Corporate Treasury Control and Performance Standards in Switzerland

Corporate Treasury Control and Performance Standards in Switzerland January 2 A comprehensive treasury survey including trend comparisons Supported by: The Swiss Association of Corporate Treasurers (Swiss ACT) PricewaterhouseCoopers Global Risk Management Solutions

PricewaterhouseCoopers (www.pwc.ch), the world s largest professional services organisation, helps its clients build value, manage risk and improve their performance. As a leading treasury consulting firm, PricewaterhouseCoopers provides advisory services to leading global, national and local companies on how to enhance treasury s effectiveness and contribution to their business. The PricewaterhouseCoopers Treasury & Risk Management Group forms part of a 5 5 professional strong Global Risk Management Solutions, which specialises in integrated risk management, strategic risk services, financial risk management, operational/systems risk management, compliance and environmental risk management.

Contents Forewords 4 Executive Summary 7 Detailed survey results 11 Section 1 13 Organisation and policy standards Section 2 23 Activities and control standards Section 3 39 Measurement and review standards Section 4 49 Infrastructure and cost standards Section 5 55 New challenges for Treasuries 3

Forewords First of all, I would like to thank PricewaterhouseCoopers for their tremendous and valuable effort in producing this important report on Swiss treasury behaviour. I am also very grateful for and proud of the readiness of so many leading Swiss corporations to contribute in a meaningful way to this survey. It is their contribution, in combination with PricewaterhouseCoopers knowledge and assessments of treasury operations, which makes it what it is a real benchmark of and for Swiss treasury activities. The survey clarifies the role of Swiss treasurers we are not risk takers. The management of risk within controlled parameters is our objective. The highlight of a Swiss treasurer s life is not the lucky punch as many would expect, it is our ability to manage risk in these unpredictable markets in a controlled way. The avoidance of unnecessary volatility is also in the best interest of our shareholders. What is risk? Is risk as obvious as it seems? Yes, we have learned through bitter and too often, painful experience to manage currency risk. But senior management s priority on business risk still too often neglects the hidden risk, e.g. from production locations, interest rate movements and funding. Do we really know all our potential risks? Do we hedge them appropriately? The integrated risk management approach is a task of the next decade enabling corporations to distinguish unbearable risks from normal business risks and to hedge them at reasonable costs. A more sophisticated and integrated risk management approach is not the treasurer s task alone, it involves the commitment of senior management and needs their support, in order to be competitive and survive in a global economy. The role of Treasury is changing. After having satisfied the basic needs of cash management, liquidity planning and liquidity protection, the optimisation of corporate finance will enrich our activities in the future. The shareholder value philosophy in the end a real, competitive bidding process for rare capital and market valuation with the introduction of value based management principles will be one of our future topics. The optimisation of assets employed and the relevant cost of capital to achieve a true economic value added for the corporation within a controlled risk environment will be a real challenge which will require our full attention. Stephan Jud President Swiss Association of Corporate Treasurers ( Swiss ACT ) Treasurer Schindler Group 4

As treasurer of one of the country s largest corporations, I am pleased to write this foreword to the new treasury survey conducted by PricewaterhouseCoopers. This study will be extremely useful to assess the status of your treasury organization in relation to others, to highlight trends in treasury management and to identify areas with a need for catch-up. It provides an excellent basis for external comparisons and contributes to the establishment of so-called best practices. Discussions with many corporate treasurers show three distinctive trends: Shareholders are increasingly expecting a company to manage its financial resources and its risks in an effective manner, the number of financial losses published in the press has increased the awareness of risks involved in treasury activities and has resulted in a certain uneasiness by top management and boards of directors, the complexity of treasury management is growing fast and requires an ever higher degree of professionalism and specialization. This leads to five basic questions, which management of a company should be able to answer: (1) What are our relevant risks? (2) Should we reduce our exposures or can we accept them? (3) How can we make sure that no intolerable impact on the corporation s profit and loss arises? (4) Is it clearly defined who is authorized to decide, and on what? (5) How well is Treasury s job done? With regard to the above, treasurers should identify and assess all material risks. For this purpose they need an adequate system to capture financial transactions, to value instruments and to measure risks. Furthermore, adequate treasury policies and, last but not least, a timely reporting to management should be put in place. As things are getting more and more sophisticated, it is important that also common sense is used when handling risks, rather than simply relying on mathematical models or IT systems, which most users do not even understand properly. Fall of 1998 demonstrated that real movements can go far beyond expected movements and related mathematical probabilities. In this context, Value at Risk may be a useful tool, but it is not sufficient to answer very basic questions, such as: What is the worst possible outcome and what will it mean to our company? This latest treasury survey of PricewaterhouseCoopers shows that a great number of companies recognize these developments and start to use more professional approaches for treasury and financial risk management. Clearly, this is an ongoing and challenging task. Comparing your treasury with peers is an effective way to keep abreast of new developments. John Manser Group Treasurer Novartis 5

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Executive Summary Introduction During 1999, PricewaterhouseCoopers carried out a survey on Corporate Treasury Controls and Performance Standards in Switzerland. This treasury survey follows a first study performed in 1996 and is again supported by the Swiss Association of Corporate Treasurers ( Swiss ACT ). The success and high interest in the last treasury survey expressed by Swiss corporates encouraged PricewaterhouseCoopers to update the benchmark for corporate treasury activities established three years ago. The goal is to provide insight to trends of corporate treasury risk management approaches, controls and performance standards applied by corporate treasuries in Switzerland as well as to identify new initiatives. Information and data for the treasury survey were gathered during interviews with treasurers of 4 corporates with Group Treasury or a regional treasury centre located in Switzerland. Tailored treasury management questionnaires were completed by PricewaterhouseCoopers Treasury & Risk Management Group members during these discussions with the corporate treasurers. The survey results provide valuable insight into treasury practices of many leading corporates in Switzerland and allow participants to compare their corporate treasury activities against other peer companies. Furthermore, the survey highlights several areas where opportunity for improvement exists as well as challenges for treasurers in the future. KEY FINDINGS Treasury organisation and responsibilities Corporate management culture influences the role and responsibilities of the treasury function, which goes well beyond cash and liquidity management nowadays. Centralised financial target and policy setting and decentralised decision making characterises the management approach applied by the majority of corporates in Switzerland. Compared to 1996 an increased centralisation of key treasury tasks is observed and material financial risks are managed increasingly on a group-wide basis by dedicated specialists. Interest rate management, Foreign Exchange ( FX ) transaction management, FX economic exposure management, Group bank relationship, tax management and insurance are more often performed on Group level than three years ago. In general, participants expect the centralisation process to continue. Most corporate treasuries in Switzerland continue to be organised as service centres. For corporates in Switzerland the establishment of a treasury committee or risk committee is becoming best practice. The main purpose of such committees is to discuss treasury strategies, monitor compliance by Group Treasury with policies, procedures and risk limits and to propose amendments to policies for approval by the Board of Directors ( BOD ). Risk management approach Across all companies surveyed, most companies, i.e. 85%, continue to apply an active risk management approach. 3% of the participants take positions unrelated to the business and another 12% pursue an approach of fully hedging treasury risks. There was no corporate identified that would not hedge any exposure. There is nothing such as the one and only approach to risk management. Corporates pursue different goals and risk strategies depending on factors such as size and capital of a company, risk tolerance, industry particularities, technical know-how and systems capabilities, just to name a few. 7

