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European corporates still rely on too few FX counterparties - Industry roundup: 13 March

European corporates still rely on too few FX counterparties

One year after the 2023 banking crisis, European corporates are still reliant on too few FX counterparties, according to a new report from MillTechFX. This puts firms at risk of serious short-term liquidity issues should a banking partner fail.

On average, European corporates have just 2.67 counterparties, and only 0.4% have more than five. This is surprising given the banking crisis that ensnared one of Europe’s biggest banks, Credit Suisse. The crisis affected vital expenditures such as payroll and supplier invoices and highlighted the risks of having a small pool of counterparties.

However, the data suggests change is afoot, with 77% exploring the addition of more FX counterparties. The second biggest operational challenge for European corporates regarding FX was onboarding liquidity providers, which may explain why the intention to diversify counterparties hasn’t translated into action yet.

Although FX volatility has decreased since peaking at the end of 2022, uncertainty remains, and hedging is at the top of the priority list for European corporates, with 67% hedging their forecastable risk. This is despite it getting more expensive, with 59% of respondents stating that FX costs had risen in the past year, compared to just 5% who said they had decreased.

The average hedge ratio among European corporates was 40-49%, with 61% of businesses saying their ratios were higher than last year. Only 1% of respondents had lower hedging ratios. The average hedge length was 4.3 months. Looking ahead, 43% of European corporates are increasing their hedge ratio, 32% are increasing their hedge window, while just 18% are decreasing their hedge ratio, and 20% are decreasing their hedge window.

Other notable findings include a reliance on manual processes draining resources. One-third of European corporates still instruct financial transactions via phone, and 24% still use email. They task nearly three people with FX-related activities and spend 2.25 days per week on FX. This is not helping with market transparency, with 59% suffering from a lack of transparency in the FX market. They are battling against hidden fees and struggle to get comparative quotes, making it difficult to know if they’re getting a good deal.

Some 78% of European corporates are exploring automating their FX operations, showing a potential shift away from cumbersome traditional FX processes. 89% of CFOs are exploring automation, suggesting this is a C-suite imperative. A vast majority (92%) of European corporates take ESG credentials into account when selecting FX counterparties. Meanwhile, 44% said that counterparties must have strong ESG credentials. 

“After last year’s banking crisis sent shockwaves throughout the industry, it’s noteworthy to see European corporates are still relying on too few counterparties,” said Eric Huttman, CEO of MillTechFX. “The data does provide some optimism with the vast majority of corporates globally moving to expand their counterparty pools to both spread their risk but also to achieve best execution.”


US annual inflation crept up in February

According to data from the US Bureau of Labor Statistics, the Consumer Price Index rose 3.2% for the 12 months ending February, slightly higher than the 3.1% recorded for the 12 months ending January. 

On a monthly basis, the index for shelter rose in February, as did the index for gasoline. Combined, these two indexes contributed over 60% of the monthly inflation increase (0.4%) in the index for all items. The energy index rose 2.3% over the month, as all of its component indexes increased. The food index was unchanged in February, as was the food at home index. The food away from home index rose 0.1% over the month.

The all items less food and energy index, reflecting core inflation, rose 3.8% over the last 12 months. The shelter index increased 5.7% over the last year, accounting for roughly two-thirds of the total 12-month increase in core inflation. Other indexes with notable increases over the last year include motor vehicle insurance (+20.6%), medical care (+1.4%), recreation (+2.1%), and personal care (+4.2%).

Elsewhere, the energy index decreased 1.9% for the 12 months ending February, while the food index increased 2.2% over the last year.

“Although today’s inflation report was slightly warmer than expected, it is unlikely hot enough to warrant the FOMC [Federal Open Markets Committee] to shift away from cutting rates later this year, which markets currently expect to start occurring during the summer,” commented Nathaniel Casey, Investment Strategist at Evelyn Partners.

Ryan Brandham, Head of Global Capital Markets, North America at Validus Risk Management, added: “While this doesn’t derail the progress the Fed is making, it highlights the challenge of addressing inflation and getting it back to the 2% target. US yields have been gradually declining throughout March, but this data might cause them to increase in the coming days as traders debate what it means for potential cuts in the US later this year.”


