Treasury Technology & the Counterparty Risk Challenge
South Florida AFP 2011
www.it2tms.com
Treasury Technology - Capability v 21st Century Demand
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Company & Speaker Background
•Counterparty Risk Management
•Process, process, process.....
• IT2 – IT-Who?
Company Bio – IT2
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•
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Global enterprise founded in 1982, with US HQ in New York
Consistent record of sustained strong growth and profitability
250+ multinational & domestic corporate & FI clients
Client examples: A. Schulman, BMC Software, Campbell Soup
Company, Costco Wholesale Corp., Marriott, Tyco
International, Volkswagen International Finance
• Over 90 professional employees world-wide, 100% dedicated
to the design, development, delivery & support of the IT2 best
practice treasury management system
Speaker Background
• Aon Corporation – 14 years
– Europe front office dealing
– Bought together 3 cash departments into single Treasury
– TMS/TWS responsibility
• Treasury Software – 11 years
– 3 vendors
– System specialist, sales, client relationships
– CT based
Counterparty Risk
www.it2tms.com
Counterparty Risk Management
Counterparty uncertainty
• Risk Indicators
• Counterparty Limits
• FAS 157
What are Today’s Main Issues and Challenges?
Post Global
Financial Crisis
#2
#1
Counterparty Risk
What is my
Exposure?
How do I assess
the Risk?
Liquidity Planning
& Funding
How much cash do
I have today?
How much cash I
expect to have or
need in the future?
A Little History
• Counterparty risk is nothing new – Herstatt, BCCI & Barings
• Financial domestic regulators have a duty to protect the financial
system
• A personal experience
• So then, today’s challenges....
Risk Indicators - Why are new risk indicators needed?
...the biggest bankruptcy in
U.S. History.
Non-Investment Grade
Investment Grade
Standard &
Poor’s
Ratings
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
BCCC+
CCC
CCCCC
C
What Other Indicators Can be Used?
Risk Policy
Based on credit rating and other factors...
EQUITY PRICE
CDS SPREAD
Risk Techniques – Current & Planned
Which of the following credit risk analysis methods does your
treasury department perform?
Already in place
In the next three years
Not planned
68%
62%
42%
24%
28%
28%
25%
13%
5%
Credit Ratings
Market Sensitive Indicators
(CDS Spread, Equity Price,
etc.)
Credit Valuation Adjustment
(CVA)
Fair Value Measurement
Are two derivatives with identical terms but with different
counterparties worth the same?
Fair Value = Market Value + Credit Valuation Adjustment (CVA)
CVA =quantitative risk assessment of counterparty non performance
Best Practice – a widely used term but what should your Treasury
consider?
That is your choice...considerations may include:
• Active financial instruments used to manage treasury operations
• Countries where risk sits today and tomorrow
• Existing policy and procedural control framework
• Internal and external audit buy-in and agreement
• C-level risk preferences
Some to Consider
Risk Indicators linked to Limits
Credit Valuation Adjustment
Bank Account Administration
www.it2tms.com
Bank Account Administration
• Bank Account Administration
• Electronic Bank Account Management (eBAM)
Common Bank Relationship Challenges
Can I be sure that I
have visibility into my
global cash position?
Do I fully understand
my counterparty
exposures and
relationship activity on
a global basis?
Are cash related fraud
or operational risks big
concerns?
• Single repository
for bank all
account information
How can a Bank
Account
Administration
system help?
• End to end
automation and
control of bank
account open,
closure &
maintenance
processes
Introduction to Electronic Bank Account Management (eBAM)
• eBAM will not solve everything but will avoid issues:
– Long and painful process to open/close;
– Lack of standardization between banks;
– Low STP;
– Risk of human error;
– High costs.
How can I tackle this issue?
• In order to achieve a high degree of cash visibility first need to:
– Achieve visibility into all open accounts
– Implement a control process for opening and closing accounts
• In order to lower costs and mitigate risks :
– Implement controlled signatory and service management
processes
– Implement standard processes across business and in turn
across multiple bank relationships
– Leverage electronic communication between subsidiaries and
banks
– Demand a flexible reporting framework
Process, process, process
• Enhanced focus on Treasury
• Policy & Procedure
• Real time, accurate information
• SOX Control
• IT Buy-in, Procurement involvement
Bank account administration
1
Central account register for all
bank account information
2
Controlled workflow for
opening, maintaining and
closing bank accounts
3
Streamline communication
with banks
IT2’s Central Account Register
Signatory
Details
Service Details
Account Details
Bank Details
Bank Contacts
Single
repository
for all bank
account
information
Account
Documentation
Trading &
Competitiveness
Statistics
Account Balances &
Transactions
Bank Fees
Controlled Workflows
Opening
Requests
Maintenance
Requests
Closing
Requests
Bank Account Administration in IT2
Bank Account Administration Visibility - Dashboard
Process
Conclusion
• What to do ?
– Consider current Policy
– Discuss with SOX Committee and Audit teams
– Understand peer group approach
– Seek advice from consultancy company
– Target needs
– Technology or not
Bank Account Administration – Summary
B
E
S
T
Integrated eBAM solution
Enhanced enterprise cash visibility
Counterparty exposure visibility
P
R
A
C
T
I
C
E
Complete transparency
Full control & audit
Reduced operational risk
Streamlined workflow
Sample of 250+ IT2 Customers
Volkswagen
Questions?