Financial risk management remains a top three priority for treasurers dealing with pandemic-driven disruptions and the resulting pressure on margins. That’s underscoring the importance of efficient FX risk management and capitalizing on digital advancements. Moreover, interest rate risk remains high on the radar for treasurers, registering as the second most impactful risk to their business. Considering market expectations for rates to eventually rise, treasurers should monitor carefully now and plan ahead.
Implications: Technology plus advanced data applications are plugging the meetings gap
Treasury leaders still appear to be having difficulty devoting enough time to meet with their business counterparts to assess economic exposure. Only 23% conduct touchpoints with a regular cadence and 37% say they have infrequent or ad hoc meetings.
In the absence of regular meetings, digital capabilities can help bridge the gap. Organizations are leveraging system capabilities rather than bespoke solutions to measure their exposure and execute risk management activities. Eighty percent of respondents are deploying enterprise resource planning (ERP), treasury management systems (TMS) or other third-party solutions for financial risk management.
Additionally, findings show that data analytics and visualization, RPA, AI and APIs are becoming increasingly prevalent in exposure management capabilities. Several of our clients, for example, already leverage AI capabilities to generate projections for cash flow and non-functional currency risk, as well as to highlight anomalies. AI is also being used to calculate the reliability of forecasts ranging from one month to one year by running algorithms to compare past forecasts against actuals.
Approaches to the LIBOR transitions are more varied. Findings show many treasury departments are taking a more passive approach to prepare for one of the more significant interest rate events in recent memory. Of the organizations that identify themselves as value-enhancing, only 14% have active transition plans in place, while 50% are in a monitoring mode.
Departments that identify themselves as strategic appear more proactive, with 29% reporting working groups in place. From a regional perspective, the respondents with working groups in place were more likely to be concentrated in Asia and Europe. This reflects the more immediate timetable for the end of LIBOR rates for GBP, EUR, CHF, and JPY at the end of 2021.
Treasurers have several paths to approach a successful transition. The most common: They can rely on their banks to alert them about contracts that require remediation, or they can wait for markets to develop products with a forward-looking term rate structure. However, there are several external and internal issues to consider in their planning. The process for amending contracts should be a discussion point with counterparties given the timeline involved and the potential effects on hedge accounting and taxes.
Internally, organizations should focus on preparing systems and processes to use new reference rates for accounting and forecasting. Utilizing any new reference rates for intercompany loans currently using LIBOR should be of particular interest to the treasurer and tax group. Ultimately, consistent communication with financial institutions on the mechanics for the transition and regular touchpoints with internal stakeholders will result in much less disruption.
Q: What best describes your treasury organization's mode of operation?
Q: How is your team preparing for the LIBOR transition?
PwC’s 2021 Global Treasury Survey report reflects the views of 340 treasury department respondents contacted by the PwC global network from February through May 2021. The respondents are based in over 30 countries, across 22 industries and in companies with median annual revenue of $4 billion. The report also relies on insights from our global team of treasury function experts.
Principal, Financial & Treasury Management, PwC US
Tel: +1 646 471 8476