Treasury in Financial Services – Eight weeks of learnings post BREXIT
16 August 2016
Following the result of the EU Referendum, I was keen to hear from our network of Treasurers in the financial services sector (outside of the big banks) to understand the impacts Brexit has had on them and how it is influencing their thinking. Eight weeks on, I’m finding that there seems to be a consensus around the immediate challenges, as they are now much clearer, and the opportunities arising from change are being embraced positively – particularly around the enhancement of role – but, understandably, there is still uncertainty around the medium term developments.
Challenges vs opportunities
1. Increased focus on in-currency liquidity management
Although the movements in financial markets, particularly the value of GBP, have been material since Brexit, many Treasurers feel such movements are still within overall thresholds. Notwithstanding this, some feel the time is right to review their hedging approaches – particularly the use of cross currency swaps and the impact of collateral calls on short term liquidity – which is leading to increasing focus on foreign exchange hedging strategy and in-currency liquidity forecasting capability. I’ve also seen that some financial services organisations are reassessing the frequency and methodology for reviewing the liquidity of assets they hold in investment portfolios to enable them to be better prepared for future market movements.
2. Brexit as a stress test data reference point
Brexit is being considered by many institutions as a useful data point for future stress testing when assessing the possible effects of significant future global events, including the upcoming US elections and other EU countries over the next 18 months. In particular, I’ve seen a re-evaluation of liquidity and currency assumptions underlying those tests. However, it appears that this revision has generally been based upon looking at each of the liquidity, capital, currency and counterparty risks independently – I’d suggest that perhaps a more fundamental reassessment based upon a holistic view of balance sheet risk might be more beneficial in the medium term.
3. Limited action on counterparty risk (for now)
I have also observed a heavy reliance on the sole use of rating agency data to assess counterparty risk. Although a number of organisations are reviewing other indicators to monitor the risk on banking counterparties, most Treasurers believed their business models were resilient to the immediate after-effects and so reviewing counterparty risk was not as high up agendas as I might have expected given the recent news concerning the UK banking sector.
4. There may be a funding opportunity for some
A number of organisations are looking to identify windows of opportunity for funding in the current market, particularly given the fall in interest rates. I suspect we may also see an increasing use of cross currency swaps with the need to more actively manage the associated swap collateral as they consider issuing in EUR and USD rather than GBP as debt market conditions allow.
5. A focus on improving reporting, processes and controls
A key issue for many continues to be the ability to consolidate and summarise information at the right level to help management better understand the risk and regulatory effects of any changes to the balance sheet and the financing position. Unsurprisingly, I have seen that those with more manual processes have found the additional demands for information and exposure-monitoring by management post the Brexit vote very difficult to manage.
With so much going on, is the time right for Treasurers to consider an upgrade project to deliver increased operational effectiveness? I believe it is. Enabling straight through process to treasury activities to improve the accuracy and efficiency of information allows the Treasurer to focus more effectively on the key risks and opportunities during a period of uncertainty. I know many Treasurers already have improvement projects on the go, and they are continuing to push them forward with a higher endeavour in the aftermath of the referendum vote.
And what of the coming months?
For the moment continuing to monitor market exposure to ensure balance sheet risk is managed and liquidity is maintained will be a core activity. Not surprisingly, identifying assets to generate yield within risk appetite ranges, whilst ensuring such assets are sufficiently liquid in the light of any future potential stresses, is proving very challenging.
As the UK’s negotiating position becomes clearer and regulators start to set out a road map for transition, identifying what is important and relevant and how to respond to the Brexit effects will start in earnest for Treasurers. I believe more fundamental issues such as the effectiveness of current banking and cash management structures, meeting new regulatory requirements, managing changes in the nature of business cash flows, potential changes to financing arrangements and organisational responsibilities will come into play, giving the Treasurer a real opportunity to deliver value to the business.