Treasury risk management

- By Christopher Jeffery
- 03 Jun 2011

Treasury managers returned to the funding and risk management markets in a significant fashion during the past 12 months. This is particularly the case for corporate treasury desks – some now staffed by former investment bankers – which have once more resumed hedging programmes following a slowdown of activity in the immediate aftermath of the global financial crisis of 2007/2008.

Historically low interest rates in the US, and other developed markets, resulted in a number of entities harnessing their foreign operations or the Asia dollar markets to raise funds. The deluge of dollars into the region during the past two years has made this relatively easy, as well as reversing the basis swap into negative territory in most cases. Corporates have tapped offshore funding to reduce borrowing costs, which have often risen in local terms due to rising local interest rates combined with a decline in credit lines from banks – which are jealously guarding their own capital and funding positions.

Another theme was appreciation of many Asian currencies relative to the US dollar and other developed economy currencies, which reinforced the need for corporates with exchange exposures to actively manage these risks.

Activity, meanwhile, has also been influenced by sharp increases and decreases in market volatility caused by dramatic shifts in consensus on global economic expectations. Fears of an escalation of the euro sovereign debt crisis along with concerns about an economic downturn sparked by damage from the Great East Japan Earthquake on March 11 caused rapid de-risking at certain points during the year.

However, hedging appears to be rising, even on a local level and in spite of the introduction of new derivatives regulations in several jurisdictions, such as India and Korea, which have influenced the way corporates use derivatives for hedging. Many still opt for vanilla products and some have shifted to longer maturity hedges.

Banks, meanwhile, need to tread carefully. Although most are well capitalised, there is a temptation to issue certain types of paper, for example old-style Tier II debt, while there is a window of opportunity until 2013 under Basel III ‘grandfathering’ provisions.

Maquarie Bank, OCBC, UOB and Woori Bank have all issued lower Tier-II debt, with some of the paper including soon-to-be-outlawed ‘step ups’. However, banks are already looking at raising more resilient forms of capital and liquidity, which will come as good new to some regulators, which appear to be taking a dim view of efforts to ‘arbitrage’ the Basel process.