CFO Perspectives: 5 ways CFOs can increase the efficiency of treasury operations

16-08-2022 | treasuryXL | Kantox | LinkedIn |

In the third edition of CFO Perspectives, we’ll draw from our work with CFOs to explore five ways senior finance executives can increase the efficiency of treasury operations using purpose-built software solutions. 

Credits: Kantox
Source

According to a recent HSBC report, as many as 81% of CFOs view the digitisation of treasury processes as an area of increasing importance. The same survey shows that technology has moved from ‘nice to have’ to a key differentiator for treasury. 

The good news is that ‘special purpose’ technology exists that —working alongside your existing systems (TMS, ERP)— allows CFO’s and finance teams to dramatically boost the efficiency of treasury operations.

In this blog, we briefly present five areas of improvement across the FX workflow. Taken together, they present a unique opportunity for CFOs to turn the ‘digital treasury’ into a day-to-day reality, allowing members of the finance team to remove operational risks while devoting more time to value-adding tasks.

Improvements across the FX workflow

Currency management is a process undertaken in three different phases. In the pre-trade phase, FX-related pricing is managed alongside the crucially important collection and processing of the firm’s exposure. The trade phase, quite naturally, is concerned with trade execution, primarily through forward FX contracts. Finally, the post-trade phase covers accounting, reporting and analytics processes and the ‘cash flow moment’ of payments and collections.

In all of these phases, easy-to-install software solutions provide tangible improvements in terms of the efficiency of treasury operations.

These improvements include:

Improvement 1: Set a strong ‘FX rate feeder’

Pain point: Commercial teams often lack the capability to use the currency rates they need to price in a data-driven and efficient way. With favourable forward points, they could use the forward FX rate to price more competitively without hurting budgeted profit margins. With unfavourable forward points, pricing with the forward rate would allow them to remove excessive markups.

Improvement: Whatever the number of transactions involved, automated solutions to price with the required FX rate can be quickly scaled to all the required currencies, with the pricing markups per client segment and currency pair requested by commercial teams.

Improvement 2: Process all types of exposure

Pain point: When it comes to collecting the firm’s exposure to currency risk, most Treasury Management Systems (TMS) are designed with accounts receivables/payables in mind. While this works fine for balance sheet hedging, the focus on accounting items precludes the automation of cash flow hedging based on the exposure collected earlier — firm commitments and forecasts for budget periods. 

Improvement: API-based solutions allow finance teams to automate the crucially important process of capturing the relevant type of exposure information and run a variety of cash flow hedging programs, including combinations of programs that require more than one type of exposure data. 

Improvement 3: Connect the phases of the FX workflow

Pain point: The trade phase of the FX workflow is where most of the attention of CFOs has been placed, as Multi-Dealer Trading platforms such as 360T have reduced the cost of FX trading for corporations. But while the execution of trades is oftentimes manually initiated, most systems lack the capability to fully automate the process of triggering trades.

Improvement: What special-purpose software brings is the capability not only to automate the trade part of the workflow —via connectivity with Multi-Dealer platforms—but also to link it to the pre-trade phase as well by ensuring that trades are executed at the right moment in time.

Improvement 4: Automate Hedge Accounting

Pain point: Compiling the documentation required to perform Hedge Accounting can be a costly and time-consuming process, as hedge effectiveness is assessed in by comparing changes in the fair value of the hedged item to changes in the fair value of the corresponding derivative instrument. This forces companies to rely on highly skilled personnel to manually execute these tasks.

Improvement: The perfect end-to-end traceability of automated solutions makes it possible accounting team to automate the painstaking process of compiling all the required documentation to perform Hedge Accounting – allowing CFOs to cost-effectively provide more informative financial statements.

Improvement 5: Automate swap execution

Pain point: The process of adjusting the firm’s hedging position to the cash settlement of the underlying commercial exposure is one of the finance team’s most resource-intensive and error-prone tasks. It can require an enormous amount of ‘swapping’, particularly for companies that manage many commercial transactions in different currencies.

Improvement: Swap automation, a task that most TMS are unable to perform, is a key feature of Currency Management Automation software. Perfect traceability allows members of the finance team to automatically ‘draw on’ or ‘roll over’ existing forward positions while removing operational risks.

Read the second edition of our CFO Perspectives series, 5 asset management tactics CFOs should borrow from when managing FX risk.

Cash & Treasury Management: Join The World’s Leading Experts in Copenhagen

04-08-2022 | cashandtreasury.dk | treasuryXL | LinkedIn

 

Featuring Chairman of the event, Pieter de Kiewit – Owner of Treasurer Search

 

Be a part of the exclusive Cash & Treasury Management Conference on the 1st of September 2022, which will be held in the extraordinary luxury settings at Hotel d’Angleterre in Copenhagen.

Get updated, expand your network, and get inspiration for optimizing your work within the Cash & Treasury Management community.

 

 

The international program consists of selected and experienced speakers that have proven success within a certain area of Cash & Treasury as e.g., ESG, digitalization and Cash Management. The conference brings together a selected group of high-level senior treasurers from global organizations. Learn from your international peers and join the exclusive network. The event ensures you a full day of new knowledge and inspiration made for high level Treasurers. You get in-depth with the latest trends, valuable content from recognized speakers and extensive networking opportunities.

