1. What should your treasury management strategy look like?
A robust strategy documenting potential risks to operations is vital for every public sector body. Mitigating a wide range of risks to your treasury activities means developing investment policies in line with the risk appetite of your organisation and the economic conditions in which you are operating. Policies for managing financial risk should flow from a set of overarching guidelines. These should set the general approach towards managing currency and interest rate risks, investing surplus cash, setting counterparty limits, and more.
2. Consider the economic situation when shaping your strategy
The economic landscape is dynamic and uncertain, so you must align your strategy with the risks created by economic circumstances. Key indicators of the performance of national and global financial markets provide useful tools. Worsening economic conditions require a more risk-averse strategy. Other important indicators include a country’s sovereign credit rating, an institution’s credit rating, and the prices of a credit default swap on the institution.
3. Understand your organisation’s credit risk
Being aware of your own credit risk will influence willingness to invest or do business with you. Certain situations, such as going to the market to borrow cash, might require you to be assessed by a credit rating agency. This will often start with your historical, then future financial position. Credit analysts will often focus on your organisation’s ability to control and mitigate risk.
4. How should you assess your own credit risk?
Always consider security first, liquidity second and yield last. Market-implied ratings are useful, estimating probability of default by an individual, organisation or country. Another effective option is the credit default swap – a financial instrument/contract for swapping the risk of a counterparty defaulting on a debt. However, credit default swap prices go beyond a debtor’s creditworthiness. Treasurers can use each of these indicators to imply a change in credit limits.
5. Why are internal controls and good governance important?
These principles underpin any successful treasury management function. Ensuring transparency of operations and decisions is vital. You can have the most robust strategy possible, but, without a framework of controls and governance, there is no evidence that decisions are being made responsibly and in the best interests of both the organisation and stakeholders.
Treasury functions operate a range of models, which can be unclear. It is better to apply broad principles of a control framework to your operations – such as segregation of duties to prevent fraud, and identifying errors or prior authorisation of financial transactions by designated staff. Clear and recorded procedures should be in place alongside, if possible, an independent body with scrutiny of the treasury function to promote transparency.
Key takeaways
- Appreciate the importance of having a robust investment strategy
- Be aware of the economic situation, and understand how the market is moving
- Assess and manage your credit risk Maintain good governance and internal controls
