How do Belgium fund managers mitigate currency exposure?

Having operated using the Belgian Franc since as far back as 1832, Belgium made the decision to adopt the euro upon its launch in 2002.

Belgium's contribution to the European Union cannot be understated, and it is often named ‘the heart of Europe’ with good reason. Home to the European Parliament, European Council and European Commission, Belgium was a key player in establishing the European Coal and Steel Community and the European Economic Community. These organisations went on to become the European Union we know today.

It therefore comes as no surprise that Belgium is heavily reliant on and invested in the value of the euro, and has experienced the currency’s highs and lows, including the value height of 1.6 EUR to 1 USD in 2008 and its gradual decline to roughly 1.1 EUR to the dollar today.

Despite its core role within the EU, Belgium maintains strong trade figures with the rest of the world, with 43.1% of imports and 32% of exports derived from outside of the Union. This makes foreign exchange a key element of the Belgian economy. The country also comes sixth in the EU in terms of GDP per capita, and accounts for 3.4% of the Union’s total GDP, making it a key business, trade and finance centre.

MillTechFX recently surveyed 250 senior finance decision-makers at fund managers across Europe to gain insight into how different countries operate FX resourcing, risk management and hedging strategies.

The report shows us that FX management is high on the priority list for fund managers in Belgium. This blog delves into the research’s insights into Belgian fund managers’ FX risk management, including their FX exposure, pain points, hedging strategies and priorities. 

In this blog:

• The importance of FX to fund managers in Belgium
• Reliance on manual processes and appetite for automation
• Belgium fund managers struggle with a lack of FX transparency
• Hedging trends in Belgium
• Belgium's need to diversify FX counterparties
• ESG priorities in Belgium
• FX should be a key priority for Belgium's fund managers in 2024

 

The importance of FX to fund managers in Belgium

The MillTechFX European Fund Manager CFO FX Report 2024 found that:

• 90% of fund managers in Belgium said that FX was significant to their business, higher than the European average of 88%.

• Belgium also had the second highest percentage of fund managers that said FX was very significant to their business (32%).
• The report also found that 74% of fund managers in Belgium said their returns had been affected by EUR volatility, lower than the European average of 89%.
• Interestingly, 57% of Belgian fund managers’ business activity is exposed to foreign currency risk. This was the second highest of any European country surveyed, behind Luxembourg (60%), and higher than the average of 51%, demonstrating the importance of FX to fund managers in the country.

Reliance on manual processes and appetite for automation

• Belgium still has work to do when it comes to embracing FX automation and its fund managers are still dependent on outdated manual processes that significantly reduce efficiency.
• An average of 2.3 days a week are spent on FX-related activities by fund managers in Belgium, slightly below the European average of 2.61 days.
• However, Belgium was found to have the highest number of team members tasked with FX-related activities (3.1), more than the European average of 2.8.

• Belgium’s fund managers were also found to have an above-average reliance on some manual processes, with 35% using phones to instruct financial transactions. Such manual processes are a burden on human capital for fund managers and significantly reduce the efficiency of foreign exchange activity.
• However, the report did find the country to have the lowest usage of email - only 29% compared to an average of 43%.
• This, on top of the fact that 84% of Belgian fund managers are exploring new technology to automate FX operations, shows that the industry is moving in the right direction towards increased efficiency.

Belgian fund managers struggle with a lack of FX transparency

• Nearly four-fifths (77%) of Belgian fund managers said there is a lack of transparency in the FX market.
• This proportion was lower than the European average of 82%, but still showed transparency to be a highly significant issue.

Hedging trends in Belgium

• Although 74% of Belgian fund managers said their returns had been impacted by EUR volatility, the country had one of the lowest proportions of fund managers that hedge their forecastable currency risk (71%), below the European average of 77%.
• That said, 89% of unhedged fund managers in Belgium are now considering hedging due to market volatility, broadly in line with the average of 88%.
• Belgium also has the highest percentage of fund managers that hedge all or a large proportion of their FX exposure - 91%.

• This was high above the 76% average. In addition, the country had the second-highest hedge ratio and 68% said that their hedge ratio was higher than last year.
• It’s clear that rising costs are challenging fund managers across Europe, with 84% saying the cost of hedging had risen. This rose slightly to 86% in Belgium.