Among others, these topics have been selected for this year’s conference:

  • Sustainability financing – experiences one year down the road
  • Proprietary data driven cash flow forecasting model
  • How we integrated Nets Group Treasury in to Nexi Group treasury
  • Experiences from a massive hacking attack
  • A career within Novo Nordisk treasury
  • Macroeconomic trends and predictions
REGISTER VIA TREASURYXL

 

As part of TreasuryXL’s network we offer treasurers 25 % discount.

Sign up now and join us 1 September – Remember to use the code when signing up: TreasuryXL25

 

 

Read the program and learn more about participation and sponsorship opportunities: cashandtreasury.dk

 

 

 

 

CFO Perspectives: 5 asset management tactics CFOs should borrow when managing FX risk

01-08-2022 | treasuryXL | Kantox | LinkedIn |

When managing FX risk, CFOs could learn a lot from the world of asset management, where a revolution —led by indexing— has led to huge gains for investors. But how can you apply this to your business’s FX risk strategy? Watch below the video, or read the article!

Credits: Kantox
Source

In the second edition of CFO Perspectives, we’ll draw from our work with CFOs to explore the parallels between asset management and FX risk. We’ll break down the processes and tools used in asset management which can be applied to your currency management strategy, with some spectacular results.

Over the last couple of decades, the world of asset management —an industry with $100 trillion under management— has been turned upside down by a quite unexpected revolution: indexing. Instead of relying on managers’ capacity to time the markets, these firms have automated the selection of assets by quietly replicating stock indexes.

Can CFOs lead a comparable revolution in currency management?

The answer is: yes, they can! Let us see why and how they can accomplish that feat.

Having embraced indexing early on, two leading firms have assets under management north of $15 trillion. What’s more, they have achieved such a spectacular result with fees that are only a fraction of the fees charged by those who embrace speculation. They have saved, and they are still saving, hundreds of billions in costs to investors.

Similar changes may be afoot in the business world. The term ‘exposure under management’, now used by CFOs and treasurers, comes from the expression ‘assets under management’. More importantly, CFOs are eschewing speculation — just like their cousins in asset management.

When managing currency risk in the one-trillion-a-day forward currency market, CFOs are using more and more digitised, automated solutions.

A random walk for risk managers

Once in a while, a lack of currency hedging or even speculating on an FX market move can yield a positive outcome for CFOs. But luck will run out at some point. Sooner or later, blindfolded by overconfidence, ‘speculative’ risk managers flounder in their vain attempt to time currency markets — with disastrous consequences for themselves and their companies.

Like stock prices and the price of other financial assets, exchange rates are not predictable. They follow ‘a random walk’ in which the forecast is set equal to today’s exchange rate (the spot rate). Accordingly, investors —and risk managers— should embrace markets rather than trying to beat them.

This is the thrust of the analogy between the asset management revolution and the coming revolution in FX risk management, an event that will ultimately enhance the strategic role of CFOs.

5 asset management tactics CFOs should borrow when managing FX risk

Let us go beyond the surface and take a closer look at the key tools and processes used by the most successful companies in asset management. These processes provide a useful template for understanding how CFOs will use Currency Management Automation solutions to manage FX.

We can single out at least five main lines of action:

  1. Avoid timing the market. Nine out of ten of the so-called geniuses of the investment world have been ‘destroyed’, in terms of comparative performance, by the more modest index funds. Adding insult to injury, the latter have charged only a fraction of the fees. The no-speculation mantra has proved immensely successful in asset management. If one accepts the view that currency markets also follow a ‘random walk’, then there is no reason to expect a different outcome when it comes to FX risk management.
  2. Achieve operational brilliance. Indexed asset managers know that their success relies on engineering products that achieve operational brilliance by taking the risk of human error out of the equation. Just as indexing is measured by the tracking error between a fund’s rate of return and that of its benchmark, Currency Management Automation is at its core an engineering product that uses Application Programming Interfaces to achieve great precision in currency hedging while allowing managers to seamlessly run the entire FX workflow.
  3. Implement scalable solutions. Successful asset managers use platforms that provide scalability, which makes it possible to quickly and cheaply enter new markets such as bonds, commodities and others, almost anywhere and in many currencies. The same idea applies to FX automation, as CFOs are set to implement scalable, data-driven pricing and hedging solutions to enter new markets, enabling their companies to buy and sell in more currencies — with FX risk systematically under control.
  4. Innovate with a purpose. Indexing is one of the few truly beneficial inventions, a technology that has saved investors hundreds of billions of dollars. Similarly, the purpose of automated FX risk management is to allow firms to confidently ’embrace currencies’, reducing costs to customers and ultimately enhancing the value of the business. When it comes to innovation, purpose matters (see: “CFO Perspectives: 3 ways CFOs can use currencies to boost their business’ value”).
  5. Keep a foot in more than one camp. The world’s largest asset manager keeps a foot in both camps: active asset management and index funds. An entire platform provides a menu from which clients can select whatever financial slice they might fancy. Likewise, CFOs have at their disposal an entire ‘family’ of automated hedging programs and combinations of programs, including balance sheet hedging and a variety of cash-flow hedging programs that respond to their firms’ goals and pricing parameters.

