In January, currency management automation software developer Kantox launched an in-house FX solution designed to allow companies to centralise their FX management and trade executions of their subsidiaries, maximising exposure netting for the group and enhancing liquidity.
It is widely acknowledged that managing the currency transactions of multiple business units poses significant challenges for finance teams, often leading to high trading costs, limited visibility and a lack of consolidated FX management.
According to Antonio Rami, Co-Founder and Chief Growth Officer at Kantox, in-house FX enables corporates to increase control over subsidiaries’ trading by allowing them to approve or reject internal FX transactions above certain amounts, tenors and currency pairs.
Hotelbed Group is now able to centralise its FX management, providing internal liquidity to 22 subsidiaries and netting exposure on a group level.
“This exposure is generated by the fact of doing business in different currencies than the entity’s functional currency on both sourcing and billing,” explains Javier Ibañez De Villegas, Head of FX Risk at Hotelbeds. “The reinvoicing process between our entities generates FX exposure.”
The companies’ main currencies are USD, SGD, GBP, MXN, AED, THB and JPY.
“From a strategic point of view, we previously managed our FX requirements in a very similar but manual way,” says De Villegas. “Where we gained with the Kantox implementation was in the automation aspects, such as end-to-end processing, conditional market orders, dynamic hedging, exposure controls and limits and granularity on reporting.”
By consolidating exposures from different entities in a single position, the company avoids inefficiencies. From a trading perspective, netting offers the possibility of reducing volumes, which can be translated into savings in a number of areas – lower bank spreads, less forward points cost and reduced credit line use.
“A central treasury can now be much more than a simple intermediary between its subsidiaries and the banks,” says Simon Chevoleau, Kantox Chief Product Officer. “Headquarters can take control, optimise, and even enhance the FX capabilities for the entire group.”
In the past, banks – especially those with large currency trading desks – have emphasised the difficulty of managing FX internally, noting that it can be difficult and expensive to have an in-house FX dealer to manually handle transactions.
While banks have a vested interest in supporting their FX business, it is true that firms with legacy infrastructure and less than optimal workflows have to do a lot of work to implement centralised FX management across multiple business units.
“FX netting is a great tool for corporate treasurers to reduce FX execution costs and it is very easy to put in place for a single entity or even a number of entities/subsidiaries executing FX against one bank entity,” says Fateh Madani, Head of eFX Sales & Solutions Americas at Citi.
However, implementation can become more complex where the subsidiaries involved are in emerging or frontier markets, which requires thorough analysis to review all aspects of netting and not just the FX pricing element.
Other than FX transaction cost reduction, streamlining operations and settlement, another important benefit is the opportunity for treasury to look holistically at FX risk and devise better risk management approaches by reviewing their policies with more data in hand – as well as reallocating hedging to its exposure origin.
“For these things to happen I would emphasise the importance of systems and processes and the important partnership central corporate treasury professionals have with their geography, legal entity and business units finance professionals,” adds Madani.