Furthermore, consideration is given to a company s core competencies when actively managing, hedging or transferring risk. The number of corporates taking positions unrelated to the operating business has further decreased. Active FX dealing, with the aim to generate a profit contribution, is usually not part of the mission of a treasury function. This also demonstrates that the vast majority of corporates do not want to build up additional risk positions and thereby tying up economic risk capital. During the last few years, various new risk management approaches have evolved. Some companies no longer address individual risk types separately. A new trend towards integrated risk management by jointly managing financial, operational, insurance and other risks by a fully dedicated risk specialist e.g. a Chief Risk Officer, is seen more often at corporates in Switzerland. This move towards integrated risk management provides opportunities for treasurers to become the risk manager of tomorrow s corporation. Control standards The survey provides an analysis of the activities and control standards applied by treasury departments. Formal treasury policies are a key instrument for the definition of objectives, tasks, authorities and responsibilities for treasury activities. Treasury policies address the treasury organisation, core treasury functions, the risk management approach to be pursued, key treasury controls, performance measurements and reporting to Management. The survey shows that the majority of companies have formal policies in place for: debt management, FX transaction exposure, and investment management, FX translation exposure. interest rate exposure, The use of policies for interest exposure management is only applied by 55% of the participants, which is surprisingly low for this core treasury function. Across all corporates a wide range of derivative products is used to manage treasury risks. The most commonly used interest rate instruments among corporates in Switzerland are plain vanilla interest rate swaps, caps, floors and forward rate agreements. The most frequently used instruments to hedge FX transaction exposure are FX spot and forward contracts, FX swaps and currency options. Bank deposits and money market placements continue to be the instruments applied by the majority of the corporates in Switzerland for their investment management, however, investments in corporate bonds, shares and other equities products are also made, particularly by treasuries managing larger portfolios. Certain companies still do not restrict risk strategies (e.g. no uncovered short sales) or explicitly define authorised instruments in their policies. The latter is considered particularly important for structured and exotic products in view of implications on the monitoring and handling of such instruments. Among leading treasuries there is a consensus that risk controls are necessary for an effective financial risk management. The use of control parameters by corporates in Switzerland has gradually increased over the past 3 years. However, the survey shows that for a large number of corporates there still remain gaps in respect of a comprehensive risk management framework, which should comprise formal policies and procedures, effective controls as well as performance measurements. Certain control tools, which are considered to be effective for risk management, such as exposure limits, value-at risk limits or sensitivity analyses, are not widely applied. Especially in the field of interest rate exposure management, which is a technically demanding area, tailored controls are often missing. Performance measurement Is Treasury doing a good job? Performance measurements and the definition of specific benchmarks are a cornerstone for board members, senior management and the Chief 8

Financial Officer ( CFO ) to assess whether treasury units are working effectively and add value to the Company. 87% of the participants stated that they consider performance measures to be either highly important or important. The measurement of treasury performance is driven by the objective to demonstrate the financial contribution of the treasury function and effectiveness of treasury strategies. Performance measurement is particularly applied at group treasury level. Six out of ten corporates measure performance for FX exposure management. Performance measurement for other core treasury activities such as interest rate exposure management, short-term liquidity and long-term debt/investments is applied by approximately a third of all companies. Among those corporates applying performance measurement, there are only few applying risk-adjusted measures. Very few corporates evaluate banking services statistically (e.g. margin and bid analyses), although there are strong views on service quality. The survey participants assessed the quality of services provided by their banking partners compared to three years ago. Management of foreign banks and cantonal banks will be pleased to note that various participants stated that their services have improved. On the other hand, corporate clients of large Swiss banks are not particularly satisfied with the level of service received. Three out of four corporate treasurers assess the quality of service to have worsened. Staff and technology For four out of ten participants, corporate treasuries in Switzerland have a size between one and four persons, including support staff. Our survey does not indicate significant changes of staffing levels compared to 1996. However, the number of professionally qualified treasury staff has increased. This may also be due to corporates employing more often sophisticated treasury management systems and therefore requiring a larger number of qualified staff. Only a small number of corporates remunerate their treasury staff based on individual performance. More companies are remunerating their treasury staff on a team performance basis than in the past. Several corporate treasuries have gone through substantial technological change during the last three years. Our survey examined the use of technology and extent of automation among corporate treasuries across the major process areas. More than half of the participants use treasury management packages to manage their core treasury processes such as deal recording, deal confirmation, operational reporting and settlement instructions. The number of treasuries applying in-house developed treasury systems has significantly decreased compared to our 1996 survey. Spreadsheets are still widely used for position recording, performance measurement and certain management reporting tasks. The use of spreadsheets continues to raise concerns from a control perspective. New challenges for treasuries Our survey also looked into new developments and challenges that treasurers may face during the next few years. New products are offered to corporate treasuries every day. New instruments include risk fusion products, credit derivatives, contingent capital solutions, multi-trigger options, weather derivatives and more. Besides the technical understanding of these complex products, the appropriate capturing of such instruments in a treasury management system undoubtedly is a challenge for corporates. Furthermore, survey participants were asked to assess how new trends and products will impact their treasury and risk management during the next five years. High impact is primarily expected from the European corporate bond market, Emerging market risks, Internet trading and the new accounting standards on financial instruments (IAS 39, FAS 133). Corporate treasurers of very large corporates envisage spending more time on interest rate risk and liquidity risk in the future, while other survey participants will increasingly focus on foreign exchange risk, interest rate risk and operational risk. 9

Categorisation Annual turnover Participants (in CHF) Small and medium sized companies <2bn 13 Large corporates 2 bn 12 Very large corporates >bn 15 Total 4

Detailed survey results Our first survey on Corporate Treasury Controls and Performance Standards in Switzerland issued in November 1996 was well received, particularly as it was the first comprehensive corporate treasury study published for Switzerland and as statistical data on corporate treasury activities is very limited. During July to October 1999, PricewaterhouseCoopers carried out a new treasury study. To facilitate comparisons as well as to allow trend analyses, our survey has been structured in the same way as in 1996 but has been enriched with a number of selected questions on new products and developments in treasury management. The key objectives of this survey were to identify: (1) Standards applied by leading corporates to the structure and operation of their treasury functions (2) Standards of control and performance measurement applied by corporates in Switzerland to their treasury activities (3) Trends and challenges for treasurers in future. The survey presents the major findings and conclusions for the following issues: Organisation and policy standards Activities and control standards Measurement and review standards Infrastructure and cost standards New challenges for treasuries 4 companies participated in the new survey, representing a broad range of industries including corporates from all parts of Switzerland. The Treasury & Risk Management Group members of PricewaterhouseCoopers personally interviewed the participants in this survey. This approach has been chosen again, to allow for discussions of individual questions and as such to immediately identify misunderstandings, should any have occurred. About the participants: Participants consist of non-banks and represent a broad range of industry sectors (including insurance). The survey includes corporates from the German, French and Italian parts of Switzerland. Of the 4 participants, 33 are quoted either in Switzerland or on a foreign exchange stock exchange. The market capitalisation of our participants, which are included in the Swiss Market Index ( SMI ) represent more than 7% of the market capitalisation of non-banks included in this index. Information on individual companies will remain confidential and will not be disclosed without prior permission of the company. The participants of our treasury study include small, medium sized, large and very large corporates. The categorisation of the respondent companies by annual turnover is shown in our table on the left side. 11

As in 1996, for certain significant findings of the survey, a distinction was made between very large corporates and other survey participants. Very Large Corporates ( VLCs ) are defined as those companies with an annual turnover greater than CHF billion. Other Survey Participants ( OSPs ) are defined as those companies with an annual turnover equal to or below CHF billion. As a result of this distinction, 15 VLCs and 25 OSPs were identified. This definition has been applied throughout this report. All survey participants will receive a summary benchmark report showing their responses against either other VLCs or OSPs and against the Swiss standard for 1999 and 1996 each. Any company, which did not participate in the survey, but would be interested to obtain a benchmark assessment for comparison with other corporates in Switzerland, should contact their local PricewaterhouseCoopers office listed in the back of this document. The primary purpose of this report is to provide an overview of the principal findings of the survey. The report is structured as follows: Section I Section II Section III Section IV Section V Organisation and policy standards. This section of the report examines the approach by corporates to manage the treasury and financial risks in their organisations, as well as the allocation of responsibility and accountability for treasury. Activities and control standards. This section of the report deals with the activities and control standards of the treasury function. Measurement and review standards. This section of the report examines the performance measurement, management reporting and internal review standards applied by corporates to treasury management practices. Infrastructure and cost standards. This section of the report analyses the staffing and technology standards applied by corporates to support their central treasury functions and identify the cost incurred by organisations for these elements. New challenges for treasuries. This section outlines new developments and some of the challenges that treasurers will face during the next few years, respectively at the edge of the new millennium. 12

Section 1 Organisation and policy standards Introduction This section of the report examines the approach by corporates to manage the treasury and financial risks in their organisations, as well as the allocation of responsibility and accountability for treasury. This section comprises: Treasury organisation and responsibilities Risk management approach Treasury policies 13