Read the first edition of our CFO Perspectives series, 3 ways CFOs can use currencies to boost their business’s value here.

What is a yield curve or interest rate curve? (Dutch Item)

25-07-2022 | Erna Erkens | treasuryXL | LinkedIn |

Valutacoach en currency specialist Erna Erkens legt uit wat er met een yieldcurve of rentecurve wordt bedoeld. Grijp op je winst door er meer kennis over te vergaren. En nog belangrijker, wanneer je er goed naar moet kijken, en hoe!

Oorspronkelijke bron

Met de yieldcurve of rentecurve wordt bedoeld de rente van de korte naar de lange rente. In een grafiek wordt op de X-As (horizontaal) de looptijden van de rentes weergegeven. Het begint met de of 3 maands rente en het eindigt op de X-As met de 30 jaars rente. Op de Y-as staat het rentepercentage.

Vaak komt de yieldcurve of de rentecurve ter sprake bij vermogensbeheer. Het gaat dan meestal over obligaties. Vaak staatsobligaties. Maar wat betekent dit eigenlijk? Waarvoor wordt de yieldcurve gebruikt? In dit artikel leggen we uit wat de yieldcurve precies is, hoe je deze curve interpreteert en waarvoor het wordt gebruikt.

  1. Wat is een yieldcurve?
  2. Waar wordt een yieldcurve voor gebruikt?
  3. Welke soorten yieldcurve zijn er?
  4. Zo gebruiken de banken de rentecurve/ yieldcurve
  5. Welke factoren bepalen de rentestructuur?
  6. Hoe interpreteer je een yieldcurve?

Wat is een yieldcurve of rentecurve?

De yieldcurve kent meerdere benamingen. Hij wordt ook wel rentecurve of rentegrafiek genoemd. Het is een  grafiek van de korte rente naar de lange rente. Vaak van staatsobligaties. In dat geval gaat het om de rendementen. Maar het komt ook ter sprake bij financieringen van bedrijven. Als je een keus moet maken voor een periode van de financiering is het een leidraad van hoe de rentetarieven per periode liggen.

Volgens het woordenboek betekent yield: opbrengst, productie, oogst, rendement. Het rendement op obligaties, inclusief de jaarlijkse rentebetalingen, de aankoopprijs en de tijd tot de afloop van de obligatie. Een obligatie  met een hoge rente zal meer waard worden op het moment dat de marktrente zakt. Een obligatie met een hoge rente zal minder waard worden op het moment dat de marktrente verder stijgt. Dus soort van tegengesteld. Dat klinkt ingewikkeld en dat is het ook.

In de grafiek wordt het verloop van de rente van 3 maanden (korte rente) tot 30 jaar (lange rente) weergegeven. De horizontale X as geeft de looptijd aan en de verticale Y-as het rentepercentage.

Waar wordt een yieldcurve voor gebruikt?

Om te bepalen wat de contante waarde van een bedrag in de toekomst waard zal zijn gebruikt men de yieldcurve. Dit is een korte uitleg voor eigenlijk iets heel ingewikkelds waar we in dit artikel niet dieper op in gaan. Wil je hier meer over weten? Neem dan gerust even vrijblijvend contact met mij op, dan leg ik het graag uit.

De twee elementen in de curve worden afgeleid van de rente van de Centrale Banken. Zij bepalen de hoogte van de korte rentes. Voor de Eurolanden is dit de ECB, maar indirect ook onze eigen Centrale Bank, De Nederlandse Bank (DNB). Wij hebben ook nog onze eigen staatsleningen, maar natuurlijk worden die ook afgeleid van de rente van de ECB. Maar soms hebben sommige Eurolanden een groter risico. Zoals 10 jaar geleden Griekenland en nog meer Zuid Europese landen. Dan krijg je meer rente, maar loop je wel een groter risico dat je je geld niet terugkrijgt als je in deze leningen investeert of belegt. Daarnaast zegt de rentecurve of yieldcurve iets over de renteverwachting van de markt.

Welke soorten yieldcurve zijn er?

Hoe langer de looptijd van de rente, hoe moeilijker het is om de toekomst in te schatten van deze rente en hoe hoger de vergoeding zou moeten zijn om te compenseren voor dit hogere risico. Hoe korter de looptijd, zoals binnen een jaar, hoe kleiner de kans op grote verschillen in deze rente ten opzichte van de huidige situatie.
In een ‘normale rentecurve’ is de korte rente het laagst en stijgt de rente naarmate de looptijd langer wordt. Die stijgende rente voor langere looptijden komt in principe omdat jaarlijks in ieder geval de inflatie gecompenseerd wordt en door onzekerheid over de toekomstige renteontwikkeling.

De componenten in de rentecurve zijn de reële rente, de inflatieverwachting en de renterisicopremie

We kennen de volgende yieldcurves:
1. De vlakke yieldcurve
2. De normale yieldcurve
3. De omgekeerde of inverse yieldcurve

De vlakke yieldcurve

Als de rentes van de verschillende looptijden ongeveer gelijk zijn, spreken we van een vlakke rentecurve. Je ziet een vrijwel gelijke horizontale lijn in de grafiek.

