IM3 Monitor – Do we have visibility and governance?


Monitoring of risk should maintain proactive oversight, which means stakeholders are rapidly alerted to developing risks and empowered to execute risk management actions.

Common Shortfalls

  • Lack of time
  • Lack of skillset or accountability
  • Lack of easily visualised and consistent dashboards and reporting of key metrics and calls to action
  • Lack of clarity on what should be monitored, when an item should be escalated creating uncertainty or who should be performing what appropriate remedial actions
  • Lack of access to live reporting

Solutions

  • Ongoing experienced strategic and operational support, oversight and market advice
  • Upskilling internal personnel
  • Risk decision making platform aligned to your bespoke risk profile, hedging policy and key commercial considerations
  • Cash flow forecasting, cash and liquidity management and hedge accounting solutions capable of servicing a global subsidiary network

Design

Design for monitoring risk needs to be performed from the multiple lenses of relevant stakeholders. At a structural level, operational staff need access to detailed dashboards with key operational calls to action. They also critically need to be able to quickly navigate the data to confidently isolate the source of a problem and appropriate remedial action. Meanwhile, a CFO most critically needs quick digestible reports stating whether treasury compliance is achieved and if there are any actions he or she must take.  Higher still, the Board, who is least likely to have a treasury risk background, needs clean concise clarity that all matters treasury are in order, ideally in a red/green, yes/no format.

Develop

Core to developing monitoring capabilities is first designing the underlying processes of people and systems interacting to achieve valuable decision making based on objective calls to action. Once complete, and the data frames and key calculations are structured in an optimised manner, we need only create charts and reports to display key insights in a visually appealing and digestible format. If the processes are improperly developed, we can only ever view suboptimal reporting that will inevitably inhibit value realisation.

Implement

The implementation of monitoring again must emphasise enabling people to make valuable decisions. Bringing key stakeholders along through the development process, showing mock-ups of dashboards and reports and discussing the operational implications is a fantastic way of starting implementation early to minimise future surprises. This also ensures that managers have skills to leverage the value that the dashboards and reports are displaying.

Operate

Monitoring is a core responsibility of risk managers. Whether this is monthly, daily or real-time is dependent on the risks being monitored and the nature of the business, however the information being monitored is simply an output of the effort spent aligning people, systems policy and processes during design, development and implementation. This is the final piece of the puzzle and should involve nothing more than looking at a screen for either a red box (bad) or green box (good) and taking management action if anything is red. Simplicity is key.

IM3 Case Study

PROBLEM

Why the challenge was proving difficult to solve

  • Low operating margins in a very fast-moving retail market segment meant profitability is highly sensitive to foreign exchange fluctuations
  • The business thus aligned its risk appetite closely to its budgeted foreign exchange rates
  • The business lacked headcount, time to monitor markets and execute appropriate hedging to protect its budget rate on an ongoing basis

SOLUTION

Rochford actions to address and correct the problems

  • Implemented weekly (at minimum) scheduled calls to discuss current and forecast net exposure across 3 currency pairs
  • Rochford provide on-going recommendations on market order levels, product mix and FX hedge book restructuring
  • Instigated budget rate setting process that balanced current market levels, existing hedging and realistic appraisal of medium-term trading conditions
  • Monitor and advise on indirect costing considerations e.g. the effect of CNY depreciation and potential of renegotiating supply contracts

RESULT

End outcome, leaving the business in a better position than at the start

  • FX budget rates are achievable and realistic without sacrificing competitiveness
  • Rochford act as ‘eyes and ears’ on the market to actively identify and communicate event risk, key market levels and trend changes; the resulting proactive FX risk advice and consistent application of policy parameters shields the client from market shocks and reactive ‘kneejerk’ hedging decisions

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