Corporates Seeking More FX Counterparty Diversification: Survey

A new report from FX-as-a-service provide MillTechFX finds that corporates in North America are looking to diversify their FX counterparties after the recent banking crisis in that country highlighted the potential risks associated with having only one or two banking partners.

The survey, carried out by Censuswide for MillTechFX, found that 88% of corporates are exploring diversifying their FX counterparties after the banking crisis. It says the crisis highlighted that a bank’s failure can cause serious short-term liquidity issues which can affect vital expenditure such as payroll and supplier invoices, even if it’s only for a few days.

Managing currency exposures is also at the top of corporate priority list with 68% experiencing increased risk as a result of dollar volatility. MillTechFX says over four-fifths of corporates already have a hedging program in place, and out of the 19% that do not, 69% are considering doing so given market volatility.

The average hedge ratio was 60-69%, and nearly eight out of ten (79%) corporates cited their hedge ratio as higher compared to this time last year. The vast majority (75%) said the cost of hedging had increased in the past year.

Looking ahead, half of corporates plan on increasing their hedge ratio over the next 12 months, while 43% plan on lengthening their hedge window.

The survey also found that many corporates’ FX processes are “manual, cumbersome and time-consuming” with 40% of senior finance decision-makers sending or uploading files, 35% relying on phone and 34% using email to instruct financial transactions.

Corporate treasury teams spend on average 2.3 days per week on FX-related matters, while 19% of those surveyed said they spent four to five days. Nearly three-quarters (72%) of treasury teams have three or more people tasked with FX activities.

The most important aspect of corporates’ FX operations is transparency of costs (37%) and the top two most challenging aspects of corporates’ FX operations were forecasting exposure (35%) and cost calculation (34%). Meanwhile, 81% of those surveyed said they were looking into new technology and platforms to automate their FX operations, while 32% said automation of manual processes was the most important factor in FX.

Elsewhere, 90% of those surveyed said that ESG has grown in importance to their business over the past year, whilst 31% said that the ESG practices of their counterparties were the most important factor in FX. Over half (54%) said that their FX counterparties must have strong ESG credentials.

“The recent banking crisis has acted as a wake-up call for the industry and it’s positive to see corporates looking to diversify their counterparties to enhance their risk management,” says Eric Huttman, CEO of MillTechFX. “This has the added benefit of providing them with the ability to compare prices, aiding transparency and enabling best execution.

Many corporates are still relying on manual processes, phone calls and emails to transact in FX. This can be both extremely inefficient and a huge drain on time and resources

“The combination of currency market swings and a difficult macro environment has created uncertainty for CFOs who are now prioritising risk management,” he continues. “Our research shows that in FX this has led to corporates hedging more of their risk, whilst also prioritising transparency and high-credit quality counterparties.

“Despite the existence of tech-enabled FX solutions, many corporates are still relying on manual processes, phone calls and emails to transact in FX,” he adds. “This can be both extremely inefficient and a huge drain on time and resources. It’s clear corporates are starting to move away from this model and are increasingly exploring tech-enabled, automated solutions.”

It is not clear whether the survey asked an important question of the corporate treasuries – whether they actually can diversify their panel of FX liquidity providers. Many corporates are reluctant to go through the extensive process of credit arrangements and others often need their panel banks to have a wider relationship with the company, for example, to be on a revolving line of credit. That said, for those companies with one or two relationships, it does seem sensible to expand the panel slightly, if possible.

On the ESG findings, Huttman says, “The broad rise in ESG as a key priority, applying to corporates and the FX market as a whole, is more than just box-ticking. Stakeholders including shareholders, clients and employees are demanding progress in this critical area. Many of our clients now ask about our own ESG practices before deciding to work with us, and a majority actually mandate that their counterparties have strong ESG credentials. It’s important to our clients, and it’s important to us.

In conclusion, he adds, “Ultimately, the research has highlighted that it is more important than ever that corporates gain a transparent view of their FX execution, streamline their operational workflows and implement a carefully thought-out risk management strategy to manage their currency exposures throughout the rest of 2023 and beyond.”