Treasury Today Country Profiles in association with Citi

Ready for another CHF-style meltdown?

Big crack in the road due to earth quake

It has been just over a year since the Swiss National Bank shocked the markets by announcing it would no longer hold the Swiss franc at a fixed exchange rate with the euro. How should treasurers be reacting now to protect their interests from similar events?

It is just over a year since the Swiss National Bank’s (SNB) announcement that it would no longer be holding the Swiss franc (CHF) at a fixed exchange rate with the euro. Whilst most business functions will have recovered from the shock, there are still matters that need tackling.

Insofar as anyone can prepare for an event such as this – after all, it even caught other central banks on the hop – being in a state of readiness from a cash and risk perspective has been made more difficult as treasury is dragged in different ways by a wave of other market volatilities. With the price of commodities, and oil in particular, in freefall, uncertainty around what the world’s central banks want to do with their own interest rates, and various geopolitical instabilities creating turbulence, focus on a past event may be difficult.

However, one of the key observations of the CHF ‘event’ was just how difficult it was for some businesses to react to the suddenness of the announcement; starved of ready-data on their precise market positions, the ability to monitor risk was found lacking “in the fog of war”, says Natasha Lala, Managing Director, Solutions for Business, at foreign exchange specialist, OANDA. Depending on how much a business was impacted by the announcement, the ability even to answer basic questions – such as are we even in business? – revealed some core concerns at the heart of this issue. As the year progressed, China added to the fray with the devaluation of its currency.

Attention on the day of SNB’s announcement was naturally demanded by CHF, the euro and other major currencies. And when China devalued the yuan, there was a knock-on effect for many other currencies especially in the emerging markets. The message is simple: from a monitoring perspective treasurers now not only have the problem of looking at the epicentre – the Swiss franc or yuan in this case – but also a great number of other currencies where their own central banks are wondering if they too should also be devaluing or de-pegging. As Lala notes: “We all remember the earthquake but the aftershocks can be pretty significant themselves.”

New threats, old methods

Where businesses were seen to be struggling to achieve accurate and timely prices as the markets were sent into turmoil, most will (hopefully) have paid heed and made inroads into fixing their information deficiencies. It is a fact that many treasury departments still use spreadsheets to manage cash exposures, risk and so forth. The spreadsheet is a prodigious tool in many more leisurely environments, but the way data is drawn into them is often through cutting and pasting, notes Lala. The rapid emergence of CHF as an issue emphasised the need for automation of this process. Wherever treasurers get their rates from, the spreadsheet needs to be populated quickly in such circumstances. If that data covers a global business, the information needs to be disseminated consistently throughout the enterprise too.

Of course, some process changes were implemented as events unfolded. The way in which rates were accessed and checked tended to see a more proactive stance, many moving to a weekly and even daily basis. But as treasurers recognised the need to check daily and scrambled to get a number, the benefits of automation have become ever more apparent. “From an accounting perspective, it is common practice to close books at the end of the month and mark-to-market at that point. That is valid from the way foreign exchange rates are used. But from a risk management point of view you have to look intra-month,” notes Lala, adding to the debate in favour of automation. “You can’t just hope that the value will be something favourable at month-end, the markets just don’t work that way.”

With the impact that FX has on the bottom line, its effects are highly quantitative. However, the focus on optimising the process has been more ‘after the fact’ than would have been expected, she adds. “When a huge gain or loss comes to FX it increases its visibility. When companies ask what they can do, the number one response is to advise them to automate; they need to be looking at changes more quickly and more deeply.”

Know the source

When seeking to automate, the first port of call is know where the rates are coming from. It is easy to get a foreign exchange rate – trying to get a good one is more difficult, notes Lala. A business may use indicative rates, for example, but fail to understand the difference between indicative and actual transactable rates.

With the right source on tap, automation of a data feed is not generally an expensive proposition. Indeed, almost every provider will offer some form of API which should be easy to integrate, even with spreadsheets (though not recommended). “You don’t need a specialised terminal. If you have a TMS or ERP for example it will likely have a plug-in already that allows easy integration with a feed,” Lal explains. An integration project of this nature is not a major undertaking and will typically take just one or two weeks to deliver – “and most of that is just testing”.

Simple automation in this way is really the bare minimum. With FX market volatility seemingly now the new norm, a post automation project would benefit from the ability to more effectively “consume” rates more than once a month to create usable information. There has to be a decision on how best to act on that data. This is where the skill of the treasury function can most effectively be deployed – “not cutting and pasting numbers into spreadsheets but in actually looking at those numbers and considering what the best course of action should be”.

The unique approach and response that such analysis will generate – based on multiple commercial factors – may benefit from the deployment of an analytics package but Lala says many businesses do not necessarily require the level of depth that these tools provide. “The treasurer will understand the principles so their biggest challenge is not so much which transaction to make from a hedging or risk management perspective, but more about how to get the data from within the enterprise to actually make the right decision.”

It’s clear that FX and currency volatility is not going away anytime soon, not least as there are now many more layers clouding the view. If the turn of events caused by the SNB (and latterly by the Peoples Bank of China) are to be headed off more efficiently in the future, thoughts really should be turning to rapid data capture, says Lala. “No matter who you use or how you do it, there is still time to make the investment – it will absolutely be worth it.”