October 2017

As technology pushes supply chains to parts of the world not reached before, corporate treasurers are faced with unprecedented foreign exchange risk. Johnny Grimes and Cara Renze demonstrate how harnessing big data is a must-have in today’s global economy

Changes in value of domestic currency against a foreign currency is one of the many strategic challenges for corporate treasurers that remains consistently on the risk management to-do list. These values have, historically, been very volatile and exchange risk not only affects buyers and sellers of goods and services overseas, but also those investing in fixed assets such as factories or property.

According to the most recent Deloitte Global Corporate Treasury Survey (June 2017), more than half of the 200 corporates surveyed confirmed that foreign exchange (FX) volatility is a top issue.1

Propelled by challenges such as political turmoil and an evolving regulatory landscape, the impact of it on business remains a point of focus, as does the subsequent ability to measure and account for it.

In an earlier FX survey by the same firm,2 nearly 60% of respondents reported lack of visibility over FX exposures and reliability of forecasts, as well as a concerning manual nature of exposure quantification. “Without accurate measurement, risks cannot be managed effectively and, hence, value erosion from negative currency rate movements cannot be minimised. Organisations should prioritise appropriate investment to improve and automate exposure capture and analysis processes,” said the report.

March of the supply chains

As supply chains reach into new markets, cross-currency flows are becoming an intrinsic part of the day-to-day payment processing routine for most organisations. However, operating outside core, known currencies can prove problematic for many of them. It is also worth noting that choice of currency is not always available when a contract is negotiated, and developing countries may insist that their trade is conducted in a hard currency such as US dollars.3

Take the example of a large, multinational retail group headquartered in Europe. Although much of its revenue and infrastructure has been historically euro-denominated, movement in online purchasing has taken the business into less liquid and more volatile markets where FX risks need active management.

Three aspects of the payment workflow keep its treasury team, and many more like it, awake at night:

  1. Centralising the multi-market FX payments and receipts;
  2. Ensuring the best FX execution; and
  3. Coming up with the right hedging strategies for income and liabilities.

Stringent FX management is not merely a tool to protect against the balance sheet impact but also as a contributor towards commercial growth. For as long as lingering inefficiencies within the workflow exist, they will increasingly prove detrimental to long-term business goals.

Strategic perspective

The Business of Treasury 2017 report,4 based on responses from 196 members from the Association of Corporate Treasurers, revealed that the time qualified treasurers are spending on strategic issues (rather than operational ones) has risen from 24% in 2013 to 40% in 2017. Therefore, as the expectations of treasury delivery grow, so do the expectations they place on their banking partners.

In short, corporate treasurers are looking to their banking partners to deliver against two core elements: consistent, global executions and data to facilitate visibility into the markets in which they operate. “More than ever, our clients are asking their banking partners to leverage global networks and cross-divisional expertise to deliver services which remove friction or roadblocks within the workflow, optimising aspects of FX execution ranging from access to cross-border, low-value clearing to simple transparency of rates,” observes Kaushik Shapiria, Head of Deutsche Bank’s GTB FX.

Processing power

Returning to the example of the European online retailer and their cross-currency transactions flows, common, yet significant challenges persist (see Figure 1). In summary, these are:

  1. The ability to access a wide range of currencies without holding multiple currency accounts or relying on the beneficiary bank for conversion;
  2. Management of the conversion and settlement process, with respect to FX pricing execution and access to the market when it is open to optimise liquidity;
  3. Navigation of local market requirements, such as documentation and purpose of payment details; and
  4. Reconciliation – automated management of incoming receipts (conversion and crediting).

Across individual payments, extra processing time or a gap in visibility may not seem overly problematic, but multiplied against thousands of payment runs a week, the consequences can be severe.

As the potential of technology grows and the processing power of payments and dealing platforms becomes immediate, the expectation of service is evolving so that critical parts of the FX transaction lifecycle are developed to consistently and transparently execute, eliminating unnecessary effort, costs and operational risks.

These integrated, automated, straight-through-processing (STP) solutions must provide: 

  • Flexible processing wherein preferred currencies can be accessed as required and payments can be executed against real-time rates within market hours;
  • Confidence in ability to scale without risk of lowered standards and quality;
  • Enterprise-wide, in-depth FX risk management capability and policies; and
  • Transparency, control and compliance.

Devil in the data

With increased focus on cost management, shareholder return and compliance, clients are increasingly expecting their banking partners to use the potential of ‘big data’ to provide transparency into their FX activities and provide grounding for related strategic decision-making.

Let us take the example of a global shipping and logistics company with significant trade flows between Europe and Asia. Through four segments of data analysis, this corporate could easily identify an opportunity for workflow efficiencies and cost reductions:

  • Hard currency analysis. This is the alignment between currency flows and beneficiary countries. Where there was an identified mismatch (payments in non-local currencies), the client could then decide if the flow was necessary or required amending. Payments in non-local currencies often come with higher costs due to conversion fees and embedded FX buffers. 
  • Transaction optimisation analysis. This identified where the beneficiaries were being paid in multiple currencies to the same account. 
  • A market hours analysis revealed that more than 90% of their flows into Asia capital controlled markets were remitted outside of local market hours, thus incurring overnight fixed rates. These rates factor in potential FX market movements until the onshore local market reopens (causing the bid-ask spread to widen). 
  • A transaction cost analysis provided insight into executions and rates, providing the client with data on expected versus achieved performance.

In delivering tailored, client-specific analysis spanning behavioural, operational and FX workflow, treasury partners are better equipped to take more effective decisions about where, when and how they can most effectively manage their FX.

Tomorrow’s treasury

With clients already reaping the benefits of these types of emerging analysis, foreign exchange risk management is becoming ever more embedded into the core workflow of modern-day corporate treasury operations. Automated solutions and data-driven insights such as these are fundamental in providing treasurers with confidence in their cross-border, cross-currency payments and receipts.

Johnny Grimes is Director of GTB FX Sales and Execution and Cara Renze is Assistant Vice President of Corporate Cash Management at Deutsche Bank


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Sources:

1 Available to clients and due for publication on
https://www2.deloitte.com
2 See http://bit.ly/2bXuEHB at deloitte.com
3 See Chapter 13 of the London Institute of Banking and Finance Guide to International Trade and Finance (2016)
4 See
http://bit.ly/2xD2b2F at treasurers.org

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