Treasury Today Country Profiles in association with Citi

Choosing the right FX relationship

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Offering the convenience of prices from a range of banks at the click of a button, it’s easy to understand why many corporates have grown fond of multi-bank FX portals. Can these FX ‘supermarkets’ really provide the value of a direct relationship with your bank though? In this article we ask whether it’s time to think again about your FX relationships, and discover that any re-evaluation should not be tied to price alone.

There is no free lunch. And that’s true where multi-bank FX portals are concerned, too. These portals, such as FXall and 360T, are undoubtedly convenient. Rather than spending time calling several banks to determine the best price, corporates can simply log-on to the portal, see prices from a selection of liquidity providers, and achieve best execution.

Or at least, that is the theory. In reality, many of the largest corporates have shunned portals in favour of voice trading, as the pricing these FX ‘supermarkets’ deliver does not always prove competitive. Meanwhile many mid-to-large corporates continue to use them, with some aspiring to move all of their FX trades onto multi-bank portals. But could those corporates turning their back on bank relationships be missing out on a world of opportunities?

“Multi-bank portals have their role to play, but generally speaking, what you get from such a portal is first of all a price,” explains Gerald Dannhäuser, Head of FX Sales, Commerzbank. “FX is much more than a price. It’s about service, advisory, product range, research and crucially, it’s about relationships.”

Moreover, only coming into play at the execution stage, multi-bank FX portals tend to be broadly disengaged from the pre- and post-execution lifecycle of the trade, which is not always best for the corporate’s overall business processes.

Matthew Richardson, Director, FX4Cash, Global Transaction Banking, Deutsche Bank agrees that the scope of multi-bank FX portals is somewhat limited. “You have to look at FX at a number of levels,” he explains. “At a very basic level, FX is just a commodity. But most corporate clients want to do something with that commodity once they have acquired it or traded it. And so very quickly you move beyond the question of just a pure trading ‘relationship’ into understanding the underlying needs of that corporate and how FX merges into their cash management world, for example. That’s where the conversation gets a bit more interesting.”

For those with basic FX needs or small scale operations, however, Peter D’Amario, Consultant, Greenwich Associates, understands the convenience of the multi-bank offerings. “The beauty of trading via a multi-bank portal is that many corporates aren’t focused on making money from FX, it’s simply a hedging tool which enables them to carry on as usual with their business. They don’t necessarily want all of the paraphernalia that comes with a proprietary platform, which is often more suited to financial institutions. So the multi-bank portal reduces administrative costs and reduces the potential for error. This is in fact how e-trading volumes among corporates became so significant in the first place – because of the convenience these portals were offering and the pared back nature of their service.”

Why then would a corporate choose to maintain relationships with a bank on the telephone side? “Because,” says D’Amario, “what corporates put through these platforms tends to be the vanilla trades that don’t have a huge story behind them. At one level, some corporates don’t maintain their key relationships, or have significantly scaled them down. What the corporates need to be aware of though is that in some cases, that’s a two-way street.”

“However, with larger corporates there still remains a compelling reason to retain the day-to-day, person-to-person relationship as inevitably there are trades that either cannot be done through a portal, or that they don’t want to execute through a portal.” One of the reasons behind this, says D’Amario, is confidentiality – if you have a big trade to be done, it might actually be big enough to move a market in the short term, which could make the transaction more expensive for the corporate. “If your bank can handle it quietly, you’ll get a better price. In addition to that, any trade that has bells and whistles will absolutely require some kind of human intervention.”

So, it’s not that multi-bank portals do not have a role to play – they do (see Treasury Today’s May 2011 article on FX portals for more proof of that) – but for corporates taking their FX to the next level of sophistication and/or those with significant trades to execute, direct relationships are a must.