Most areas of the UK saw business activity rise in February

The latest NatWest Regional PMI survey showed that business activity grew across most parts of the UK in February. Business confidence also generally picked up amid a more broad-based improvement in underlying demand. However, labour market trends remained more varied, with firms in most areas reporting stronger cost pressures and low capacity utilisation.

The PMI Business Activity Index is the first fact-based indicator of regional economic health that is published monthly, tracking the monthly change in the output of goods and services across the private sector. A reading above 50 signals growth, and the further above the 50 level, the faster the expansion signalled.

Two-thirds of the monitored UK nations and regions recorded business activity growth in February. London remained out in front despite seeing its pace expansion ease to a three-month low (index at 56.5). At the other end of the scale, Wales (47.5) posted a solid and accelerated fall in output, while declines were also seen in the North East (47.5), Yorkshire & Humber (48.3) and South West (49.3).

February data showed a growing number of areas reporting higher inflows of new business. There were renewed upturns in Scotland, the South East and the East of England, while the strongest overall increase was once again recorded in London. Firms in Yorkshire & Humber, Wales and the North East, by contrast, reported further reductions in new work.

Cost pressures intensified across most parts of the UK in February. Input prices grew fastest in London, where the inflation rate quickened to a six-month high. Only in the East of England and Scotland did costs rise more slowly compared with January. Northern Ireland* saw the weakest overall increase and was unique in recording a rate of cost inflation below its long-run average.

Firms in London recorded the sharpest overall rise in prices charged for goods and services in February, as has been the case in five of the past six months. They were followed by those in the East of England. Rates of output price inflation generally quickened, except for in Scotland and the West Midlands. The slowest increase in charges was once again seen in Northern Ireland.

Scotland topped the rankings for employment growth for the fourth time in the past five months in February, pushing London back down into second place. The East of England, Northern Ireland, South West and South East saw slight increases in workforce numbers, while the North West recorded no change. Job cuts were seen everywhere else.

Falling backlogs of work remained a common theme across the UK during February, a sign of a general lack of pressure on business capacity. The South East saw the most marked decrease, followed by Wales. Only London recorded a rise in outstanding business, though even there, the increase was marginal and slower than in January.

“These latest PMI figures build on the positive start to the year we reported last month, with business activity rising in the majority of nations and regions in February,” commented Sebastian Burnside, Chief Economist, NatWest. “Encouragingly, growth in most cases is being supported by increasing levels of new business, indicating a pick-up in underlying demand and hinting that the upturn has legs.”


Global derivatives markets must become more efficient to grow

Efficiency efforts in the derivatives market are being driven by both headwinds, such as regulation and economic pressures, and the tailwind of strong projected volume growth amid continued global market volatility. Nearly 70% of the 210 derivatives market participants contributing to a new study by Coalition Greenwich in partnership with FIA said the derivatives clearing business must enhance capital efficiency to generate needed capacity and support future growth.

“Derivatives are an integral component of the financial and asset management ecosystem and the potential for increasing volatility in an environment of elevated interest rates and economic uncertainty has shined a spotlight directly on the market structure that supports these instruments,” said Stephen Bruel, Senior Analyst at Coalition Greenwich Market Structure & Technology and author of Derivatives Market Structure 2024: Focusing on Capital and Workflow Efficiency.

In the US, the Federal Reserve and other banking regulators have proposed new rules that could make it far more expensive for banks to clear derivatives for their clients. In fact, half the study participants ranked capital management as the top issue facing the industry in 2024. Market participants also cite additional regulation, operational challenges and geopolitical risks as top priorities. Conversely, study respondents see a series of trends that could power growth in derivatives trading volumes, including volatility from macroeconomic uncertainty, improved access for foreign investors to markets in China and India, and the increasing participation of retail investors.

Although a sizable minority of market participants believe generative AI is poised to transform derivatives trading and clearing workflows, the most impactful solutions could be much simpler.

“Accommodating additional volumes and complexity requires an improved operating environment,” added Bruel. “In a high-volume/low-margin business rife with manual intervention, both intermediaries and their clients are keen to increase straight-through processing. For intermediaries in the derivatives market, the development and adoption of operational standards at the global level would be a game changer.”


