FX management Automation

Why is FX management still a big issue for Treasurers?

The perennial problem of FX management

After a long COVID period, we would like to explain why FX management remains a major issue for all treasurers. Among the different factors explaining this focus on FX we should mention and underline volatility, manual processing (mainly on the pre-trade phase), inefficiencies in some TMS solutions, absence of link between operations and treasury, globalization of businesses including more emerging countries and exotic currencies, margin preservation, which is key and (accounting and compliance) reporting, also essential and too manual. For all these reasons and many others, FX management remains, in general, in top three risks and priorities for corporate treasurers.

  1. Margin preservation

Foreign Exchange exposures management remains essential in an extremely volatile economic context to preserve our business margins. Some currencies can refrain from selling to some counterparties to avoid related FX risks.

  • Manual Processing

We notice that among our treasury community, a lot of peers have still heavy manual processes around FX management and over-use XL spreadsheets to make the link and fill in the gaps of their systems.

  • Volatility

Although we have always faced market fluctuations, the current health crisis has exacerbated the volatility, which can have deep P&L impacts if not properly hedged or monitored. Time is an issue and daily swings could kill margins in couple of minutes.

  • Reporting

Effective reporting on FX management (i.e., financial and accounting/IFRS) requires ad hoc IT tools and often more than what TMS’s are proposing. It explains why some vendors bought other solutions to complement their suites or why treasurers use ad-on’s or ETL solutions to make the job. Same issue is notice for EMIR reporting (although highly simplified since refit).

Lessons learnt from the last crisis

The two major lessons learnt are: further centralize and further automate processes to become more efficient, more resilient and generate added value for the group. It appeared clearly in recent surveys (e.g., EACT 2021 or PwC Global Treasury survey) and frequent talks with peers that one of the means to sort FX management issues is technology. The first problem starts with collection of total and net exposures. Without good estimate and FX forecasts and without a precise view on underlying exposures, no way to effectively manage FX risks. The identification of underlying exposures is essential and requires discipline, coordination with affiliates, tools, policies, sound strategy, and rules. The sooner an underlying risk is identified, the faster it will be hedged. As volatility and more importantly intraday volatility increases, time becomes the key to successful FX strategies. Depending on the underlying businesses, the strategy and the one-to-one approach make the more sense, providing you can hedge immediately 24/7. Who can claim he/she is doing so? Therefore, no doubt, the sooner and the more automatically you hedge an exposure the better you will be protected. Couple of minutes may cost a lot in terms of pips lost (or gained). In industries with low margins under pressure because of health crisis, it became even more important to survive. Furthermore, theover-hedging given economic circumstances is back and reinforced by COVID. It explains why it is important to identify risks, ad hoc hedges and to unwind the surplus if, and when any. To track efficiently the over-hedging is not as easy as it looks like.

Why not fixing it so?

Having talked to CFO’s, some told us but if it is a major issue why not fixing it as there are solutions. There are solutions to complement TMS’s. Nevertheless, there are not that many. A common misunderstanding consists in believing FX platforms solve problems. Maybe for a part of it but not if not fully integrated and orders automatized for its feeding. The reasons listed above, explain why some corporations are still far from being fully automated for their FX management: e.g., lacks in TMS’s, absence of coordination with operations and interfaces with their IT tools, reluctance to changes and love stories with XL or no audit of weak internal controls around FX management. But time has changed and the momentum for revamping strategies and processes has increased, given COVID consequences. Thus, the first step is to get a firm commitment and sponsoring from the C-level. You also need a comprehensive review of programs and strategies, which are often lacking. No strategy, no policy, means no efficient hedging process. What do you want to achieve at the end of the day? Do you know that lots of treasuries do not have policies and procedures in place and no documented and tested internal controls? The approach should be clear, written, policed and programs in place to be systematically applied. Systematicity is also the key to succeed (no exception and no breaks in hedging with 24/24 policies). But, as always, (treasury does not escape to this fact) we all have a lack of human resources. It even reinforces the idea of automation to free up this precious and scarce time. It is virtuous if by reducing workload, you increase availability of resources for more added-value and analytical tasks.
Education and communication are required

It is difficult to change things without explaining the reasons and demonstrating benefits. Although it is easier than it seems. For example, a solution like KANTOX can make precise estimates of your savings and benefits. People are not always aware of the importance of internal controls to mitigate risks and of being consistent and systematic when hedging. The risks of errors and frauds have been exacerbated by COVID and lockdown. We still overuse XL spreadsheets for doing what systems cannot deliver. A pity and an increasing risk: the risk of XL errors because it is a personal and individual tool, not enough robust these days (although useful for other purposes). FX management is not only highly manual or too manual but also not the most interesting process, as hedging can be extremely heavy and repetitive. Delegating hedging of volumes to a (machine make sense to allocate free time to analysis. Hedging exotic currencies or monitoring currency pairs with high IR differentials can give you a competitive advantage on peers. Treasurers need to enhance their soft skills to communicate better and educate the management on what should be done and why it hasn’t been done so far.

From a problem to an opportunity…

It appears that the FX management function and role is increasing over years. It consumes lot of energy because it remains highly manual. We must say too manual. It important because of market volatility (e.g., Turkish Lira or Rubble reached historical low levels) is increasing and margins are tightening, because of the economic crisis. FX management becomes more strategic and not only a “finance topic only”. The objectives and policies should be agreed and approved by the C-level and the strategy and procedures by the Treasury Committee. We can notice a general lack of ad hoc technologies, even when treasurers have state-of-the-art TMS’s as they cannot execute everything. We need an additional layer to manage in a comprehensive and efficient way the FX management. Treasurers (in general) remain too XL-dependent for management, reporting and dashboarding. XL is not robust enough, risky as error-prone, usually belongs to one employee and is not structured, shaped for being used by many. Reporting of the FX risks and exposures as well as IFRS remain complex. No one could contest that CFO’s usually complain about the poor quality of FX reporting produced by TMS’s. Usually, you need additional tools to effectively manage the FX risk automatically. Robots and RPA’s can help up to certain limits. Therefore, treasurers should better “sell” the needs for automation given growing importance of FX management.

Take-aways

We can recommend to first assess current situation, define pain points and weaknesses and areas for improvement, contemplate solutions to automate processes to hedge 24/7 for freeing up time for more analytical tasks. By being more consistent and systematic in applying an FX policy or a strategy. Adopt a one-to-one approach, if you can, but with machine to make treasurer’s life easier and start hedging in exotic currencies to give your sale forces a competitive advantage. Often, companies refuse to deal with countries with exotic currencies and high differential of interest for financial reasons and not for commercial reasons. COVID has increased uncertainties and underlying cancellations or delays in deliveries impact P&L under IFRS (e.g. roll-overs, de-designations, re-designations…). It requires perfect coordination between operations and treasury to track all changes. Centralization of FX management is also key to succeed. Concentration of expertise at HQ treasury level is an obvious best practice. Volatility will not disappear soon, we guess. Time will remain “the” main issue. Therefore, machine can overcome this problem and systematize the hedging approach for consistency and increased efficiency. Machines also enable the dynamic hedging, and to mitigate swap points noise and impacts into P&L, that’s the cherry on the FX cake. If you have problems, talk to your peers and to specialists to contemplate new best-in-class solutions.

François Masquelier, CEO of Simply Treasury

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).

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