Cash & Liquidity ManagementCash ManagementFX risk: Break the cycle of “just keeping up”

FX risk: Break the cycle of “just keeping up”

Working on a lean treasury team can be a difficult job. The large number of areas that have to be covered and the amount of information that needs to be gathered, analyzed and understood is daunting.

Working on a lean treasury team can be a difficult job. The large number of areas that have to be covered (cash, liquidity, debt, risk, etc.) and the amount of information that needs to be gathered, analyzed and understood is daunting. All of this takes place while being looked at as a cost center that nonetheless needs to provide valuable perspectives and lead important initiatives.

While your team is working to keep up, they are simultaneously being asked to provide insights, innovation and process improvements to the larger treasury/finance/reporting structure. Macroeconomic events that trigger large currency or interest rate movements, as well as changes that inevitably happen within the company, don’t make this job any easier. In many cases, these changes eliminate their ability to improve how treasury works.

Even positive change can be scary. An already busy team can be distracted by the mandate to learn new tools or to implement updated processes. Current tools may be inadequate and existing processes stale and unresponsive, but how do you manage to make these pieces better when your key people are barely keeping up?

The area of foreign exchange (FX) risk provides a stark example. Cash flow exposure management requires your team to work closely with business units to get the most up-to-date and accurate information possible before incurring the cost of hedging that risk. Because of the general lack of uniformity in how companies manage the exposure gathering processes, the majority of your time is likely spent reviewing, consolidating, inputting and analyzing your exposure data (for each currency, entity, region, etc.). The potential for your team to get stuck on this process alone can have a big impact on the rest of the organization.

“The first step in managing your FX risk – collecting exposures from your business units – can be an exhausting and error prone process.” 

Meanwhile, an important opportunity could be lost. When your team is spending the majority of their time managing the data that they collect from their business units, they are missing out on the opportunity to collaborate with those same people, get better data through better processes and focus more on effectively managing the performance of your hedging program. But how do you break the cycle of just keeping up and move towards better management of your time, energy and the intellectual capital of your team? Step back and take a hard look at what you and your team spend your time on.

The first step in managing your FX risk – collecting exposures from your business units – can be an exhausting and error prone process. How much work is it to consolidate all of the data from multiple spreadsheets that were emailed to you? Do you spend time translating exposure formats into a standardized template? How much communication with your local treasurers is needed just to gauge the accuracy of the data?

The best practice is to get business units to input their own exposures, but still maintain control of what risks get hedged. We have talked to many central treasury managers that give many reasons why this is not possible. But it is possible; with the right tool and the right process, you can take all of that work off of your team’s plate, increase accountability in your Business Units and understand your data better.

The same goes for trade requests. Email and spreadsheets still run this process for treasury teams. In a way this makes sense because your local business units often have the best view of what the hedges and other trades should look like. But they still need you. In order to manage this workflow efficiently, you need an easy-to-use execution request tool, with a robust approval process. This shifts the weight to your business units to manage their own data and processes, without central treasury giving up its role as a stakeholder.

“The hardest and most important job is to be able to explain how well the FX hedging program is performing.”

Once trades are executed, post-trade processing can consume an enormous amount of time and resources, especially if you seek to achieve hedge accounting. Trade booking, confirmations, hedge documentation, inception effectiveness testing and initial booking of journal entries are jobs that need to get done quickly and well. But are these tasks what your team should be spending its limited time on? If you automate all of these processes, instead of linking data and monitoring system processes for valuations and hedge effectiveness, your team could spend its time analyzing the results and measuring the performance of your hedging program.

Working with corporate treasury groups over the years, the ChathamDirect team has learned that the hardest and most important job is to be able to explain how well the FX hedging program is performing. Without the right tools, this process can be difficult and the results hard to measure. Large scale events that dramatically shift currency relationships require treasury teams to provide detailed explanations of what the company is exposed to and what current positions would look like if rates were to move in certain directions. Smaller scale events like unexpected gains/losses in your hedging portfolio also require detailed explanations that, without the right tools in place, can make that job time consuming and onerous.

What we have learned from corporate treasury teams is that the two most important areas of focus for FX risk, working closely with your business units on getting good exposure data and being able to fully explain the results of your FX hedging program, are often crowded out by all of the data processing tasks that treasury teams must complete every month. The answer is to automate as many of those processes as possible so your team can spend time collaborating with business units and key stakeholders on the most important jobs.

ChathamDirect provides an intuitive workflow and high degree of automation to complete these routine tasks, while also providing the tools that your team needs for better collaboration on the front end of your process and better performance analysis on the back end.

Using ChathamDirect, your team can elevate above the rote tasks associated with managing a hedging program, and focus on providing your stakeholders with the information and analysis they need to make constructive decisions.

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