E-trading at Philip Morris’ Treasury
by John Jacob, Director Treasury, Philip Morris Finance S.A.
Could you describe the FX risks you run as a business?
The largest foreign exchange transactional volumes arise from hedging the in-house bank’s multicurrency intercompany loan portfolio through currency swaps. Other transactional exposures resulting from the purchase of raw materials or international sales activities are hedged on a selective basis at headquarter level. The same goes for net investment hedges.
The company's objective is to achieve hedge accounting wherever possible.
Could you describe your FX hedging policy?
Certain hedge activity, for example foreign currency funding related hedging, is mandatory. Hedging decisions for other transactional or net investment hedging are taken at headquarter level by the Treasurer and CFO. Any hedging activity must be related to an underlying commercial exposure: speculation is strictly forbidden. The company’s objective is to achieve hedge accounting wherever possible.
What other initiatives have you undertaken within treasury to automate your transactional and operational risk processes?
Ninety-eight per cent of all foreign exchange and money market transactions are dealt over the e-trading platform and subsequently automatically booked via an interface into PMI’s treasury application. Confirmations are electronically exchanged and matched with all counterparties through the Misys CMS engine, which also handles the CLS (Continuous Linked Settlements) messaging to our CLS third-party settlement agent.
What was your motivation for e-trading?
To achieve straight-through processing (STP) from dealing into treasury; confirmation and settlement; accounting systems; the ability to share business with all relationship banks; identifying the best pricing through competitive bidding among a larger banking group; audit logs; elimination of errors and misunderstanding on amounts; direction of trades and exchange rates. Also the ability to introduce stricter controls and approval levels in the trading process through access rights management in the e-trading platform.
Why did your treasury decide to use 360T?
360T was tested against another major platform for a couple of months. The main reason that users and management chose it was that the system doesn’t limit the number of banks to which a pricing request is sent. The other feature we liked was the pre-execution cost benefit analysis, i.e., a trader can see the opportunity cost of trading on the second or third best offer by moving the mouse over the other quotes. If you are doing a two-month swap you might be willing to sacrifice $100 and trade with a stronger-rated counterparty.
What have been the main benefits of e-trading to your business?
STP, ability to find the best pricing opportunities, fairer volume distribution among our group of banks and last but not least, the performance and volume reporting provided by 360T.