Many corporates in North America are looking to diversify their FX counterparties after the recent banking crisis highlighted the potential risks associated with having only one or two banking partners, according to a report from FX-as-a-service provider MillTechFX.

Some 88% of corporates are exploring diversifying their FX counterparties after the banking crisis at Silicon Valley Bank, Credit Suisse, First Republic Bank and Signature Bank. The crisis highlighted that a bank’s failure can cause short-term severe liquidity issues which can affect vital expenditures such as payroll and supplier invoices, even if it’s only for a few days. 

Managing currency exposures is also at the top of corporate’s priority list, with 68% experiencing increased risk due to US dollar volatility.  Over four-fifths of corporates already have a hedging programme in place, and out of the 19% that do not, 69% are considering doing so given market volatility. The average hedge ratio was 60-69%, and nearly eight out of ten (79%) corporates cited their hedge ratio as higher than last year. The vast majority (75%) said the cost of hedging had increased in the past year. 

Looking ahead, half of corporates plan on increasing their hedge ratio over the next 12 months, while 43% plan on lengthening their hedge window.

Many corporates’ FX processes are manual, cumbersome and time-consuming with 40% of senior finance decision-makers sending or uploading files, 35% relying on phone, and 34% using email to instruct financial transactions. Corporate treasury teams spend, on average, 2.3 days per week on FX-related matters, while nearly one in five of those surveyed (19%) said they spent four to five days. Nearly three-quarters (72%) of treasury teams have three or more people tasked with FX activities.

The most critical aspect of corporates’ FX operations is transparency of costs (37%), and the top two most challenging aspects of corporates’ FX operations were forecasting exposure (35%) and cost calculation (34%). Meanwhile, 81% of those surveyed said they were looking into new technology and platforms to automate their FX operations, while 32% said automation of manual processes was the most crucial factor in FX.

The survey also picked up the rising importance of ESG, with 90% reporting that ESG has grown in importance to their business over the past year. Some 31% said that the ESG practices of their counterparties were the most important factor in FX. Over half (54%) said their FX counterparties must have strong ESG credentials.

“The recent banking crisis has acted as a wake-up call for the industry and it’s positive to see corporates looking to diversify their counterparties to enhance their risk management,” commented Eric Huttman, CEO of MillTechFX. “This has the added benefit of providing them with the ability to compare prices, aiding transparency and enabling best execution. The combination of currency market swings and a difficult macro environment has created uncertainty for CFOs who are now prioritising risk management. Our research shows that in FX this has led to corporates hedging more of their risk, whilst also prioritising transparency and high-credit quality counterparties. 

“Ultimately, the research has highlighted that it is more important than ever that corporates gain a transparent view of their FX execution, streamline their operational workflows and implement a carefully thought-out risk management strategy to manage their currency exposures throughout the rest of 2023 and beyond.”