By: Andy Gage Vice President of Strategic Markets, FiREapps
By: Andy Gage Vice President of Strategic Markets, FiREapps

The Road to Automating Currency Risk Management

Since the financial crisis of 2008, currencies seem to be in a near-constant crisis. From Brexit to the plunge of Brazilian real and recent volatility in emerging markets currencies like the Turkish lira, global currency swings have become increasingly common and remain top of mind for CFOs and treasury professionals. 

Since the financial crisis of 2008, currencies seem to be in a near-constant crisis. From Brexit to the plunge of Brazilian real and recent volatility in emerging markets currencies like the Turkish lira, global currency swings have become increasingly common and remain top of mind for CFOs and treasury professionals. 

As such, it is imperative for multinationals to have a clear understanding of their foreign exchange (FX) exposures and to mitigate the associated risk to avoid impacts on financial results. However, a manual FX management program can make this task exceedingly difficult to complete in an accurate and timely fashion. In order to achieve this, organizations need to automate their FX management processes to improve their company’s ability to withstand currency headwinds.

The Benefits of Automation

Automating FX management processes has many benefits, including the creation of secure interactions between technology platforms and teams, improved workflows, cost savings, risk reduction and the elimination of manual intervention, thus reducing human error. 

By systematizing every step in the process and eliminating areas of manual intervention, automation gives back time to treasury, allowing them to focus on more value-add tasks such as analyzing information, tracking exposure trends and proactively seeking other risk reduction opportunities. 

For organizations that are looking to employ automation into their current FX management processes, they need to consider which of the three main types of automation best fits the goals of their business:
 
Data Transfer Automation optimizes data-gathering, ensuring human touch points are minimized, and the resulting potential for errors is reduced.
 
Workflow Automation identifies and establishes exposure benchmarks across the enterprise, ensuring consistency and eliminating currency surprises. 
 
Process Automation introduces end-to-end modernization, ensuring errors are mitigated, efficiencies are maximized and risk is eliminated. 

There is no “wrong” type of automation. Employing any one of these automation types changes the way treasury is perceived within their organization, transforming them into a resource in strategic planning. And the decision to choose one over the other is dependent on the differing needs of treasury teams and the corporate profile under which they fit. 

Employing any one of these automation types changes the way treasury is perceived within their organization
Employing any one of these automation types changes the way treasury is perceived within their organization

Defining Your  Company’s Corporate FX  Management Profile

Every organization’s FX environment is different and suffers challenges unique to their program. However, regardless of the sophistication or complexity of an organization – every company can benefit from automated currency risk management. This is true even for companies already utilizing treasury management systems (TMS) and/or FX trading platforms.

Most companies looking to automate will fall under one of the three common profiles for corporate FX management:

Grow

The first profile describes companies that are interested in incrementally improving their existing FX management programs. This type of company is generally looking for a more effective way to manage exposures. And in doing so, wants to establish efficient, automated processes and leverage better data for trade execution and hedge accounting. 

Optimize

The second profile type includes companies in need of a next-generation, straight-through process to optimize their FX management program. These companies are already using advanced currency risk management processes, but find that their program cannot keep up with their organizational growth. 

Expand

Lastly are highly-complex companies that are looking to expand their current offerings with more robust processes. These organizations are looking to consolidate, map and analyze complex FX datasets in a way that will allow them to keep up with their rapid growth. 

Automation Success Stories

Many organizations have benefited from identifying what type(s) of automation they want to implement and defining which profile their business fits, resulting in near-immediate quantifiable results, improved operational efficiencies, time savings, reduced expenses and increased risk mitigation.

The Bottom Line

Fully automating currency management ensures that an organization is operating under current industry best practices. Modernizing data collection, exposure consolidation, calculation and analysis, and hedging recommendations gives treasury the confidence that their program is running efficiently, cost-effectively and reducing the most amount of risk possible. 

While many companies have already taken steps to automate and modernize their programs, there are still many that have not. But the companies profiled in this article prove that every organization – no matter the size, complexity or sophistication - can benefit from automation. It is never too late to begin your journey to automation, and as this environment of currency crisis continues, there is no better time to alleviate the challenges facing your program and transform currency management into a modernized and cost-effective process.

Automation Success Stories Grow:

A $3 Billion  Pharmaceutical Company

A $3 billion company, the treasury team of this organization relied on a manual balance sheet-based program that lacked complete data, as subject to human error and took four to six hours a day to execute. Most of their processes were spreadsheet-driven and reliant on the unreliable data they received from various sources. 

Solution
In deploying a currency risk management solution, the company was able to design and launch an end-to-end FX management process to replace its manual data collection and forecast adjustments. This end-to-end automation connected their ERP system, currency risk management solution, trading platform and treasury management system (TMS) – ensuring a closed-loop process. 

