By Joseph Neu
For some markets, the situation a year after the collapse of Lehman Brothers is roughly the same as it was prior to it. A week before the collapse, for example USD/EUR was 1.427 and 12 months later it was around 1.429. The financial press, similarly, is talking up the return of business as usual in financial markets. However, this does not mean the one-year anniversary of an event that ushered in the worst of the financial crisis has not had an impact—far from it.
NO SENSE OF BEING THE SAME
The fact is that even getting back to something that looks like pre-September 15 market conditions has been no easy task. And this includes the job done by treasury professionals who have had to navigate their firms’ finances through the 12 months in between (and many are still hard at work at this). This hard work should not, and will not be forgotten.
Thus, we can eliminate one potential takeaway on this anniversary: no matter how bad the event, the markets will always find their way back, so just hide your eyes until they get there. While some may hope that regulators (and legislators) show such complacency now, treasurers and their risk managers show no signs of easing up on their vigilance. The crisis created too much agita and effort to risk repeating.
This explains why, for example, across The NeuGroup’s network of peer groups treasury professionals may be out of full-blown crisis mode, but no one has become complacent. Instead, most continue to guard against a false sense of security. This means as capital markets improve, they are being quick to get through funding windows (and knowing they are not alone in this thinking), lest their be a sudden worsening of conditions.
However, perhaps more importantly, they are also reviewing policies and procedures and putting in place mechanisms to help ensure that their firms will be protected as memories of the crisis fade.
As a result, on the risk management side, there remains a full-press effort going on across all fronts to revamp exposure identification and mitigation efforts. The aim is to make them more effective and efficient, so that they can be done unceasingly.
The overriding lesson post-Lehman is that no one wants again to be burned by a false sense of security—created by either being unaware of the risk (in an action or inaction), or thinking the risk event is too unlikely to occur to care. In this regard, the post-Lehman world will never be the same. And since the catalyst was a financial institution failure, perhaps the most enduring change is how the risks in transactions with FIs are weighed.
A SETTLING OF ACCOUNTS
In most financial relationships the most basic of risks is the potential for one counterparty to fail to settle its accounts. Accordingly, settlement risk has been elevated from a very minor concern to a major one for most treasury professionals.
- No more ruined weekends. Thanks to the Lehman failure, for example, if a bank fails to deliver currency as promised leading into a weekend, more treasurers will not only notice but move swiftly to do something about it before skipping out on a Friday.
But before that, more scrutiny is being paid to counterparty risk so as to avoid transacting with banks with the potential to ruin a weekend.
- Documented protection. On this score, ISDAs and CSAs have become de riguer, as is ensuring that the entity booking a transaction is the entity authorized and covered by the ISDA (see IT, June 2009). The latter is a direct lesson of trades being booked to Lehman in London, sometimes by accident, which proved both unoffsettable and less than fully recoverable.
- Better, faster platforms for settlement. As a result, more risk management professionals and their advisors expect to see tools and platforms aimed to curb settlement risk, a la CLS with foreign exchange, to really gain traction.
Among post-Lehman takeaways, then, is that the perceived ability of a bank to settle and/or physically deliver expeditiously to exacting specifications will set the tone for how other risks in the relationship are viewed. Should a counterparty deviate from its traditional settlement pattern, moreover, this will be a trigger for further investigation. Apart from luck, attention to the things that appear insignificant is, in the end, what prevents firms from falling victim to a crisis.