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Many operating subsidiaries are exposed to risks due to foreign exchange rates and commodity prices. Centralising risk management provides the following advantages:

Netting - Offsetting risks in different subsidiaries can be netted, reducing costs due to differences in bid and ask prices.

Pricing - Centralising the positions increases volumes, giving better rates.

More effective hedging - A centralised treasury, with skilled staff and appropriate system support, can use the best derivative instruments to hedge risk at a lower price than subsidiaries can achieve.

When centralising risk management, Treasury enters into inter-company deals with the subsidiaries at rates that are better than the subsidiaries could achieve in the marketplace themselves.

Treasury can hedge the risk in the market at a more favourable rate and earn a profit. Many companies are now required to apply hedge accounting to hedging transactions.

This is complex, requiring sophisticated systems support. Hedge accounting is best done centrally as part of Treasury’s service and then distributed to the subsidiaries, which can load the results into their accounting systems as required.

Funding - Raising long term funds can be done better by a centralised Treasury service centre, which goes to the market and borrows on behalf of the group, achieving a better rating and lower risk than a typical subsidiary.

Treasury can also build up expertise in the area, using structured products and exotic derivatives to lower total funding costs.

Funds raised are lent to subsidiaries either by providing them with overdrafts or longer term loans.

Treasury earns revenue for the company by providing more cost-efficient financing than individual subsidiaries can find themselves.

If a company relies heavily on debt for financing, then using advanced financing instruments supported by a sophisticated treasury system can add tremendous value.

As for FX and commodity hedging transactions, accounting processes for structured products and exotic interest derivatives can be complicated.

A centralised treasury service centre with appropriate systems will reduce the workload, ensuring that all processes are fully auditable and compliant with industry regulations.

By organising Treasury as a centralised service centre, Treasury provides substantial value-added services to subsidiaries, at a profit.

By charging the subsidiaries for services incurred, Treasury moves away from being a cost centre and becomes a revenue-generating service centre.

This can only be achieved with senior level backing, along with investment in appropriate resources and technology to support the new processes and the volume such a new treasury service centre would have to handle.

Joergen Jensen is director of product management at Wall Street Systems, a Treasury and trading software firm with 500 employees servicing over 300 banking, corporate and central bank customers, operating out of 11 offices worldwide.

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Related links

• Wall Street Systems