The role of technology in operational risk management


Perspectives on Operating Risk

Of all the risk areas treasurers must manage, operational risk is the most difficult to quantify; it effectively requires the involvement of all areas and disciplines within the corporate financial environment. Technology is an important tool for the risk manager, delivering the benefits of control and traceability of events and data, as well as efficiency gains.

In this article, John Lyons, Head of Global Transaction Services UK, at RBS discusses how treasurers are currently harnessing technology to help them manage counterparty, credit, and operational risk.

Unsurprisingly, over the past two years, counterparty risk, the cost and availability of credit and the preservation of value have been high on the agenda in our regular discussions with corporate treasurers. For example, with counterparty risk very much a headline concern, treasurers are favouring multi-banking in order to spread their company’s exposure. They are looking to technology to deliver this efficiently, without reducing the visibility of data, control, convenience or cost effectiveness they had come to expect from proprietary banking solutions.

Counterparty risk drives the demand for standardisation and portability

This trend towards multi-banking is prompting strong interest in corporate access to SWIFT, the secure payment and messaging network that was developed for banks, but is now also open to corporate users. SWIFT members benefit from internationally recognised messaging standards and industry-level security for their messages over a network connecting them to all their counterparties. As well as payment instructions, the SWIFT network can be used for balance and transaction reporting from multiple banks, foreign currency (FX) and trade confirmations and a variety of information and transaction message types. But SWIFT membership and connectivity can involve installation and maintenance of software and hardware that is both specialised and costly and these considerations sometimes put a brake on corporate participation.

Technology has provided a solution via bureau-based ‘software as a service’ (SaaS) options that allow companies to outsource their SWIFT messaging processing to a third-party for a service charge plus transaction costs, avoiding the need to manage the necessary infrastructure in-house. Recognising the value of such solutions to our customers, RBS has partnered with a third-party provider to make available a SWIFT Service Bureau with processing at arms length, but with the convenience of a contract direct with the bank, which also manages implementation and servicing.

Using a third-party provider in this way adds further operational risk benefits in addition to multi-banking - for example, a managed implementation process, and full contingency data recovery capability. In addition, data can also be tailored to the company’s own preferred format for integration to an enterprise resource planning or treasury management system.

SaaS is also helping to make treasury management software more widely available to treasuries, at a reduced cost, allowing for full integration of available banking and other data for risk management analysis, such as stress and scenario testing of liquidity and its accessibility.

Risk management is driving a broader remit for treasury

We are also seeing a renewed impetus for business process re-engineering among corporate customers as a result of concerns about the availability and cost of credit, as well as general operational risk management needs, resulting in a wider remit for the treasury function within the organisation. Increasingly, treasury is charged with financial risk management and working capital management right across the organisation. The treasury department wants to understand the end-to-end financial value chain: where and how commercial transactions are made, the level of management information available about them and whether their overall impact on the balance sheet can be reduced via techniques such as supply chain financing or receivables discounting.

Banks are responding by delivering integrated reporting of cash and trade finance activity. For example, RBS customers can now monitor the procure-to-pay and order-to-cash cycles at the same time as their cash and liquidity management data, in one integrated system. The increased transparency around transaction pricing, interest margins and straight-through-processing (STP) levels this provides can help to drive down transaction and financing costs, as well as providing obvious risk management benefits.

Online money market portals answer the call for deeper fund analysis

Preservation of principal and value is another risk management concern for treasurers. The detailed story is that, at the operational level, this is particularly focused on short term investments. Treasurers consistently report they still have difficulty with achieving accurate cash flow forecasting beyond three months out, and this often causes them to keep cash in short term investments, in case it is needed. This, in turn, is focusing attention on the quality, accessibility and yield characteristics of overnight investments. Given the environment, treasurers are no longer willing to accept overnight investment options at face value without a greater depth of detail to allow them to thoroughly understand risk in investment opportunities.

The availability of both online proprietary and multi-fund money market and FX portals addresses this need, making it easy for treasury staff to compare and contrast a range of funds from a number of providers at their desktop, before deciding to invest. Investment options can be easily compared by yield, tenor, credit rating and underlying asset composition, and fund managers’ comments and reports reviewed, before the investment is placed, improving visibility, centralised control and risk-analysis with no loss of convenience.

Automating manual processes protects against operational risks

The control and transparency that automation of processes delivers are valued by treasurers along with cost effectiveness and efficiency. For example, where a portal is used, changes to treasury and investment policies and limits for authorisation and execution of investments can be immediately implemented, whenever they need to be reviewed or reset. Similarly, automating liquidity management through cross-border or in-country sweeps can provide valuable risk management support, as well as improving working capital management, because target or zero balancing accounts on a daily basis reduces the opportunity for mis-management or fraud on company accounts.

Our discussions with treasurers since the credit crisis demonstrate that incremental improvements in the use of technology are playing an important role in reducing risk, as well as increasing efficiency and cost effectiveness. Whenever manual processing is eliminated or the amount of time necessary to ‘mine’ treasury data reduced, operational risk management is improved giving treasurers more time to use their expertise to ‘future-proof’ their treasury operations.




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