Voor de banken is dit geen gunstige rentegrafiek. Zij verdienen meestal geld aan het kort aantrekken van spaargelden en het uitzetten van gelden voor een langere periode, bijvoorbeeld door hypotheken met een lange vast rente. Een vlakke yieldcurve komt ook niet vaak voor, meestal is er een normale rentestructuur waarbij de lange rentes hoger zijn dan de korte rentes. Als een vlakke rentecurve weer naar een normale rentecurve gaan met lage korte rentes en hogere lange rentes is dat een teken dat de economie weer aantrekt na economische krimp, waarbij een vlakke yieldcurve of zelfs een inverse yieldcurve geen uitzondering is.

De normale yieldcurve

Een normale yieldcurve ontstaat als de markt verwacht dat er inflatoire druk zal optreden. De rente is naast compensatie voor het risico ook voor de geldontwaarding. Om te zorgen dat de koopkracht aan het einde van de looptijd gelijk is zal degene die het geld uitleent compensatie willen.
Als inflatie stijgt kun je minder kopen voor 1 euro dan voorheen. Daardoor is er dan een hogere rente nodig. Op dat moment worden er lang(er)lopende obligaties verkocht. Dit zorgt weer voor een daling van de koersen van de obligaties en een verhoging van de rentevergoedingen ten opzichte van de koers. Het effectief rendement, de rente, zal dus stijgen. In de grafiek zie je dat de lijn linksonder begint en rechtsboven eindigt.

De omgekeerde of inverse yieldcurve

Bij deze yieldcurve zie je dat de lijn in de grafiek linksboven begint en rechtsonder eindigt. Dat betekent dat de korte rente hoger is dan de lange rente. Dit is wel een uitzonderlijke situatie en duurt meestal niet zo heel lang. Een langere looptijd heeft meer risico’s waardoor de rente vaak hoger is. Een omgekeerde rentecurve zie je vaak als de economische onzekerheid toeneemt. Er worden in de nabije toekomst economisch zwaardere tijden verwacht.

Zo gebruiken de banken de rentecurve

Bij een normale rentecurve kunnen de banken geld verdienen aan deze rentecurve. Zij geven consumenten rente voor hun spaargeld. Dat geld lenen zij vervolgens tegen een hogere rente uit aan anderen. Het verschil tussen de korte rente, de lange rente minus de gemaakte kosten is de winst voor de bank. Als de korte rente hoger is dan de lange rente lijdt de bank dus verlies met een negatieve marge. Dat was van 2013 tot 2021 een groot probleem voor de banken.

Welke factoren bepalen de rentestructuur?

Er zijn veel factoren die de rentestructuur bepalen. We bespreken hier de drie belangrijkste:

  1. De verwachtte ontwikkeling van de rente:
    Als er een rentestijging wordt verwacht kan de yieldcurve sneller gaan stijgen. Dit komt omdat langer lopende leningen worden verkocht door beleggers. Als men verwacht dat de rente zal dalen kan dat een vlakke of omgekeerde/ inverse yieldcurve tot gevolg hebben.
  2. Liquiditeit:
    Door de grote liquiditeit wordt de korte rente lager. Hiermee wordt het inflatierisico namelijk ook beperkt.
  3. Kredietwaardigheid:
    De uitgever van een obligatie is een debiteur. De kredietwaardigheid van de debiteur heeft invloed op een eventuele rente-opslag, (creditspread) die door de beleggers worden geëist. Nederland en Duitsland zijn landen die veiliger worden geacht dan bijvoorbeeld Griekenland. Griekenland zal daardoor waarschijnlijk een hogere rente moeten betalen voor hun staatsobligaties dan Nederland.

Hoe interpreteer je een yieldcurve?

Een rentecurve is echt een momentopname. Wat je vandaag ziet kan morgen weer heel anders zijn. Maar heel snel zal een rentecurve geen grote veranderingen laten zien. Het is niet zoals bij valutakoersen. Deskundigen kijken naar de ontwikkeling van de curve en anticiperen daarop met hun beleggingen en investeringen.
Als ondernemer kun je de yieldcurve gebruiken om een gevoel te krijgen van de economische ontwikkeling van de markt. Met een omgekeerde yieldcurve is de verwachting dat er economisch zware tijden aankomen. Vaak hebben we daarna te maken met een vlakke yieldcurve waarbij je ziet dat de economie weer langzaam aantrekt. Is de yieldcurve stijl met een lage korte rente en een hoge lange rente, dan zitten we in een groeiende economie met redelijk normale rentestanden.

Owner at EEVA

Approaches to FX Volatility

13-07-2022 | treasuryXL | ComplexCountries | LinkedIn |

The latest CompleXCountries report is based on two Treasury Peer Calls in which senior treasurers from Asia, the Americas and Europe discussed the latest bout of increased FX volatility, and the impact it is having on their hedging strategies. As to current volatility, some people are adjusting their strategies, but most prefer to stick with the approach which has already been defined.

Source

FX – one of the biggest and most important challenges we all face. It has a direct impact on the business, and everyone has a view.

The calls (European morning and afternoon to accommodate Asia and the Americas) were to discuss the latest bout of increased FX volatility, and the impact it is having on people’s hedging strategies – if any. Unsurprisingly, it turned into a long discussion of the way different companies approach hedging. The report below is long and very varied – we managed to reduce it to 20 pages, but they are dense. As to current volatility, some people are adjusting their strategies, but most prefer to stick with the approach which has already been defined.

