How to set up an efficient FX in-House Bank at Corporate Treasury level?

Whatever the T(R)MS in place, and however sophisticated it may be, the FX management part leaves some parts insufficiently covered or too generic to satisfy dynamic currency risk management. This is why it's worth considering a complementary CMA (i.e. Currency Management Automation) solution, especially if you've had a TMS for some time (sometimes as long as 10 or 15 years). Let's take a closer look at what needs to be considered for hyper-automation of currency risk management from A to Z, and for perfect efficiency from pre-trade to final post-trade settlement.

Optimal FX-IHB

What do we mean and what do we consider when we talk about FX-IHB? First, it's useful to define what we're talking about. An optimal FX in-house banking solution is a centralized platform that enables corporations and MNC’s to manage foreign exchange (FX) transactions efficiently across all subsidiaries and business units, from the identification of the operational risk till the final settlement of the hedging instrument. It often serves as a hub for internal transactions, enabling streamlined FX management and risk mitigation. The best solutions and organizational setups have several defining characteristics and offer notable benefits. We recommend naming such a solution, which perfectly complement TRMS, the Currency Management Automation (CMA). These solutions are gradually emerging (see the categorization proposed by www.treasurymap.com ).

Key Features of the best FX In-House Banking Solutions:

(1) Centralization of FX Management:

These tools act as a single hub for all FX-related operations, providing consistent pricing, hedging, and intercompany (TP) management across the organization.

These integrated technologies tend to incorporate automated workflows, robust FX reporting tools, and real-time visibility into currency exposures and FX positions. The connectivity with ERP and TRMS systems and financial platforms is necessary for seamless transaction processing and full efficiency from A to Z.

(2) Customizable Hedging Programs:

CMA solutions enable the company to implement tailored FX hedging strategies (combined/mixed if needed) to minimize currency risk, protect margins and to optimize and automate processes from pre-trade to post-trade.

(3) Internal Netting Mechanism:

A perfect CMA solution also integrates internal currency flows to reduce external FX trades, cutting costs and improving efficiency (i.e. Netting system). It enables us to offset (via netting) all intercompany transactions on a regular basis and to offset payables/receivables to reduce the number of flows in and out at the scale of the group.

(4)? Regulatory Compliance:

It also enables us to build in a deep compliance check and ensure adherence to local and international regulations, as well as IFRS accounting rules, and to produce ad hoc reporting and analytics.

(5) Liquidity Optimization:

CMA enables better cash flow forecasting and hedging strategies application, but also to reduce the need for external borrowing in foreign currencies.

How to best organize the design of an FX In-House Bank?

The treasury must be ideally fully centralized. IHB are dedicated to central organizations to enhance finance management and improve efficiency while reducing costs. This central treasury team should have highly skilled employees who oversee the FX strategy (normally fully automated 24/7), potentially supported by regional treasury teams where needed. The idea is to have a limited team as FX management should be fully automated through the CMA solution. But it also requires a clear communication channel, well-defined roles and seamless coordination between subsidiaries and the central treasury.

Technology is an enabler. Utilization of advanced ERP platforms like SAP Treasury, Kyriba, FIS, ION, or custom-built solutions can be combined with a CMA solution, which will fill out the gaps of the TRMS. With a better data analytics and risk management system in place dedicated to FX hedging and central automated system, including identification, consolidation of risks, execution of hedging and respect of pre-defined strategies and management of underlying exposures and hedging instruments until final settlement. It is important to leverage data insights to anticipate currency volatility and make informed hedging decisions.

What are the benefits for the company?

(1)? Cost Savings: with internal netting and bulk FX trades resulting in lower transaction fees and spreads, full application of policies and strategies and hedging 24/7 (to avoid risks of losses generated by slow reaction to hedge exposures).

(2)? Improved Risk Management: Centralized control over FX exposure reduces the risk of mismatches and enhances financial stability. It optimizes currency management by the hyper-automation of all processes from the pre-trade phase (i.e. identification and reporting of underlying exposures).

(3)? Enhanced Operational Efficiency: Automation and process optimization save time and reduce manual errors. The XL sheets complementing TRMS should be fully prohibited. The full overview of underlying operational risks from inception and immediate automated reporting enables the CMA to immediately hedge and dynamically manage all intercompany and accounting transactions/posting, as well as all relevant reports.

(4)? Strategic Flexibility: The ability to quickly adapt FX strategies in response to market changes or corporate objectives. In a fast-changing world, proactivity or at least fast reactivity are key as time is the name of the game.

(5)? Transparency and Control: Provides a clear view of global FX exposure in real-time and aligns it with the company’s overall financial strategies.

A must-have solution for all MNCs

By integrating a robust FX in-house banking solution, corporations can ensure effective currency risk management, cost efficiency, and alignment with business goals. A currency management solution can perfectly complement TRMS solutions, such as SAP Treasury, Kyriba, FIS, ION, CEGID, COBASE, … (and other we cannot name all - see: www.treasurymap.com ). Given gaps and holes into existing TMS solutions and outdated TMS in place, CMA are the must-have FX solution for optimizing management and saving money. Treasurers should stop using XL sheets to fill out gaps and supplement what TRMS are not able to do and to get a fully automated execution and reporting. It is becoming a best treasury practice.

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Fran?ois Masquelier, CEO of Simply Treasury – Luxembourg – January 2025

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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).