The challenges of centralising foreign exchange operations for multinational corporates

By Thomas Gavaghan | 12 June 2017

The ability to enter into new markets geographically can help drive top line revenue growth, or offer cost-cutting advantages in production and output. Companies expand internationally in one of two ways: organically or through M&A activity. International growth carries with it a number of added risks, the most prominent being currency. With the constant volatility in markets and geopolitical uncertainties in every geographic region (Trump, Brexit, North Korea, Venezuela riots), companies are struggling to centralise this risk. 

Treasury and risk management technology has evolved as a way for corporations to automate their hedging programs, but without an internal strategy to centralise their FX operations, there are added risks and complications. In a recent Wall Street Journal article, it was noted that 150 of Citbank's largest corporate clients use treasury management technology, but only half of them can track their risks on a global basis (Automating Currency, Risk Management a Challenge for Corporate Treasurers—WSJ).

Challenges of a decentralised risk management operation

The surge of takeovers is rising despite market and political volatility, and this is likely to continue as investor demand for better returns will also persist. Mergers and acquisition growth offers long-term opportunity for the organization, but in the short term, treasury and finance teams are forced to adapt to different and disparate technology, reporting and processes. Finance teams are now faced with integrating these processes into existing enterprise workflows so they can gain the global visibility needed to run a centralized risk management program.  

As a consultant, I often work with companies that chose to run their currency hedging programs in isolation of newly acquired subsidiaries. Running a combination of regional FX programs side-by-side can be problematic and may not yield accurate results or similar benefits of a centralized program. This type of program prevents the company from identifying and achieving internal natural hedges, while also possibly increasing transaction costs. Additionally, it perpetuates the inefficiencies found in decentralized environments, since all hedges will need to be tracked, and accounted for according to the regulatory specifics within these isolated regions.

In a decentralised environment, underlying constraints exist for the organization to ascertain accurate forecasts across the enterprise. FX forecasting should be a part of the overall budgeting process of the company. Making this a separate exercise forces extra effort, and does not allow both activities to dynamically change over time as markets shift. 

Similar to aligning FX forecasting to the enterprise budget, FX performance should be continuously measured, down to the subsidiary level. Even if a hedging program is not active, a company should be measuring the materiality of their risk and how this is changing over time. This allows a company to know the opportunity cost of not hedging to include in a cost-benefit analysis for a hedging strategy moving forward.

Centralising your risk management strategy

If a there is a hedging program in place, what is the impact of untimely forecasting into the decision making? 

Alignment of teams

Senior management should be involved in assessing and understanding the economic risks of not having a centralised strategy and their impacts. This is not a treasury-only exercise and will require multiple stakeholders throughout the finance group up to senior management to invest in a centralisation strategy. Involving groups from accounting, IT, tax and audit early will lessen the likelihood of roadblocks. Additionally, in the decentralised environment you should look to involve the stakeholders in the local areas that are currently involved in the day-to-day treasury operations.

Value of technology

Determine your technology footprint today to manage the hedging program. Identify the systems and tools that are in place that subsidiaries use to forecast, capture deals, process, and perform accounting. Commonly, an existing Treasury Risk Management (TRM) solution will be in place to help with the latter functions in the back office. Even in organizations that have a TRM solution, the forecasting and exposure gathering process is done in outside tools - commonly Excel. Look for ways to integrate the TRM downstream to help in data collection, needed for the forecasting process in place today. 

Prioritise high risk first

Organizations looking to undertake a centralisation process should start with the locations of the business that are most at risk for currency volatility. When working on projects with companies implementing a TRM for the first time, it’s important to understand where the underlying exposure data is derived from. At risk exposures often can be traced back to a local controller in a subsidiary that feeds information to central treasury on a periodic basis. Another risk exists in the source files or source program from which the controller is determining the forecast.

Integrating solutions to centralise risk management operations

Once sources for forecasting are identified, the integration of the systems does not need to be a significant IT exercise. Often times, the idea of centralisation is overshadowed by the thought of trying to integrate different internal applications to a new system. While massive ERP tools are largely owned by internal IT groups and lack turnkey integration tools for outside applications, focused TRM technology should have dynamic integration capabilities that easily adapt to the source system. The source applications should provide data files that can be mapped into the risk management technology with simple interfacing tools taking no development effort by the IT team or the vendor. It could be as easy as exchanging pre-formatted files through an interface that the TRM provider builds and maintains.

With the advances in technology, especially the innovation in cloud-based risk management solutions with scalable integration tools, isn’t it time to evaluate a centralized strategy that streamlines your business, and improves communication across borders? Look to align with the key stakeholders across the organization, including IT, in an effort to promote the company’s growth strategy and protect future earnings.