Decisions, decisions

With this in mind, what should corporates be looking for from their FX bank(s) and what factors should be influencing their FX relationships? The scope of a corporate’s FX business and the complexity of the transactions that it needs to undertake will, to some extent, dictate what level of interaction a corporate requires with its FX bank and, in some cases therefore, the institution that the corporate works with. Basic factors that can influence the choice of provider include (in no particular order):

  • The bank’s capacity in terms of products and set-up

    How many currency pairs are on offer? Can you trade in African and Asian currencies for example? How is the bank handling new currencies such as CNH?

  • Online facilities provided by the bank

    Is the bank a leader in this field, known for innovation and being at the cutting edge of FX technology? What is the scope of the bank’s online tools? Does the bank also feed the multi-bank platforms?

  • Service quality and expertise (the human touch)

    How well does the sales team respond to queries and understand your business? What is the quality of the bank’s advice and research?

  • Price

    Are you getting what you pay for?

Although price is frequently cited as the most important factor influencing FX relationships, this is really a misnomer, as Bernard Sinniah, Managing Director, Global Head of Sales, Corporate FX at Citi, explains. “The factor truly tying everything together for clients is not price, but value.” D’Amario agrees saying that, “Value is really the point where price and service quality balance each other out and make sense for the client. Each client will have a different notion of ‘equilibrium’ based on their specific needs but there is always a point somewhere along that continuum where value can be achieved.”

Standing out from the crowd

Taking price out of the equation then and looking instead at value, competition between banks has started to focus around two major ‘value-adds’: relationship and technology. “Relationships are absolutely crucial,” says Sinniah. “Having a dedicated sales person that will help the client to identify risk and then work out with them the best technique to use in order to hedge that risk, as well as assisting them in executing that hedge, is extremely beneficial. This is why voice services remain integral to the overall FX piece.”

“We need to make sure we help our clients across the lifecycle of the trade. If a client wants the whole package, not just execution, then they absolutely must liaise directly with their bank. It’s not just about making sure that the trade that is executed is the right one, or is done in the most efficient manner, there’s a follow-up process too. Post-execution, for example, clients might want to know what their six month exposure is or their geographical exposure. They may also want to receive a phone call when significant currency moves happen, so they can discuss how to adjust their portfolio and rebalance their hedges if necessary. That’s how strong, deep relationships add value.”

Richardson agrees, saying that offering the client value is a question of making sure that you have given the client “what they need, not just what you happen to have on the shelf.” Again, this comes back to getting to know the client’s business, which means dedicating a sales or relationship manager to assist them in formulating the right policy based on their cash flow and seasonality. A true FX bank should also offer analysis on the company’s exposures and come up with solutions that assist them in managing FX risk in a better way, with a long-term vision, rather than executing trades as and when.

Education therefore becomes part of the bank’s relationship role as well. “Clients are moving away from looking at where currencies are going, towards a systematic, rules-based approach to hedging,” says Sinniah. “We really welcome that sense of order and direction and as a bank we can help clients to build plans around their currency exposures and offer appropriate risk mitigation tools.”

This kind of advisory service is particularly relevant when markets are turbulent. “The only constant trend at the moment is uncertainty,” comments Dannhäuser. “During the volatility in 2008/9, corporates learned that if they hedge large exposures when market pressures are uncertain, they could well turn out to be over-hedged sooner than they might think.” Advisory teams can help corporates to project through the uncertainty and to consider the appropriate hedging strategies and tenors. Dannhäuser also recalls another useful lesson around relationships from the previous turmoil. He says that in 2008, there were days when if you called up your bank, you could trade, but the liquidity on the multi-bank platforms was drying up. “When times get tough, it is relationships that carry you through.”

A new kind of relationship

It seems slightly incongruous then that with so much focus on relationships, banks are resolutely ploughing money into their FX technology, rather than expanding their FX sales force. But just as people have forsaken the high street for internet boutiques, or now chat interactively online with their mortgage advisor rather than face-to-face, FX relationships are changing too. In many ways, technology has usurped the human touch to become the backbone of any FX offering. “Technology is essential in the actual processing of the transaction,” says Richardson. “In particular when you are talking about high volume activity: if you don’t have it fully automated, if you don’t have a completely straight through processing environment, the error rates will pick up. Quite simply, the more human hands touch a process, the more chances are that things will go wrong.”