Belgium’s need to diversify FX counterparties

The banking crisis in 2023 sent shockwaves throughout the finance industry. Credit Suisse, a globally systemic bank, stood on the brink for the first time since Lehman Brothers and, in the US, three regional and specialised banks failed in rapid sequence. 

Whilst the banking sector has seemingly stabilised since the turmoil of Spring 2023, many senior finance decision-makers at European fund managers are taking lessons from the crisis on board. 

• Our research found that 90% of European fund managers are looking to diversify their FX counterparties.
• Only 84% of fund managers in Belgium, however, said they were exploring counterparty diversification, the joint-lowest proportion.

ESG priorities in Belgium

Driven by increased pressure from investors, governments and consumers, ESG criteria are now central to the decision-making process for many fund managers. Our survey found that the trend has also begun to play an increasingly important role in selecting FX counterparties and service providers. 

• 94% of senior finance decision-makers at European fund managers said that ESG credentials impact their selection of FX counterparties, while 56% said they have a big impact.
• Belgium, however, was found to have the second-lowest proportion of fund managers that said the ESG credentials of fund managers impact their selection ‘to a great extent’ – 45%. This was significantly lower than the average of 56%.

FX should be a key priority for Belgium’s fund managers in 2024 

With uncertainty set to stay, we believe the management of FX currency risk should be considered a top priority for fund managers in Belgium in the year ahead. 

Fortunately, there are several ways they can improve their FX risk management infrastructure and protect their returns in these uncertain times:  

Transaction cost analysis (TCA) – TCA was specifically created to highlight hidden costs and enable fund managers to understand how much they are being charged for the execution of their FX transactions. Ongoing, quarterly TCA from an independent TCA provider can be embedded as a new operational practice to ensure consistent FX execution performance.  

Comparing the market – We believe that fund managers should seek alternatives to the traditional single bank-based approach. Instead, they should look for solutions that enable them access to live rates from multiple banks and execute at the best rate, all whilst reducing the operational burden traditionally associated with this kind of market access.  

Outsourcing – There is a growing recognition that outsourcing does not necessarily mean a loss of control, less transparency or reduced quality of FX activities, but when using the right partner outsourcing can improve transparency and execution quality. Outsourcing can therefore enable fund managers to dedicate more time to core business matters, which is all the more important amidst inflationary and volatility pressures.  

Strong governance – FX is one of the largest and most liquid markets in the world, but also one of the most complex. Setting up and onboarding new FX counterparties, centralising price discovery and navigating the post-execution phase require a team of people and often have their own complications. Harnessing solutions which can enhance transparency and governance can help fund managers improve the cost, quality and transparency of their FX execution.  

Diversification of liquidity providers – Recent events in the banking sector show that reliance on one or two counterparties can be an extremely risky strategy, as the loss of a major FX counterparty could render firms unable to trade. We believe fund managers should begin exploring technology-driven alternatives to the single bank-based approach that enable them to transact in FX in a way that addresses risks associated with a single point of failure. 

Automation – Despite the rising threat of currency movements, many fund managers continue to rely on manual processes like phone and email to execute FX trades which may make it harder to mitigate the impact of currency volatility. Harnessing automated solutions can offer end-to-end workflow, greater transparency and faster onboarding, helping finance departments streamline their FX functions. 

How MillTech FX can help 

MillTechFX is an FX-as-a-Service (FXaaS) pioneer that enables fund managers to access multi-bank FX rates via an independent marketplace.  

MillTechFX’s market access, pricing power and operational resource enable it to deliver a tech-enabled integrated solution that delivers transparency, cost reduction and operational burden reduction for senior finance decision-makers at fund managers.  

It is end-to-end at no additional cost, offering easy and quick onboarding, multi-bank best execution and hedging management, and connectivity into clients’ bank accounts, internal systems, administrators or custodians.  

To speak to us directly please reach out to our EU sales team at eusalesdesk@milltechfx.com, phone number +33 1 88 24 98 90, or request a free TCA here. 

Find out more at https://www.milltechfx.com  

 

This blog post examines & refers to the data and results of a survey by Censuswide on MillTechFX’s behalf conducted between 10 November and 27 November 2023 based on a survey of 250 senior finance decision-makers at mid-sized asset management firms in Europe (described as those with assets under management ranging from €500m to €20b). The full survey can be found here.