Profit-Loss: Technology is changing the way corporate treasurers operate

Profit & Loss talks to Tod Van Name, Bloomberg’s global head of FX and commodities electronic trading, about how technology is changing the way that corporate treasurers operate.

Profit & Loss: With a lot of global macro uncertainty anticipated for the year ahead, are corporate treasurers under more pressure when it comes to managing their FX exposures?

Tod Van Name: There’s no question that corporations are always considerate of market pressures, and while there haven’t been wild currency swings in the US, where the dollar has been strong and stable recently, for treasurers not in the US it has become a particularly big issue.

For firms that are big exporters or importers in Latin America or emerging markets, where the value of their domestic currency may have dropped by 30-50% over the past two years, it is a concern because with volatile price swings in the currencies, the overall change in the value of that currency year-to-date isn’t always as apparent and therefore neither is the hedging risk. So market risk is one aspect of what treasurers are looking at.

P&L: What are the other areas?

TVN: Well firstly, it’s important to note that a lot of treasurers have become much more sophisticated in managing their risk exposures because technology has given them the tools to more effectively measure the risk that they incur.

It used to be that treasurers looked at internal budgets, their balance sheet and their income statements, saw where they had some overseas sales and receivables and then just managed or hedged these. This is still part of what treasurers do on a daily basis, but there are other risks that they also have to look at, in particular they’re focused on interest rate risk, commodities risk and FX risk.

The process that these treasurers are responsible for overseeing has become more complicated than just examining simple cash flows, but at the same time even as these companies grow their staffing size, it doesn’t necessarily increase corresponding to their revenue growth. So the treasurers are required to do more with the same amount of staff and that means that they need better tools in order to operate more efficiently.

What I mean by this is that it’s not just about giving them screens with lots of data on it, but enabling them to look at their workflow and understand what their risks and exposures are, managing how they’re going to allocate those risks across multiple divisions and branches and then how they’re going to interact with the marketplace. Then they need to be able to monitor the impact of all the hedges that they put on or take off and go through the accounting cycle or meet regulatory requirements that might be in place in terms of documenting their trading activity.

P&L: But when talking about the sophistication of corporate treasuries, there’s surely a wide spectrum in terms of the budget and expertise that firms have at their disposal?

TVN: Yes, there’s definitely a spectrum. There are some treasury operations that when you go to visit it’s like walking into the quant lab at MIT, and when firms reach this level of sophistication they actually don’t need a lot of people, because their systems can take many different points of the business into account and can look across a longer time horizon.

But we also spend a tremendous amount of time with less sophisticated corporates, not just here in the US, but also in emerging markets, showing them the tools and best practices that many other treasuries are using. A lot of corporates are still working off spreadsheets or, when it comes to their currency exposures, relying on their banks to advise them on whether they expect a currency to move and therefore they should hedge against that.

What can help these treasurers is having tools at their disposal so that they can validate this advice and show how they were able to eliminate or reduce risk by coming up with an effective hedging strategy.

P&L: There must also be a clear disparity in terms of the technology that’s actually required for different treasury operations…

TVN: So despite the incredible technology advances that we’ve seen, FX is still very much a relationship business. That’s particularly true in markets like Mexico, South Korea, Taiwan, Malaysia and the Philippines where the broker market is very much alive and well. If you come into these markets touting a piece of technology that can stream rates and eliminates people then you’re going to face a lot of resistance, so you have make sure that the solutions that you’re offering are applicable and relevant to the way that each market operates.

P&L: When thinking about technology for corporates, are there any “game changers” left at this point? Or are firms really just looking for incremental improvements to what is already available?

TVN: I think there are actually several things that have changed the way that this market actually operates. First and foremost is regulation, which even touches the buy side and the corporate space.

Corporates in Europe will have a reporting obligation under MiFID II, and this represents a very real change in workflow for many clients. The question for these clients is: do they develop their own technology for reporting or can they work with someone to aggregate their information and make it available for them to pass on to whatever repository it is required to go towards?

Secondly, from a compliance standpoint the current environment means that everyone who interacts with markets needs to be able to explain why they made the decisions they did and provide an audit trail of how they managed the process. In this regard, we see compliance is becoming a really important part of the workflow for corporates.

Thirdly, amongst a number of corporate clients, particularly those outside of the major financial centres, we see a trend of firms moving towards a centralised treasury model. This means that instead of relying on their local branches to interact with the market, which can be ineffective and can be an operational risk, they are consolidating that practice into their central treasury.

That gives them the ability to stop paying spreads on every trade because if you’re a firm with one subsidiary in Brazil that needs to buy US dollars and another in Switzerland that needs to sell US dollars, then it makes much more sense to net the two together instead of going to market and paying spread and commission on each.

So many of these central treasuries are aggregating the flow of their hedges and the cash flows that they need to cover and then having a bank net down the positions where possible and go out to the market place and execute the rest. The central treasury can then allocate the costs associated with this execution however they want across their business. This makes the whole process more efficient and gives this central treasury more oversight than they’ve ever had in the past. We’ve actually seen a surprisingly large uptick in corporations wanting to be able to see and monitor this whole process from beginning to end.

All of these are substantial changes that have been enabled by technology.

This article was originally published in Profit & Loss and can be accessed here. Copyright Profit & Loss 2017 www.profit-loss.com