Electronic platforms help take FX risk management to the next level

The Bank of International Settlements’ recent Triennial Survey revealed that daily FX daily volumes exceed $7.5 trillion. As volumes continue to scale, FX risk management becomes more critical than ever for firms operating in today’s global economy.

And the risks companies face are increasingly complex as Gerard Melia, Head of FX Sales at StoneX Group, observes, “The landscape of FX risk management has evolved significantly, driven by increased globalisation, market volatility, geopolitical events, and advancements and complexity of FX risk management technologies.”

This evolution necessitates a multifaceted approach to risk management that goes beyond traditional methods. Treasury managers now grapple with various risks including transaction, translation, economic, contingent, credit, liquidity, and operational risks. Each of these categories presents unique challenges, requiring specialised knowledge and sophisticated tools to manage effectively.

Electronification has long been positioned as a solution to these challenges. But what role is it playing and how can firms implement these programs successfully?

The electronification effect

Traditional treasury management systems, while still valuable, often struggle to address the full spectrum of modern FX risks. Melia says, “Managing FX risk is only one part of the responsibilities of a modern treasurer and traditional treasury management systems, while useful, often fall short in addressing the full spectrum of FX risks.”

Meanwhile John Stead, Director of Sales Enablement and Marketing at smartTrade, believes the way treasury systems are organised within firms is to blame for their shortcomings.

“Traditional treasury systems may not achieve their full potential because they are often siloed, handling either transaction processing or risk analysis, but rarely both,” he says. “This creates significant gaps in the risk management process, leaving firms exposed to risks that are not fully identified or mitigated.”

The silos treasury systems operate in mean they fail to capture the different kinds of FX risk firms face. For example, Eric Huttman, CEO of MilltechFX, highlights transaction, translation, and economic risk as the three major categories of FX risk.

“Managing these risks has become increasingly complex due to globalisation, market volatility and the intricate financial structures of modern businesses,” he says. “Many treasury systems struggle to fully capture and address these risks, focusing on specific aspects like transaction or translation risk without integrating all risk factors.“

Digital transformation in FX has gone a long way toward changing risk management, equipping treasury managers with sophisticated tools to navigate an increasingly complex market landscape. 

Electronic platforms have become instrumental in enhancing FX risk management through real-time monitoring, predictive analytics, and comprehensive data normalisation, marking a significant departure from traditional methods.

Huttman paints a picture of these traditional methods, saying that 34% of European corporates still instruct financial transactions over the phone, while nearly a quarter (24%) use email. But the manual tasks don’t end there.

“Finance professionals may have to get approval from different layers of seniority, wait for trade confirmations which usually arrive via email, process settlement, enter payment details and, in some instances, share trade information with third parties such as administrators or regulators,” he says. “All this internal, manual and siloed communication can be extremely inefficient. And this is just for one, single trade.” 

All of this means firms are waking up to the need to move away from such inefficiency and embrace technology.

“Electronic platforms have fundamentally enhanced FX risk management through real-time monitoring of FX positions, market movement and transactional data,” Melia notes. This real-time capability is helping firms quickly understand their risk exposure and response to market fluctuations—a dramatic improvement over traditional end-of-day risk assessments.

The ability to track exposure in real-time also helps treasury managers make informed decisions promptly, crucial given the way market volatility has been recently.

Stead elaborates on the power of these new tools by offering an example. “smartTrade’s advanced risk management tools leverage real-time market data and centralised positions to provide a holistic view of FX exposures,” he says. This integration offers treasury managers a comprehensive view of their risk profile, enabling more informed and proactive decision-making.

The consolidation of data from multiple sources ensures a single, accurate view of risk exposures, which is vital for firms operating across multiple jurisdictions and currencies.

The benefits of electronification extend beyond just monitoring. Predictive analytics, powered by sophisticated algorithms and machine learning, are now at the forefront of risk quantification. “Electronic platforms enable treasury managers to leverage predictive analytics (algorithms and machine learning) to quantify the risks,” Melia says.

Firms can now anticipate potential market movements and adjust their strategies accordingly, moving from reactive to proactive risk management.

Transparency and price discovery have also seen significant improvements, “Thanks to advancements in trading platforms and connectivity,” explains Melia. For instance, he says StoneX Pro aggregates pricing from diverse liquidity providers, simplifying access to top-tier liquidity for small to mid-sized firms without requiring heavy investments in technology and expertise.

This democratisation of access to quality liquidity sources levels the playing field for smaller market participants.

Huttman cites price discovery as one of the benefits for corporates embracing electronification. “For many corporates, it is operationally inefficient to set-up and manage multi-bank relationships, meaning they often rely on a single bank or broker to meet their FX hedging requirements,” he says. “Automated solutions enable firms to compare prices from multiple liquidity providers on a single marketplace. Not only does this bypass the often onerous phone calls and email exchanges, but it also enables firms to get the best available price and lock it in with the simple click of a button.”

