From Commodity to Strategy: A New Era for FX
by Helen Sanders, Editor
Foreign exchange undertaken by corporations has often been dismissed as a commoditised product in recent years, with wafer-thin margins and a predominance of electronic trading, particularly for commonly-traded currency pairs. This is changing, for a variety of reasons, not least the expansion of multinational corporations in Asian, Latin American and African markets, and the emergence of corporations headquartered in these regions that do not use ‘traditional’ currencies such as USD or EUR as their base currencies. In addition, as treasurers continue to enhance financial and operational efficiency, reducing FX risk and cost is an important element of their optimisation strategy.
Shifting corporate FX requirements
Despite the apparently ‘workhorse’ nature of most corporate FX activity, i.e., to fund foreign exchange liabilities and exchange surplus FX receipts into base or another required currency, FX has emerged as an important priority for treasurers. Morgan McKenney, Global Head of WorldLink® Payment Services, Treasury & Trade Solutions, Citi Transaction Services explains,
“Globalisation, urbanisation and digitisation are macro trends driving dramatic changes in how market participants operate to transform challenge into opportunity. According to a recent study undertaken by Citi, FX exposure management and local currency payments regulations are amongst corporate treasurers’ key priorities, highlighting the importance of an effective approach to foreign exchange and cross-currency payment management.”
This includes multinational corporations headquartered in developed markets that have expanded the range of currencies in which they need to operate, but also multinationals from less developed markets, as Ebru Pakcan, Global Head of Payments, Treasury and Trade Solutions, Citi Transaction Services continues,
“As multinational corporations emerge from developing markets, their priorities may differ from those headquartered in developed economies, not least as their currency flows are different and their base currency is less likely to be a major trading currency such as USD or EUR, leading to greater reliance on, and activity in local currencies.”
Complexity and materiality
Historically, many companies focused on a limited number of currencies, with relatively immaterial activities in a wider range of currencies. These were often left unhedged and held on accounts. Today, activities in Eastern European, Asian, African and Latin American currencies are far more substantial, so treasurers need a far more proactive currency risk management strategy. This shift has a major impact on all aspects of treasurers’ FX strategy, from their hedging strategy, operational processes and structures, right through to the criteria for selecting their counterparty banks.
The importance of pricing?
In a changed economic and regulatory environment, the strategic nature of banking relationships has shifted dramatically over the past five years. Financing typically forms the core of a corporate-to-bank relationship, with other activities such as cash management and FX ancillary to this. Just as cash management is by no means a commoditised business that can arbitrarily be offered to a bank providing financing, FX is no different. When FX dealing portals were first introduced, there was an expectation that treasurers would approach their approved banks and simply select the best quote on each occasion. While this may be the case for commonly traded currency pairs, treasurers are looking for more from their FX banking partners than simply individual prices. Daren Blaker, Head of UK Corporate FX Sales, RBS discusses,
“Foreign exchange is generally considered to be an ancillary product, particularly as part of a wider lending relationship, whereby corporates will typically invite their lending banks to bid on any FX transactions that they have. Clearly, there is no obligation to accept any bank’s bid and price is not normally the key differentiator. What does differentiate banks in their clients’ eyes is the ‘value-add’ that they provide, that could be in the form of market analysis, insightful research, innovative ideas or handling sensitive transactions.”