Q: What is your job function?
A: We spilt the job into internal treasury and external treasury. I’m the external treasury manager. I report into the head of tax and treasury. I’m more focused on the funding and also the interest rate derivatives side of the business. The internal treasurer is more focused on cash flows and short-term funding requirements. He will also look after around 80% of the FX trading we do.
Q: What are the major risks you are exposed to?
A: Interest rates and FX. We obviously like to know what will happen to these two in advance as it determines our hedging strategy. In the case of interest rate swaps we tend to operate much closer with the banks. We use an information source, independent from the banks, for pricing and estimations and to help create competitive tension.
Q: You have just announced you have are using Bloomberg to manage FX risk and execute trades. Why?
A: We were mostly dealing on the phone or with an individual’s bank FX platform prior to the shift. We didn’t really have the flexibility to deal with multiples of banks.
We have internal requirements to have a certain amount of FX quotes before making a trade. We really had a transactional banking relationship and we rely a lot on those. But because they are all on individual systems, it was hard to quickly compare rates.
We also needed to get documentation to prove we were finding competitive quotes between different parties, which was also difficult to implement under the old process.
Q: What does the new platform do?
A: It allows us to select and line up the banks that we want to get a quote from and the platform then fires out a request to them. It has a competitive nature and we can see all the rates and it keeps a record of the whole process. This makes our auditing much easier.
Q: Why didn’t you choose the Reuters service?
A: The service we were getting from Reuters was very poor. I chased them up on a number of occasions – knowing they were a dominant player in this space – but they just didn’t return calls. Bloomberg was more responsive and, because we also had other requirements in the interest rate space, Bloomberg was able to deal with that much better.
Q: How costly is it to implement?
A: Once you get over the cost of buying a Bloomberg license, the cost of trading FX is very small It’s also relatively simple to set up. It’s more about whether the banks are plugged in on the other side. For us, that’s the case with the major banks.
Q: What FX exposures do you have?
A: Primarily euro and US dollar. We do hit other currencies on a fairly regular basis, some of them quite peculiar; the Fiji dollar, for example. In terms of volume, we transact about A$400 million a year. When we look at the business in respect to the quantity of FX versus the cash underlying it’s not a huge amount.
We have particular limits in terms of what we hedge out. We look at this on a weekly basis. We hedge out the US dollar and euro through to six months – which at that point we may have a 30% to 50% hedge weighting – we come back in and within the month we pretty much have a 100% hedge at that point in time.
We also have a rolling series of hedges which are timed for when expected payments are. We don’t undertake any options – it’s hard to get one passed the board.
Q: How do you monitor counterparty risk?
A: We get news alerts on the companies we deal with. We also conduct a monthly report which compiles various forms of research, including interest rates, important market events that occurred in that month.
We also closely monitor credit default swap spreads. If we detect any movements, we then start to look in the news to see if there’s anything the company has been up to that month. Credit ratings seem to behind the times. Some the major counterparties we deal with don’t even have them.