Director of Global FX Risk Management
Stuart Kirk is Director, Global FX Risk Management, for Xerox. Having moved out of banking nearly a decade ago, he talks to Treasury Today about a whole new set of challenges and how Xerox has managed to square up to them with a lot of judgement and a little luck.
Xerox, like Hoover, Aspirin and Escalator, is one of those companies whose names have become synonymous with an entire genre: in this case, photocopying. Consistently creative Xerox, founded in the US in 1906, has ideas far beyond being a noun and a verb. Company Chairman and CEO, Ursula Burns, now presides over a business that has sought to escape the curse of a generic trademark. “From our earliest days, our purpose was never about making copies but making it easier to share information,” she said recently.
True to this cause, in 2010, Xerox took a greater step forward, acquiring business process outsourcing and information technology services provider, Affiliated Computer Services (ACS). The combined business now has operations in 160 countries, employs more than 140,000 people and offers perhaps the broadest portfolio of document management, business process services and software in the world. In 2012 the business generated revenues in excess of $22 billion.
Xerox may be a single-minded company in terms of how it gets things done, but it is formed of two distinct sides. It has a technology business, offering printing and document handling functions; and a services business which covers a broad sweep largely around the business process outsourcing space. Its treasury operations are divided between two key locations: Norwalk in Connecticut, US and Dublin, Ireland. Strategic decisions flow from the group treasurer’s office in the US whilst responsibilities within the Dublin office are divided between global foreign exchange (FX) risk management and cash and liquidity management (with a team of five treasury-dedicated accountants to boot) with both joining forces to manage the inter-company loan books and the balance sheet management process that sees cash from all entities pooled for central deployment (more of which later).
The Dublin-based treasury serves almost all operations outside of the Americas, covering Europe, across to the Middle East and India and into parts of Asia Pacific; the majority of the latter, at least on the technology side, is managed by the long-established Fuji Xerox joint venture.
“We’re not at the point of putting an overlay structure in place yet, but that’s where I’d like to get to.”
Xerox is naturally dollar-denominated but like many MNC’s, it has several treasury companies to meet localised funding needs. This structure gives Xerox a multi-currency balance sheet, centrally-managed from Dublin. A major part of this office’s remit is to manage the currency risk attached to the balance sheets of all the treasury companies.
Within the business operations, currency exposures are centralised and managed in as few locations as possible (eg supply centres), whilst within the emerging markets, where rules vary widely, exposures are managed country by country. All this activity certainly places a heavy demand for all the major global currencies, with 37 different currencies in the current line-up. A multi-billion dollar total FX trade flow is generated by around 6,000 deals per year.
Then and now
Heading up the FX risk team is Director of Global FX Risk Management, Stuart Kirk. Kirk started his financial career as a management trainee on the retail side of Ulster Bank. He swiftly moved into the treasury team and took on FX trading duties before moving to Citibank in Dublin as a proprietary trader. When Citi closed the desk as part of its centralisation programme, Kirk transferred to Bank of Ireland Global Markets as Senior Dealer for Spot FX (“watching over the demise of the Irish pound”) before getting into his current professional stride, setting up from scratch the treasury operations for Gensec Bank Ireland. Gensec was the overseas investment banking arm of South African insurance company, Sanlam. Sanlam later decided to exit banking altogether, by winding up Gensec Bank and selling its 25% shareholding in ABSA to Barclays.
As that door closed, another opened with the chance meeting with a former Citi colleague who had recently returned to Ireland after a stint with Xerox in the US to head up the Dublin treasury centre. Under the guidance of the firm’s new group treasurer, Rhonda Seegal, they decided to set up a centralised FX risk management function in Dublin. With the new office in need of FX risk expertise, Kirk stepped into the breach, once more charged with setting up operations from scratch, commencing in January 2004 as Director, EMEA Treasury. He held this post for five years before rising to his current position of Director, Global FX Risk Management.
Now, working alongside the US-based Directors of Global Cash Management and Global Corporate Finance what exists, says Kirk, is an “extremely well joined up” operation. This, he adds, is a product of the group treasurer’s vision of unity across the Treasury function.
And the winner is…
En route, Kirk joined the Board of The Irish Association of Corporate Treasurers, a position he held from 2005 until 2011, taking up the reins as President in 2009. Together with many of his co-workers at Xerox, he has also earned a Yellow Belt for Lean Six Sigma business processes, a methodology, he feels, “makes you terribly disciplined about how you approach things”.
It was this quest for clarity and order that saw Kirk collecting the most recent feather in his treasury cap. His effort to put in place a new approach to currency risk management was feted in June of this year as winner of the Best Foreign Exchange Solution at Treasury Today’s Adam Smith Awards. The system, explained below, has seen currency risk management edge closer to centre-stage with some significant benefits brought to the group.
Treasury drivers: the in-house bank
Embedded within the global structure of Xerox are over 250 operational entities which sell equipment and services to clients across the world. Alongside these are a number of shared service centres (SSCs) including sites in India, the Philippines, Malaysia, Ghana, Guatemala, Jamaica, Mexico and Peru. Wherever possible all short and longer-term lending and project-based finance is funded from Dublin. Similarly all surplus cash is remitted to Treasury (preferably on a zero-balance basis).
With all banking, funding, liquidity and corporate finance functions under one roof, the Treasury is effectively Xerox’s in-house bank. It works directly with a small group of global cash management banks which provide “the plumbing” that enable cash transfers in and out. Typically, Xerox entities around the world do not borrow from or maintain deposits with local banks and only require bank accounts to pay local bills, salaries and so on and to facilitate sweeping.
