MillTechFX Sees FX Counterparty Diversification Ahead

Continuing a theme of its regular surveys, the latest report from MillTechFX – this time on European corporates – argues that these firms are “still too reliant on too few counterparties”.

This has been a constant refrain from the firm’s surveys of asset managers and corporates in Europe and North America over the past year, however while MillTechFX observes “the data suggests change is afoot”, it also reports the “surprising” finding that European corporates have just 2.67 counterparties and only 0.4% of those surveyed have more than five.

Again, the firm, which offers a multi-dealer FX trading platform for corporates and asset managers, highlights last year’s banking crisis which ensnared Credit Suisse, it was eventually taken over by rival UBS, and, MillTechFX says, “affected vital expenditures such as payroll and supplier invoices and highlighted the risks of having a small pool of counterparties”.

The firm sees reason for optimism when it comes to change, reporting 77% of those surveyed are “exploring” more FX counterparties, although as history often shows, “exploring” and “onboarding” are very different things. On that point the survey finds that the second biggest operational challenge for these corporates when it comes to FX is onboarding liquidity providers, “which may explain why the intention to diversify counterparties hasn’t translated into action yet”, the firm admits.

Although FX volatility has decreased since peaking at the end of 2022, uncertainty remains and hedging is at the top of the priority list for European corporates with 67% hedging their forecastable risk, the survey finds. This is despite it getting more expensive with 59% of respondents stating that FX costs had risen in the past year, compared to just 5% who said they had decreased.

The average hedge ratio among European corporates was 40-49%, with 61% of businesses saying their ratios were higher than last year. Only 1% of respondents had lower hedging ratios. The average hedge length was 4.3 months. Looking ahead 43% of European corporates are increasing their hedge ratio and 32% are increasing their hedge window, while just 18% are decreasing their hedge ratio and 20% are decreasing their hedge window.

The report also found that 34% of European corporates still instruct financial transactions via phone, and 24% still use email. They task nearly three people with FX-related activities and spend 2.25 days per week on FX. This is broadly in line with findings from surveys of North American and UK corporates published by the firm in recent months.

Again the word “exploring” comes up, with the survey finding 78% of European corporates are looking at automating their FX operations, showing a potential shift away from cumbersome traditional FX processes. 89% of CFOs are exploring automation, suggesting this is a C-suite imperative, MillTechFX argues.

Another regular feature of these surveys is a perceived lack of transparency – and MillTechFX says 59% “suffer” from this in the FX market. “They are battling against hidden fees and struggle to get comparative quotes, making it difficult to know if they’re getting a good deal,” the platform argues.

Another regular feature of the report – ESG – also continued, with 92% of European corporates taking ESG credentials into account when selecting FX counterparties, and 44% saying that counterparties must have strong ESG credentials.

“After last year’s banking crisis sent shockwaves throughout the industry, it’s noteworthy to see European corporates are still relying on too few counterparties,” says Eric Huttman, CEO of MillTechFX. “The data does provide some optimism with the vast majority of corporates globally moving to expand their counterparty pools to both spread their risk but also to achieve best execution.

“Despite lower volatility and rising FX costs, it’s positive that European corporates are still prioritising hedging,” he continues. “With interest rate changes and geopolitical volatility expected in 2024, hedging currency risk is one of the primary ways that businesses can mitigate the risk posed by this uncertain financial climate. More are increasing their hedge ratio and window than reducing them, which indicates their risk-sensitive mindset for the year ahead.

“Looking to the future, the data suggests we can expect to see corporates across the globe prioritising the automation of manual processes which are draining resources, progressing on the ESG front and implementing strong risk management strategies to protect their business from counterparty risk and currency exposures,” he concludes.