Making that back-end technology a successful front-end (ie client facing) offering however depends on two things: capabilities and client usability. Between banks, the online capabilities available to clients will vary, but include the following: news, research and analysis; exposure management; live rates; one click or double click trading and reporting functionalities – including historic and mark-to-market reports. Each platform, from Commerzbank’s Click&Trade FX to CitiFX Pulse, will also have its own additional USPs and degrees of customisation. The ability to customise is key, as for these single-bank platforms, usability is the real trump card today. In essence, clients now have ‘relationships’ with a user interface through their bank’s FX technology. And far from disintermediating the sales force, this actually means that the day-to-day transactions can be carried out by the client through their online ‘representative’ ie the bank’s portal, whilst more value-added conversations take place over the phone.

“We are trying to make sure that we apply technology and STP to make our clients’ lives easier,” says Sinniah. “We are not shrinking our day-to-day human coverage, but we are making it more significant, shifting our telephone conversations away from pricing and execution efficiency – which is all handled by the technology – to assist clients with process efficiency and currency strategy.”

Despite this overall trend towards electronic trading, many corporates – in particular the large ones – still choose to conduct more complex or larger trades (usually in excess of $1m) over the phone as it is often easier and more efficient in those cases, with the voice route frequently proving cheaper. Moreover, “Clients want flexibility – they don’t always want to do things the same way every day. They want to mix and match human interaction with automation and we need to make sure we offer the best service in both worlds,” comments Richardson.

This means that technology is no longer de facto a product or selling point, it has become a client-led tool, another way for a corporate to interact with its bank, should it choose to. Technology is not a replacement for human relationships therefore, it is – or at least should be – a complement to them.

“Lloyds Bank Corporate Markets has taken a client-led approach to heart in the roll-out of its new comprehensive e-solution – Arena for FX trading and money market deposits,” says Rob Garwood, Head of FX Sales at Lloyds Bank Corporate Markets. “Arena has been developed with a close eye on the needs of our user groups, which range from commercial, mid-market and major corporate clients through to hedge funds, asset managers and banks. A crucial element of Arena’s development was a year-long consultation process, which included a series of workshops in which representatives from different client sectors discussed their requirements with the bank’s IT development, sales and marketing teams.”

“With Arena, clients can access a broad range of Lloyds Bank Corporate Markets’ financial markets expertise and services online. It offers our clients insight, analysis, information and reporting to help inform their trading decision. Clients can also access Arena’s user-friendly charting system for analysis of real-time and historical rates, or specific currency pairs, and of course there’s direct access to the expertise of the technical analysis team based in London,” continues Garwood. In addition, the platform features a tiered filtering system for the bank’s research, again helping the user to find what they want, with a minimum of time and effort.

Usability in terms of the ‘friendliness’ of the interface is just one challenge for creating technology that will be a hit among corporates, however. Another is integration. Any corporate reconsidering their FX relationships right now should think seriously about how their bank assists them with this. How does the bank’s offering communicate with in-house systems? Does the bank’s portal integrate straight into your ERP for example?

Final considerations

And while integration between systems is important, a final point to consider is integration between departments or functions. “As a corporate considering my FX bank relationship, I would have some holistic requirements that must be met,” comments Dannhäuser. “Ideally, you want to have a bank that is not only good at FX but also does interest rates and commodities well, because at the end of the day, it’s all about dealing with market risk.”

As a treasurer, there will naturally be cash management requirements too, which must be factored in to the overall offering. Look for a bank that can deliver this cross-product expertise not only through its technology but through its relationship and sales managers. This may mean going a little further along the ‘value continuum’, but as the saying goes, ‘you get what you pay for’.