Technology And Treasury Management: Managing FX Exposure


By Denise Bedell

Companies with international operations are looking beyond spreadsheets to get a timelier view of their global FX exposures.


Within a few hours of Osama bin Laden’s being killed, global markets had responded. The price of oil was down and the dollar was up. The near-instant reaction highlighted a growing trend: Global events are having a practically immediate impact on markets—and hence corporate risk exposures.

Companies began to see the effects of this in their results during the recent financial crisis, with, for example, unrealized FX losses increasing in size and significance on the balance sheet. Consequently, most multinational companies have had to reevaluate both their exposure management processes and systems in order to get a clearer, more timely picture of global exposures.

Sander van Tol, a partner at Zanders FX, says: “Treasurers are definitely managing FX exposures more closely due to the increased currency volatility.” As part of this transformation, companies are focusing on how they evaluate exposures, notes van Tol: “Most corporates use their cash flow forecast for this purpose.” The cash flow forecast and resulting FX exposures may be created by the ERP (enterprise resource planning] system of the company or specialized treasury management systems, or, as in many cases, by a spreadsheet.

Although many companies still use a spreadsheet in whole or in part for forecasting cash flows and exposures, the drawback of doing so is becoming ever more apparent. No matter how sophisticated a company’s macros might be, managing complex exposures via spreadsheet takes a significant amount of time and resources. Although spreadsheets provide a great deal of flexibility, for those companies with real-time exposures, real-time solutions are key.

Chris Davis, co-founder and managing director at FX work-flow solution provider TwoFour, says: “It is overwhelming the amount of manual processes that have to be created and macros that are necessary to move data around with a spreadsheet.” He points to issues with backing up spreadsheets, the potential for keying error and accidental changes, and the lack of easily auditable process trails as drawbacks to a spreadsheet approach.

In global companies with many exposures the biggest issues, however, are time and resources. Real-time information is critical in global risk management, and spreadsheets simply may not make the grade on that front.

For corporations that see a need for more real-time exposure management, the desire for something beyond spreadsheets is increasing. This fits in with the broader trend toward using either a specialized treasury management system (TMS) or an ERP system with an integrated treasury module for wider treasury, cash and risk management, says Ari Morris, a partner at Treasury Alliance Group: “There is more demand and interest in fully functional TMSs, and within that treasurers are getting [access to] reports and better understanding what their FX positions might be.”

“The advantage of using a TMS or integrated ERP is that these systems can also be used for deal management, transaction management and [hedge] accounting,” says van Tol. In addition to making exposure reporting more effective, companies are also reevaluating both their policies and procedures around FX management and their use of external systems for managing transactions.

Jeffrey Wallace, managing partner at Greenwich Treasury Advisors, says: “There might be more corporate use of the CLS Bank, which has real-time settlement of FX trades, as the best way to eliminate settlement risk.” SWIFT—for connecting with counterparties—and the use of systems such as IT solutions provider Misys’ online trade confirmation service may also become increasingly popular for companies. These offerings can greatly improve automation and reduce counterparty connections and transaction costs. Companies connecting to their counterparties through SWIFT can use it for FX confirmations, and use SWIFTNet Accord for confirmation matching.

While the credit crisis provided a boost to this development, the continued and increasing volatility of the FX markets have fueled the trend. Companies struggled to handle the impact of exposures on their profit-and-loss and balance sheets as an indirect effect of the credit crisis. “The P&L; and balance sheets of most companies were hit by the credit crisis, and hence realized and unrealized FX losses have a bigger impact on the company,” says van Tol.

It is not just FX exposures that companies are looking at, notes Justin Brimfield, senior vice president for Corporate Development at solution provider Reval: “The volatility that is being experienced by corporations is not just in the FX market. Certainly commodities and interest rates have also been volatile and have caused organizations to review and react.”

As a result, many companies are reviewing their entire risk management strategies. Baron Canon, a solutions manager at Misys Opics Plus, explains: “There is obviously a big emphasis on risk management, but also a renewed focus on getting back to basics. There is more concentration on hedging, but simpler hedging. [Clients] want liquid, easier-to-understand products.”

The impact of global regulatory changes also has to be considered in any hedging strategy. In the US, for example, the Dodd-Frank Act is coming in and hedge accounting is changing. “Even though that affects only a certain type of corporate, it will result in a rise in transaction costs, widening spreads and so on,” says Canon. “This will impact everyone that goes out in the market and is hedging positions in FX.”

Morris believes companies are in an initial stage of awareness, education and understanding of how to improve exposure management. “They are setting the stage for what will come in the next wave of development, where they will actually execute strategies to increase visibility, reporting and so on.”

The first step is education. In order to delve deeply into exposures, it is not just systems that must be adjusted but also behavior. Exposures begin at the operating company level. For companies hoping to create greater visibility in their global risk, change has to happen at that level. Improving understanding of the bigger risk picture by those at a business unit level who generate the exposures will help them to better clarify exposures and thus allow treasury to create a more accurate picture of risk.