This lesson examines the management of counterparty credit risk and the importance of credit ratings in short-term cash operations.

8.1 Counterparty Risk in Cash Management

Counterparty risk is the risk that a counterparty (e.g., a bank where funds are deposited, or a borrower of funds) will default on its obligations. This is a critical risk to manage in cash operations. The DipTM syllabus includes a section on “Counterparty risk” as part of the Working Capital and Trade Finance unit . Treasurers must identify and assess counterparty risk to ensure that cash is held with sound institutions and that investments are secure.

8.2 Credit Ratings for Short-Term Investment Products

Credit ratings are a key tool for assessing counterparty risk. The ACT syllabus requires the learner to understand “Credit ratings for short-term investment products” . Ratings from agencies like S&P, Moody’s, and Fitch provide an assessment of the creditworthiness of an issuer or instrument. Treasury professionals use these ratings to set credit limits and select appropriate investment products.

8.3 Managing Liquidity Risk in a Cash Context

Liquidity risk—the risk that the organisation cannot meet its short-term obligations—is a primary concern for treasury. The DipTM syllabus emphasises the need to “Recommend practical liquidity management strategies that are consistent with the needs and risk appetite of the organisation” . This includes:

  • Commercial responses: Such as working capital management .

  • Internal sources and uses of surplus cash: Such as intercompany lending .

  • Mechanisms for remitting cash across a group: Including royalties, dividends, and loans .

  • Reducing the cost of debt financing: Minimising borrowings, reducing margin risk, and understanding the yield curve .

  • Money market borrowings and deposits: Using money markets to manage liquidity .

  • Investment of surplus cash: Applying the principles of security, liquidity, and yield .

  • Diversification: Spreading risk across different counterparties and instruments .

8.4 Credit Limits and Concentration Risk

To manage counterparty risk, treasury professionals must establish and monitor counterparty credit limits. The DipTM syllabus includes “Techniques for establishing counterparty credit limits” . This involves assessing the financial health and creditworthiness of counterparties, setting maximum exposure limits, and monitoring exposure against those limits. Diversification is a key tool for managing concentration risk, which is also highlighted in the ACT syllabus

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