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Treasury FX automation in five steps

Raj Melvani
Raj Melvani
Performance Director – Corporates & Commodities, Asia

FX automation is widely viewed among Asia corporate treasurers as complex and laborious, when the reality is very different. This concluding piece in our two-part series presents five steps for implementing an end-to-end FX workflow solution.

  1. When embarking on the FX automation journey, treasurers frequently don’t know where to begin, nor how to see through the project from start to finish.
  2. Our five steps to Treasury FX automation stress the importance of achieving buy-in from internal and external stakeholders and understanding all FX exposures.
  3. A Refinitiv corporate treasury best practice report highlights the benefits and various stages of an automated, end-to-end FX workflow solution.

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In the first part of this series exploring the development of Treasury FX automation in Asia, we highlighted the features and benefits of a fully automated, end-to-end FX workflow.

While many treasurers now have a good understanding of these advantages, it’s puzzling why some continue to manage their FX manually.

Granted, they have their reasons. One of these is concern over the implementation process.

As a rule, technology projects are complex and laborious, with many overrunning in terms of budget and timeline. Yet with the right strategy and team in place, the opposite is true.

When embarking on the FX automation journey, treasurers frequently don’t know where to begin, nor how to see through the project from start to finish.

While there is no definitive list of tasks, or an order in which they must be executed, our experience at Refinitiv suggests there are five steps to implementing an end-to-end FX automation workflow solution, as highlighted below:

1. Attain buy-in from internal and external stakeholders

Commonly, the toughest challenge associated with FX automation is managing the expectations of treasury team members. Understandably, they are wary of roles being replaced by technology.

Automation, however, creates a strategic opportunity for treasury.

It is not always appreciated how staff commonly move from executing administrative tasks to managing more strategic, higher value roles — where they oversee the running of new systems and processes. Team members must be informed of this transition as far in advance as possible.

It’s not only internal personnel that need to be informed of change. Banks that service treasury must also be kept abreast of the company’s automation plans.

Accordingly, banks will ensure that any procedural changes experienced their end will not impede the automation process.

2. Identify and understand all FX exposures

Only when all FX exposures have been identified can companies gain a holistic understanding of the risks and opportunities automation presents.

These exposures can be identified using a treasury management system, an enterprise resource planning tool, or accounting software.

Generally there are three types of FX exposure:

  • Transaction exposure — the amount of future cash exposed to future exchange rate changes.
  • Translation exposure — the cash of foreign affiliates that must be translated into the parent company’s home currency.
  • Economic exposure — the potential impact of long-term exchange rate changes on company cash.

Treasurers can then forecast accurate FX position calculations. These can be computed daily, weekly, monthly or quarterly, depending on the complexity of the company’s business requirements.

Download Scaling New Heights – Automated FX Workflow Management for Corporate Treasuries in Asia. Treasury FX automation in five steps

3. Define FX policies and create a hedging strategy

Treasurers can now outline the aim of FX exposure management, the amount of exposure allowed, acceptable levels of exposure, and the hedging methods chosen.

There are tools that allow treasurers to set policies on procedures for FX exposure management and exceptions. These include the ability to control who can execute what.

A corporate’s hedging strategy must meet business and regulatory requirements. When categorizing this strategy, the risk management framework needs to define the allowable financial instruments — for instance, vanilla FX options, FX forwards or NDFs — and distinguish between external and internal hedging techniques.

Quote by Kenneth Ng. Treasury FX automation in five steps

4. Set performance metrics, stress test and evaluate regularly

Performance metrics, which frequently assess the success of the policies and strategy, can now be set.

Considerations might include:

  • The impact a 10 percent market move will have on the business.
  • How easily and quickly treasurers can re-adjust pricing with customers and suppliers.
  • Whether the company has ample cashflow to support its currency hedging requirements.

To evaluate the quality of FX exposure management practices, treasurers can backtest hedging procedures, and analyze the deviations from the set target. This requires calculating positions, and forecasting future FX rates and hedging.

Treasurers must formally review the FX policy at periodic intervals, as well as measure the effectiveness of forecasted exposures for previously calculated positions.

The results of these activities must be frequently communicated to all stakeholders. There are solutions that can assist treasurers with these tasks, saving many hours and achieving other cost savings.

5. Instill robust governance measures

To ensure FX management procedures comply with approved policies, companies must establish a risk oversight committee comprising of senior management.

While not partaking in operational decision-making, it should regularly review FX strategies and exposure limits, and approve exceptions to the FX policies, if necessary.

There should also be an operational compliance unit to monitor derivatives transactions, and ensure that only approved instruments are used. In addition, it must supervise trading procedures, properly calculate exposures, and accurately measure FX risk.

Best practice FX automation

With more than 4,500 corporate treasury users accessing Refinitiv’s suite of FX solutions, we help clients overcome their trading pain points, and support decision-making through accurate and timely market news, and trade analysis.

Scaling New Heights – Automated FX Workflow Management for Corporate Treasuries in Asia: A Refinitiv report explaining the advantages that automated workflow management brings to corporate treasury management