The new, automated process in place allowed the company to phase out its time-consuming manual data collection process and forecast adjustment. And within 48 hours they had access to the accurate, complete and timely data that was previously locked inside of their ERP system, giving them quick access and revealing currency exposures they were unaware of previously. 

Their Program Today
Each day, general ledger balances, hedge and rate files are sent before the start of business. This automated feed allows treasury to automatically see all exposures and hedge recommendations every morning in their currency risk management solution.

After reviewing their exposures, hedge recommendations are automatically prepared and delivered to their trading platform by the currency risk management solution. After trades are executed, trade details are sent to their TMS for month-end accounting entry generation and posted automatically to their ERP. 

Benefits

  • The treasury team can review exposures daily and investigate if any significant changes are detected. 
  • Their new, automated program is portable with execution being transferred to an analyst who completes the process and initiates daily hedges in as little as 15 minutes. 
  • The company can process double the number of currency pairs they can manage, reducing risk and saving $1 million annually in trading costs.
  • FX impacts are controlled to 1 cent earnings per share.

Automation Success Stories OPTIMIZE:

A $5 Billion Specialty Chemical Manufacturer

Already using advanced currency risk management processes, this specialty chemical manufacturer’s existing program was unable to keep up with the rapid growth the company was experiencing. Their balance sheet hedging program was arduous, taking two days to gain visibility into exposure data after their books had closed.

They also bore substantial workforce costs, devoting more than 600 hours annually to extracting balance sheet information from their ERP and running a series of pivots and filters in spreadsheets to generate their exposure. This made it difficult for the treasury team to determine which accounts were being remeasured, putting them at risk of over- or under-hedging. 

Solution
The treasury team overhauled their entire FX process and implemented a currency risk management solution to automate currency management and trade execution, while also implementing a TMS. Using a specified query tool provided by their currency risk management solution, the company was able to collect the most accurate, complete and timely data available in their ERP system, enabling the treasury team to gain on-demand visibility into exposure data.

Their Program Today
Automating their program overhauled not only each step in the currency risk management process but also create a straight-through process that reduces risk and frees up treasury to work on more value-add tasks. They also decided to adopt a portfolio approach to manage risk holistically. 

Today, their transaction currency balances are pushed from their ERP to their currency risk management system where it is used to analyze exposure data before hedge recommendations are made and sent to their trading platform. From there, it is sent to their trade confirmation matching and clearing vendor before sending confirms and trades to the TMS, which then sends the accounting data for executed trades back to the company’s ERP system.

Benefits

  • Through implementing a currency risk management solution to facilitate automated exposure extraction, the company can reduce lag time between the closing of their books and calculating exposures. They can now complete the process in one hour instead of the two days it previously took. 
  • They experience an annual savings of $5 million in FX-related costs and were able to eliminate 600 hours of manual labor.
  • The company reduced $750,000 in market risk.
  • An additional $2.75 million is saved due to more efficient hedging based on portfolio 

Automation Success Stories Expand: 

A $25 Billion Technology  Company

In need of sophisticated, multi-step decision processes to facilitate their in-house banking structures, this $25 billion company wanted to implement workflow automation into their FX management program. 

Even though they had a large global footprint, the company relied on manual data collection and analysis, requiring more than 200 hours each week to facilitate currency risk management processes. They lacked centrally-managed currency analytics and used a decentralized hedging process that required most locations to complete hedging calculations (done at the local-country level) in spreadsheets. They also suffered significant challenges in Europe, where 21 entities traded in 12 currencies that resulted in more than 16,000 FX trades. 

Solution
Treasury’s priority was to review internal hedging policies and procedures. They selected a currency risk management solution to standardize the process and identify FX exposures by country. 

They then decided to employ an in-house bank to automate their transactions and hedge accounting. Their ERP was integrated into the process to remeasure, settle and account for all trades before sending them to their trading platform. 

Their Program Today
Balance sheet data is collected from their ERP and other source systems and databases daily, with a centralized process in their currency risk management platform. Each region continues to manage its own exposures, while corporate initiates the process. After creating a consolidated exposure set in their currency risk management solution, local controllers and treasury teams review the data, adjust for miscellaneous items (payments, inventory, etc.).
 
Hedge recommendations are made in their currency risk management solution, through which a secure, netted trade is then sent to their trading platform. After execution, confirms are sent to their TMS and then forwarded to their currency risk management solution, where corporate trades are allocated to each entity and sent to their TMS for back-to-back transactions accounting. Final internal and external hedges are then sent back to their currency risk management solution for future exposure calculations. 

Benefits

  • Their new, centralized processes give the company expertise and mean they are less reliant on individuals.
  • They experience a 65 percent reduction in time spent managing FX each week as a result of on-demand access to exposures. 
  • By implementing a currency risk management solution, setting up an in-house bank and initiating an automated program, they reduced FX costs by nearly 50 percent.
  • The company is on track to save €1.5 billion annually in bid-offers, forward points and transaction costs.