Treasury Today Country Profiles in association with Citi

Treasurers let down by poor visibility over FX exposures

Broken swing on a swing set in park

Nearly 60% of treasurers in Deloitte’s recent Global FX Survey cite a lack of visibility over currency exposures as being a key challenge in 2016.

The volatility that began in the currency markets last year, and which has continued into this year, is creating numerous challenges for treasury practitioners. Most notably knowing what exposures exist and the risks posed by these.

This was a key finding of Deloitte’s 2016 Global Foreign Exchange Survey which showed that 58% of the 133 corporates surveyed lacked visibility over FX exposures and the reliability of their forecasts. The complexity of the topic and the lack of consistency and standardisation in respect to the sources that treasury uses to retrieve FX data were cited as being the primary reasons for this.

“Corporate treasurers want an answer to a simple question: what is the currency profile of all my revenues, costs and profits?” says Karlien Porre, Partner, Treasury Advisory Services at Deloitte. “But obtaining the answer to this is complex, and it grows in complexity the larger and more global the organisation becomes as the data sits in more disparate systems.” The survey alludes to this complication with 59% of corporates stating that they use two or more sources to identify and quantify their FX exposures.

This perhaps wouldn’t be such a challenge if treasurers were able to extract this information in an automated fashion and consolidate it in one system. Yet, this remains a pipe-dream for many organisations with 62% still receiving manual FX forecasts from business units, increasing the risk of late and unreliable forecasts.

Chart 1: Challenges treasurers face when managing FX risk
Chart 1: Challenges treasurers face when managing FX risk

Source: Deloitte

Utilising technology to its fullest

Technology can provide a solution to this challenge and, in many cases treasurers already have this at their disposal. “Our study shows that 56% of treasurers are using a TMS or other financial system for FX risk management,” says Porre. “But, for the most part, its use is limited to the process-driven tasks in the back end such as deal capture and confirmations of trades.”

Whilst it is useful to automate these processes, Porre believes that on the whole corporates are under-utilising their TMSs and should extend the focus to cover the FX management process end-to-end. “Corporates should look to begin using their TMS or other IT solutions to identify and analyse their exposures – this will enable better decision making,” advises Porre.

To utilise a TMS to its fullest, it needs to be using accurate information. The issue then reverts back to the fact that treasury relies on other parties, and their systems, to deliver this information.

“Treasury needs to impress the importance of FX risk management on business units and sales and procurement teams to ensure it receives the information it requires,” says Porre. “Treasury may also sometimes need to shout a bit louder when there are company-wide IT projects being undertaken to make sure that the IT department understand its requirements.”

The art of communication

Treasurers may also need to improve how they communicate with the board. The study indicates that just under 40% of boards are not sufficiently provided with clear reports on FX exposures and FX risk management performance. Furthermore, over 70% said that they report only basic metrics such as quantum FX exposures, hedged exposures and FX gains and losses.

This may come as a surprise, especially when it is considered that in an earlier Deloitte survey the vast majority of treasurers recognised themselves as strategic partners to the board.

“Treasury can only be a strategic partner if it communicates effectively,” says Porre. “If the board does not receive the right type of information around FX then not only may they be unware about the impact this is having on shareholder value, they will also not be able to see the value treasury is adding in safeguarding this.

“And by providing more insightful information to the board the level of understanding that it has will only increase, potentially giving treasury more leverage when looking for investment in new tools to manage the risk.”

Porre is also keen to point out that a well-informed board is necessary to ensure that the treasury is challenged on what it is doing and if there are better, or more cost effective, options available.

Seeking for natural hedges

And it seems, according to the results of the study, that there are often better options available. Only around half of respondents use risk management techniques such as cash flow netting and exposure matching, whilst 89% use derivatives – primarily to hedge cash flows. “There therefore appears to be lots of scope for corporates to use natural hedging techniques to reduce their hedging costs,” says Porre.

Natural hedging requires a certain level of sophistication, however. “To effectively naturally hedge, the treasury needs to have automated systems that provide good visibility over its exposures. The board will also be required to have a detailed level of understanding and be well informed because treasury will need to build-up small positions before they hedge in the market, requiring stricter limits ” she adds.

Porre’s advice to treasurers is clear: take steps to achieve greater visibility, inform your board and then challenge yourself to save costs through seeking natural hedges.

The impact of BEPS

The need for corporate treasurers to have a good handle on their FX visibility and processes looks set to intensify due to the OECD’s Base erosion and profit sharing (BEPS) proposals. The project, designed to address the concerns that the profits of multinationals are being allocated to locations different from those where the actual business takes place in order to reduce their overall tax liability, will have an impact on corporate hedging.

“Transfer pricing will come into play if hedging transactions are completed centrally by treasury and pushed down to the operating units through internal transactions,” says Porre. “Treasurers will need to ensure that the costs and profits of these trades are correctly and fairly shared between the operating units. It will also need to make sure that it is passed through at the correct rate.”

BEPS will therefore add a significant challenge to an already complex process. In Porre’s view, corporates need to act now to be ahead of the game. “Treasurers need to begin documenting the volume and size of its transactions, the cost of providing these and the benefits and value of doing so. This will then enable them to more efficiently review the way the cost and value of hedging transactions is spread to be in line with the new BEPS rules should this be required,” Porre adds.

Want to know more about how to manage FX effectively?

Read how Jim Colby, Assistant Treasurer at Fortune 100 firm Honeywell and his team have worked to build a robust and resilient FX risk management process.