How to Develop a Corporate Treasury Policy with Examples

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Ernest Hemingway once said that ‘hesitation increases in relation to risk’. He was right. The greater the risk, the more we hesitate, and in doing so, the more opportunity we may forgo. The corporate treasury policy is a tool designed to give organisations the best of both worlds – assessing and controlling risk, whilst letting businesses pursue opportunities with confidence.

Read on to find out how to develop a strong corporate treasury policy and give your business every advantage it deserves.

What is a Corporate Treasury Policy?

A corporate treasury policy defines how an organisation should respond to foreign exchange, interest rate, commodity, counterparty, liquidity, funding, or other financial risks. Recorded in a document, the treasury policy will review the potential cause and impact of such risks (for example, the effect of rising central bank rates on liquidity), the company’s ‘risk appetite’ for that risk (i.e. where the red lines are), the appropriate response (for example, hedging the risk using derivatives), the controls to manage the risk, and the system of risk reporting. Think of your corporate treasury policy as a fiscal driving manual – it helps your organisation keep the wheels turning and avoids overheating or breaking the financial engine.

Why Your Business Needs a Corporate Treasury Policy

To continue the motoring analogy, operating a business without a corporate treasury policy is like driving at full speed, with the lights off, and with no way to avoid a giant hole in the road. No matter if you’re an SME or a multinational, your organisation needs a treasury policy to predict and protect against fraud, exposure to involvement in risky ventures, impact on cash flow, foreign exchange volatility, counterparty credit risk, and more. Additionally, operating without a clear set of guidelines, response instructions, and checklist of measures to control or defend against risk, (also known as ‘if X, do Y, with Z’), does more than make the company vulnerable to economic events, it may also hinder the organisation’s ability to do business. For example, in Ireland, some banks will no longer let companies draw down debt unless they have a solid corporate treasury policy in place.

General Guidance on Corporate Treasury Policies

Treasurers should consider these general guidelines before producing their corporate treasury policy template:

• To ensure consistency throughout the organisation, use existing risk management frameworks and systems in the company, terminology, measures, and policy templates.
• Consider the company business profile, financial position, corporate strategy and economic environment to identify the key risks, identify potential offsetting actions, set the risk appetite and set the risk response.
• Adopt a standard risk management process for each risk.
• Assign ownership and accountability for the management of each treasury risk and associated treasury policy.
• Review the risk management process at least annually or when there are major changes in the company profile, corporate strategy or economic environment.

A Checklist to Develop a Corporate Treasury Policy

Developing an effective corporate treasury policy means creating a set of protocols that answer these key questions:

• Identify the risks – where are the company’s key vulnerabilities?
  • FX risk
  • Commodity risk
  • Debt portfolio risk
  • Compliance risk
  • Interest rate risk
  • Cash investment risk
  • Counterparty risk
  • Institutional risk
• Assess the risks – what is the likelihood of the risks occurring and what is the organisation’s potential risk exposure?
• Evaluating risk – what is the organisation’s appetite for risk should it materialise?
• Risk response – what will the business do to counter or mitigate risk?
• What tools or actions will you incorporate to respond to risk? (For example, moving to a fixed interest rate on long-term borrowing to offset rising central bank rates).
• How do the answers to these questions fit with your current risk management measures and your overall operating policies? What changes will they require? (For example, will your new treasury policy mean forgoing future business in certain jurisdictions?)
• How will you report the risk? Who is in the information loop, what is the hierarchy for reporting?

Corporate Treasury Policy Examples

Sudden and adverse financial events may leave your business exposed unless the corporate policy to assess, mitigate and counter risk is clear and decisive. See the examples below for an indication of the necessary clarity of policy inclusions:

Risk Exposure – Evaluation

What is your exposure before and after existing risk mitigation (expressed as the likelihood and size of potential loss or gain)? The measure could vary by type of risk, (for example, counterparty credit exposures based on credit ratings). Additionally, are there any natural hedges (offsetting risks) in your company that reduce the exposure?

Risk Response

What is your risk response? It will typically align with the policy objective, for example, eliminate FX risk due to accepting payments in foreign currency.

Some options for the risk response:

• Avoid (i.e. don’t enter a market or transaction)
• Transfer (i.e. by insurance or to a third party)
• Reduce (i.e. using controls)
• Accept (i.e. if the risk is not material)

Reporting

Have you selected KRIs (Key Risk Indicators) that measure the risk exposure, related hedges (if relevant), risk triggers and risk appetite? If so, have you established a system for reporting KRIs and the performance of the associated controls so that senior management can monitor and control the key risks within the company?

Key Takeaway

An organisation’s size, jurisdiction, or sector is no guard against adverse risk. Markets move at light speed, political stability may crumble overnight, prices can collapse or rise in an instant. Sometimes, the best defence is still a good defence. In an age of increased financial volatility and globalised markets, every organisation needs a strong corporate treasury policy to succeed.

Mitigate Currency Risk with Clear Treasury

Clear Treasury’s mission is to take the complexity out of your international payments strategy. To learn more about our services, how they may complement your corporate treasury policy, and how we transparently assist businesses engaged in cross-border trade, get in touch or become a client today.