This document is from a recent roundtable discussion I participated in. The views are my own based on client discussions and general market research.
I will cover 5 areas:
· The importance of FX business to banks
· Pricing FX and gaining transparency
· Role of FX platforms
· How the banks are reacting
· The role of FX API’s
What is clear is that treasury like everything else we do in our lives is being influenced by technology. No longer are we accepting of things happening slowly, we want it now and if one provider can’t fulfil our needs we will go to another who can. FX has been relatively slow to embrace this new world but that is changing. The advance of Cloud services and real-time streaming of data is a major factor behind this.
Corporates are probably the most important customers of a bank’s FX trading desk. Given that trade and capital flows influence FX rates, one could argue that they are the most important group in FX markets. What’s more, for most banks, the corporate FX trading relationship is seen as an extension of its cash management and payments businesses. Since this is the core franchise of banks, the currency trading relationship can take on a significance beyond the FX business itself.
We all know that FX risks can take on a variety of forms, so they require a variety of instruments to hedge them. By far, the most popular instrument is spot FX. This is the most straightforward instrument: if you have a foreign currency exposure, spot FX reduces exchange rate risk though it may leave the basis risk unhedged if the exposure derives from a transaction that will take place in the future.
However the pricing for this business is not always transparent and this is my second point; corporates are starting to question their banks in particular about their pricing structures. At a recent Treasury Dragons we saw what a number of software vendors are doing in this area to try and improve the reporting around bank fees. But one area that still remains opaque is FX pricing.
A report by the IMF in 2019 concluded that “…dealers charge higher spreads to less sophisticated clients. However, price discrimination is eliminated when clients trade through multi-dealer request-for-quote platforms. “
The takeaway here seems to be that those companies who have the best technology will pay less in bank fees.
What is clear is that corporates need to become increasingly aware of their choice of bank and trading strategy in order to avoid being disadvantaged by a highly opaque market.
One Fintech trying to help with the problem of margin opaqueness is Just Technologies. The Just system offers FX-exposed companies insight into the unknown margin that their banks are charging. This enables them to choose the cheapest provider, or negotiate down prices.
As the IMF researchers note in their study, having access to multi-dealer platforms help with price competitiveness.
One way of achieving this is to use a multi-dealer platform such as 360T, Currenex or FXall. These electronic platforms enable market trading between counterparties, offering pricing from a selection of investment banks.
Platforms such as 360T distinguish themselves by their enhanced reporting and analytics which offer a highly granular breakdown of trade capture metrics measured against industry benchmarks. The benefits to clients are plentiful: the FX platforms presents 100s of pricing streams offering clients unique differentiated liquidity which can be specially customised for their needs. Clients also benefit from live data streaming, providing real-time tick data within seconds allowing for ultimate price transparency.
This better level of price transparency is what makes these platforms so popular with corporate users. Clients are able to undertake much more efficient transaction cost analysis enabling more balanced relationship discussions with their counterparty banks.
So what about Hedging? Unless your company is only dealing with domestic customers and suppliers, then you are bound to be exposed to FX risk. If you are an importer buying your goods abroad or an exporter selling internationally, or if you are invested elsewhere than domestically, you are vulnerable to FX risk.
Movements in FX rates can be detrimental to your profits and it can certainly prove to be a considerable risk to your book valuations. If you are running a high volume low margin business, small fluctuations in the exchange rate can make a big dent in your profits.
When facing such market volatility and uncertainty, it’s critical to have real-time visibility into your financial exposures and positions and make the best FX hedging decisions to protect profitability. Hedgebook’s system is a great example of an easy-to-use SaaS treasury solution helps businesses manage financial risk, streamline compliance reporting and protect their bottom line.
This brings me to my penultimate point – what about the banks? Banks are realising the impact that technology is having on the business and reacting to it by partnering with Fintechs or developing new products themselves. To give an example of this; Citi saw a growth in demand to automate the execution of low-value small ticket cashflow hedges. As a result it developed a new tool in partnership with a fintech and carried out a pilot with a number of clients. Other banks are doing similar things whether through their Fintech Innovation Centres or partnering directly with Fintechs. Why develop something yourself when there are companies who have already done it?
In addition banks are being challenged on other fronts from players such as Oanda who specialise in cross-border corporate payments in multiple currencies.
Finally I want to mention API’s. APIs allow systems and products to talk to each other. So your Treasury Management System should be able to speak to the FX dealing platform, confirmation matching software, Hedging system etc all in a seamless manner. An obvious benefit is that less resources will spend less time on manual tasks. APIs’ can also help you manage your FX risk in real-time by, for example, letting invoices, sales-orders, or payments data trigger an FX trade.
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