What is that approach? The participants came from a variety of different industries, and covered a broad range of different ways of handling the issue.

  • Everyone has a defined hedging approach, though most contain some degree of flexibility. So, if the approach is to hedge the next 6 months, for example, there may be leeway to go down to 4 months or up to 8.
  • Most people add their hedges via a layering approach, where they build up the hedge over time. This provides an average hedge rate, and avoids the risk of choosing a single point in time.
  • Everyone tries to match their hedges to the needs of the business. This involves co-ordinating with the business units to get their input on the ability to change prices, how long it takes to do so, etc.
  • Most companies have a centralised approach to hedging, but there is variety as to whether central treasury acts as and advisor, or as a decision maker. In most cases, this is decided by the company’s internal measurements and incentive system.
  • Several companies try to insulate the operating units from the effects of currency. This is done by various means: several participants operate re-invoicing centres, which invoice the operating entities in their own currencies, and manage the resulting exposures in the centre. One participant achieves the same result by levying a currency specific working capital charge on the operating units. The income from this charge is then used to pay for hedges – which may, or may not, actually be taken out.
  • In these cases, the centre usually operates as a profit centre – but with strong risk management disciplines to contain the danger of positions getting out of control.
  • One other approach is to fix a budget exchange rate for the coming year, and try to lock that in via hedges. There was a discussion as to whether this suits all businesses.
  • Most participants use forwards for hedging, with the choice of deliverable or NDF varying from one country to another. Several use options, though cost and accounting complexity were obstacles.
  • One participant has an approach which is built entirely around options, including a sophisticated trading strategy to reduce the cost of what they view simply as an insurance policy, like any other. This company is also very opportunistic, and will be active or inactive in the market according to their view of current pricing. This company is also private, and family owned, so they have a higher tolerance for earnings volatility than most – and they are not concerned about quarterly earnings announcements. They also have a relatively high margin business.
  • In this company, as in all others, this strategy is only possible because it has the understanding and buy-in of the management and the operating units. Every participant mentioned this as being key for success.
  • Generally, the percentage of hedging is fixed by policy. However, most participants exercise some judgement, based on the cost of hedging. This is particularly relevant for some emerging market countries, such as Brazil, Argentina and many African countries. The judgement as to what constitutes a hedge which is too expensive was often empirical, but the currencies which were left unhedged usually did not represent a significant exposure for the company.
  • Most participants prioritise balance sheet hedging over cash flow hedging, but some take the opposite approach. In all cases, the accounting treatment is a significant factor in determining the approach.

Bottom line: hedging and managing currency is one of the key competences of the treasurer. For many years to come, it will continue to be one of the areas where there is the biggest variation in approaches – and endless debates. If you have an approach which is well defined and which has been fully discussed with the business, there should not be any need to change it during a period of volatility – though it can be an excellent stress test!

Contributors: 

This report was produced by Monie Lindsey, based on two treasury peer calls chaired by Damian Glendinning.

[The full report can be downloaded FREE by corporate treasury practitioners, please Log in to your account to download (if you receive emails from us – use your email address to retrieve your password), if setting up a new account, please ask for the FX report in the comments and ComplexCountries will send you a copy]

Please contact ComplexCountries to find out about their subscription packages.

CFO Perspectives: 3 ways CFOs can use currencies to boost their business’s value

05-07-2022 | treasuryXL | Kantox | LinkedIn |

As a CFO, you are aware of the benefits of FX hedging for treasury. However, are you also aware of the macro-level advantages for your company and its value?

A new CurrencyCast series has just been introduced by Kantox. They examine five ways that efficient currency management may benefit your entire business in the first episode of their CFO Edition miniseries, including how to incorporate it into your strategy and how to decrease cash flow fluctuation. Watch below the video or read the corresponding blog.

Credits: Kantox
Source

In the first edition of CFO Perspectives, we’ll draw from our work with CFOs to explore three ways senior finance executives can make currency management a winning growth and cost-saving strategy for their business.

Looking at the concerns expressed by CFOs in most risk management surveys, a number of familiar themes seem to reoccur: the importance of cash flow forecasting and monitoring, the centrality of FX risk management and the ongoing digitisation of treasury processes

Yet, this picture is far from complete. 

Ultimately, among the tasks assigned to CFOs, there is the need to make a contribution toward enhancing the value of the business. But what is the role —if any— played by currency management in that regard? Answering this question allows us to single out three strategic contributions of currency management that CFOs should prioritise.

Value and FX hedging: time for a reassessment

Does currency management create value? The traditional view has been ambivalent: a ‘glass half full, half empty’ kind of appraisal. While the benefits of hedging FX have never been in dispute, the problem lies with the perceived high costs of currency management.

This is precisely where things are changing—and quite fast. Digital, API-based technology is putting to rest the notion that currency management is always a costly, resource-intensive task. Meanwhile, Multi-Dealer Platforms (MDPs) such as 360T, embedded in these solutions, sharply reduce trading costs.

