Treasury Today Country Profiles in association with Citi

VW drives South American FX trading in new direction

Volkswagen campervan close up on the VW logo

Brazil’s largest automotive segment exporter, Volkswagen Brazil, is looking to a new foreign exchange (FX) trading platform to tackle local market conventions and drive further efficiency and transparency in its currency trading deals.

Seamless workflow around pricing, currency trade execution and foreign exchange (FX) risk hedging are all part of Volkswagen (VW) Brazil’s currency exposure management programme across South America, now being handled solely on Bloomberg’s FXGO trading platform.

VW Brazil, a wholly owned subsidiary of the German vehicle manufacturer, has been operating in the country since 1953. It has risen to become the country’s largest manufacturer of cars and light commercial vehicles, and is currently the largest automotive segment exporter. It had been using a number of disparate and non-integrated systems to execute its mainly hedging-driven FX activities such as pre-trade analytics, price discovery, trade execution and post-trade stress testing and risk analysis. One of the key drivers for implementing the Bloomberg FX software was its need to take over more currency hedging from its German parent.

There is good reason to do this, explains Tod Van Name, Bloomberg’s Global Head of FX, Economics and Commodities. Brazil has some unique and interesting conventions within the financial markets and VW Brazil wants to be able to react to these demands locally with a system that has been tailored to suit these peculiarities.

“If VW Brazil is going out to its local Brazilian counterparties for pricing, all of the counterparties need a solution that supports local market instruments,” says Van Name.

In order to meet its local requirements, VW Brazil required Bloomberg to implement a number of customisations. An example of this is the ability to execute Brazilian real-based time deposits and the ability to offer non-deliverable forward (NDF) trading. Another customisation required the system to facilitate different spot trades. In the developed market, the standard settlement timeframe for FX spot transactions is T+2, whereas in Brazil, settlement can range from T+0 to T+2. And, adds, Van Name, in Brazil it’s not unusual to require split settlement. Where the norm is to exchange one currency for another, here traders might settle one currency on one day and the other on another day.

Having worked closely with the vendor, the platform now enables VW Brazil to get pricing from the main international money centre institutions and from local providers. The latter is particularly important as a means of maintaining the relationship element that is so important in South American commerce. The platform has been “seamlessly integrated” with VW Brazil’s existing technologies, including its treasury management system (TMS). It is now being used “extensively” by a diverse range of users – including personnel in treasury, risk management, the CFO’s office and by the pension fund manager – to manage all of its FX exposures for operations in Brazil. It has recently commenced trading on behalf of its subsidiary in Argentina with plans in the pipeline to use FXGO for other subsidiaries across South America.

Beyond this, VW Brazil will be closely watching the impact of regulation on the market, notes Van Name. By trading locally it may not face restrictions imposed by the likes of Dodd-Frank in the US or Markets in Financial Instruments Directive (MiFID) in Europe and with most of the company’s FX being for hedging purposes, it tends to fall outside of the regulated environment for FX. But if it decides to execute options, it could place a reporting demand upon the company and, as the Brazilian real is not a free-floating currency (it is traded only as a NDF outside of Brazil), this too will require the watchfulness of the company in terms of market developments and will benefit from the greater transparency that the platform delivers.