Managing volatility and regulations: how a treasury management system can help

Treasury regulations and market volatility are key concerns for today’s treasurer. Volatility stems from issues such as the unwinding of the Fed’s balance sheet, rising geopolitical tensions and tarriffs. Liquidity and cash forecasting have always been important issues for treasury, and in today’s increasingly volatile markets, highly variable input prices and regulatory pressures compound this importance.

The TMS solution

For CFOs and treasurers, particularly in commodity-intensive corporates, access to quality analytics and full visibility over their cash has never been more important. This was the case for Etihad Airways. The company selected a treasury management system (TMS) that reduced manual processing by providing a direct interface to the dealing platforms connected to their enterprise resource planning (ERP) solution.

Reports have essential scenario and volatility analysis for pricing built in, which helps users determine the outcome when key variables such as price and availability change. The TMS is an integral part of group treasury operations, with cash flow forecasts sourced across the business and held centrally. By automating through a single solution, Etihad’s treasury department now has more time to focus on strategic decision-making to add value to the business.

Before the TMS was deployed at Etihad, a foreign exchange (FX) hedge could take hours for traders, who had to ensure that all the information had been captured — time that would delay downstream operational activities. Today, transfer of cash happens seamlessly, as SWIFT payments can be made directly from the platform. The use of Excel has also changed, with macro-filled template spreadsheets, including pre-configured pivots and charts directly populated by system data.

Treasury regulations also remain an important concern for corporates, and there is a drive to automate processes and strengthen controls around the world. It is vital that back-office processes are clear to follow and easily interpreted, so that unintended inconsistencies are eradicated.

With the right TMS, treasurers can visually map business process workflows using point-and-click configuration, access any data related to accounting and trades, and reference data captured by the system for that workflow. Once created, business processes can be executed consistently and monitored in real-time and ensure compliance with treasury regulations.

Work efficiently, with an eye on compliance

The IFRS 9 standard provides an example of where automation can support compliance. Having gone live on Jan. 1, 2018, IFRS 9 replaces most parts of IAS 39. It incorporates guidelines designed to improve transparency by placing more focus on legal over economic substance. The trade-off is the potential for more volatility in reporting profits and losses. It provides many tests to help companies navigate the enhanced reporting standards.

By investing in automated data flow optimization, treasurers can leverage this information with big data analytics. Cognitive learning technologies can also provide additional intelligence into operations and ways that treasury can improve risk and investment strategies.

Movement in hedge accounting principles

The accounting standards bodies, such as FASB and IASB, are also introducing changes to hedge accounting principles. These are designed to improve the hedge accounting model in order to facilitate financial reporting that more closely reflects an entity’s risk management activities. The amendments also make certain targeted improvements to simplify the application of hedge accounting. In order to hedge exposures from commodities and financial instruments, corporations must make use of favorable accounting treatments to reduce profit and loss (P&L) volatility.

An integrated trading, risk management and accounting system can help corporations address the challenges that the changes to hedge accounting principles create. Such a platform can undertake the required tests and generate hedge documentation, designations and classifications to support emerging standards and associated regulatory reports. It can also handle specific guidance respecting risk component hedging, the rebalancing or de-designation of hedge relationships, effectiveness testing and incorporation of credit risk provided under IFRS 9, for example.

Stay secure

Security is also key for today’s treasurer, as headline-grabbing cyberattacks make fraud prevention a top-of-mind priority at board level and for senior management. A platform that offers segregation of duties for managing and monitoring security access levels is essential. A TMS that has strong encryption protocols in place and access rights managed at a granular level can support treasury in this regard, as well as provide a detailed audit trail.

With pressure from regulations and market volatility to deal with, treasurers need to have the best possible technology solution at hand. Technology can free the team from manual processes, and provides the analytical power to assess the wealth of data in the business to guide the best possible strategic decision-making by the treasurer.