CFOs: three strategic contributions of currency management

(1) Create opportunities for growth

Feeling concerned about exchange rate risk, managers may neglect the growth opportunities that come from ‘embracing currencies’. Buying and selling in more currencies allow firms to capture FX markups on the selling side while avoiding markups on the contracting side. Two examples will suffice:

(a) On the selling side: In e-commerce setups, currencies can be leveraged to increase direct, high-margin sales on company websites with many payment methods. Multi-currency pricing is the secret weapon for reducing cart abandonment, which still stands at about 77% globally.

(b) On the buying side: Buying in the currency of their suppliers allows firms to (1) Avoid inflated prices charged by suppliers who seek to manage their own FX risk; (2) Widen the range of potential suppliers by putting them in competition; (3) Obtain extended paying terms.

By taking FX risk out of the picture, currency management enables firms to reap these and other margin-boosting benefits of using more currencies in their day-to-day business operations. Ultimately, it is about removing the disincentives that prevent firms from ‘embracing currencies’.

(2) Provide more informative financial statements

Informative financial statements allow investors to assess the quality of management by removing noise from the process. To the extent that the variability in net income is perceived as a measure of management quality, effective currency hedging creates a sense of discipline in the eyes of investors.

The good news for CFOs is that technology is making great strides in cost-effectively managing the accounting-related aspects of currency management. Here are two examples:

  1. Balance sheet hedging. Automated micro-hedging programs for balance sheet items take the impact of FX gains and losses out of the picture, as invoices are hedged with great precision.
  2. Traceability and Hedge Accounting. The perfect end-to-end traceability made possible by automated solutions eases the costly and time-consuming process of compiling the required documentation for Hedge Accounting.

(3) Lower the cost of capital

Companies can reduce cash flow variability thanks to a family of automated hedging programs and combinations of hedging programs, including layered hedging programs that make it possible to maintain steady prices in the face of adverse currency fluctuations.

In challenging times, when the availability of external financing at a reasonable cost is scarce —an all too common occurrence in years of pandemics and wars—reduced cash flow variability makes it possible for companies to execute their business plans and meet all cash commitments.

An impaired capacity to raise financing has implications in terms of valuation, especially for smaller businesses. This ‘cost’ has been variously measured, with some estimations ranging from 20% to 40% of firm value. Currency management enhances the capacity to raise finance and, by extension, lowers the cost of capital and boosts firm valuation.

A wide range of opportunities to create value

We have singled out three major contributions of currency management in terms of creating value for the business: (1) stimulating growth while protecting and enhancing profit margins; (2) lowering the variability of cash flows; (3) presenting more informative financial statements. We can mention even more benefits:

  • Taxation is optimised as smoother earnings reduce the tax burden when higher levels of profits are taxed at a higher rate.
  • Capital efficiency is raised when pricing with the FX rate improves the firm’s competitive position without hurting budgeted profit margins.

While most of these advantages have been known by CFOs for many years, there is a new factor to consider: they can be implemented with Currency Management Automation solutions that remove most of the resource-consuming, repetitive and low-value tasks performed by the finance team, eliminating unnecessary operational risks along the way.

With an added bonus: by leveraging currencies, CFOs have the opportunity to take decisive steps in terms of digitisation. According to a recent HSBC survey, digitisation is seen as the most positive factor by 84% of CFOs overall, as they expect investments in digital technology to have a “positive impact on their business”, with more than half of them expecting it to give the business model “a large boost”.

The time to act is … now!

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Treasury & Banking in India

20-06-2022 | treasuryXL | ComplexCountries | LinkedIn |

This call took place against the background of the war in Ukraine – but it was a useful chance to catch up on the ever-improving situation in India.

India has always been complex, with many regulations and poor clarity. This is clear from the comments below, where participants often have different experiences on the same topic. But, overall, the economy is working well, people are making profits (this was not always the case), and regulations are becoming more user-friendly, even if they remain challenging.

Source

Business structure: most participants have one legal entity which faces customers, and a different one which acts as an international shared service centre, invoicing other companies in the group on a cost plus basis. This can lead to inefficiencies in cash management: everyone struggles with domestic cash pooling and intercompany loans, while the shared service centre has guaranteed profits and cash generation. One participant has all activities in the same legal entity, which makes life easier.

Intercompany loans within India create transfer pricing and tax challenges: there is a required or recommended interest rate of 8%, compared to deposit rates of 4% to 4.5%.

Cross border cash pooling and intercompany loans are generally very difficult: many approvals are required. Dividends are subjected to withholding tax of 15%, which is sufficient to deter some, but not all, participants from paying dividends. However, this is an improvement on the previous 22% dividend tax, which was often not creditable against tax in the receiving country.

Netting of intercompany invoices is not allowed. However, one participant is using an Indian entity to centralise all invoices within the country using a POBO/ROBO process, and limiting the transactions to a single, large, gross in/gross out settlement. They are also looking at a non resident INR account.

Participants mostly use deposits for investing their excess cash. One is using the TIDE deposit: the bank automatically sweeps fixed amounts of cash above a defined threshold into deposits. These receive a higher rate if they remain for more than two weeks, but can be released if needed, with a lower interest rate being paid.

Most participants use international banks, mainly Citi and BNPP. Most complained that Citi are reluctant to use automated FX platforms, and are behind on the electronic transmission of import documentation – but one participant had a more positive experience. JPMorgan again received positive comments for their approach.

The participants who use local banks generally had positive comments about them, and found they were a big help with pricing, especially on loans and letters of credit.