The efficiency gains from electronification are substantial. “Automation, from trade execution to settlement, has streamlined operations and minimised the likelihood of human error,” Stead says. This automation, coupled with the integration of algo trading and EMS platforms, allows firms to achieve better pricing and improved execution quality.

The impact of these advancements is evident. The BIS Survey mentions the increasing adoption of electronic trading platforms and how they account for a large portion of daily FX turnover. This electronic shift is not just introducing more efficiency—it’s reshaping the entire landscape of FX risk management.

However, it’s crucial to recognize that while these electronic platforms provide powerful tools, they also require sophisticated skills to utilise effectively. As Melia cautions, “The skills to effectively hedge against these risks through complex FX structures are often beyond the capabilities of many treasury management teams.”

Data-driven approaches to hedging and currency management

Electronification is increasingly paving the way for more automation—particularly when speaking of systematic hedging programs. These systems are helping firms leverage data better and paving the way for more sophisticated, efficient, and effective risk management strategies.

“Electronic platforms have the potential to revolutionise how companies implement systematic hedging programs and improve the overall effectiveness of FX risk management. These platforms enable the automation of hedging strategies based on predefined risk parameters, ensuring consistent execution aligned with corporate risk policies,” says Melia.

Stead elaborates on this point, noting that “smartTrade supports automated hedging strategies that can be customised to meet a firm’s specific needs.” This customization allows firms to tailor their hedging approaches to their unique risk profiles and objectives.

“Electronic platforms often integrate with other financial systems, enabling seamless data flow and consolidated reporting,” Huttman adds. “This integration allows for a broad view of FX exposures across the organisation, ensuring that all risks are accounted for and managed effectively.”

Moreover, the ability to automatically trigger hedges when certain risk thresholds are met provides a level of responsiveness that was previously unattainable with manual processes.

However, the successful implementation of these advanced hedging programs is not without its challenges, Melia cautions. Success “depends on several factors, including the quality of the technology deployed, the configuration of hedging algorithms, the expertise within the treasury department, and the quality of the liquidity accessed,” he says. This underscores the importance of not just having the right tools, but also the expertise to use them effectively.

The rise of electronification goes hand-in-hand with firms recognising the value of a data-driven approach to risk management. “Organisations began to take a strategic approach to data management in the mid-2000s,” Melia explains. “The advent of cloud computing in the 2010s enabled companies to store and analyse vast amounts of data more efficiently.”

This shift towards data-centric decision-making has been further accelerated by the growing interconnectivity of modern companies and the evolution of FX risk management platforms.

Stead emphasises the importance of data consolidation. “Consolidating data from various sources into a single platform is critical for treasurers to gain a comprehensive understanding of their risk exposures and take informed actions,” he says. “This unified approach to data management enables more accurate risk assessments and supports informed hedging decisions, whether executed manually or through automated systems.”

Most importantly, data consolidation removes data silos—one of the biggest shortcomings in existing risk management systems. “A single platform also simplifies the management of FX risks by streamlining workflows, improving accuracy, and enhancing reporting capabilities. It enables treasurers to quickly assess their overall risk position, identify potential vulnerabilities, and adjust strategies proactively,” Huttman says.

The combination of electronification and data-driven approaches to risk has led to the rise of Currency Management Automation (CMA) solutions. When asked about their effectiveness, Melia is quick to acknowledge their benefits. “…increased efficiency and speed, enhanced accuracy with reduced human error, optimised hedging strategies, and, ultimately, cost reduction,” he says. The fact that these solutions leverage advanced technologies, including artificial intelligence and machine learning, further makes them an attractive proposition.

Stead notes that CMA solutions have “transformed FX risk management by automating the entire FX workflow, from trade execution to settlement and reporting.” This automation not only reduces operational risk but also frees up treasury teams to focus on more strategic activities.

Also, Huttman notes, CMA solutions scale well, helping firms manage risk seamlessly as transaction volumes grow.

Despite these advancements, challenges remain, even if they are potentially short-term ones. 

Melia points out that treasury managers still face issues such as fragmented and outdated data, the gap between near-real-time and real-time data, budget constraints, and the increasing complexity of FX risk management. Additionally, while large companies can directly access bank liquidity, smaller firms often lack such access. This makes firms like StoneX Pro crucial in helping these firms, he says, who can “…source the type of liquidity that matches their hedging needs in a cost-effective manner.”

Integration with existing platforms and working with a service provider

“The latest generation of FX risk management platforms is designed with interoperability in 

mind, ensuring seamless integration with existing systems like ERP and treasury management systems (TMS),” Stead says. 

This integration capability is not just a convenience—it’s a crucial feature that maintains data consistency across all platforms, significantly reducing the risk of discrepancies that could lead to incorrect risk assessments.

Stead highlights that “smartTrade provides flexible FIX and REST APIs, enabling its trading and payments platforms to work harmoniously with other systems with minimal integration effort.” 

This approach ensures that firms can leverage new FX risk management tools without disrupting their existing technology stack, promoting a more holistic and efficient approach to financial management.