If an entity needs cash for non-routine purposes – funding for an infrastructure project to enable it work with a new client, for example – it can call upon Dublin to provide that loan efficiently and without prejudice. Indeed, as an in-house bank, Dublin relies on each entity to inform it of its needs and, as long as it has business approval, treasury does not veto these funding requests (as a ‘real’ bank may do). That said, treasury is “not an ATM machine that dispenses cash automatically”, states Kirk. In fact it is involved closely in processes such as the structuring of funding, asset and liability management, and taxation, legal and accounting matters. This ensures each entity is set up optimally in terms of the amount and type of capital and debt on its books.
The industry model today veers more to clients leasing rather than buying equipment outright (a business model actually invented by Xerox in 1959 to promote its Model 914 copier). The recent shift further in this direction has seen the company establish leasing companies in most countries around the world. These are able to borrow term funds from treasury (from three months up to five years, depending on the size of the business) to match the portfolio of leases to external clients, the basis risk thus transferring to the centre.
A new way of hedging
Xerox’s award-winning currency risk approach is described by Kirk as an “evolving process”, growing out of the implementation of a new treasury management system (SunGard’s Quantum) back in 2004. Having aligned its business processes to match the system rather than the other way round, as had been the case with the previous system, the company could enjoy straight through processing for the first time. With everything transaction-driven and online, loans, deposits, FX trades, risk limits, bank account data et al could be booked in Quantum, enabling accounting processes to run straight from its general ledger. Automation also meant that spreadsheets could be retired and, bar use for ad hoc analysis, most have now gone.
“We’re not trying to make money out of currency. What we’re trying to do is dampen down the impact of currency volatility.”
Having built the foundations for progress, the first task of the new FX risk management regime was to look at group exposures on a consolidated basis and to quantify the total impact of FX volatility on earnings. The second was to tackle transparency around Xerox’s existing hedging programme to optimise and balance cost with risk. The final part was to find a more systematic approach to FX hedging.
Kirk explains that Xerox’s policy is for 100% of on-balance sheet exposures to be hedged, but a variable percentage applies to forecast exposures; the more certainty underpinning a forecast, the higher the ratio hedged and vice versa. Some of Xerox’s currency exposures are naturally more certain than others. Its Yen exposure, for example, has a higher degree of certainty than other currencies because the volume of trade with the company’s Japanese suppliers is fairly consistent. Some uncertainty remains and thus how far out to hedge, when, and with what product, is a primary concern.
The development of a systematic hedging process saw the team consider a number of possibilities. Hedging a whole year in advance at one time was deemed too risky. A rolling programme was considered, where every quarter a certain percentage of a currency requirement is hedged 12 months out, but often this would achieve little more than the average forward rate. It was decided that where forward contracts were not adding value, the focus should shift to FX options.
With banking partner Citi, Xerox turned to the concept of relative value. Here, if the price of a currency is above its long-term fair value, then forwards should be used. If the price is more or less par with fair value, a mix of forwards and options should be used. If price is way below fair value, the approach would be to use options (on the basis that price should revert to fair value over time). At different points in the cycle all of these products can be used in varying degrees, hence the process is known as Dynamic Layered Hedging (DLH).
“What we’re doing is assessing where the price is, relative to fair value and where we are in the business cycle,” explains Kirk. Keeping track of each layer in each quarter over a rolling period of four or five quarters requires the fine-tuning of each layer and taking product decisions every quarter; it is complex, he admits, but it yields results – and in any case “the power of technology” is at hand.
The genesis of the DLH lies in an enormous amount of back-testing with Citi that used data accumulated over 20 years. This exhaustive technology-led process enabled Xerox to move ever-closer to the most appropriate blend of products and scenarios based on its core currency exposures. Having now successfully run DLH for three years, even some of the non-core currencies are now being brought into the programme. However, Kirk points out that hedging emerging market currencies can be prohibitively expensive and only a “slimmed down” version of DLH can be deployed, if at all.
The next phase of the hedging programme will be to advance scenario testing beyond the current currency-by-currency or country-by-country basis towards a total-corporation basis, enabling Kirk to plot against more detailed trends. Correlation analysis between currency pairs has already been undertaken using the risk module within Quantum (the system underwent a major upgrade in 2012). Kirk’s goal is to be able to feed all exposures into a single matrix so the impact of any movement by any currency can be monitored and, as a dollar-reporting company, any translation risk faced by Xerox can be tracked. “We’re not at the point of putting an overlay structure in place yet, but that’s where I’d like to get to.”
A broader understanding of FX risk around the business has also helped steer it in the right direction. “As I’ve engaged more with the business over the years, more people realise how currency can affect our business,” Kirk notes. “They never used to think about it; it was just something treasury took care of.” Now, he says, it’s got to the point where almost everyone has a view on currency which is not always a good thing: “sometimes it feels like I’m surrounded by currency experts!” Hence the company has had to adopt a more systematic approach “to take the emotion out of the hedging decision”.
As treasury professionals obviously fully in-tune with the potential consequences of currency movements, Kirk and his team has a well-rounded (and well-grounded) remit. “We’re not trying to make money out of currency. What we’re trying to do is dampen down the impact of currency volatility, period over period.” It’s a demanding role, but that is what Kirk seeks. There have been some significant external changes which have been implemented over the years and now, with the likes of SEPA, Dodd-Frank and EMIR, and the indirect impact of Basel III to contend with, he relishes the next set of challenges in his career. The move away from banking (an industry which is now extremely challenging “for all the wrong reasons”), comes with no regrets. For Kirk, “being part of a highly-rated global company is where the action is now”.