Organisational management approach of participants 13% 7% Fully Centralised Fully Decentralised 8% Centralised policy making and decentralised decision making Day-to-day responsibilities of Group Treasury 9 8 7 6 5 4 3 2 % 55% 52% 91% 78% 74% 9% 74% 7% 57% 8% 78% 83% 48% 95% 74% 2% 26% 13% 9% 25% 17% 38% 26% 93% 83% 8% 61% 13% 1999 1996 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 3% 75% 48% 1 Cash Management 2 Long-term funding 3 Investment Management 4 Interest rate Management 5 FX transaction exp. Mgmt 6 FX translation exp. Mgmt 7 FX economic exp. Mgmt 8 Group Bank relationship 9 Op Co Bank relationship Collection & payment cycle Management 11 Commodity risk Mgmt 12 Leasing 13 Corporate Finance 14 Taxation 15 Pension fund Management 16 Insurance 14

Treasury organisation and responsibilities Centralised financial target and policy setting and decentralised decision making continues to be the most common management approach of corporates in Switzerland. This applies to 8% of the survey participants and 13% are fully centralised. Only 7% of the participants have a fully decentralised corporate management culture. The percentage of companies with a centralised management style increased compared to our 1996 survey (13% vs. 4%). The corporate management culture influences the role and responsibilities of the treasury function. In general, fewer tasks are performed at Group Treasury or regional treasury level for companies with a fully decentralised management approach. The organisational structure and the assignment of treasury responsibilities to different levels are also affected by new techniques in risk management and system developments. The trend to manage material financial risks on a group-wide basis by dedicated specialists at the centre prevails. Centralisation of treasury and financial risk management functions is also facilitated by enterprise-wide systems such as SAP and Peoplesoft, allowing easier and more timely access to transaction and exposure data of individual group companies. Nowadays the role of treasury goes well beyond cash and liquidity management. The survey examines the allocation of day-to-day responsibilities for treasury activities to group treasury, regional treasury, country cash manager and operating company level. Our table highlights the most common allocation of responsibilities for different treasury tasks. Main responsibilities assigned to Group Treasuries comprise long-term funding (%), Group bank relationship (95%), Corporate finance (93%), interest rate risk management (9%), FX economic exposure management (83%), FX translation exposure management (8%), taxation (8%), investment management (78%), insurance (75%) and FX transaction exposure management (7%). Working capital management (including debtor collection and creditor payments) as well as local bank relationship management remain largely decentralised. Where applicable, commodity risks often are managed by purchase departments or, like leasing activities, by other finance functions and less frequently by Group Treasuries. In many cases the investment management for pension fund assets is outsourced to specialised banks or is managed on an operating company level. The survey results show that OSPs centralise more tasks at Group Treasury level than very large corporates. This particularly applies to those treasury activities, which require special treasury expertise or substantial technical know-how such as interest rate exposure management (% vs. 73%) or investment management (88% vs. 6%). In addition to critical mass considerations, this situation is explained by VLCs sometimes assigning such treasury tasks to regional treasury centres. Compared to our 1996 survey an increased centralisation of treasury activities has been observed. A significant move towards centralisation has taken place for the following functions: Group bank relationship (95% vs. 74%), interest rate management (9% vs. 74%), FX economic exposure management (83% vs. 48%), tax management (8% vs. 61%), insurance (78% vs. 48%) and FX transaction management (7% vs. 57%). The participants indicated that they expect the centralisation process to continue. 15

Location of responsibilities for treasury activities Centralised at Group Treasury Long-term funding Investment management Interest rate exposure FX translation exposure FX transaction exposure FX economic exposure Bank relations Group Corporate Finance Taxation Insurance Partially centralised / partially decentralised and other finance functions Cash management and short-term funding Leasing Responsibilities with operating companies and other finance functions Bank relations Operating Companies Working capital management Commodity risk Pension funds Role of treasury 7% 7% 73% 13% Service Centre Profit Centre Cost Centre Not formally defined 16

Half of the companies interviewed still perform their cash management activities and short-term funding primarily on a decentralised basis. However, when cash concentration and netting techniques or Shared Service Center structures are introduced then specific tasks performed on all levels are affected. Across all companies surveyed, 5% plan to implement or have already implemented a pan-european Euro cash pool within the next two years. For another 3% of the participants Euro cash pooling is under evaluation. Therefore it is to be expected that also banking and cash management activities will more frequently be co-ordinated through Group Treasuries in the future. Most corporate treasuries in Switzerland continue to operate as service centres (i.e. the primary objective is to support the operating business and not the generation of a profit contribution). 13% of the companies surveyed run their treasuries as profit centres. Three participants each stated that their treasury acts as a cost centre or that the approach is not formally defined. The latter is somewhat surprising and, neither undefined, nor cost centre approaches were observed in our first survey. Therefore, the percentage of service centres decreased from 87% to 73% compared to 1996. Amongst service centre treasury functions, few operate within any formally defined measurement criteria. Most of these functions do not use formalised Service Level Agreements ( SLA ) with their operating businesses, which would help evaluate the quality contributions to the overall business. Across all companies, 55% indicated that they recharge costs to the operating companies. This applies to two of the three cost centres (5%), a portion of the service centres (44%) as well as for one profit centre and one treasury function, for which the approach is not formally defined (3% each). The establishment of a treasury committee or risk committee is becoming best practise in Switzerland. Already 53% of the survey participants have set up such organisational body. Even two thirds of the very large corporates have established a treasury or risk committee. The main purpose of such a committee is to discuss treasury strategies, review treasury activities, monitor compliance by Group Treasury with policies, procedures and risk limits and to propose amendments to policies for approval by the BOD. 17

Risk management approach Fully hedge Actively manage risks Do not hedge = none Take positions 1999 Fully hedge Actively managing risks Do not hedge = none Take positions 1996 12% 3% 85% 4% 4% 92% Dedicated Risk Officer 5 All participants 4 4% Very large corporates 3 2 23% 12% Other survey participants Existence of risk officer position 18

Risk management approach The majority of the participating companies, i.e. 85%, continue to apply an active risk management approach. 3% indicated that they take positions unrelated to their underlying business risk and another 12% pursue an approach of fully hedging their treasury risks. There was no Swiss corporate identified that would not hedge any exposure. An active risk management approach should not necessarily be seen as the execution of a high volume of derivative transactions. Main challenges for corporates primarily consist of the timely identification of risks, prompt information flows within the group and the proper aggregation of risk exposures. There is nothing such as the one and only approach to risk management. Different goals are pursued and strategies differ due to risk being perceived as: a hazard (i.e. the risk of bad things happening), an uncertainty of outcomes (e.g. not meeting expectations) or an opportunity. As a consequence of their views companies will either focus on avoiding the downside, managing volatility/variances or exploiting the upside. Furthermore, consideration is given to a company s core competencies when actively managing, hedging or transferring risk. 1 Risk management strategies and approaches pursued by corporate treasuries in Switzerland also vary due to factors other than different objectives. Discussions with the treasurers interviewed showed that other key factors comprise: company size, capital and credit standing (e.g. risk absorption capacity) a company s risk appetite, being the maximal tolerable loss length of product development cycles and planning horizons industry particularities, like price adjustment mechanisms and earnings volatility technical know-how and systems capabilities. Also new risk management approaches have evolved, which do not address individual risk types in an unconnected manner. 23% of all the participating companies, respectively 4% for VLCs, stated that they have a dedicated risk officer position, e.g. Chief Risk Officer, in their company. The new trend to integrated risk management by jointly managing financial, operational, insurance and other risks by a fully dedicated risk specialist was first observed at financial institutions and large corporates in Anglo-Saxon countries. Given the need for a comprehensive understanding of a group s business, technical risk management skills and pro-active monitoring of new developments and trends, the background of treasury professionals would be an asset for dedicated risk management units. This may provide additional opportunities for treasurers in the future. 19

