Counterparty Risk Concerns Today’s Treasurers

2014 Liquidity Risk Survey shows some progress in risk mitigation, but challenges remain in counterparty risk management.

CFOs, treasurers, analysts, and other financial management decision-makers have made in-roads in mitigating risk by increasing restrictions on which banks can hold their uninsured deposits and updating their investment policies frequently. But despite progress in both understanding and managing counterparty risk, many organizations still do not appear to have formal counterparty risk exposure policies or frameworks in place, nor do they appear to be able to adequately aggregate, analyze, and monitor their counterparty exposures.

These were two of the major findings revealed in the fourth annual Liquidity Risk Survey, a study of short-term investment, debt, and forecasting practices conducted by Capital Advisors Group, Inc. and Strategic Treasurer LLC. The 2014 survey, the results of which were released in May, elicited responses from 112 treasury and finance professionals, including CFOs, treasurers, assistant treasurers, vice presidents of finance/treasury, managers or directors of cash investments, treasury/cash managers, and treasury/cash analysts. Respondents spanned companies ranging in size from over $10 billion in annual revenue (21 percent) to those with less than $500 million (29 percent).

Ongoing concerns about the health of the global banking and financial system underscore the wisdom of taking measures to mitigate counterparty risks. Companies face exposures from multiple sources, including (but not limited to) bank deposit balances, money market fund holdings, separately managed account holdings, lines of credit, foreign exchange contracts, and vendor and customer accounts. Some businesses seem to be implementing strategies to mitigate risks across counterparties in a comprehensive way. Unfortunately, few organizations appear to have yet reached that level of sophistication in their risk management practices.

 

Additionally, 75 percent of organizations reported that their debt has more than one maturity date or that they have intentionally tried to stagger debt maturity dates, compared with just 58 percent in 2013. This shift suggests that organizations may be using multiple maturity dates to guard against unfavorable terms at the time of refinancing or to reduce the impact on their business if the debt markets freeze up at an inopportune time. The strong pace of credit facility negotiation and renegotiation is likely to continue as long as loans have fewer covenants and interest rates stay low. However, looming interest rate increases may impact the current buyer’s market for debt by the time we conduct our 2015 survey.

This year’s Liquidity Risk Survey shows a clear trend toward improvement in certain risk mitigation practices, and we expect that trend to continue into 2015. Last year, our survey indicated a complacency toward bank exposures, while this year’s survey revealed that over the past year companies have taken meaningful steps to mitigate risk, including placing limits on uninsured bank deposits.

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