Why is technology the key to optimised FX risk management
Seismic economic shifts and continued uncertainty make effective risk management tools more vital than ever
Seismic economic shifts and continued uncertainty make effective risk management tools more vital than ever
Despite the best efforts of regulators to unite key international markets under equal frameworks, the pandemic, together with ensuing socio-political uncertainty, has begun to chip away at the globalised financial infrastructure.
In turn, forex (FX) risk is growing apace for the many companies that trade in multiple currencies.
Although FX volatility is one of the biggest challenges facing the financial stability of organisations today, there are countless treasurers out there that are still not actively monitoring key risks.
Others, meanwhile, do so manually and laboriously, or by using inept tools. As such, companies both big and small continue to welcome avoidable pitfalls.
The Global Treasurer spoke with ION Treasury’s Jack Duffy to explore the issue.
Health crises aside, the pandemic has had an unparalleled impact on our economies. To start, markets saw a sharp increase in savings as lockdowns persisted and much of the population stayed stuck at home. This, in turn, fed into soaring demand for consumer goods. Major disruptions in production and supply chains, meanwhile, further compounded these shifts.
Then just as signs of economic recovery began to appear, Russia invaded Ukraine and brought even more chaos to both production levels and global supply chains. Political uncertainty in the region remains, lending itself to an even stronger US dollar.
In response, governments are attempting to cool their respective economies by increasing interest rates. Naturally, the consequence of doing so in the medium to long-term overshadows companies of all shapes and sizes as they continue to navigate such turbulent waters.
While it is imperative companies pay greater focus to their FX risk management, doing so is no simple task.
“There’s a challenge in really addressing the increasing volatility and complexity across the world in an effective way,” Jack Duffy, product manager at ION, tells The Global Treasurer. “And on top of that, leaning into using more complex instruments and different kinds of strategies [that were previously restricted to] the banking sector.”
For instance, although there has been a particular focus on liquidity over the past two years, there has also been a surprising degree of underinvestment in technology. As such, there are many companies out there that still need to take the next step in their FX management so as to better approach today’s tumultuous environment.
Companies are also faced with the problem of quantifying their risk exposure. FX is distinct in that it touches every single point of a business; in every such instance, an organisation becomes exposed. As exposures escalate, data becomes increasingly difficult to consolidate, thanks largely to the various systems in play. “That all becomes a big headache very quickly,” Duffy adds.
Fortunately, having a top-notch integrator and a standard interface for the various systems in play enables the consolidation of everything into one format. This, in turn, helps treasurers to understand and quantify their risk exposures far better.
To achieve this degree of sophistication, automation is key. As well as empowering treasury teams of all shapes and sizes, there is a clear monetary benefit to consolidating a company’s view of its position across all exposures, financial instruments, and internal policies.
Automating FX risk management also means the mundane manual work, which can take up an inordinate about of time and effort, is no longer necessary. Instead, treasurers have an opportunity to carry out proper financial and performance analysis – in other words, real value-added work.
Further benefits can be obtained by using a Software as a Service (SaaS) solution. Not only can it simplify FX risk monitoring, but it is also capable of enhancing hedge management by producing automated hedging schedules and integrated APIs that instantly pull all transaction data in order to develop position overviews by risk, currency and maturity.
Duffy adds: “It is always good to couple your market news with your FX risk, because FX is a liquid market. It is something treasurers do maybe 100 times a day, every single day, which gets very risky, very quickly. Therefore, you need access to really good market data and insights in an integrated way.”
A SaaS solution also allows individuals to utilise the benefits of scale. “Everyone gets the same improvements; having the latest, greatest version, means no risk of missing out on anything.”
And there is more to come. AI can further improve the validity of a company’s forecasts and decision making. “It can suggest trades based on 100 different parameters, which can be mind-boggling for someone to do on a spreadsheet,” Duffy tells The Global Treasurer.
It can even automate early draws, net forwards and market orders based on the pre-defined conditional criteria of that company’s choosing. What’s more, smart, in-built micro-hedging also addresses many of the inherent vulnerabilities that come with manual hedging processes.
Being web-based, light and easy-to-use, SaaS for FX management has long been used by small companies. They also have no upgrades to worry about, which can be a massive undertaking if there is a big project underway.
On the other hand, larger companies have often felt the need to operate an on-premise solution, even despite the difficulty of integrating all their data sources and systems into one place. But that is now changing. With hardware and server structures improving, SaaS is becoming far more resilient and more scalable.
Its performance, meanwhile, has markedly improved in the last five years, while the benefit of automatic upgrades is a no-brainer for all types of organisations. As such, more and more bigger enterprises are beginning to move into the space, as well.
Essentially, SaaS for FX management has become a key driver for a lot of companies. “We can give you market data, bank connectivity and access to [all relevant] platforms in a very standard, succinct way. And no matter what company size, shape, industry or form, they’re all on the same version and using the same functionality; it’s a community feel, because we’re all speaking the same language,” says Duffy.
The economic landscape today is daunting. Businesses are faced with constant changes and growing FX risk. Luckily, they can equip themselves with the tools needed to wade through and come out the other side stronger, more resilient and more profitable.