Companies with a formal policy for treasury activities 9 8 7 6 5 4 3 2 75% 65% Debt Mgmt 78% 7% Investment Mgmt 55% 61% IR Mgmt 88% 83% 73% FX transaction 61% FX translation 1999 1996 25% 39% FX economic Responsibilities for treasury objectives and policies: Development 9 8 7 6 5 4 3 2 % Board 73% Group CFO 3% Treas/Fin Committee 85% Group Treasurer 3% 3% % % CCM Div Fin Director OpCo Audit FD Committee Responsibilities for treasury objectives and policies: Review & approval 9 8 7 6 5 4 3 2 78% Board 65% Group CFO 15% 13% Treas/Fin Committee Group Treasurer % % CCM Div Fin Director 3% 3% OpCo Audit FD Committee Responsibilities for treasury objectives and policies: Monitor compliance 9 8 7 6 5 4 3 2 % Board 55% Group CFO 38% Treas/Fin Committee 83% Group Treasurer 8% CCM 15% Div Fin Director 35% 23% OpCo Audit FD Committee Responsibilities for treasury objectives and policies: Reporting compliance 9 8 7 6 5 4 3 2 5% Board 23% Group CFO Treas/Fin Committee 68% 23% 13% 13% 13% 5% Group Treasurer CCM Div Fin Director OpCo Audit FD Committee 2

Treasury policies The coverage of treasury activities by formal policies has increased in Switzerland compared to 1996. However, it should be noted that content and level of detail of policies vary a lot in practice. There are still significant gaps to a comprehensive treasury and financial risk management at various treasuries in Switzerland, particularly as effective control parameters and performance measurements are still missing at many companies. The latter indicates that the effectiveness of the treasury framework, where established and implemented, may sometimes be limited. This corporate treasury framework comprises treasury objectives (e.g. a mission statement), treasury policies and treasury procedures. Treasury policies are a key instrument for the definition of objectives, tasks, authorities and responsibilities for treasury activities. Furthermore, treasury policies often address the treasury organisation, core treasury functions, the risk management approach to be pursued, key treasury controls, performance measurements and reporting to Management. The majority of companies have formal policies in place for debt management, investment management, interest rate exposure, FX transaction exposure and FX translation exposure. Only one out of four participants has established policies for FX economic risk, which focus on long-term and competitive exposures. The use of policies for interest exposure management by only 55% of the participants is surprisingly low for this core treasury function. With regard to company size, VLCs more frequently apply formal treasury policies than OSPs. Investment management policies are applied by 87% of VLCs compared to 72% of OSPs. This might also be due to large corporates frequently managing sizeable liquid funds. The majority of the companies in Switzerland assign the responsibility for developing treasury objectives and policies primarily to the CFO or the Group Treasurer. Group Treasurers have more often been involved in the development of treasury policies compared to the results of our first survey. The treasury objectives and policies are reviewed and approved by the BOD or the CFO for most participants. However, given the significance of financial risks and importance of treasury strategies for many corporates, it is surprising that 22% of the companies interviewed still do not require an approval of treasury policies by the BOD. Responsibility for monitoring policy compliance and reporting treasury compliance (e.g. also for subsidiaries) has shifted to some extent from local finance directors to the Group CFO and Group Treasurer, which may be a result of increased centralisation of treasury tasks in many groups. The role of Audit Committees is limited, as many companies in Switzerland have not yet established such an organisational body. An annual review of treasury policies is less frequently applied than in the past (35% vs. 57%), which may also reflect pressures experienced by many Group Treasurers. Companies predominantly review policies on an ad-hoc basis (73%) or when significant events arise (e.g. mergers and acquisitions). However, a periodic review (e.g. at least a review on a bi-annual basis) is important due to the fast changing nature of business, new technical developments and additional tasks having to be assigned. 21

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Section 2 Activities and control standards Introduction This section of the report deals with the activities and control standards of the treasury function in Swiss corporates. The survey looks at the different types of financial instruments used by the surveyed participants within each risk management program and the methods used to identify and control risks for major risk types. This section is divided into the following chapters: Interest rate exposure management Foreign exchange exposure management Transaction exposure Translation exposure Economic exposure Debt management Investment management 23

Interest rate risk monitoring and management 8% 11% 5% Not monitored For special events Transaction basis 54% 22% Portfolio basis Net overall approach Interest rate exposure management approach 13% 8% Fully hedge = none Partially hedge Take positions 79% Do not hedge Instruments used to manage interest rate exposures 9 8 7 6 5 4 3 2 7% 61% 52% 43% 45% 43% 4%35% 43% 35% 33 28% 33% 26% 26% 18% 2% 17 Plain vanilla IRS FRA Caps Floors Collars Options Swaptions Derivative based swaps 1999 1996 IR Futures Control parameters applied to interest rate management activities 6 5 4 3 2 45% Authorised Instruments 48% 38% 38% 3% Counterparty limits IR sensitivityprofit % fixed/ floating Aggregate portfolio limits 15% 13% % Dealing limits Instrument exposure limits Stop-loss limits 8% Delegated authorities 24

Interest rate exposure management Interest rate risk is neither monitored, nor managed by only 8% of the responding companies, whereas another 11% manage the risk occasionally for special events (e.g. acquisition of a new subsidiary). Only 5% of the companies focus on interest rate risk on a transaction by transaction basis. The majority of respondents, i.e. 54%, state that they manage interest rate risk on a net overall basis. The remaining 22% primarily manage interest rate exposures on a portfolio basis, e.g. for a debt or a securities portfolio. This indicates that interest rate risk is predominantly managed on an aggregated level. However in practise, a clear definition of a risk-free position or target risk profile (including a specific benchmark), as a prerequisite for an effective risk management, is often missing. It is also evidenced by 45% of the survey participants not having formal policy for interest rate risk management. 79% of all participating companies partially hedge their interest rate exposure. 8% of the surveyed corporates take positions unrelated to their underlying business exposure and 13% do not hedge at all. In terms of companies not hedging interest rate exposure (13% vs. 29% in 1996), a distinction must be made between those which consciously choose not to do so and those, which do not possess sufficient technical know-how to pro-actively manage interest rate exposures. Discussions with treasurers showed that unlike to banks, corporates frequently focus on cash flow and net interest income implications when managing interest risks, and not primarily on market value movements. A wide range of derivative instruments is applied to manage interest risk. The most commonly used interest rate hedging instruments among Swiss corporates are plain vanilla interest rate swaps (7%), caps (45%), floors (4%) and forward rate agreements (FRAs, 43%). Compared to our 1996 results, interest rate swaps are employed by more participants (7% vs. 61%) and fewer participants make use of FRAs (43% vs. 52%). In addition to gaps in respect of formal policies also effective controls for interest rate exposure are still limited and performance measurements are missing at most corporates. For example, sensitivity analyses of interest rate volatility on profit and aggregate portfolio limits are in place for 48% only, and 3% respectively of the participating companies. It should be taken into account that interest rate risk management is a technically demanding area and controls need tailoring to support defined objectives and to reflect particularities of individual companies. A number of treasurers stated that they are in the process of developing a formal framework for an interest rate risk management. 25

Foreign exchange exposure management approach: Transaction Foreign exchange exposure management approach: Translation 5% % Fully hedge Partially hedge 38% Fully hedge = none Partially hedge Take positions Do not hedge 85% Do not hedge = none 62% Foreign exchange exposure management approach: Economic 84% 16% Fully hedge = none Partially hedge Take positions = none Do not hedge Annual value of external FX transactions 8 7 6 5 4 3 2 58% 76% 27% 25% 27% 24% All participants Very large corporates Other survey participants 17% 46% % CHF 2bn CHF 2 bn more than CHF bn Impact of the introduction of the Euro: Overall risk profile % 8% Time spent to manage FX risk following to the introduction of the Euro: 3% 25% 2% Increased Unchanged Decreased <25% Decreased >25% Increased = none Unchanged Decreased <25% Decreased >25% 62% 72% Transaction and hedging costs related to FX risk following to the introduction of the Euro: 8% 3% Increased = none Unchanged Decreased <25% Decreased >25% 62% 26

