U.K. firms ramped up FX hedging in Brexit run-up

This article is by Rebecca Spong of Bloomberg Briefs. It appeared first in Bloomberg Brief | Corporate Treasury. 

Mid-sized U.K. companies stepped up their efforts to hedge against currency volatility in the run-up to the June 23 vote on the country’s membership of the EU.

A report from East & Partners Europe says that the use of FX options by corporates with about 20-100 million pounds annual turnover became “universal” during the full year ending June compared with 89.2 percent of mid-sized firms in 2015.

  Simon Kleine, head of client service for East & Partners Europe, said that the June referendum acted as a catalyst for the increased use of hedging. “Lower corporate businesses clearly recognized the need to adopt the use of FX hedging products in the last year, with an acceleration in their use in the six months leading up to the U.K. EU referendum resulting in universal use of FX options now,” he said.

Most Mid-Sized Firms Are Hedging FX Risk

The use of hedging instruments among small-to-medium-sized and micro businesses in the U.K. has yet to gain the same adoption rate, with just 21.1 percent of SMEs using FX options in the last year. More than a quarter have used FX forwards. The turnover band for SMEs is 5-20 million pounds. More than 75 percent of smaller businesses still rely on spot FX products, the report found.

Just over 40 percent of the U.K. companies that responded to the survey were in the manufacturing sector, with 21 percent in wholesale, 7 percent in retail and 6.5 percent in financial services excluding banks. The remainder were in various industries including the transport sector.

A total of 2,217 U.K. businesses from micro, SME and lower corporate segments were interviewed in May 2016.

The survey also showed that three banks, Citi, Deutsche and HSBC dominate the hedging market with a combined market share of around 30 percent in both FX options and FX forwards.

SMEs Are Less Active in Hedging

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