Life after Brexit for Treasurers

28 June 2016

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The UK’s decision to leave the EU will have significant implications for business though experience has taught us that UK business is adaptable and innovative when confronted with new challenges and opportunities. There will be significant uncertainty over the coming months as the detailed political and legal issues are worked out, and business confidence may be impacted.

Treasury will be at the forefront of this challenge and navigating the liquidity and financial risks of the business through this period of uncertainty.

So what are Treasurers doing today and the coming weeks?

  • Managing up short term liquidity

In this time of stress, we have noticed a further flight to quality and liquidity. Many Treasurers have increased their short term cash holdings though finding a home is also becoming difficult.  Where these are held in currency, the quality of cash forecasting to support both short and medium term hedging decisions is critical. Liquidity is being drained by higher than normal collateral calls and maintaining sufficient liquidity during this period is fundamental, particularly in light of the cost of managing non-sterling flows.

  • Reviewing stress tests

Current movements have generally been within stress scenarios thresholds. However the quality of scenario analysis and stress testing will become apparent over the comings weeks and months. Although many models are currently operating within the stress thresholds, further instability will arise with on-going volatility in the markets with developments in other countries. Treasurers will need to reassess sensitives and assumptions taking a holistic view of balance sheet risk management.

  • Revisiting counterparty risk

The impact on sectors and companies will vary and rating agencies are likely to reassess credit risk, particularly in light of credit agencies’ commentary on downgrades for the UK. Treasurers are revisiting their counterparty policies, risk appetite and limits, and checking that they are able to update their models quickly. In addition there will be a need to review documents for potential impact of material adverse change clauses.

What’s next?

Many of our clients have spent the last few months building a contingency plan. Financial markets are experiencing significant volatility and there is an ongoing flight to quality. However there will be additional implications across the broader business – affecting procurement, sales, finance, tax, regulatory and compliance. Trying to work out what’s important, relevant and factually correct will be a challenge for most organisations as will dealing with the weight of information and insight that will be hitting the inbox.

Our clients are continuing to monitor the impact through a variety of tools manage the key areas of focus. This includes understanding how partners, customers and other financial institutions are approaching this and what back up plans they may have is crucial.

As we move beyond this week the future landscape will become increasingly clear, and organisations will need to engage with a wide range of internal stakeholders to determine priorities within a dynamic framework. Treasurers should support the driving of this agenda through its tools to manage and aggregate the economic data impacting the balance sheet. The key is understanding which areas are most affected and then building in Early Warning Indicators and triggers to monitor impact. 

This is a great opportunity for Treasurers to demonstrate to senior management how they are able to pull together a range of risks into a single framework.

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