Foreign exchange exposure management Our survey examines approaches pursued by corporate treasuries in Switzerland for FX transaction, FX translation and FX economic exposure management. FX transaction exposures arise out of the operating business from actual conversion or exchange of one currency for another, resulting in cash gains or losses, which directly impacts profit and loss. FX translation exposures relate to investments in subsidiaries with a different functional currency than the Group s base currency. Translation differences do not result in actual cash flows. FX economic exposure management deals with the potential of suffering a gain or loss through fluctuations in market prices due to changes in business and economic circumstances within a country of operation in the longer term. Among all surveyed corporates, 85% stated that they partially hedge their foreign exchange transaction exposure. 5% of the participants take positions, which are unrelated to underlying exposures and % fully hedge their foreign exchange transaction exposure. FX translation and FX economic exposures are addressed differently. 62% of the participating corporates do not hedge their FX translation exposure and 84% do not hedge their FX economic exposure. Comments received showed that corporates in Switzerland, both VLCs and OSPs, focus their FX risk management on transaction exposure. For the 95% of corporates, which either fully or partially hedge their FX transaction exposure, it should be noted that individual hedging strategies vary substantially, e.g. with regard to period covered or hedge ratios. The percentage of participants taking positions unrelated to the operating business further decreased to 5% (vs. 13% in 1996). This also demonstrates that the vast majority of corporates does not want to build up additional risk positions (tying up economic risk capital) and that active FX dealing, with the aim to generate a profit contribution, is increasingly not part of the mission of the treasury function. A decrease of the annual external FX transaction volume is observed for treasuries in Switzerland. In 1996, 86% of the VLCs reported a transaction volume of more than CHF 2 billion per annum. This number decreased to 73%. The corresponding figures also decreased for OSPs (76% vs. 6%), indicating lower transaction volumes as well. The decrease in transaction volume is not surprising. Given increased centralisation of treasury activities and improved group-wide information flows, Group Treasuries can more easily reduce foreign exchange volumes transacted with external counterparties by netting the group s foreign exchange flows (which also helps to reduce credit/counterparty exposures). Another key reason is the introduction of the Euro, reducing or eliminating exposures in participating EMU currencies on different levels (Group and subsidiary). Three of four survey participants stated that the introduction of the Euro helped to reduce their group s FX exposure. 63% of the companies assess the overall risk profile having reduced up to 25% and % of the participants (3 VLCs and 1 OSP) estimate the reduction to even exceed this range. The time spent on managing FX risk reduced for 76% of the participants, but only one OSP expects to save more than 25%. The results with regard to transaction and hedging costs are similar: 71 % experience cost reductions, including those 7% (2 VLCs and 1 OSP), which expect the effect to exceed 25%. 27

Instruments used to manage FX transaction exposure 9 8 7 6 5 4 3 2 % % 91% 88% 87% 78% 74% 55% 7% FX spots FX forward FX swaps CY options CY CY futures borrowings 5% 1999 1996 17% Control parameters applied to FX transaction exposure management activities 9 8 7 6 5 4 3 2 9% Agreed basis 55% 6% Exposure limits Min/ Max % hedge 25% Dealing limits 65% Authorised Instruments 4% 35% 38% Sens - base Stop loss Sens - reporting CY 18% Deleg authorities 28

Foreign exchange transaction exposure management The most commonly used instruments to hedge FX transaction exposure are FX spot contracts and FX forward contracts (both used by all participants), FX swaps (88%) and currency options (78%). Borrowings in foreign currency (55% vs. 7%) and currency futures (5% vs. 17%) are less frequently used than in 1996. Currency futures are still not popular with corporate treasuries due to administrative efforts related to the maintenance and handling of margin accounts. A clear and unambiguous definition of transaction exposure is a cornerstone for an effective FX exposure management. Technical exposure definitions for example should outline how tender offers or other contingent flows are to be treated and how individual instruments are to be aggregated (e.g. use of underlying or delta values for currency options). Nine out of ten participants state that they have an agreed basis for identifying the transaction exposure. The use of other control parameters has increased to some extent compared to our last survey. The most frequently applied control parameters to manage FX transaction exposure include authorised instruments 65% (vs. 43% in 1996) and a minimum/maximum percentage of exposure to be hedged 6% (vs. 48%). Other control tools, which may be more effective from a risk management point of view, such as exposure limits (55%) and sensitivity analysis of exchange rate volatility on base currency value (4%) are not as wide-spread. Stop loss limits are used by 35% of participants (unchanged) and dealing limits are less frequently used (25% vs. 48%), which may relate to FX dealing activities being pursued by few corporates only. 29

Instruments used to manage FX translation exposure 45 4 35 3 25 2 15 5 23% 39% 23% 39% 3% 26% 13% 13% 15% 26% 26% 35% 13% 13% 1999 1996 4% % CY FX forwards FX spots Cross None CY borrowings currency futures CY options FX swaps swaps Control parameters applied to FX translation exposure management activities 23% 18% 15% Sens - net assets 6 5% 5 4 3 2 Agreed basis for Identification Sensprofit Authorised Instruments 8% % 5% 3% 5% % Min/Max % hedge Delegated authorities Sens of fx rate vol on cons gear Stop-loss limits Exposure limits Dealing limits 3

Foreign exchange translation exposure management Our survey shows that most companies in Switzerland are not hedging their translation exposure. 38% of the surveyed corporates partially hedge their foreign exchange translation exposure. Very large corporates more often hedge this exposure than other survey participants. Translation exposures do not lead to immediate cash flows. Translation exposure arises when profits and losses, assets and liabilities are denominated in a foreign currency but are expressed in terms of a base currency for financial reporting without an actual conversion taking place. The revaluation differences resulting from the translation of net assets and net income of subsidiaries into a group s functional currency are included in translation adjustments, a component of consolidated equity. With regard to instruments for translation management, currency borrowings and FX forward contracts are primarily used. These instruments are applied by 23% of the survey participants, respectively by 61% of the companies, which partially hedge translation exposures. Several treasurers pointed out that they are more concerned about effects of currency fluctuations on transaction risk than on translation risks. Therefore translation exposures are less actively monitored and controlled and less frequently reported to senior management than transaction exposures. Translation risk, however, is not always well understood by Management members in all respects. Disregarding translation exposures as accounting exposures and focusing solely on cash flows or transaction exposures could be dangerous. For example, adverse translation movements may result in a significant decrease of total consolidated equity and in turn, a higher debt/ equity ratio could trigger convenants included in financing agreements (with severe implications on liquidity). 5 % of the participants identify translation exposures (vs. 35% in 1996). Other control parameters include sensitivity of FX rate volatility on consolidated net assets (23%) and sensitivity of FX rate volatility on consolidated profits (18%). It is surprising that only few companies make use of sensitivity analyses to assess and control effects of exchange rate fluctuations on profits or consolidated equity, despite Value at Risk or similar tools being more frequently available (e.g. integrated functionality in various treasury management systems). 31

Instruments used to manage FX economic exposure 35 3 25 2 15 5 25% 26% 26% Local currency invoicing 3% Match currencies % 22% 22% FX forwards 8% Incorporate margins 5% 13% % CY options 4% 1999 1996 % % Currency Futures = borrowings none Control parameters applied to FX economic exposure management activities 12 8 6 4 2 % Agreed basis for Identification 5% Exposure limits 5% 8% 3% 5% % % Stop Authorised Sens cons Sens Min/ Delegated loss limits Instruments profit base CY value max% hedge authorities 32

Foreign exchange economic exposure management FX economic exposure, also known as strategic or competitive exposure, relates to a range of factors. They comprise the geographical location in which a company operates, the location of its competitors, the hedging strategies of its competitors and differences in exchange rate movements between competing currencies in the longer term. Examples of measures of economic exposure management include sourcing of raw materials in foreign currency or the relocation of manufacturing plants to other countries. As the latter will have wide-ranging implications, senior management will often be involved in the decision making. More than 8% of corporates in Switzerland do not hedge FX economic risk or undertake a formal assessment of the sensitivity of this risk on key financial targets. This is despite only 13% of the participants stating that the economic exposure would be insignificant to them. Reasons for not managing are attributed to economic exposures being: not quantifiable (38%) and/or not manageable (13%) and/or not identifiable (%). Companies in Switzerland managing FX economic exposure risk tend to use natural hedging techniques. Matching the currency of payments and receipts (3%) and local currency invoicing (25%) are the most frequent techniques applied. Less than 15% of the participating corporates actively hedge their FX economic exposure with derivative instruments. As pointed out by the treasurer of a leading telecommunication firm, big tickets would have to be written to effectively manage economic exposures and senior management may not be inclined to approve such large hedging transactions. Furthermore, effects of derivative transactions on liquidity and obstacles in applying hedge accounting are of relevance, too. Control parameters are infrequently applied by corporates. % of the survey participants state that they have an agreed basis to identify/hedge economic exposures. Other control parameters are hardly used. 33