Tax remains complex and challenging.

 

Bottom line: the – excellent – report below reflects the significant complexity of doing business and managing treasury in India. But it is an important market, and one which is improving. So it is definitely worth the effort!

To access this report:

Access to the full report is available to Premium Subscribers.
Please contact us to find out about our subscription packages.

4 ways to optimise currency management in times of crisis

14-06-2022 | treasuryXL | Kantox | LinkedIn |

Did you know that CurrencyCast season 2 of Kantox is now available? In the first episode of the season, we look at four must-have tools to help you optimise your currency management and protect your business from risk in times of crisis. To see all episodes of CurrencyCast, click this link.

Credits: Kantox
Source

This week’s CurrencyCast looked at the four Currency Management Automation tools you need to navigate 2022’s predictable unpredictability. Here are our key takeaways:

(1) Put cash and currency management on the same page

The tool? The first Currency Management Automation tool is automated swap execution.

Why? Because, in times of pandemic and war, “Cash is King “. A recent risk treasury survey by HSBC finds that as many as 82% of CFOs say that cash management has been the most crucial issue during the last three years—and that is unlikely to change any time soon. The point is that cash management and FX risk management need to go hand in hand, especially in the current context.

How? By automatically executing the swap transactions that are necessary to adjust hedging positions to the settlement of the underlying commercial transactions, as cash flow moments do not always coincide. Failing to automate these cash adjustments properly hinders the whole risk management process. Yet, in FX risk management, cash management related tasks need as much attention —and as much automation— as other tasks of the FX workflow, like pricing with an FX rate, collecting and processing exposure information, or executing hedges.

(2) Optimise the impact of shifting interest rates 

The tool? The second Currency Management Automation tool is a robust FX rate feeder that enables commercial teams to price with the appropriate exchange rate, whether it’s the spot or the six-month forward rate, with all the required pricing markups per client segment and currency pair.

Why? Because interest rates are shifting in many places as we speak. As interest rates change, so does the difference between exchange rates with different value dates, also known as forward points. On the one hand, if your company is based in a strong currency area like Europe or North America and you are selling into Emerging Markets, your commercial teams may need to price with the forward rate to avoid unnecessary losses on the carry. On the other hand, you can take advantage of ‘favourable’ forward points to price more competitively without hurting your budgeted profit margins.

How? Most Treasury Management Systems (TMS) are not equipped with what we call at Kantox a ‘strong FX rate feeder’ that would enable commercial teams to quote with the appropriate exchange rate, in this case, the forward rate. For that, you need a software solution that, working alongside your existing systems, provides your commercial teams with all the FX rates they need for pricing purposes.

(3) Prepare for disrupted supply chains 

The tool? The third Currency Management Automation tool is an FX hedging program that allows you to delay —as much as possible, and according to your own tolerance of risk— the execution of hedges.

Why? Right now, as we speak, global supply chains are in turmoil. Commodity prices are seeing wild swings, and the economic outlook remains uncertain. This may lead to lower visibility regarding your cash flow forecasts and your forecasted exposure to currency risk.

How? One of the most fascinating tools that we have developed at Kantox —about which we will devote a future episode of CurrencyCast— allows treasurers to create a buffer from a ‘worst-case scenario’ FX rate that you wish to protect, if your aim is to keep steady prices during an entire campaign/budget period, and you can reprice at the onset of a new period.

This buffer, created by means of conditional FX orders, provides the flexibility to leverage information from incoming firm sales/purchase orders that are hedged. Forecast accuracy is usually correlated with time. As the campaign progresses, that flexibility allows you to gain more visibility into what is typically considered the less visible part of your exposure.

Delaying hedge execution also will enable you to:

(1) Create savings on the carry if forward points are not in your favour

(2) Set aside less cash than would otherwise be the case in terms of margin and collateral requirements

(4) Protect your profit margins and cash flows

The tool? Last but not least, the fourth Currency Management Automation tool needed to tackle 2022’s predictable unpredictability is —quite obviously— a strong FX hedging program.

Why? Because you need to protect your budgeted operating profit margins and company cash flows from currency risk. You may also desire to reduce the variability of your performance as measured in your financial statements. By allowing your firm to confidently buy and sell in the currency of your suppliers and customers, you take advantage of the margin-enhancing benefits of ‘embracing currencies’.

There is an additional benefit that may prove particularly relevant these days. In the event of a sharp devaluation of your customer’s currency, if you only sell in a handful of currencies such as EUR or USD, your customer may be tempted to unilaterally wait for a better exchange rate to settle their bills. You don’t want to be in that position — and you do it by selling in local currencies in the first place.

How? With the help of a family of automated hedging programs and combinations of hedging programs designed to systematically protect your firm from currency risk. These can be personalised whatever the pricing patterns of your business — whether you face dynamic prices or you desire to keep steady prices during an entire campaign period, or you wish to keep prices as stable as possible during a set of campaign periods linked together.

Treasury in transition – explore the agenda for EuroFinance International Treasury Management

13-06-2022 | Eurofinance | treasuryXL | LinkedIn

 

Featuring keynote speakers, Guy Verhofstadt and Göran Carstedt…

The 31st annual EuroFinance International Treasury Management returns in-person this September 21st-23rd in Vienna. With treasury changing like never before, join more than 2000 attendees, including 150 world-class speakers for transformative insights and the year’s best networking.