UK government plans National Payments Vision

An independent Future of Payments Review in the UK, chaired by former Nationwide Building Society CEO Joe Garner, has found that the UK’s payments landscape is congested and would benefit from a clear overall strategy. The government says it is committed to maintaining the UK’s reputation as a world-leading payments ecosystem and so has accepted the recommendation to publish a National Payments Vision this year.

The objective of the National Payments Vision is to provide clarity on the government’s ambition for UK payments. It will seek to guide industry and regulatory activity by providing direction on the shared outcomes the government aims to achieve to ensure a world-leading payments ecosystem. The Vision will be the government’s complete response to the Future of Payments Review.

The National Payments Vision will build heavily on the extensive work and engagement undertaken by Joe Garner for the Future of Payments Review, including the public Call for Input. The government will undertake a programme of engagement on key issues, and will work closely with key trade associations and membership bodies to gather views.

The government has appointed Joe Garner as an advisor on this work to ensure that the National Payments Vision builds on the views shared through the Future of Payments Review. The National Payments Vision should be published as soon as possible later this year.


Mastercard and Nexi team up on European open banking payments 

The paytech Nexi has chosen Mastercard as its strategic partner across Europe to support open banking account-based payments. Mastercard Open Banking will facilitate e-commerce payments across Nexi’s gateways serving merchants across Europe through this partnership. 

Mastercard and Nexi will build an integrated digital payment ecosystem by advancing Mastercard Open Banking-powered solutions. Unlike more traditional payment options, open banking allows anyone with a bank account to initiate swift digital payments to a merchant’s account. Payments are initiated directly through existing authentication protocols with a consumer’s bank, including biometrics, to retrieve the necessary information to execute a payment, making the experience easy and efficient. 

Benefits for merchants include real-time payment authorisation and settlement, enabling quick access to funds and improved cash flow and revenue stream management. By leveraging innovative technologies and payment methods, merchants can better align with heightened customer expectations for fast and frictionless payment experiences in the digital landscape. 


CBA launches green business loans

Commonwealth Bank of Australia (CBA) has launched a new loan to support Australian businesses. The Business Green Loan targets commercial businesses seeking competitive funding for sustainability practices such as renewable energy projects, energy-efficient building upgrades, and pollution reduction initiatives.

CBA says it can tailor terms to suit customers' individual needs depending on their projects, assets and funding needs. Eligible assets and projects for the Business Green Loan may include:

  • Renewable energy, such as solar, wind, hydropower and batteries. 
  • Energy-efficient assets include highly efficient motors, lighting, heating, and cooling.
  • Energy-efficient building upgrades.
  • Recycling, refurbishment, composting projects.
  • Water efficiency and pollution prevention initiatives.

CBA’s commitment to supporting customers with their sustainability transition is reflected in the bank’s 2030 Sustainability Funding Target (SFT). As part of the SFT, CBA aims to deliver AU$70bn in cumulative funding across a range of sustainable industries and asset types, including renewables, energy efficiency, low carbon transport, commercial property, land and agriculture, waste management and sustainability-linked lending.


Jefferson Bank expands Finastra partnership to boost instant payments strategy

Jefferson Bank, an independent bank serving communities across Texas, has selected Finastra Payments To Go, a payments-as-a-service solution for its new instant payments services. The cloud-based payments solution should help Jefferson Bank to deliver both RTP TCH and FedNow services 24/7, and accommodate the rapidly growing volume of instant payment transactions.

Deployed on Microsoft Azure’s cloud, Payments To Go provides Jefferson Bank with the agility needed to offer new payments rails, including RTP and FedNow Service. Both RTP TCH and FedNow services, available through Finastra’s Financial Messaging Gateway, connect directly to their respective networks for frictionless access to the payment rails.

“We have worked with Finastra for many years and deeply value its team’s proven experience implementing instant payments services not just in the United States, but across the globe,” said Sarah Booker, Senior Vice President, Deposit and Card Operations Manager at Jefferson Bank. “Finastra Payments To Go gives us access to the same payment processing technology used by big banks, enabling us to provide our customers with state-of-the-art payment services in addition to the experience they have come to expect from us.”

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