Instruments used to manage debt 9 8 85 83 8 74 7 6 5 4 3 2 % 1999 1996 7 Bank overdraft Bank uncommitted 57 Bank committed 53 57 4 Bonds/ Debentures 52 Discounted trade bills 35 28 Convertible loan/bonds 3 3 23 Commercial papers Private placements 18 17 15 22 Medium-term Notes Other Control parameters applied to debt management activity 7 6 5 4 3 2 58% 63% 6% 43% 3% 25% 23% Core number of funding banks Target mat profile Structured debt/ equity evaluation Authorised instruments Min credit rating of funding banks Min % committed facilities Other (mainly securities) 34

Debt management The most frequently used instrument for debt management is the bank overdraft, which is applied by 85% of Swiss corporates. Other instruments applied by the majority of the surveyed participants are bank uncommitted facilities (8%) and bank committed facilities (7%). Other debt instruments are bonds (53%) and discounted trade bills (4%). Both VLCs and OSPs use these instruments. In addition, several VLCs surveyed also make use of commercial papers and private placements due to their access to international capital markets. Target maturity profile (63%), a structured debt/equity evaluation (6%) and core number of funding banks (58%) continue to be the most frequently applied control parameters. The awareness that control parameters are needed for an effective debt management has increased over the past 3 years. For example, more participants (6% vs. 48% in 1996) use structured debt/equity evaluation. Shareholder value concepts and increased pressure by shareholders may have led to both VLCs and OSPs focusing more on balance sheet structure and return on equity. 35

Instruments used to manage investments 9 8 7 6 5 4 3 2 Money market time deposits 88% 91% 9% 87% Bank deposits 45% 61% 43% 33% 22% 13% Government Repurchase securities Commercial agreements papers 1999 1996 55% 43% Other Control parameters applied to investment management activity 8 75% 7 6 5 4 3 2 Min counterparty credit rating 6% Max counterparty exposure limit 73% Authorised instruments 58% Maturity profile 25% Dealer limits 3% 3% Delegated authorities Other 36

Investment management Both VLCs and OSPs stated that their most frequently used instruments to invest surplus funds continue to be bank deposits 9% and money market placements 88%. Compared with 1996, government securities (45% vs. 61%), commercial papers (33% vs. 43%) and repurchase/resale agreements (13% vs. 22%) are less often applied. On the other hand, the percentage of other investments increased to 55% (vs. 43%). This primarily relates to corporate bonds, shares and other equities products held by corporate treasuries with portfolio management activities. 3 out of 4 participants surveyed apply minimum counterparty credit ratings (75%) and authorised instruments (73%) as their main control parameters for investment management. Other instruments include maximum counterparty exposure limits (6%) and maturity profile (58%) and duration analyses for bond portfolios (included under other ). Some corporates with substantial investment management activities make use of Strategic Asset Allocations ( SAA ) and Tactical Asset Allocations ( TAA ). Furthermore, some of these participants have defined overall portfolio limits (e.g. total Value at Risk) or even limits for defined worst case scenarios. Various companies do not restrict the use of risk strategies (e.g. no uncovered short sales) or do not explicitly define authorised instruments in the policies. The latter is deemed particularly important for structured and exotic products (e.g. with special activating features or triggers) in view of implications on the monitoring (e.g. sudden jumps in volatility) and handling of such instruments. 37

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Section 3 Measurement and review standards Introduction This section of the report examines the measurement, management reporting and internal review standards applied by corporates to treasury management practices. This section describes: Performance measurement Management reporting Operational controls 39

Is performance measurement important? 13% 52% 35% Yes High Yes Yes Low No = None Principal reasons for applying performance measurement 7 6 5 4 3 2 58% 65% 45% 45% 23% 15% 23% 3% Assess effectiveness Demonstrate financial contribution Demonstrate efficiency Motivate staff Evaluate individual performance Evaluate bank/deal quality Provide incentives to dealer Other Treasury activity to which performance measurement is applied 9 8 7 6 5 4 3 2 6% 88% FX exposure management 33% 76% Interest rate exposure management 38% 65% Short-term liquidity management 3% 1999 1996 53% Long-term debt/investments Specific benchmark used by treasuries 45 4% 4 38% 35 3% 3 25% 25 2% 2 18% 15 13% 13% % % 5 Net funding costs Return on investment Transac volumes/ period analyses Net hedging cost Cash mgmt costs Counterparty bid perf analysis Internal rate of return Other Average spot rates Forward rates Planned rates Assessment of large Swiss banks 9 8 7 6 5 4 3 2 18% 13% 2% 75% 8% 72% All participants VLC OSP 7% 3% 4% 3% 4% % Improved Unchanged Worsened Not applicable Assessment of cantonal banks 5 45 4 35 3 25 2 15 5 33% 3% 28% 25% 13% 32% All participants VLC OSP 7% 5% 4% 4% 47% 36% Improved Unchanged Worsened Not applicable 4

Performance measurement Performance measurements and the definition of specific benchmarks are a cornerstone for board members, senior management and the CFO to assess whether treasury units are working effectively and add value to the company. While 87% of the participants stated that they felt performance measures are either highly important (35%) or important (52%), only 73% of the companies surveyed indicated that they apply performance measures to (certain) treasury activities. The main reasons why corporates apply performance measurements are to: demonstrate financial contribution of the treasury (65%) assess effectiveness of treasury strategy (58%) demonstrate efficiency (45%) motivate staff (45%). There is a correlation between the turnover of a company and the application of performance measurement. Larger companies more often use performance measures and benchmarks. Only 2 % of VLCs as opposed to 32% of OSPs do not apply any performance measurement. The majority of respondents who do not apply performance measurements cite difficulties in setting appropriate and relevant benchmarks as well as system limitations. One participant only mentions cost as reason not to use performance measurement. The majority of the corporates participating measure performance for FX exposure management (6%). Performance measurement for other core activities like short-term liquidity performance (38%), interest rate exposure management (33%) and long term debt/investments (3%) are applied by fewer participants. This represents a significant decrease from our 1996 results and is surprising in view of the importance attributed to performance measurements. Likewise the use of specific indicators, apart from profit or loss, to measure the treasury results dropped compared to1996. Return on investments (4% vs. 59% in 1996) and net funding costs (38% vs. 71%) are the two benchmarks most frequently applied. With the exception of forward rates (3% vs. 24%), the use of all other benchmarks has decreased to levels of 2% or below. Counterparty bid performance analyses are used by only % of the participants. Although most corporate treasuries do not evaluate banking services in a statistical manner, there are clear views on the quality of services provided by different type of banks. Survey participants assessed the quality of services provided by their banking partners compared to three years ago. Management of foreign banks and cantonal banks will be pleased to note that 43% respectively 3% of the participants stated the their services having improved. Following major merger and various restructuring activities, however, corporate clients of large Swiss banks are not particularly satisfied with the quality of service received. 75% of the corporate treasurers assess the quality of service to be worse than in 1996 and one company is considering switching bank relationship. With regard to other Swiss banks, two thirds of corporate treasuries do not bank with these institutions. 41

Assessment of foreign banks 6 5 4 3 2 43% 27% 52% 45% 53% 4% All participants VLC OSP 13% 8% 4% 5% 7% 4% Improved Unchanged Worsened Not applicable Assessment of other Swiss banks 8 7 6 5 4 3 2 3% 33% 28% All participants VLC OSP 68% 68% 67% 3% 4% % % % % Improved Unchanged Worsened Not applicable Level at which performance measurement is applied 8 7 6 5 4 3 2 7% 25% % 15% 2% 15% 5% Group treasury Regional treasury Transaction Department Activity Dealer Other Frequency of review of treasury performance 6 5 4 3 2 18% 13% 55% 4% 15% Daily Weekly Monthly Annually Other Treasury performance reported to: 7 6 5 4 3 2 63% 43% 33% Senior Management Board of Directors Treasury/ Fin Committee Other = none Audit Committee = none Responsibility for the review of treasury benchmarks 6 5 4 3 2 5% 3% 18% % 5% Senior Management Treasury/ Fin Committee Board of Directors Audit Committee = none Other 42