  • Inspirational headline speakers– including member of European Parliament, Guy Verhofstadt and and one of the world’s top business minds, former head of IKEA, Göran Carstedt
  • Practical insights from case studies across 5 streams– explore the latest innovations driving change and how to apply them to your treasury
  • The new Future of Money Stage– a dynamic experience for disruptive ground-breaking ideas from crypto to the token economy
  • Meet with more than 100 banking and tech partnerson the exhibition floor and  join forces to innovate and shape the future

Learn from the experiences of more than 150 best-in-class treasurers including:
– Abraham Geldenhuys, VP and group treasurer, Kongsberg Automotive
– Yang Xu, SVP, corporate development and global treasurer, Kraft Heinz
– Alex Ashby, Head of treasury – Markets, Tesco
– Debbie Kaya, Senior director of treasury, Cisco Systems, Inc.
– Daniel Melski, VP finance and treasurer, Church & Dwight Co., Inc.
– Angel Cheung, Assistant treasurer, John Lewis Partnership

For more information and to register, visit: https://www.eurofinance.com/international

 

Read more

TreasuryXL contacts can claim a 10% discount with code: MKTG/TXL10 on top of the early-bird price which expires on July 29th – a combined saving of over €2000.  Register here today.

We hope to welcome you in Vienna.

The EuroFinance Team

About EuroFinance

EuroFinance, part of The Economist Group, is a leading global provider of treasury, cash management and risk events, research and training. With over 30 years of experience, our mission is to bring together the brightest minds and most influential voices in treasury. Through in-depth research with 1,000 corporate treasury professionals every year, we have a unique insight into the trends and developments within the profession and an unrivalled global viewpoint.

Contacts

Marianne Ford
Senior Marketing Manager
EuroFinance

Economist Impact
[email protected]

Winding Down Russia: Treasury Challenges

23-05-2022 | treasuryXL | ComplexCountries | LinkedIn |

 

This was our third call on the situation in Russia. It focused on the practical challenges people are facing: nearly all participants are either running down their businesses or continuing on humanitarian grounds for products which are exempted from sanctions, particularly in the healthcare sector. However, as one participant put it, winding down is easier said than done.

This report was compiled by Monie Lindsey. based on a Treasury Peer Call chaired by Damian Glendinning.

We are happy to share a copy of the full report FREE, please contact us and mention ‘Russia Report’ in your message.

Source

Chair’s Overview

This was our third call on the situation in Russia. It focused on the practical challenges people are facing: nearly all participants are either running down their businesses or continuing on humanitarian grounds for products that are exempted from sanctions, particularly in the healthcare sector. However, as one participant put it, winding down is easier said than done.

  • Many businesses operate through franchises in foreign countries. Terminating the franchise agreement may not be enough to stop them from continuing the business and using the brand name – some high-profile companies which have stopped operations still have franchisees who are continuing to trade, using the name.
  • In some cases, the name remains on the business. This makes it difficult for the brand owner to walk away, as the reputational risk remains.
  • People in the healthcare sector feel a need to carry on for humanitarian reasons. For them, there are significant logistical challenges getting new shipments into the country: no flights, very little sea freight, so heavy dependency on road transport, with limited willing suppliers. They are encountering an additional issue: sanctions apply based on customs codes, and some health care products have not been appropriately coded.
  • In other sectors, companies continue to sell down their existing inventory – but even this can be complicated, as fresh inputs can be required to make goods saleable.
  • Still, other participants have operations that are purely local, and do not require imports. These will typically continue to function, though moves are being made to make them fully independent.
  • Despite all the above, most participants continue to be able to pay down intercompany debt, pay dividends and settle outstanding intercompany invoices.
  • Cash operations are complicated by the need to segregate payments emanating from sanctioned banks. Again, this seems to work, and customers are usually willing to transfer their payments to non sanctioned banks.
  • Many Russian entities have taken steps to disguise their real ownership as a means of evading sanctions: some participants are using a database to identify the true beneficial owners to see whether sanctions apply.
  • Most international banks continue to function, but SocGen recently announced it is selling Rosbank. This raises the concern it may be sanctioned in the future.
  • Most international banks are refusing to open new accounts, and none is interested in taking deposits. This is a concern for participants who are building up cash balances as they sell down inventory. Raiffeisen seems to be the major exception to this.
  • It continues to be possible to convert RUB into hard currency – as long as you are not using a sanctioned bank. Hedging is also possible, but liquidity is limited and deliverable forwards are not available. NDFs seem to work.
  • Several participants have had to remove their Russian subsidiaries from their centralised treasury structures and in-house banks. This has resulted in the hiring of new local staff to manage the newly independent operations.
  • One participant raised the concern that Russia may be branded as a state sponsor of terrorism. This would complicate matters even further.

Bottom line: despite the length of this summary, there are still further details in the report below. Please read it. The overwhelming feedback from the call was that everyone is trying to comply with the sanctions, and business is either being scaled back, or completely localised. People have stopped looking for ways round sanctions – but compliance is complicated.

The full report on Winding Down Russia: Treasury Challenges is available to subscribers. Please get in touch for details. Enquire