Foreign exchange (FX) risk management has shot up from 'second order’ to a key priority for many corporate treasurers. With major currencies such as the US dollar, euro and pound all experiencing strong fluctuations over the past year, many corporates are beginning to feel the pain from this volatile climate.
Kyriba’s January 2023 currency impact report found that currency movements cost North American companies alone US$43.2 billion between July to September 2022 — an all-time high since data tracking started a decade ago. European firms also reported a huge 68% increase in FX related headwinds within the same period.
The surge of the US dollar during the latter half of 2022 has caused a particular headache for corporates. IBM, for example, recently reported that the US dollar’s rise hurt its revenue by more than $1 billion in Q4 2022, whilst according to Goldman Sachs, share prices of S&P 500 companies with large overseas exposure are down about 23% since the beginning of last year.
For many firms, however, FX volatility has accelerated the shift away from outdated processes towards automated solutions that are better equipped to mitigate the risk of currency fluctuations. So, with currency volatility set to persist throughout 2023, how can corporates adapt their operations to protect their bottom lines during these turbulent times?
Legacy systems are lagging behind
Despite the renewed focus on managing the growing threat of currency movements, many firms still lack the necessary tools to mitigate the impact of FX volatility.
For many corporates, FX processes are manual, cumbersome and time-consuming. Nearly two-thirds (65%) use manual execution processes and over a third (36%) still primarily use email for instructing financial transactions, while 29% rely on phone calls.
FX price discovery can often involve multiple phone calls, e-mails or online platforms to log in just to get comparative quotes from counterparties. Because the market is constantly moving, price discovery requires a team of people to collectively decide which of these counterparties can offer the best quote.
It is therefore somewhat unsurprising that over a third (35%) of corporates rate their FX set up as below average or worst-in-class.
A technology-driven approach to FX risk management
With FX moving up the list of priorities, many CFOs and treasurers at corporates are beginning to consider moving away from traditional providers and legacy infrastructure.
Instead, there has been a notable increase in organisations embracing digitisation to streamline these functions, with 89% of senior-finance decision makers now looking into new technology and platforms to automate their FX operations.
These solutions offer a number of benefits, including:
- Centralised price discovery - For many corporates, it is operationally inefficient to set up and manage multi-bank relationships, meaning they often rely on a single bank or broker to meet their FX hedging requirements. Automated solutions enable firms to compare prices from multiple liquidity providers on a single marketplace. Not only does this bypass the onerous phone call and email exchanges, but it also enables firms to get the best available price and lock it in with the simple click of a button.
- End to end workflow - Post-trade execution processes can be fully automated, from settlement to onward payment, regulatory reporting or sharing trade data with third parties. This saves much-needed time and resources, enabling firms to focus on core business matters.
- Transparency - By embracing digitisation, firms can benefit from complete transparency through real-time reporting and FX transaction cost analysis (TCA). TCA can be used to help firms understand how much they are being charged for the execution of their FX transactions, in addition to demonstrating good governance to internal stakeholders.
- Fast onboarding - Rather than spending months (even years) setting up multiple FX facilities with different counterparties, a digital FX marketplace enables firms to begin transacting within weeks.
With FX volatility now one of the most serious challenges facing corporate treasurers, it is vital that firms are on the front foot to tackle the threat of currency movements. As corporates ramp up their search for efficiency gains, those which harness automated, technology-driven solutions that can streamline FX operations in a cost-effective way will be able to stay one step ahead of the game.
Like this item? Get our Weekly Update newsletter. Subscribe today