Overall, FX activity for corporates has been closely correlated with economic activity – dropping off throughout lockdown and now showing signs of recovery. What’s notable, however, is the drop in FX hedging activity.
PwC’s 2021 Global Treasury Survey found that inaccurate forecasting and poor visibility were the biggest challenges facing treasury teams. If a corporate can’t accurately forecast, then this hinders its ability to effectively hedge FX risk over the medium to long term. The knock-on impact is that corporates are more vulnerable to currency fluctuations potentially eroding margins. According to HSBC’s latest corporate risk management survey, 57% of CFOs (rising to 77% in EMEA) say they suffered lower earnings in the past two years due to significant unhedged FX risk.
The likely permanence of remote and/or hybrid working has led treasurers to pursue digitisation, automation and simplicity in terms of the tools, processes and products they use. Treasury teams have been running at maximum capacity, so exploring outsourced solutions for various financing functions is a priority and will help free up time to fulfil other strategic objectives.
As markets recover, one of the key challenges ahead is how treasurers balance the difficulties of accurately forecasting FX exposures against the need to effectively manage FX risk in seeking to protect profit margins.
More broadly, treasurers are also prioritising the adoption of technology that tackles operational complexity, cash-flow optimisation and sharpening the focus on financial risk management – they want an FX provider that can help them achieve these goals and, as a consequence, treasurers are reassessing their key relationships with banking partners and other service providers.
For example, we’re seeing more treasurers explore wholesale FX marketplaces that offer multibank execution and centralised, digitised solutions that drive operational efficiency.
Some businesses are even considering fully outsourced, end-to-end FX execution services, which can take FX off their plate altogether, giving back capacity to their treasury teams.
These solutions won’t impact cash-flow optimisation either; treasurers can still implement uncollateralised hedging, requiring no initial or variation margin, which they may have in place with their incumbent FX counterparties already, and ensures an FX risk isn’t replaced with a liquidity risk.
FX best execution offers many benefits to treasurers; most importantly cost reduction. However, pursuing FX best execution can be extremely difficult for corporate treasurers, as it requires them to implement and manage multiple FX counterparty relationships simultaneously.
Let's say a corporate has gone through all the necessary steps (often arduous) and now has a multibank panel at its disposal for FX execution. Each counterparty might have different trade processes and systems to navigate, and so the corporate might have to make an additional investment not only in an aggregator platform to centralise price discovery, but also in middle- and back-office reconciliation, confirmation and settlement tools.
Fortunately, in addition to the existing multibank platforms, there is a new generation of fintech companies emerging that enable corporate treasurers to access a single interface to access live rates from multiple banks and execute at the best rate.
This type of multibank price streaming and execution process was previously the exclusive domain of the largest trading institutions. This is a genuine step forward in innovation, as it increases efficiency, streamlines operations and saves customers money.
Corporates should seek out solutions that also incorporate transaction cost analysis (TCA). TCA provides corporates with a transparent breakdown of FX costs across all their transactions as proof that a pre-agreed cost promise has been delivered. TCA can also be shared with the CFO, board of directors or shareholders, as evidence of best practice.
Treasurers are moving away from manual processes towards digitisation. Citi’s latest Treasury Diagnostics Report found that 57% of corporate treasurers are looking at transformative opportunities across their function.
While the past year has forced corporate treasurers to focus on the fundamentals of their function, next year we expect to see an even greater focus on digitisation and a move towards the implementation of fast, cost-effective and efficient technology, tools and partners, including multibank FX platforms.
Eric Huttman is CEO of MillTechFX
