Increased scrutiny in reviewing counterparty financial well-being will be a high priority for some time.
Bank downgrades are having an impact on mitigation strategies, treasurers say. To meet this challenge, many treasurers have taken the obvious steps necessary to lower risk and continue to monitor and evaluate any downgrade very closely.
Others are combining this with more proactive approaches. Here are a few that were discussed recently at a NeuGroup Global Cash and Banking Group (GCBG) meeting in September.
Lower limits. Most investment policies have limits set according to ratings or other identified risk metrics. GCBG members are using these guidelines to lower cash balances held with downgraded banks. Even without specific guidelines, members are making appropriate decisions to move funds to higher-rated banks.
Cash out of the country. Members are sweeping funds out of Greece, and more broadly, out of the eurozone completely. Cash pooling structures help to mitigate risk by moving funds, either notionally or physically, out of the riskiest areas. And some members have taken the added step of implementing an additional physical movement of funds on top of the notional structure already in place. The real objective, by whatever means, is to move funds to safer jurisdictions.
Walk the line. Most members are taking a hard line when it comes to the application of investment policy guidelines and are moving funds without negotiation. However, some members are taking a slightly softer approach and are offering downgraded banks a warning or other type of early notice that future business may be at risk if ratings slip beyond a certain point.
CLS makes a comeback. Continuous Linked Settlement (CLS) is a system that was first developed in 2002 as a way to eliminate settlement risk of foreign exchange trades. As we move forward with an environment of bank downgrades, some members are looking again at CLS as a viable tool for helping to contain settlement risk. It is a market infrastructure that mitigates FX settlement risk globally through the operation of the CLS Payment-versus-Payment (PvP) settlement service.
The global economic outlook indicates that increased scrutiny in the review of counterparty financial well-being will be something that continues to be of highest priority for members well into the future. The development and enhancement of in-house counterparty risk models will be time well spent to help treasury managers gain insight into the possible “early warning signs” of trouble ahead.