Mind the Gap
Every visit to London reminds us of the old line by George Bernard Shaw, that the British and the Americans are two nations divided by a common language. Nowhere else are we asked if we “fancy” a cup of tea. Nothing but the Queen’s English quite captures unwavering resolve like “keep calm and carry on.” And no other place but the Underground do we catch that most iconic refrain: “Mind the gap.”
What’s the reason for the gap between the train and the platform in the London Underground? Whereas some train stations feature a reasonably straight track trajectory, others (such as the Bank Station on the Central Line) curve dramatically, causing the train car to overhang the platform in some places and leave a gap in others. Specifically, on an inside curve the car’s middle overhangs the platform while a gap exists at each end, while on an outside curve the gap is widest at the car’s middle. Depending on the sharpness of the platform’s curvature, the gap can be as wide as one foot, so inattentive passengers could incur bodily injury if they didn’t see “Mind the Gap” tiled on the platform floor or hear it ringing out from overhead speakers.
Though we weren’t in London this past week, we couldn’t help thinking “Mind the Gap” as we reviewed Deloitte’s new global corporate treasury survey. From several hundred survey respondents, a full 90% stated that stewarding risk management for the company was their mandate – only managing liquidity ranked higher. Further, of the strategic challenges faced by these corporate treasurers, nothing ranked higher than managing FX volatility.
Yet despite a clear acknowledgement of their risk management mandate and the top strategic importance of managing currency volatility, these treasury professionals acknowledged a significant gap in their risk monitoring practices. Fewer than half engaged in any kind of sensitivity analysis on currency or interest rate fluctuations and their impact on the business. Moreover, fully three-quarters of the treasury groups surveyed did not actively monitor at-risk metrics (like cashflow-at-risk or earnings-at-risk) based on potential swings in financial inputs.
At this point, it’s impractical to change the train-platform gaps in the London Underground system, as some parts of the system date back 150 years! For treasury professionals, however, several practical steps can be taken to close the gap between strategic risk mandates and current practices, such as choosing to:
Assess economic exposures, especially those currently unhedged. The dollar has fallen between 10%-15% this year against a number of currencies. For companies mostly sensitive to foreign-denominated costs, the dollar’s decline will put pressure on their bottom lines, while companies with material overseas revenues will see the top line lifted by currency benefits. Both types may wish to assess hedging plans as soon as possible, either to prevent further cost increases in USD terms or to lock in favorable revenue conversion rates.
Determine optimal at-risk metric and track it. In keeping with the broadly acknowledged mandate to steward financial risk management for their companies, treasury groups can work with their finance teams and external advisors to choose the most suitable at-risk metric for their companies. Across industries, companies have made compelling cases for concentrating on value-at-risk, cashflow-at-risk, or earnings-per-share-at-risk, among others. Once the best-fit metric is chosen, companies can take concrete steps both to track it and to drive strategic corporate finance decisions, including hedging, based on its insights.
Obtain a “mind the gap” assessment. Under the regulatory frameworks of Dodd-Frank, EMIR, or MiFID II, even companies with an ideal handle on hedging financial exposures may possess gaps in best execution, reporting requirements, or collateral management. A gap assessment — tailored to a specific client’s corporate entity structure, organizational chart, worldwide footprint, and financial exposures – can help minimize the space between your organization’s mandates and its activities.
Please give us a call if you have any questions, or drop by for a cup of tea. And don’t forget to mind the gap!