The Corporate Treasurer Checklist

Against a backdrop of high inflation, ongoing supply chain problems and rising currency volatility, corporates have navigated an increasingly difficult landscape over the past twelve months.

These challenges have placed many firms across all sorts of sectors under mounting pressure, and the lessons that businesses learn in stormy seas will often sharpen the focus on how a company’s finance function could evolve during calmer waters.

With several treasurers setting their plans in motion for 2023 and beyond, here we look at how choosing the right foreign exchange (FX) partner can help achieve what many CFOs consider their key strategic priorities.

Navigating an uncertain landscape

The past few years have shown, if anything, the importance of planning for improbable outcomes. Geopolitical events like the invasion of Ukraine, or central bank policy such as rising interest rates, can have a huge impact on currency markets.

If a business finds itself on the wrong side of an FX market move whilst unhedged, it can lead to significant losses.

Despite that, some CFOs still adopt a ‘wait and see’ approach when it comes to currency markets and try to hold out covering their FX exposures until market conditions are more favourable.

This approach, however, holds significant risk in the current volatile landscape. According to Kyriba’s January 2023 currency impact report, currency movements cost North American companies $43.15 billion between July to September 2022 — an all-time high since data tracking started a decade ago.

IBM has become the latest big name to highlight the need for an effective hedging strategy, recently reporting that the US dollar’s surge towards the end of last year hurt its revenue by more than $1 billion in Q4 2022.

CFOs should aim to ensure they are managing known risks when they can and do away with opportunistic hedging so bottom lines aren’t left exposed to FX market volatility.

Liquidity Management

In tough times liquidity is precious, whether that’s a company's own funds or maintaining sufficient headroom on working capital facilities. According to Deloitte’s 2022 Global Treasurer survey, enhancing liquidity risk management is a critical priority for over half of all CFOs.

We believe businesses should explore ways to eliminate unforeseen demands on free cash flow, and one such demand might arise from managing FX risk.

For example, corporates may have to post collateral against FX hedges in the form of initial or variation margin. After posting cash collateral with an FX counterparty this capital is essentially dormant; it isn’t earning a return for the company and can’t be accessed at times when they might need it most.

CFOs should therefore consider seeking hedging solutions that are margin free and don’t pose a threat to cash flow.

Automation and outsourcing

Inadequate treasury systems infrastructure is one of the top three challenges faced by many Treasury teams today. This is particularly prominent in FX. According to our 2022 CFO FX survey, nearly two-thirds (65%) of corporates use manual execution processes, with over a third rating their FX set up as below average or worst in class.

It’s therefore easy to see why 89% of senior-finance decision makers now looking into new technology and platforms to automate their FX operations.

Unlike manual processes, these solutions can streamline the end-to-end workflow, heighten transparency and enable many firms to get the best possible rates.

CFOs can even look to fully outsource their FX requirement. According to HSBC and Acuris, 44% of CFOs in larger companies (with revenues over $5bn) have outsourced some of their day-to-day functions.

Harnessing external solutions may

• ease the administrative burden of onboarding new FX counterparties
• centralising price discovery
• navigating the post-execution phase, whilst also freeing up resources for more effective use elsewhere.

The end product is also more likely to be of higher quality, leading to improved execution. 

ESG

According to EY, more than three-quarters of investors think that companies should make investments that address ESG issues relevant to their business, even if it reduces profits in the short term.

Similarly, 60% of corporate treasurers believe that ESG criteria will have a significant impact on treasury organisations and processes.

ESG-linked FX derivatives are in their infancy, with only a handful of examples cited in ISDA’s 2021 report ‘Overview of ESG-related derivatives, products and transactions’. However, we believe CFOs should expect these kinds of structures to become more common.

Before ESG-linked derivatives go mainstream, CFOs might want to explore forming relationships with banks, and other service providers, that are aligned with their company’s own ESG priorities.

Forming the right relationships

Bank relationship management is central to many businesses achieving their goals.

Despite this, over half of treasurers still use spreadsheets for their bank relationship management, with no system in place to enhance the ease and efficiency of this process.

This may increase the complexity and difficulty of managing bank relationships.

CFOs clearly must consider how their external relationships can help them manage FX risk more effectively, but historically this might have meant bringing more banks into the mix rather than fewer.

Utilising multibank execution solutions that offer all the competitive benefits of more banking relationships, without the operational drag, can enable treasurers to gain a clearer view of the market and ensure they are executing at the best possible rate.

How MillTechFX can help

MillTechFX by Millennium Global is the FinTech affiliate of Millennium Global Investments, one of the largest specialist currency managers globally. Our FX-as-a-Service model helps corporates and global businesses significantly reduce both FX costs and operational burden associated with FX execution and rolling hedging requirements.

We provide an end-to-end solution, from onboarding with up to 15 counterparty banks to execution, settlement and reporting of FX transactions, including TCA, across multiple funds.

Get in touch with us to find out more about how we can help you navigate your FX challenges in 2023.

 

Some of the data in this piece refers to a survey conducted by Censuswide on MillTechFX’s behalf between June 2022 – July 2022, based on a survey of 251 CFO’s, treasurers and senior finance decision-makers in mid-sized corporates (described as those who have a market cap of £50mil up to £1 billion).