Market Risk Assurance
In April 2014, Origin introduced a new market risk assurance service offering an independent outsourced risk assurance service, complementing Origin’s established advisory services.
- All businesses are exposed to market risk.
- The decision to do nothing or to mitigate certain risks should be an active one.
- This must be recorded in a policy document.
- Reconciliation to policy must be regularly undertaken as companies evolve and markets change.
- Small and medium sized corporates need effective risk policies and regular, timely assurance that their activities or changes to exogenous factors do not place them outside of policy limits and at risk. It is the responsibility of board and management to know the financial risks to which they may be exposed.
- Being a ‘non hedger’ does not preclude the need for active monitoring.
- Scenario stress testing with timely and accurate pricing (mark to market) is a prerequisite for understanding exposure and corporate risk and sensitivity to these changes.
- Interest rate, foreign exchange and commodity input/output parameters are complex and may be beyond the resources of the finance and accounting function operating with generic spread sheets and ad hoc sourced price inputs.
- Assurance to board and management is best provided independently by market risk specialists.
- Resourcing and cost constraints preclude small and medium corporates from accessing the latest updates to internationally accepted pricing systems and allocating adequately trained/experienced staff with the time to properly devote to providing informed assurance.
- An outsourced model provides specialist risk managers, guaranteed independence and a real-time updated pricing system for a fee which is cheaper than like for like in house provision. It is also expandable on demand.
- Changes in corporate activity gives rise to the need for assessment of the new or expected risk exposure. Origin’s MRA capacity can plug this gap with timely specialist valuations, advice on strategic direction and tactical/execution assistance using state of the art software.
RISK POLICY PREPARATION AND ASSESSMENT
- Determine suitability for the risks to which the company is exposed.
- Recommend changes to the policy if it is absent delinquent, or incomplete.
Review existing financial risk policy:
OVERALL RISK IDENTIFICATION AND ANALYSIS
- Considering: native risk position, expected changes and random/imposed events.
- Sensitivity analysis – to be aware of the impact & materiality.
- Rank and recommend possible responses.
Review the nature and extent of the risks faced by an individual company (or project) and report on available mitigation options.
HEDGING PORTFOLIO ANALYSIS
- Identify if actual results have or may diverge from intended over time.
- Identify danger points in the choice of hedging products. This is a benefit of hiring ‘the poacher turned gamekeeper’.
- Provide a stress test of the portfolio under selected ‘what if’ scenarios
If a company has a hedge portfolio – holistic/macro or against specific flows – assess the existing portfolio for suitability to meet objectives and for compliance with policy.
MARK-TO-MARKET OF EXISTING PORTFOLIO
- Mark to market by counterparty is common but not ideal. Valuations independent of both counterpart and the in-house responsible person using internationally accepted and regularly updated systems reduce risks.
- Offered monthly or quarterly in accordance with materiality and company reporting requirements.
- Ad hoc valuations can also be provided in case of significant market volatility.
All risk positions needs to be regularly marked to market.
- RECOMMEND STRATEGIES TO MITIGATE UNWANTED RISKS
- Macro/holistic company wide basis.
- Flow specific security.
- FAIR VALUE ANALYSIS
- Review proposed hedging strategies and opine on suitability for purpose.
- Highlight non-linear unwanted risks which may accompany.
- Confirm compliance with risk policy.
- Determine true ‘cost’ by measuring deviation from fair value and close out cost.
- HEDGE ADVISORY IN CONTEXT OF DEBT
- Revenue security in context of debt covenant ratios especially when there is currency/commodity exposure.
- Interest rate exposure analysis.
- Identify and provide fair market value.
- Identify impediments to termination.
- Identify risks associated with maintaining inherited positions.
- Report/assess hedge portfolios of takeover target contextualizing to market trends and risks in the broader context.
- Advise on impact of blended portfolio post acquisition.
- ‘On call’ augmentation capacity to existing corporate treasury function.
- Intermediate between hedge facility providers and the company to ensure transparent pricing.
Identify and analyse exposure changes ahead of entering new debt facility.
Provision of education and training to both executives and non-executives outlining risk assessment and mitigation contextualised to the company’s business, the market and counterparty product offerings.
PREPARATION OF SHAREHOLDER/MEDIA PRESENTATIONS
The convergence of volatile prices, complex hedge instruments and conflicting agendas may lead to the public release of misleading representations of a company’s risk or response to risk. OC MRA can provide independent analysis and reports on hedging policies and portfolios for distribution to shareholders and media in conjunction with company’s PR/media advisors to ensure accurate presentation of the company’s activities and responses.
EXPERT OPINION REPORTS AND ANALYSIS
Specialist value-add to corporate advisory work. For legacy positions:
OUTSOURCED ON DEMAND VIRTUAL TREASURER