A De Facto Standard Reference Architecture for Managing Currency Risk

By Andrew Gage | 21 August 2015

Currency volatility created more intense headwinds in the first quarter than even at the height of the euro crisis. But some companies are managing through the volatility, with no currency surprises. One thing the treasury teams at those companies have in common: confidence. It is the single most important element in a well-run currency risk management program. After all, you can’t make informed decisions if you don’t have confidence – confidence that the exposure data you’re looking at is an accurate, complete, and timely picture of your true exposure.

Those treasury teams – and their CFOs, CEOs, boards, and investors – have confidence because of the best-in-class people, processes, and technology that constitute their currency risk management programs. At those companies, treasury is strategic. The treasury team collaborates with stakeholders inside and outside the business to facilitate decision making that takes currency risk into account. They’re not just managing processes; they’re adding value. And to do that, they rely on a de facto standard reference architecture for managing currency risk. In this article, I’ll explain what that reference architecture looks like, and the results it has enabled award-winning treasury teams to achieve.

To achieve confidence, treasury teams need best-in-class people, processes, and technology

Accurate, complete, and timely exposure data is the only kind that engenders confidence. To get it, smart companies rely on best-in-class people, processes, and technology. As Brent Callinicos, former treasurer at Microsoft and Google and CFO at Uber, explained in a recent webinar, “Treasury teams need to be staffed by talented, quantitative people. They also need to be equipped with the systems tools and the real-time data they need and the time required to be strategic.” Treasury can’t be strategic, adding value for the business, if they’re spending all their time on manual processes, digging up and validating data.

Time to be strategic was one outcome that Srikanth Dasari, Head of Treasury Front Office at Dow Corning Corporation was aiming for as he embarked on a currency risk management program transformation. “We wanted to automate everything the system could handle and use human capital to provide thought leadership. Our philosophy was, and is: don’t touch anything that a system can do better. Humans should spend time on value-adding activities – such as partnering with the business to foresee how developments in the pipeline might affect risk, and what needs to be done to remain compliant.”

This approach, one of freeing up human capital to be strategic via scalable technologies, has been repeatedly recognised by the treasury community as a best-in-class approach at companies such as Google and Dow Corning.

The reference architecture for enabling award-winning treasury teams

So what does a system that enables treasury teams to be strategic look like? Broadly, it’s automated, end-to-end, straight-through processing. More specifically, there are three key components of the de facto standard reference architecture for managing currency risk, including 1) exposure analytics and decision support; 2) a trading platform for trade execution; and 3) a TMS for trade accounting.

First is a web-based application for exposure definition, data integrity analytics and exception reporting, detailed exposure analytics, and VaR analytics for decision support. This application accepts automated feeds from the company’s ERP system(s), forecasting systems and when necessary direct entry of forecast data from the field. It then applies source-dependent rules-based data mapping and integrity checks, in the end, delivering comprehensive analytics on the sources of exposures. That enables treasury to take advantage of strategic operational/organic exposure elimination or shaping opportunities and to establish and evolve cost-effective and high-performing hedging programs – including enterprise trade aggregation and netting.

In addition to exposure analytics and decision support, an on-demand FX management platform serves as an integrator, enabling collaboration between the other components in the architecture such as multi-bank or single-bank trading platforms and/or Treasury Management Systems  – to raise and extend the entire system. It also gives treasury the detailed currency data necessary to work collaboratively with other functions in the organisation, informing decisions on planning, forecasting, managing costs, working with vendors, and other areas of the business.

FX management platform enables treasury to be strategic

At Dow Corning, the treasury team implemented automated, straight-through processing to save time, reduce risk, and free up human capital. It worked: the system cut the lag between the close of accounting books and exposure calculation from two days to one hour. The reduction in market risk that had been generated in the two-day interim yields savings of $750,000 per year. Across the entire program, automated, straight-through processing frees 600 hours of human capital a year, which the company puts toward higher value activities.

Companies have found that a implementing an FX management platform as I’ve described need not be difficult, time-consuming, or expensive. Cloud-based risk management technology makes developing the ability to get an accurate, complete, and timely view of your currency exposures relatively easy and inexpensive. It is easy to see why John Connors, former CFO at Microsoft said, “Cloud-based currency risk management technology is the wave of the future.”

Key takeaways

  • The treasury teams at companies that have been able to manage through currency volatility have something in common: confidence. It is the single most important element in a well-run currency risk management program.
     
  • Accurate, complete, and timely exposure data is the only kind that engenders confidence. To get it, smart companies rely on best-in-class people, processes, and technology. That enables treasury to be strategic.
     
  • A system that enables treasury teams to be strategic is an FX management platform that supports automated, straight-through processing.
     
  • There are three key components of the de facto standard reference architecture for that platform, including 1) exposure analytics and decision support; 2) a trading platform for trade execution; and 3) a TMS for trade accounting.
     
  • Dow Corning, is a great example of a company that implemented an FX management platform and yielded tremendous results, including 600 hours of human capital a year saved – capital that can now be put to strategic use.


By Andy Gage, Vice president of strategic market development and global head of research, FiREapps

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