If one positive emerged from the volatility shock to foreign exchange (FX) markets in March 2020, it was that the market structure worked. Liquidity held up and corporate treasuries were able to hedge. Spreads might have occasionally been wider than normal, but pricing was available throughout. 

This meant that treasuries did not, after the initial shock of the first wave of the pandemic, need to be overly concerned about whether they could hedge exposures. A dispersed workforce and local limitations on the movement of people, however, created a very different problem. Manual processes were exposed, and the list of risks to be managed steadily grew as companies fought to ensure resources were adequate and in the right place at the right time. Logistics disruption and FX exposure were just two of these risks. Coping with business change during the early days of the pandemic could have derailed ongoing automation programmes, but it also underlined why momentum and sticking to the plan are so important. Streamlining, automating and optimising internal processes were more than a ‘nice to have’ benefit as remote working rapidly became the norm. 

Few corporate treasuries would argue against greater workflow efficiency, but achieving it is less than straightforward and demands a collective organisational determination that also involves other finance functions and the IT department. In addition, while there are common processes, each firm has its own nuances in how it operates. This makes buying an off-the-shelf solution (such as an enterprise resource planning or treasury management software system) challenging. While it might work on 90% of the necessary workflow, adapting an already-built technology solution can be onerous and expensive if 100% efficiency is to be accomplished. 

Workflow automation is, therefore, a thousand different journeys for a thousand different firms, especially in the corporate space. Yet there are plenty of junctions where those paths cross over, and here is where the opportunities lie. Rather than attempting to optimise an FX trade in a product – with a spread of perhaps one tenth of a pip – it is far better to optimise the processes that inform the decision to hedge in the first place.

"Predicting currency movements is a very difficult business, but we are getting much more consistency in our numbers"
Craig Tellwright, Head of Financial Services, Yusen Logistics (UK) Ltd

Perhaps the biggest obstacle to implementing technological change is knowing when to start. No two companies are at the same stage of evolution, especially when considering the proliferation of ‘new economy’ corporations seeking to offer online services on a global basis. These firms are at a very different evolutionary stage to those that have existed for decades, or recently engaged in a merger or acquisition. 

However, most treasuries share one common goal: a drive for efficiency. “Treasuries are highly motivated to achieve efficiencies,” says Yannick Marchal, Managing Director, Global Head of Autobahn Maestro at Deutsche Bank. “For some this means beating the market on execution, but for many others it is about streamlining and focusing on operational risk reduction.” Conversely, in certain cases treasuries are willing to retain the same risk appetite when they can manage risk and related expectations with greater certainty.

Managing FX risk through automation has been the focus in recent years for Yusen Logistics¹, the international freight forwarding, contract logistics and supply chain solutions provider and a subsidiary of the major Japanese shipping company Nippon Yusen Kabushiki Kaisha, otherwise known as NYK Line. At the Northampton head office of Yusen Logistics (UK) Ltd, operational risk reduction is the priority, says Craig Tellwright, its Head of Financial Services. It is not about profiting from FX trading; rather the company wants to reduce the volatility around its balance sheet hedging programme. Deutsche Bank worked closely with Tellwright to review his processes, prepare data for automation, and eventually launch Yusen’s balance sheet hedging programme on its workflow automation platform. 

“For many years our process was to try to predict closing balance sheet positions four or five weeks in advance and take out some forward contracts to hedge them,” Tellwright explains. “That led to some big swings at the end of each reporting period due to exchange rate movements and an imperfect hedge. We began working with Deutsche Bank in early 2019 and now, while we still place the forward contracts, they are for one week and we adjust the hedge weekly. So, rather than try to predict the future and be exposed to exchange rate swings, our final balance sheet position is significantly better.” 

Tellwright acknowledges that accounting challenges remain, but the reduced volatility of returns and automated workflow mean the finance team can dedicate resources to specific targeted areas to help overcome them. “There are still risks of course. Predicting currency movements is a very difficult business, but we are getting much more consistency in our numbers,” he says.

Figure 1: Yusen Logistics forex analysis, pro- and post-automation

Source: Yusen Logistics

A good starting point for FX automation can come from the highest level, such as balance sheet hedging. However, as the journey proceeds, the right solution allows a treasury to implement fully integrated and synchronised workflow solutions across numerous FX activities, including hedging future expected exposures, cross-currency cash management, and cross-border payments and receivables. 