There are still only very few corporates which apply risk-adjusted performance measurements. The corporates in Switzerland which apply performance measurement for treasury activities use the following benchmarks, listed in decreasing order: relative percentage targets (e.g. Morgan Stanley Composite Index World Equities) policy rates (e.g. budget rates) absolute targets risk-adjusted absolute targets Performance measurement is particularly applied at group treasury level (7%). Compared with the 1996 survey, the number of companies applying performance measurement on a regional- and/or department level or on a transaction basis have decreased. Corporates treasury performance is primarily reviewed on a monthly (55%) or annual (4%) basis. It was noted that the number of corporates reporting performance measurement to senior management has dropped during the past three years (63% vs. 88% in 1996). Similarly, a decrease is observed for reviewing treasury benchmarks by senior management (5% vs. 71%). It appears that senior management has not given high priority to performance measurement and the assessment whether the treasury function is adding value to the company lately. However, this situation should also be seen in context of various recent mergers/restructurings and the lack of comparative data for many companies. 43

Reporting by group treasurer to senior management: CFO 9 8 7 6 5 4 3 2 88% 85% 45% 7% 25% 55% 58% 18% 7% 18% Liquidity position Liquidity performance IR exp position IR exp performance FX transaction exp position FX transaction exp performance FX translation exp position FX translation exp performance Bank relations positions Bank relations performance Reporting by group treasurer to senior management: T/F committee 35 3 25 2 15 5 3% 25% 23% 8% 28% 23% 2% % 18% 5% Liquidity position Liquidity performance IR exp position IR exp performance FX transaction exp position FX transaction exp performance FX translation exp position FX translation exp performance Bank relations positions Bank relations performance Reporting by group treasurer to senior management: Board 5 45 4 35 3 25 2 15 5 45% 2% 2% 2% 18% 15% 13% % 8% 5% Liquidity position Liquidity performance IR exp position IR exp performance FX transaction exp position FX transaction exp performance FX translation exp position FX translation exp performance Bank relations positions Bank relations performance 44

Management reporting The majority of the participants report treasury activities to the CFO and about 3% of the companies report treasury activities to a treasury committee. In Switzerland most Group Treasurers report liquidity, interest rate exposure, FX transaction and translation exposure positions as well as bank relationships to the CFO and/or to a treasury or finance committee. Significantly fewer companies report performance measurements for those activities. Surprisingly, the reporting to the Board of Director is in place for very few companies only (except for the liquidity position reporting by 45% of the participants, which will hardly allow them to assess the treasury activities). In this context, consideration should be given to non-transferable and inalienable duties of Swiss Board of director members. In this respect, the Swiss Code of Obligations, article 716a, particularly mentions the structuring of necessary financial controls and stipulates that adequate reporting is to be provided to the board members. With regard to reporting frequency of treasury performance, reporting to senior management is mainly performed on a monthly (55%) and/or on an annual (4%) basis. 45

Operational controls of Group Treasury 9 8 7 6 5 4 3 2 88% 65% 58% 43% 55% 61% 1999 1996 Objectives & policies Procedure manual Internal audit review 46

Operational controls The survey examined the extent to which key operational controls were applied by corporate treasuries. 88% of the participants stated that they use formal treasury objectives and policy manual. This represents a significant increase of 23% over the 65% in 1996. However, content and level of detail of policies vary frequently in practise. Treasury procedures describe individual treasury tasks and responsibilities in more detail or outline individual steps to be followed (e.g. for a groupinternal netting process). Treasury procedural manuals are established and available for 58% of all survey participants compared to 43% in 1996. The increase demonstrates that many companies have recognised the importance of clearly defining key processes and controls on treasury activities (e.g. performance of counterparty confirmation control by an independent unit). However, over 4% of all companies have not yet established treasury procedures. A regular review of treasury activities is undertaken by internal audits of 55% of the surveyed participants (compared to 61% in 1996). While not all participants have an internal audit unit, some companies internal audits hardly address the treasury function, despite the materiality of treasury and financial risks. This may be due to treasury and derivatives transactions not representing the core activities of an industrial company and internal audit often not being very familiar with such activities. For the 45% of firms with a lack of treasury activities review by internal audit, the BOD and Management should carefully assess whether they are prepared to accept this situation. Several companies have started to establish a partnership on internal audit (e.g. including external specialists into the audit team) or to outsource part or all of the internal audit function. 47

48

Section 4 Infrastructure and cost standards Introduction Cost effectiveness of treasury operations is a major issue for corporates. An efficient blend of the proper staff size, quality of employees and use of technology must be reached to ensure that corporate treasury has sufficient resources to manage the treasury function effectively while operating within a reasonable cost structure. This section of the report analyses the staffing and technology standards applied by corporates to support their Group treasury functions and identify the cost incurred by organisations for these elements. This section provides survey results as follows: Staffing levels and treasury personnel costs Treasury technology and costs 49

Staffing levels: Total staff Staffing levels: Number of qualified staff 23% 13% 3% None 1 to 4 23% 8% 8% 3% None 1 to 4 5 to 5 to 38% 11 to 2 21 or more 6% 11 to 2 21 or more 25% Staffing levels: Staff paid on individual performance 15% 5% 75% 3% 2% None 1 to 4 5 to 11 to 2 21 or more Staffing levels: Staff paid on team performance 23% 13% 8% 3% 53% None 1 to 4 5 to 11 to 2 21 or more Treasury employment costs 25% 25% CHF to 5K CHF 5K to 1m 5% CHF 1m to 2m 15% 3% more than CHF 2m No response 5

Staffing levels and treasury personnel costs Among all companies surveyed in Switzerland, 41% of the surveyed companies work with treasury teams of four persons or less, including support staff. Lean management and treasury structures are sought by many corporates in order to keep personnel costs low. A concern exists, however, for those corporates with low staffing levels, since the segregation of duties for treasury activities may be compromised. It should be noted that it is very difficult to determine appropriate staffing levels due to the differing size of companies and the types of treasury activities and functions performed. The survey indicates that there is a correlation between the company size and the number of treasury staff. Companies with annual gross sales of more than CHF billion maintain larger treasury departments, for instance 33% of VLCs employ over 2 staff while the majority of OSPs employ up to 4 treasury staff. Our survey does not indicate significant changes of the staffing levels in Switzerland compared to 1996. However, the number of professionally qualified treasury people has increased. Only 3% of the participants stated they did not have any qualified treasury staff compared to 17% in 1996. This may also be due to corporates employing more often sophisticated treasury management systems and therefore requiring a larger number of qualified staff. Only a small number of corporates remunerate their treasury staff based on individual performance (23% vs. 22% in 1996). On the other hand, more companies are remunerating their treasury staff on a team performance basis than in the past (44% vs. 3%). Corporates in Switzerland prioritise team performance to individual performance. As the percentage of companies running a profit centre remained unchanged at 13%, the survey indicates that more treasury departments acting as service centers remunerate some treasury staff on a performance basis than in 1996. 45% of the participants have annual employment costs of up to CHF 1 million. Comparing with the 1996 survey no significant change in corporates treasury personnel costs has been identified. 51

Technology used for core processes 7 % 6 5 4 3 2 6 6 5 3 Deal Recording 5 13 43 Position Recording 28 53 Deal confirmation 13 25 Accounting 55 33 Settlement instr. 58 55 Reports 43 8 8 53 Perf monitoring Package In-house Spread sheet Intended changes in technology base within the next 3 years 7 6 5 4 3 2 TMS Management reporting Decision Support/ analytics Automated dealing/ confirmation systems Reasons for use of technology 9% 9 8 7 6 5 4 3 2 Efficiency 38% Cost reduction 75% Improved risk analysis/mgmt 8% Improved controls 58% 3% Improved communications Re-engineering of processes % Other Technology costs: Treasury Management System 32% 13% 3% 5% 2% CHF CHF1 to K CHF to 2K CHF2 to 5K >CHF5K Technology costs: Decision support 4 38% 35% 35 3 25 2 15 5 CHF CHF 1 to K 2% CHF to 2K 5% CHF 2 to 5K 3% >CHF 5K Technology costs: Market information Technology costs: Other systems 25% 8% % 44% 13% CHF CHF1 to K CHF to 2K CHF2 to 5K >CHF5K 45% 47% 5% 3% CHF CHF1 to K CHF to 2K CHF2 to 5K = none >CHF5K 52

