Cash & Liquidity Management

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Treasury Transformation to Minimise FX Risk When faced with reduced profit margins due to negative FX movements, DFS engaged with their banking partner and came up with a unique cross-currency, cross-border solution.

Treasury Transformation to Minimise FX Risk

Featuring Kenneth C. K. Ng, Group Treasurer, DFS Group and Stephen Chan, Head of Liquidity Management, Asia Pacific, Global Transaction Services, Citi

With retail operations across Asia and beyond, DFS has cash inflows in a wide range of currencies, while most purchasing takes place in USD. Its group treasury in Hong Kong faced huge bank charges with a large number of cross-border cash transfers and the cost of buying and selling USD. Furthermore, there was a great deal of manual work required by local divisions and treasury to administer the process, and tight deadlines. DFS was therefore seeking to transform its cash management processes to avoid negative FX movements eroding the company’s profit margin, whilst reducing labour-intensive processes and external transaction costs. This would be no easy task but not impossible. To do this they required a banking partner that was committed to understanding their needs, who could successfully bring together product innovation with customer service excellence.

Designing a new cross-currency, cross-border solution

DFS approached Citi to discuss ways of enhancing the way they manage cash and foreign exchange risk, in order to make the process more convenient without increasing risk or cost. There were a variety of reasons why DFS selected Citi. Firstly, Citi already had a strong relationship with DFS as its key partner bank for global cash management and payments in both local and foreign currency. Secondly, the bank is a participant in DFS’s loan facility. However, the quality, as opposed to simply the scope, of the relationship was the decisive factor in DFS’s decision. Kenneth C.K. Ng, Director and Group Treasurer, DFS explains,

“We have had a long and successful relationship with Citi for both borrowing and cash management. A particular benefit of working with them is the quality of service that we receive, so we were enthusiastic about opportunities to extend the relationship further.”

He continues,

“We worked closely to design a new solution that would meet our current and future needs by reducing costs and administrative effort, whilst increasing our currency flexibility. We were impressed by its innovative and pragmatic approach to designing, implementing and maintaining a cost-effective, scalable solution that was specifically designed around our business objectives.”

The new liquidity structure represents a complete transformation in the way that cash and FX risk is managed at DFS. Local business divisions no longer need to transfer surplus cash to treasury, nor to request additional funds. Similarly, treasury does not need to exchange foreign currency amounts for USD, nor to convert amounts back to local currency. The workload across the business has therefore been substantially reduced, whilst retaining visibility and control over cash flows and FX processes.

To achieve this, the solution comprises a two-way cross-currency, cross-border sweeping arrangement with automatic conversion into USD. Surplus funds in DFS’s accounts across the region, in all currencies, are automatically swept into a central USD account held by DFS’s global shared service centre (SSC). The conversion is performed at a competitive rate based on an agreed margin with the sweeps undertaken according to pre-defined rules determined by DFS. Similarly, overdraft balances in each currency account are funded automatically from the liquidity structure at the end of each day to avoid overdraft charges. The process is fully supported with account information and confirmation of foreign exchange transfers provided promptly through CitiDirect® Online Banking.

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