Integrated Cross-Border Operations
- Leveraging the Foreign Exchange Opportunity
by Greg Edwards, Global Head of Transactional FX, and Gareth Lloyd-Williams, Head of UK Corporate Sales, HSBC
Managing foreign exchange (FX) risk is a priority for every international treasury function, helped by a range of solutions which have emerged in recent years to increase risk transparency and enhance operational efficiency. However, by leveraging innovative FX solutions, treasurers can also facilitate new commercial activities and create competitive advantage, whilst managing risk and cost.
Early stages of the FX innovation journey
Foreign exchange (FX) management has been an area in which innovation has flourished over the past decade or so, but this has largely been targeted at automating and increasing transparency of FX transactions between treasurers and their banks. This includes the evolution of bilateral dealing platforms (e.g., HSBC evolve) offered by banks, and independent, multibank trading platforms. By leveraging these platforms, treasurers can seek competitive quotes on a wide variety of currency pairs and product lines from multiple counterparties, transact online and transfer deal and quote information to the treasury management system (TMS).
These solutions offer significant opportunities in managing risks and costs by enabling treasurers to seek the best quotes, demonstrate price discovery and achieve high levels of straight-through processing (STP) by integrating these platforms with their TMS. This integration often operates ‘two-way’ so that treasurers can aggregate exposures from across the business and then deal net positions in the market.
Not only do these automated dealing platforms offer considerable value for buy side market participants, such as corporate treasuries, but there are also benefits for their banks, as more resources can be invested in expertise and solutions to support clients’ wider FX requirements as opposed to quoting on regular transactions. The investment in more value added services is becoming increasingly apparent, with innovative solutions now available that offer the precision, transparency and automation that treasurers demand across the full spectrum of their FX requirements.
The cost and risk of foreign currency payments
One of the issues that affects companies of all sizes, and where the highest volume of transactions is typically involved, is foreign currency payments, i.e., payments or collections in a currency that differs from the account into which they are paid or received, which therefore need to be converted into the account currency. In many cases, it is not feasible or worthwhile for a company to hold accounts in every currency in which it pays suppliers or employees. For example, staff hotel bills, cross-border royalties or even pension payments to retirees living abroad can seem small in value when taken individually, but together they can represent a considerable sum. This results in significant FX risk, and time and cost to process multiple cross-border payments. Similarly, from a collections perspective, it is not always possible to dictate the currency in which a company receives cash, leading to conversion costs and potential loss of value date.
When faced with the challenge of cross-border payments and collections, treasurers need to avoid erosion of value, achieve visibility of FX rates used to convert the payment or collection amount, enable clear identification of incoming flows, and potentially enable automated reconciliation. While companies of all sizes, from the largest multinationals through to microbusinesses, may share the same objectives, there are clear differences in the resources and technology in place to address them.