The impacts of COVID-19 and market instability have escalated the risks that treasurers face. Not only has market volatility negatively impacted liquidity conditions and Foreign Exchange (FX) markets, but the move to remote work has created a new dimension of risk involving cybercrime. To combat these risks, it is imperative for treasurers to have an effective risk management strategy in place that mitigates the impacts of the pandemic. In order to create an effective risk management strategy, treasurers must first understand the types of risks exacerbated by the pandemic.
Risk Exposure Areas & Reasons
One of the top risks that treasury departments are struggling to address surrounds liquidity. The pandemic has substantially elevated liquidity risk, which is the risk associated with an enterprise’s ability to convert an asset or security into cash to prevent a loss. A disruption in supply chain, inventory, and declined demand has caused revenue loss for many companies, negatively impacting working capital lines and liquidity. Treasury activities surrounding liquidity have forced treasurers to require increased levels of liquidity and working capital and address cash balances that have become trapped or unavailable.
Organizations have also faced heightened concerns around the requirements of real-time liquidity management reporting. Faced with insufficient reporting capabilities that lack full visibility of the organization’s liquidity availability, treasury departments have struggled to adapt to market volatility and liquidity tightening in an effective way.
The pandemic has posed unpredictable market conditions for companies, posing even more risks to treasury departments. Foreign Exchange (FX) markets have been impacted by the pandemic, creating a challenging valuation environment for treasurers.
During the last quarter of 2020, currency volatility returned to pre-pandemic levels, weakening the US dollar against major currencies during the last quarter of 2020. The Q1 2021 showed a strengthening of the US dollar, which Industry Analysts are relating to the difference between European and US efforts to roll out COVID-19 vaccines.
These unpredictable conditions have been the cause of volatility in currency, which has significantly impacted treasurers. A lack of insight into liabilities and has caused consequences of millions in losses. Increased FX market volatility creates a need for treasurers to understand the impact on their balance sheets, the risks to valuations, and financial reporting.
Not only do market conditions aggravate threats to treasury departments, but the increase in cybercrime has created a new dimension of risk. The ever-growing use of mobile devices, cloud-based data storage, and digital payment systems has created a platform for cybercriminals to attack.
Cybersecurity has been a topic of discussion for years. The transition to remote work in response to COVID-19 has created vulnerabilities for companies, and cybercriminals are using them to their advantage. The move to remote work has seen cybercrime increase in the financial sector by 238%, according to the head of cybersecurity for spyware technology company VMware.
To combat these risks, treasurers need to establish a treasury risk management strategy with best practices in place.
Assessment & Mitigation Strategies
The first step in creating a treasury risk management strategy involves risk assessments of your treasury department’s current state. Treasurers should take inventory of current risks and potential liabilities that may be associated with the move to remote work and cybercrime.
For example, reacting to currency volatility means evaluating current treasury policies. Companies should understand current market conditions and look to re-evaluate their policies in a way that will allow their business to continue operating efficiently. Adjusting to current market conditions will require a great deal of flexibility and agility in processes, and treasurers must consider this.
Next, treasury departments should understand the capabilities of treasury and risk management technology. For example, cloud-based treasury systems can alleviate challenges posed by the transition to remote work. A cloud approach to treasury means that the same workflows can be run anywhere by users. Users have access to treasury systems operations without needing to physically be in the office, providing flexibility to implement business processes seamlessly.
To securely maintain this workflow, treasury teams need to have consistency in their application security. Authentication protocols, like multi-factor authentication, hard or soft tokens, IP filtering, and/or single sign-on, must be used to log into treasury systems. As companies transition to remote work, these authentication protocols must remain in place. This ensures that data always remains encrypted and prevents vulnerabilities in business processes that cybercriminals can use to attack.
The move to a cloud-based treasury system is vital in response to COVID-19. Treasurers also need to utilize the capabilities of treasury management systems (TMS) that can create a defense against the risks mentioned above.
For example, capabilities from a Software-as-a-service (SaaS) system can optimize risk management in treasury. Functions like FX management can provide detailed analytics to allow for complete visibility into currency exposures. Enhanced visibility enables better assessment, mitigation, and reporting of currency impacts on earnings and financial statements. A transparent view of your treasury’s financial position can alleviate potential risks and enhance accuracy for best practices.
Liquidity management capabilities can address potential threats to liquidity by using a controlled, automated approach. Liquidity can be more effectively managed by utilizing a standardized treasury payments approach. Not only does this enhance accuracy, but a standardized approach fights against fraud and cybercrime more efficiently.
Other treasury management system capabilities that should be optimized are fraud detection functionalities. Fraud detection functions use scenario-based, real-time detection techniques to prevent possible fraudulent activity.
Utilizing these capabilities can create a defense for treasurers against cybercrime and currency volatility. To read more about the key advantages of a Cloud-Based Treasury Management System, read our blog post here.
Understanding the benefits of a TMS and its capabilities and proactively reacting to threats can lead to an effective risk management strategy for your treasury systems. Elire’s Treasury Management Services can help your organization keep up with today’s constantly changing Treasury world. Our Treasury Advisory Services can modernize your Treasury Operations and address risks with our expertise in Global Liquidity and Forecasting, FX Multi-lateral Netting & Exposure Hedging, and more.
To learn more about treasury best practices, view the library of session recordings for the 2020 Elire Treasury Experience here which includes educational sessions, product demos, and customer panels for the modern Treasury and Finance Professional.