024 to increase. This year's top external threat remains cybersecurity and data privacy, closely followed by a varied group of concerns including supply chain issues, digital transformation, and growing regulatory and law enforcement scrutiny.”

 

Federal Reserve Financial Services launches ACH risk management service 

Federal Reserve Financial Services has announced the launch of FedDetect Anomaly Notification for FedACH Services, a risk management service designed to help financial institutions identify anomalous activity and supplement their fraud detection and alerting tools. This addition to FedACH Risk Management Services allows financial institutions to receive notifications via secure email when anomalous FedACH activity is detected.

“This service will put timely information into the hands of financial institutions about anomalies that arise in day-to-day FedACH transactions,” said Mark Gould, FRFS chief payments executive. “We know our customers are increasing their investment in risk management tools, and we’re excited to offer another solution at no additional cost that helps them quickly address potential fraud and improve operational efficiency.”

The service can help financial institutions catch potential fraud attempts with account verification through micro-entry return and forward-entry monitoring. It can also help originating financial institutions adhere to Nacha rules around change notifications and avoid future rule violations.

“It is important for originators to understand and establish a baseline for normal forward and return volumes of micro-entries and to recognise and react to activity outside of those levels,” said Michael Herd, Senior Vice President of ACH Network Administration at Nacha. “FedDetect Anomaly Notification provides a method for organisations using micro-entries to recognise and prevent suspicious activity.”

 

The headwinds of inflation are still blowing in the US

The economic outlook in 2024 appears to be more positive as the probability of a recession in the US fades, says David Solomon, CEO and chairman of Goldman Sachs, on an episode of the Goldman Sachs Exchanges podcast. But there are still plenty of challenges. 

For one, rising geopolitical risks and a packed global election calendar create uncertainty, which could give rise to more volatility and delay investment decisions. And while inflation has meaningfully abated, higher housing and energy prices could keep inflation higher than the market expects, he adds.

“I'm not quite as bullish as everyone else that we're going to see a series of cuts this year and we're going back to an environment of much, much lower interest rates,” Solomon says. “I think we have a significant number of headwinds [that] are going to still keep interest rates higher for longer.” 

Nevertheless, a more benign economic environment gives companies more confidence to move forward with much-delayed strategic decisions and M&A activity, which Solomon expects to pick up in 2024. “We haven't seen a recession. There's a higher probability of a softer landing. And so naturally, people are regaining confidence and, therefore, the transaction activity, the financing, the investment, the deal-making activity is starting to pick up.”

 

CFTC customer advisory highlights AI scams

The US Commodity Futures Trading Commission’s (CFTC) Office of Customer Education and Outreach (OCEO) has issued a customer advisory warning the public about AI scams. ‘AI Won’t Turn Trading Bots into Money Machines’ explains how the scams use the potential of AI technology to defraud investors with false claims that entice them to hand over their money or other assets to fraudsters who misappropriate the funds and deceive investors.

With the growth of the use of AI in everyday life, scammers are claiming that it can generate huge returns using bots, trade signal algorithms, crypto-asset arbitrage algorithms, and other AI-assisted technology. The prevalence of social media platforms and “influencers” makes it even easier for fraudsters to spread false information. The advisory warns investors that claims of high or guaranteed returns are red flags of fraud and that strangers promoting these claims online should be ignored.

“When it comes to AI, this advisory is telling investors, ‘be wary of the hype,’” said OCEO Director Melanie Devoe. “Unfortunately, AI has become another avenue for bad actors to defraud unsuspecting investors.”

The advisory aims to help investors identify and avoid potential scams, including a reminder that AI technology cannot predict the future. It also lists four essential items investors may consider, including researching a company's or trader's background, before trusting their money to trading bots or trade-signal providers.