There are also less obvious areas where automation can help. “While most treasuries manage their major currency cash flow effectively, they often have a lot of small exposures in regional currencies,” observes Bhavna Sahay, Deutsche Bank’s Head of Corporate e-FX for Western Europe ex DACH. “By identifying these balances and optimising them, within established parameters and thresholds for action, we are able to automate that process.”

With an efficient and optimal hedging programme in place, what is the next step? It depends on the individual firm, but for Yusen it is getting bank balances automated. “We are working on this now, which will mean it is one less thing to worry about because our balances will be factored into our hedging programme,” Tellwright explains. “It’s the next step in simplifying our process and allowing us to focus on scenario planning and modelling for further changes to how we operate. 

“Automation allows us to access the right data, and this is where the proactive, consultative approach really helped us. The bank talked to us about new ideas and what we could do together to help our business. This may have been about new processes or just pieces of data, but it enabled us to get our message across to non-financial people in the business and highlight how we are mitigating the risk around our FX exposures.” 

Rachel Whelan, Managing Director, Global Head of Transactional FX Product Management and APAC Head of Cash Product Management at Deutsche Bank, stresses the value of a holistic solution that links the hedging strategy to payment flows. “Using the hedge as part of the cash management process means a treasury is doing much more than just a currency hedge,” she adds. 

To achieve this though, requires working in partnership to build appropriate solutions, rather than a rush to market to buy a number of off-the-shelf technologies that have to be linked together. A consultative approach is needed, adds Whelan’s colleague Johnny Grimes, Managing Director and Global Head of Liquidity Product, Transactional FX. “Technological transformation has to compete with a lot of other items on treasuries’ ‘to-do’ lists. So transforming into the digital space needs to come at the right time for these companies. It is really about finding the right trigger point to initiate that transformation process, and that comes through open discussions.”

"Treasuries are highly motivated to achieve efficiencies"
Yannick Marchal, Managing Director, Global Head of Autobahn Maestro, Deutsche Bank

Perhaps the most persuasive argument for workflow automation is to help a company expand. Although many grow organically, as noted, others also build out through mergers and acquisitions – and this represents challenges for the corporate treasury as more complexity is introduced into processes. “As firms grow in this way it adds to the already disjointed data processes they need to support,” says Marchal. “Using automation to combine these data processes is key to developing the right solutions. 

“There are more parts of the business delivering data, often over different time horizons. By working closely with corporates, we can understand their transactional data patterns and develop the ideal solution to access that data, and use it to maintain effective hedging and cash management.” 

Geographical expansion also represents a challenge. Establishing a physical presence is difficult – and was even before Covid-19. As Whelan notes, Asia Pacific has many regional nuances and a wide range of currency regimes, making it more complex to do business in than other regions. A bank can help to overcome these challenges and open borders to new business. 

This is especially important when it comes to restricted currencies where non-deliverable forwards (NDFs) are widely used for hedging. “A treasury using NDFs to hedge probably also needs to make and receive payments onshore,” she observes. “We can help by linking the hedging programme to the payment collection function, while ensuring that local regulations are observed. Removing a major pain point from the process allows the company to focus on what it does best.” 

For others though, it is about new markets. In the digital age, a growing number of companies are looking to deliver products remotely, without a local presence. “Many companies in the digital space want to see how their business goes in new markets before committing physical resources,” says Grimes. “These firms also still want to manage the financial side of the business at a central level. They don’t want to outsource small pockets of risk, they want to manage it from a central perspective, which requires a holistic solution.” 

For many businesses, the current environment and length of the pandemic is putting treasury efficiency under particular scrutiny. Those adversely affected by Covid-19 could see a bounce back in growth, which in itself puts pressure on operations.  

This means challenging existing perceptions about automation and being open to the potential benefits. What it does not mean is giving up control over cash management and hedging decisions. For some this will represent a big step into the unknown. Yet, as with so many successful solutions, the journey will start with a conversation about what is achievable. 

Colin Lambert is a freelance financial journalist and publisher of thefullfx.com. He was previously a columnist for the FX news and events website Profit & Loss 

Sources

¹ See FX risk management: bring on the robots at flow.db.com