Moreover, the ability to integrate easily with existing systems enhances the scalability of risk management solutions. When it comes to choosing a suitable FX risk management solutions provider, firms need to consider a range of factors beyond just the technical capabilities of the service provider’s platform.

“Apart from financial stability, regulatory robustness, and scalability, firms should choose FX risk management solution providers that are aligned with their specific needs,” Melia says. This alignment is crucial, as the most advanced technology may not always be the best fit for every organisation.

Stead emphasises the importance of comprehensive solutions, stating that “The provider should offer a platform that covers the entire spectrum of FX risk management, from transaction processing to risk analytics and reporting, and even other asset classes such as money markets and fixed income products.”

Integration capabilities are also a key consideration. “Seamless integration with existing systems like ERP and TMS is crucial for ensuring data integrity and operational efficiency,” Stead explains, echoing his earlier points about the importance of interoperability in modern FX risk management platforms.

“Providers at the forefront of technological advancements, particularly in AI/ML, will offer more advanced tools for predictive analytics and automated risk management,” he adds.

Experience and expertise also play a vital role. “A provider with a proven track record in the FX market and deep expertise in financial technology will be better positioned to deliver reliable and effective solutions,” Stead says.

Finally, Stead highlights the significance of customization and support, noting that providers should offer a platform that can be tailored to the specific needs of the firm, along with robust customer support. This flexibility and support can be crucial for firms as they navigate the complexities of risk management.

Melia adds an important caveat to this selection process, noting that “The subset of organisations with the budgets and expertise to access the most advanced technology and execute complex risk management strategies isn’t representative of the wider market.”

He recommends firms choose a solutions provider carefully, considering not just the technical capabilities of the platform, but also its alignment with the firm’s specific needs, resources, and expertise. In doing so, firms can ensure they select a solution that not only meets their current needs but also supports their future growth and evolving risk management strategies.

Huttman highlights transparency as a critical feature to evaluate, particularly when conducting TCA. “TCA goes hand-in-hand with best execution and can be used as an ongoing audit of FX practices as well as to hold existing FX counterparties to account,” he says. “TCA can come with its own costs, so it is important that firms look to partner with a provider which already has TCA built into its offer.”

Huttman also points to onboarding efficiency and strong governance as critical points to evaluate. “FX is one of the largest and most liquid markets in the world, but also one of the most complex,” he says.

How risk management will likely evolve

No talk of the future of FX risk management platforms is complete without examining the state of next-generation technologies like AI and ML. These advances promise to reshape the landscape of FX risk management, offering enhanced capabilities and efficiencies.

“AI is clearly a huge trend currently but it’s important that the FX market focuses on genuine use cases, rather than just the technology,” Huttman says.  “At MillTechFX, we have been exploring using generative AI to automate parts of the compliance process by enabling our team to find specific information within legal documents which accelerates onboarding.”

He also notes that generative AI is playing a role in the development process at MilltechFX. “We feed parts of our code base to a generative AI model to allow developers to get answers on different parts of our code base without having to search through documentation, saving valuable time,” he says.

“The integration of artificial intelligence and machine learning into FX Risk Management platforms is inevitable, promising enhanced decision-making, risk management, and task automation,” Melia says. This integration is expected to dramatically improve the ability of firms to anticipate and mitigate risks, moving from reactive to proactive risk management strategies.

Stead dives into how these technologies are already being implemented and their potential future applications. He notes that “smartTrade has already integrated AI/ML elements into its eFX platform, providing sophisticated analytics and decision-making tools, including client segmentation, market analysis, and pattern recognition in trading behaviour.” These advancements are not just theoretical possibilities but are already enhancing the capabilities of existing platforms.

Looking to the future, Stead says, “These technologies will enhance the predictive capabilities of risk management platforms by identifying patterns associated with both typical and atypical behaviour, allowing firms to anticipate and mitigate risks before they materialise.”

This predictive capability represents a significant leap forward in risk management, potentially allowing firms to avoid losses before they occur.

“In the future, we can expect greater automation in FX risk management, with AI-driven algorithms capable of executing trades and managing exposures autonomously, further reducing the operational burden on treasury teams and enhancing overall efficiency,” Stead predicts.

Melia cautions that the adoption of these technologies may not be as rapid or straightforward as some might expect. He notes that “in the near term, the pace at which AI and ML will be adopted, and the extent to which they will replace existing manual treasury processes, remains uncertain.” This reflects the complex nature of risk management and the potential challenges in implementing these advanced technologies.

Indeed, Melia highlights several significant challenges that treasury departments will face in adopting these technologies. These include “navigating complex regulatory and compliance requirements, addressing issues of data quality and accessibility, overcoming infrastructure limitations, and managing additional risks and costs.”

While challenges remain, Melia, Stead and Huttman are all bullish on the role electronification and technological advances will play in risk management. Given increasingly complex market conditions and risk factors, a move to predictive risk assessment looks like the right one.