As corporate treasurers grapple with the ever-increasing demands of their role in the enterprise, many of their new responsibilities involve complex management of finances, particularly when it comes to foreign exchange (FX) risk exposures — especially in today’s volatile times.
While the current global markets are labeled as particularly risky, FX volatility has always been a challenge for finance executives. Researchers suggest that treasurers are struggling to hedge against those risks and take advantage of the technologies out there that can help. A report published last year by Deloitte revealed exchange rate volatility is the largest point of friction for corporate treasurers today.
Exacerbating treasurers’ struggle to get a handle on FX fluctuations is a lack of transparency: 43 percent of the professionals Deloitte surveyed said a lack of visibility makes FX risk exposure worse for their organizations.
The report concluded that treasurers lack the technologies they need to heighten that visibility and obtain real-time insight into FX risk exposures.
Leonardo Ramos, director of treasury FX dealing at FX and global payments firm EncoreFX, agrees, but told PYMNTS that he’s seen an increase in corporate treasurers rising to the challenge of complex FX management requirements.
“FX markets are becoming more mature, and treasurers more sophisticated,” he said in a recent interview. Treasurers working with EncoreFX “are much more aware of where FX markets are trading, how forwards markets function, how interest rates and economic data releases affect markets, and how much spread or fees they are being charged by their bank or FX provider.”
It's a promising observation, considering how previous research has warned companies — especially small businesses — about a lack of transparency in how financial service providers are charging customers for FX services. Recent allegations that American Express secretly hiked FX fees for its small business customers shed light on this issue.
In Ramos’ view, treasurers are beginning to take the lead in FX risk mitigation, and it appears education has become a critical component of that effort. These professionals are paying greater attention to geopolitical events, watching political press conferences and taking note of trade negotiations and disputes, he explained.
Trade disputes involving the U.S., China and elsewhere are only the latest global events threatening to add even greater volatility to FX markets — the other recent, major geopolitical event to send shockwaves through FX markets was, of course, the Brexit vote.
Last March, Western Union published research on how U.K. businesses are impacted by Brexit. The report found that U.K.-based importers saw an average profit decrease of 12 percent in the wake of the EU referendum, and analysts linked that decline directly to FX volatility. And, like Deloitte, Western Union found that only 22 percent of businesses surveyed have increased FX management by implementing tools like forwards and options, signaling a lack of technology adoption. Western Union also found that 16 percent simply expect FX volatility to gradually smooth itself out.
“Many small- to medium-sized businesses have cross-border payments and simply accept the fact that sometimes rates move in their favor, and sometimes they move adversely,” reflected Ramos. Businesses that rely on that strategy, however, could pay for it later on. It’s true that FX markets ebb and flow, he said, but “large swings in currencies can often be detrimental to a corporates’ bottom line, and trends in currency movements can last over many years.”
“So, not hedging, and simply accepting that rates will move, can often be incredibly dangerous and, for some companies, [it’s] the difference between profitable and not profitable,” he added.
For treasurers that are hedging, Ramos said he has seen two main strategic camps for addressing geopolitical events that impact FX markets. One is for treasurers to continue to systematically hedge simply to secure price certainty. But others, he said, have taken a more “hands-on” approach to FX management in an effort to not only gain price certainty, but secure better exchange rates.
“In my opinion, the treasurers who have a systematic hedging strategy with a mix of spot, forward and conservative structured products tend to outperform the more active treasurers, while spending a lot less time stressing over rates,” he said.
While not all treasurers are taking the required measures to mitigate FX risk, Ramos said he’s seen these professionals not only enhance their knowledge of geopolitical events and FX strategy, but also heighten their requirements for the financial services offered to them. He described meeting expectations as a “deal-breaker” for treasurers when choosing a financial service provider.
“Corporate treasurers have a certain expectation for speed of delivery that is constantly changing, and the bar [is constantly] being pushed higher as technology improves,” he noted. With treasurers placing greater importance on visibility of global payments, providers have to step-up to the plate, too.
EncoreFX recently announced that it had joined SWIFT’s global payments innovation (gpi) service — a technology designed to heighten transparency of transactions as they move throughout the inter-banking system — in an effort to meet treasurers’ expectations. As treasurers’ own responsibilities grow, their financial services providers will have to keep pace.
“Corporates ... have an understanding of how technology is constantly changing and improving in this space. So with that maturation and understanding comes a stronger demand for more efficient payments and more sophisticated hedging solutions to mange risk,” said Ramos. “There are not too many treasurers who simply wait for payables and receivables to come due, call up their bank and accept the rate given.”