24 August 2020
Managing the corporate FX workflow: from silos to end-to-end automation

In most companies, managing foreign exchange is usually the role of treasury teams. In industries where FX has become one of the most sensitive components, as in airlines where fuel and planes are purchased (or leased) in USD, you sometimes find FX managers whose unique role is to take care of FX and nothing else.

That said, historically, FX has been managed as a silo in most companies. As part of larger finance teams, treasurers have usually struggled to get real-time data related to FX exposure. As a consequence, they base their hedging decisions on outdated or approximative data (like forecasts), and they take decisions about the best hedge ratio or the best moment to hedge based on their experience, and on their assumptions of exchange rate movements and volatility.

To make a long story short, “converting” the hedging policy into hedges has always been an art more than a science.

But let’s take a step back.

When you think about corporate FX, it is not only about treasury or the exchange rate — it is also about accounting and how you value your hedging products (mark-to-market, gains & losses). More importantly, FX hedging is a key element in terms of a firm’s commercial capability and competitiveness.

Let me explain.

When you sell overseas, if you charge your foreign clients in their local currencies, you mechanically increase sales. At least, this is what we have experienced with our own clients at Kantox. But, you have to clearly define a process when pricing in foreign currencies. A similar principle applies on the purchasing side. When you pay foreign suppliers in their local currencies, you usually get better terms, and so better margins, but again you have to assume the related FX risk.

FX is not an isolated element that should be managed by the Treasury team as a silo. Rather, it is a company-wide element that impacts top-line and profitability and it should be leveraged in order to increase competitiveness.

Let us come back to the role of the Treasury team. As mentioned above, managing FX is not anymore about making hedging decisions and negotiating spreads (thanks to multi-dealer platforms like 360T or FXall, achieving “best-price” has become fairly easy). It is also about making sure that there is a clear alignment with the Commercial team to price in local currencies in order to grow the top-line.

To do so, it is mandatory to calculate (and to update) pricing parameters based on exchange rate movements, and to automate this process to make it efficient and robust. FX management is also about alignment with purchasing teams, allowing them to pay foreign suppliers in as many local currencies as possible. 

Therefore, the Treasury team needs to manage the FX exposure along the corporate cycle, from the moment it is merely a forecast, right until settlement. In between, the exposure will have become a Sales or Purchase order, and then an Account receivable or payable on the balance sheet.

As soon as FX management is not viewed as a silo anymore, but as a key component of regular business operations, automation becomes key. Selling and purchasing in local currencies means that many currency pairs need to be managed. This requires updated data related to Forecasts, SO/PO, AR/AP, and a decision-making process set in real-time in order to stick to the underlying business reality. The time when treasurers were focusing on actively managing their 5 or 10 main currency pairs only – while making decisions based on their appreciation potential – is fast disappearing. As a process, it has become way too complex.

The time for automation has definitely come—machines are extremely reliable to execute hedging policies 24/6 at a micro level.

In the last couple of years, we have heard a lot about automation in the FX space. To be clear, automation means “performing tasks that were previously performed by humans” — dead simple. What is still very unclear is the scope for automation, in others words, what part of the corporate FX workflow will be automated with software solutions. In many real-life cases, automation is limited to a fraction of the workflow: reducing the number of clicks, eliminating errors due to manual filling, and saving a bit of time.

Multi-dealer platforms like 360T offer solutions that will automatically route your trades.

FX analytics software like FIREapps can extract data from your ERP or your TMS to calculate your FX exposure and give you hedge recommandations automatically.

Almost every vendor speaks of automation nowadays, but it does not always mean the same thing. 

FX automation creates new opportunities driven by the treasury team.

When thinking about FX as a way to leverage competitiveness, increase the top-line and improve profit margins, it is not really about better trade execution or spreads. Rather, it is about automating the full FX workflow. As a treasurer, there is much more value to be created by helping commercial, purchasing and accounting teams to leverage the untapped opportunities related to foreign currencies, than by trying to optimise FX in a silo. When the FX workflow has been fully automated, I mean really “0 click”, more time is available for the treasury team to fine tune the machine, to optimise the hedging policy and to convert FX into an enabler of higher revenue, higher margins and stronger business.

At Kantox, we consider that foreign currencies are an opportunity if properly managed. This is why we have built Dynamic Hedging, a software solution that fully automates the corporate FX workflow.

Philippe Gelis

Philippe Gelis | p.gelis@kantox.com