Survey Highlights Treasurers’ Concerns Over Visibility of FX Exposures

A new survey from Citi shows that gaining visibility of their FX exposures remains a core concern for corporate treasurers.

In the survey, which includes responses from 400 corporates of varying sizes, industries and geographies, improving cash forecasting was cited most frequently as the top priority amongst these firms.

“Firms are recognising that they still have shortcomings in terms of visualising their balance sheet, which is one of the most important aspects of treasury management. And throughout this survey, we consistently see a focus on transparency,” says Erik Johnson, global coordinator at Citi FX Risk Solutions.

Johnson says that this desire for greater visibility has led to a significant shift in terms of how corporate treasurers think about their FX risk. In the survey, 91% of respondents say that they have an FX risk policy in place and 71% of these firms review this policy annually.

“If you go back several years, companies in general weren’t reviewing their FX policies on an annual basis. What we’re now seeing is that the business models are shifting very quickly, in part because technology is creating a much more rapid transparency of the balance sheet,” says Johnson.

He continues: “The other big shift we’ve seen in the past couple of years is that firms are really measuring the impact that FX has on both company and industryspecific key performance indicators. Even though 63% of survey respondents said that their objective when managing risk is to reduce volatility with regards to both cash flow and earnings, the reality is that only 12% are actually hedging their earnings translation. So while there is a shift in focus to understanding the impact of FX on their business models, some of our clients are still in the process of adjusting their risk management to match that focus.”

Jaya Dutt, global head of risk management solutions for corporate FX at Citi, says that one result of this desire for increased visibility is that treasuries are increasingly centralising their risk management operations in order to take a more holistic approach to handling these risks.

“In terms of where trades are booked, whether firms use their centralised treasury or execute in regional treasury centres is more of an operational decision, but when we talk to clients today, we are seeing head office focusing more on holistic risk management strategies,” she says.

The survey does, however, highlight some challenges facing corporate treasurers looking to improve the transparency of their exposures and apply this holistic approach to managing them.

For example, although 72% of respondents currently use treasury management system (TMS) or enterprise resource planning (ERP) treasury modules, only 33% of them can access these technologies in all locations where treasury activities are performed.

“The fracture of technology across organisations is a key observation that we think is at the root of many of the challenges associated with managing risk,” says Duncan Cole, EMEA head of the Treasury Advisory Group at Citi.

He adds: “Probably more importantly, the survey shows that 45% of treasurers are not using their TMS to support their financial risk management process. We think this is too large of a figure, particularly given the type of investment required to deliver some of these technologies into the organisation. So the technology is being underutilised from a risk management perspective.”

Cole also points out that the survey shows that in many cases, there is a distinct lack of integration between the different technologies being deployed by corporate treasurers.

Only 37% of respondents say that the TMS that they’re using to manage risk has full, automated connectivity with their general ledger, and 77% say that they don’t have a fully integrated ERP/TMS platform with their banks. As a result, manual reconciliations are needed, which introduces inefficiencies into the risk management process.

Although corporate treasurers are looking at new technologies to automate repetitive manual tasks and improve integration between both their own internal systems and external platforms, with robotic process automation (RPA) and application programming interfaces (APIs) proving to be where most of the focus is right now, Cole notes that progress has been slow in this area.

“There’s parallel working groups in these firms investigating these new technologies, but there’s still a long way to go in optimising the existing technology because the underlying fracture between the existing TMS and ERP systems has not been resolved in the past two years,” says Cole, referencing a similar survey published by Citi in 2017.

Dutt concurs with this assessment, pointing out that although 72% of respondents say that they use a TMS or ERP system, the exact same percentage also say that they have manual inputs into cashflow forecasting.

“I think what this demonstrates is that there is a call for continuous improvement in processes given the current challenges in integration of the ERP and TMS systems and limited risk management process which are offered by these systems currently,” she says.

Dutt adds that it’s impossible for firms to forecast liquidity and cash flows with 100% accuracy, and therefore it is also important to build in flexibility to their risk management systems.

The survey shows that spot, swaps and forwards remain the most commonly permitted FX instrument, but that 46% of respondents said that options-based strategies are allowed under their companies’ policies.

“Because of the difficulty in forecasting exposures, and systems currently not being adequate for them to devise an effective risk management process, clients need to add optionality and flexibility into their FX hedging mix, which is why we see clients using FX options. Also, recent changes in accounting have facilitated the use of FX options,” says Dutt.

This is evidenced by the fact that hedging uncertain exposures was the most common reason given for choosing an FX option strategy by the survey respondents.

Interestingly, 82% of the respondents reported having exposures outside the G10 currencies, yet 78% said that they either hedge emerging market (EM) and G10 exposures the same, or essentially don’t hedge the EM at all. The reason why these are notable statistics is because, as Johnson explains, corporate balance sheets have continued to expand into local markets and EM and yet there hasn’t been any meaningful shift in the amount that treasurers are hedging against these exposures.

“This is still a work in progress and we’re working with a number of clients to carve out EM risk management practices and look at cost effective ways of managing EM risk,” he says.

The main reasons why the survey respondents aren’t currently hedging their EM currency exposures more is that it is cost prohibitive to hedge these currencies, the relative lack of liquidity in the market for these currencies and the local regulatory requirements associated with trading them.

Galen Stops

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