FX risk management, the part of the treasury too often forgotten

In a recent global survey made by HSBC, we can understand what CFO’s expect from treasury and how they see how both could work together in a post-COVID era, facing increasing uncertainties and in a quest for growth. The responses are interesting and give guidelines of what treasury future could look like. Although this article focuses more on the example of FX management, it also underlines more general trends applicable to other areas of risk management.

How optimal is your FX management?

Many corporate treasurers are convinced that their FX management is optimal because they would have an interfaced TMS and FX platform. This is certainly a good start, but it is not enough to achieve complete automation. If we believe the recent HSBC survey of CFOs, it appears that we are far from the perfection claimed by many. In last HSBC survey on key findings after COVID crisis, it appears that there is room for improvement in the FX risks management. 57% of CFOs say that they suffered lower earnings in the past two years due to significant unhedged FX risk (rising to 77% in EMEA) – a failure to address all facets of FX risks management efficiently continues to have an impact on corporate results and only 23% of CFOs view their treasury as “best in class” in this area. It simply confirms that most CFOs wouldn’t be fully convinced of the maturity level of their treasury teams. It is also in line with recent EACT survey which identify as priority changes in IT tools, including TMS’s.

More resources on the horizon

According to the same HSBC survey, 74% of CFOs expect that the level of resources (i.e., staff + tech’s) will increase in their treasury department in the next three years, bridging the gap between wider responsibilities and aspiration. These resources won’t be only human but also technological. Therefore, it seems that CFO’s are aware of need for reinforcing treasury teams but also convinced better performance of treasury pass through (new) technology/technologies. For long, it was difficult to hire additional FTE, especially because of the recent COVID. Accepting to hire it a positive sign. But investing in technology to further automate processes appears eventually as a “must”. If treasurers can obtain additional FTE’s, we do believe these resources would have better roles than simply be assigned to manual processes. Doing so would be denying current organization inefficiencies. Additional staff only makes sense if it is accompanied by technology investments.

Bright digital future ahead

We also found interesting the 53% of CFO’s claiming that digitization will give their business model a good boost in the coming years. The digital FX platforms become the norm. It seems that 55% of treasurers already use such platforms. Nevertheless, FX platforms are only part of the FX automation processes (when interfaced with the TMS). Considering it is “the end of the story” would be a mistake. Automation should start earlier in the FX management of risks, at inception, when the risk arises at operating level. But outsourcing is freeing up the treasury’s time. It seems that 44% of CFO’s of MNC’s have or consider outsourcing day-to-day treasury function due to increased process automation and digitization. And 29% are at least thinking about outsourcing some functions. Outsourcing is a potential solution for some tasks. However, automation is even better and more efficient.

Emerging markets, a major driver for growth

A majority of CFO’s (i.e., 79%) believe their company will see positive impact from development of emerging market economies over the next couple of years. It means that emerging countries also imply more FX risks in exotic currencies. It means an increase of FX hedging and hedge relationships. Both will have consequently more transactions to manage, to report and to treat. Automation would again be the best solution to cope with increased workload. And, good news, treasury will be in position to bring added value to the operations by hedging exotic currencies and opening new markets.

Strategic evolution of treasury

CFO’s eventually agree on the evolving role of treasurers and the shifting accelerated partly by COVID crisis (sort of catalyst). CFO’s and treasurers aspire to more rigorous risk management on the long-term strategy. The need for clearer channels of communication between C-level and treasurers is essential to secure, protect and defend the financial health and growth of the business. Given problems caused or increased by COVID, treasurers see their responsibilities increasing. Treasurers will have more strategic role, providing they can cope with increasing workload and tasks. And guess what, automation can again be the panacea to allocate his/her time to more analytical and strategic tasks. Apparently, CFO’s are confident treasurers can make it. They believe that the treasurers will be able to take on these new tasks and responsibilities. It will be sufficient if C-level agrees to give them the technical and human means to do so. But on their side, the treasurers must also work to better "sell" their technical projects. We must work to better communicate the benefits and potential of such projects. The future will be complicated and it requires to be ready and technologically equipped to better manage the treasury and make it more efficient. If the treasurer takes his department to the next level and optimizes its management, he will create undeniable and significant value for the entire company.

?Fran?ois Masquelier, CEO of Simply Treasury

Luxembourg November 2021

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Disclaimer: This article was prepared by Fran?ois Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).