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Treasury management systems ‘falling short of needs’

While technology is increasingly recognised as a key enabler in meeting their risk management objectives, many corporate treasurers report that their treasury management system (TMS) doesn’t fully support their financial risk management processes, reports Citi.

The group’s second report titled Managing Risk and Opportunity through Uncertainty follows up on a similar publication from 2017 and canvasses opinion from nearly 400 large companies – 41% in the Americas; 39% in Europe, the Middle East and Africa (EMEA); and 20% in Asia.

The latest report finds that many companies still need to make material changes to optimise their treasury and financial technology core infrastructure, with the majority identifying the cost and integration of technologies as the biggest obstacle to overcome.

Among the key findings of Citi’s latest survey:

  • 63% of respondents said their TMS was either not integrated or only partially integrated with their enterprise resource planning (ERP), which provides the required underlying business data to identify risk exposures;
  • 45% said that their TMS didn’t support financial risk management processes, thereby creating greater complexity and potential for error;
  • 77% reported that they lack full integration of their ERP and TMS infrastructure with banks, creating additional manual processes;
  • Survey respondents said they have started to embrace new technologies for efficiency and integration, with 58% leveraging robotic process automation (RPA) and 54% using application programming interfaces (APIs).

Erik Johnson, global coordinator for CitiFX Risk Solutions at Citi says that technology is “a big part of the new frontier” for treasury and with business models changing fast emerging technologies such as artificial intelligence (AI) and machine learning are becoming critical. However treasury “still needs the fundamental building blocks” and many of the shortcomings revealed in Citi’s 2017 survey remain evident.

Banks as partners

Looking ahead, 54% of respondents to this year’s survey want to see continuous improvement in operational treasury efficiency and 77% expect technology advances to drive fundamental changes to the treasury function.

Companies are looking to banks as key partners in their journey to transform treasury, with 79% of respondents stating that they intend to acquire innovative solutions from banks to this end.

“As corporates increasingly recognise technology as an important enabler to meeting risk management objectives, they are searching for ways to effectively integrate their ecosystem and, while doing so, automate repetitive tasks,” says Duncan Cole, head of the treasury advisory group at Citi.

“Trusted partners with long-standing relationships are well placed to provide critical support and help corporates navigate the rapidly changing landscape.”

The survey notes that the widespread perception among many survey participants that their TMS doesn’t fully support their financial risk management processes highlights the need for “a robust foreign exchange [FX] policy framework”. Most respondents (91%) said they have a formal written policy for FX risk in place and 71% review it annually.

Counterparty/credit risk was a close second, with 89% of respondents having a formal policy in place, followed by liquidity risk (84%); interest rate risk (82%) but only 43% for commodity risk.

Survey participants identified earnings as their main focus area for risk management objectives, but while 63% of companies flagged the reduction of earnings volatility as a key objective, the proportion that actually directly hedge earnings translation exposures is only 12%.

Asked which types of risk they hedge, respondents answered as follows:

Net monetary FX-denominated assets and liabilities           68%
Forecasted FX-denominated exposures                              55%
Net investment in foreign operations                                    25%
Earnings translation                                                              12%
Contingent risk, inc. bid-to-award risks or M&A                    12%

Emerging market exposures

Emerging market (EM) currency risk is also an area of concern for corporates, with 82% of respondents saying they have exposures to currencies outside the main G10 group. They highlighted cost, lack of liquidity and local regulation as key challenges. A surprising finding was that 78% of respondents do not differentiate between EM and developed market hedging practices.

“In a market marked by low volatility and high geopolitical uncertainties, there is an opportunity for corporates to take a step back and use informed data and analytics to optimise currency risk,” says Johnson. “This implies the use of more sophisticated tools and the implementation of differentiated strategies between emerging and developed markets.”

Among other findings the role of treasury in working capital management appears to be growing although only 31% of respondents say they have full responsibility, while 50% have ad hoc involvement and only 15% have no involvement

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