Treasury technology and costs The survey analysed the use of technology and extent of automation among corporate treasuries across the major process areas. Nowadays, more than half of the participants use treasury management packages to manage their core treasury processes such as deal recording (6%), deal confirmation (6%), operational reporting (58%) and settlement instructions (55%). It is also apparent that the number of treasuries applying in-house developed rather than package treasury systems has significantly decreased compared to our 1996 survey. Spreadsheets are still widely used for position recording, performance measurement and certain management reporting tasks as they provide flexibility of ad-hoc reporting at a low initial cost. About two third of OSPs use spreadsheets for performance measurement and reporting to management. The use of spreadsheets continues to raise concern from a control perspective. Questions may result from the integrity of data and as the related application are not integrated with other systems and may be subject to operational risk (e.g. data or formulas could be overwritten unintentionally). Several corporate treasuries have gone through a substantial technological change during the last three years. Therefore it is not surprising that fewer participants than in 1996 stated that they expect major investments to take place for technology within the next three years. Nevertheless, 6% plan to enhance their treasury management system. Various participants foresee investments in certain additional risk management tools. Main reasons for corporates using treasury management packages are the increase in efficiency (9%), improved control (8%) and improved risk analysis/management (75%). Many companies consider whether the principles of Value at Risk ( VaR ), which were initially developed for market risk management in a financial environment, can be applied in the corporate environment. Discussions with treasurers showed that only few corporates in Switzerland apply value-at-risk tools. Such tools are primarily used for the management of investment portfolios. The implementation of cash flow-at-risk techniques or enterprise-wide risk management systems, which require tailored modelling of multiple risk and other factors like CorporateMetrics 2, have not been identified. With respect to corporate treasury technology costs, 32% of the participants incur annual costs up to CHF for their treasury management system, assuming a 3-year amortisation. This percentage relates all to OSPs, except for one VLC. Almost half of the very large corporates (i.e. 47%) spend more than CHF 5 on treasury management system costs per annum. In Switzerland 35% of the corporates surveyed do not spend money on additional decision support tools and another 38% of the participants spend up to CHF annually, again assuming a 3-year amortisation period. However, 47% of VLCs spend more than CHF on decision support per year. 53

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Section 5 New challenges for Treasuries Introduction This section outlines new developments and some of the challenges that treasurers will face during the next few years, respectively at the edge of the new millennium. The individual chapters are presented as follows: Use of new products New developments Growth of relative importance by risk type 55

Frequency of use of new products 6 5 4 3 5% 3% 3% 3% 2 1 Risk fusion products Credit spread derivatives Credit default swap Total return swap 56

Use of new products Treasury departments continuously face new product developments. New instruments include risk fusion products, credit derivatives, contingent capital solutions, multi-trigger options, weather derivatives 3 and so on. Besides the technical understanding of these complex products also the appropriate capturing of such instruments in a treasury management system undoubtedly is a challenge for corporates. One survey participant applies risk fusion products and another participants presently are reviewing the use of such products. Through the combination of different risk categories in one product over several years, respectively a blend of traditional insurance risks (like fire risks) with financial risks, different diversification effects can be achieved 4. A common comment received was that pricing of integrated products, however, is lacking transparency for corporates. The use of credit derivatives is not yet widespread in Switzerland. Only treasury departments of 2 participants, both VLCs, currently make use of such products. Credit derivatives allow users to reduce particular credit exposures without having to physically remove assets from the balance sheet. Credit default swaps, credit spread options, total return swaps and other credit derivatives can be used both for risk diversification and for investment purposes (return enhancement). The latter, however, is rare as the taking of additional credit risk, which is unrelated to the operating business, is usually not seen as a core competence of corporates. The market for credit derivatives is growing fast and J.P. Morgan estimates that the notional outstanding will exceed US Dollar 1 trillion in 2 5. It is expected that also non-financial institutions will increasingly use credit derivatives in the future, for instance with regard to credit concentration or large exposure to particular type of industries. 57

New trends / products New developments with high impact during the next 3 5 years 6 4 All participants VLC OSP 2 Europ. corp. bond Swiss market Repo Market Energy risk management Emerging market risk Risk fusion products Credit derivatives Internet trading Outsourcing Dynamic risk simulation tools IAS 39/ FAS 133 58

New developments Survey participants were asked to comment how the new trends/products will impact their corporate treasury and risk management during the next five years. High impact is primarily expected from the European corporate bond market, Emerging market risks, Internet trading and the new accounting standards on financial instruments. The establishment of a European corporate bond market is of particular interest to VLCs, which have access to capital markets. The European corporate bond market is of importance as lower financing costs are expected from this source of funding. High impact is also expected from Emerging market risks. The regional crises in Asia, Russia and Latin America, resulting credit crunches and increased volatility are still in the mind of many treasurers. Emerging market crises may become even more drastic, if supranational organisations like the International Monetary Fund will no longer bail out banks and private investors in the future. Not surprisingly, new developments in Internet and E-commerce 6 are closely watched. 23% of the treasurers interviewed expect a high impact from Internet trading for the corporate treasury and risk management. Specific implications are not yet obvious in all respects, however, there is a broad range of risk services (e.g. Web-based treasury management systems offered by software vendors) and electronic broking and execution services which can be accessed through the Internet. With regard to the new accounting standards on Accounting for Derivative Instruments and Hedging Activities (FAS 133) 7, respectively Financial Instruments: Recognition and Measurement (IAS 39) particularly VLCs expect a high impact. The new hedge accounting requirements are more stringent (e.g. hedge effectiveness tests) and corporate treasuries are particularly concerned about group-internal netting of exposures not being allowed 8. As part of special projects, several multinational companies have started to systematically review and assess derivative products employed, present and alternative hedging strategies and their effect on earnings volatility. Given the wide-ranging implications, preparations are made for new risk management approaches, operational and accounting processes as well as necessary system amendments ahead of the effective dates (for fiscal years beginning on June 15, 2 respectively on January 1, 21). The introduction of the Swiss Repo Market seems not to have high significance for corporate treasuries so far. Repurchase and resale transactions are secured money market instruments and a means to access financing fast and at low cost or, to place short-term funds on a secured basis. When credit risk considerations will gain importance and interest rates will raise to higher levels this situation may change. In spite of the deregulation of the energy market in various countries (and possible increased volatility of electricity prices) our survey participants do not attribute a high significance to energy risk management for their companies. 59

Growth of relative importance by risk type Increassing importance for company expected for: 4% All participants Very large participants 28,6% Other survey participants 5% Liquidity risk Interest rate risk Foreign exchange risk Equities risk Commodities risk Credit risk Operational risk 6

Growth of relative importance by risk type Survey participants were requested to determine two out of seven risk types, which they believe will gain more significance for their company in the next three to five years. The questionnaire included liquidity risk, four market risks (interest rate, foreign exchange, equities and commodities), credit risk and operational risk. The variance from an equally distributed response frequency of 28.6% (two seventh) is used as indicator for the growth of relative importance by risk type. Interest rate risk and foreign exchange risk were most frequently mentioned, followed by operational risk. The low result for both equities risk and commodities risk is not very surprising as not all treasuries invest in shares or other equities products and not all participants are exposed to significant commodities risks. Corporate treasurers of VLCs envisage spending more time on interest rate risk (4%) and liquidity risk (33%) in the future. OSPs will focus on foreign exchange risk, despite of the recent introduction of the Euro, interest rate risk and operational risk. 1 In Pursuit of the Upside: Leading Thinking of Issues of Risk, PricewaterhouseCoopers Global Risk Management Solutions, 1999 2 CorporateMetrics Technical Document, RiskMetrics Group, April 1999 3 Weather Risk Special Report, Energy and Power Risk Management, RISK 1999 4 For example see Swiss Re New Markets, Alternative risk transfer for corporations: a passing fashion or risk management for the 21st century?, Sigma 2/1999 5 The J.P. Morgan Guide to Credit Derivatives, 1999 6 E- Business - Made in Switzerland, PricewaterhouseCoopers, 1999 7 The New Standard on Accounting for Derivative Instruments and Hedging Activities (FAS 133) An Executive Summary, PricewaterhouseCoopers, September 1998 8 Hedge accounting, Sebastian di Paola, The Treasurer, March 1999 61

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