Changing the Rules of the Game: A New Dawn for FX Risk Management
By Eleanor Hill, Editor
From micro-hedging to leveraging data analytics, technology is radically changing the way treasurers manage foreign exchange (FX) risk. Philippe Gelis, CEO and Co-Founder, Kantox, discusses the true value of automating FX hedging, explains the role of analytics in improving hedge execution, and comments on what makes fintech-bank partnerships a success for all involved, not least the corporate treasurer.
Eleanor Hill (EH): How is evolving technology assisting treasurers to better manage their FX risk?
Philippe Gelis (PG): The fourth industrial revolution is driving a fundamental shift in corporate treasury – away from manual processes, towards automation. This new way of working can be seen across payments and cash management, as well as FX risk management. Some corporates are currently very early on in their automation journey, others are far more advanced. But wherever a corporate is on the automation spectrum, there are always further benefits and insights to be gleaned, so I see this being the direction of travel for the foreseeable future. Automation is certainly not just a buzzword, it is the new normal for treasury.
EH: How does Kantox’s offering reflect the shift towards automation – and how are corporate treasurers benefiting?
PG: The heart of Kantox’s offering is the ability to automate FX hedging and execution. Our Dynamic Hedging solution enables corporate treasurers to completely automate hedging processes, hedge small or large transactions in bulk, and streamline FX workflows.
A practical example of where this has been extremely useful for treasurers was the day of the Brexit referendum results. Corporates running our automated hedging solution had their risk fully under control when they arrived at their offices that morning, as their hedges were executed overnight. Those without such a solution in place were immediately faced with trying to estimate their FX exposure and hedge in bulk as quickly as they could, knowing that the market was continually falling. One treasurer lost close to €2m as a result of having manual processes in place.
These benefits are the tip of the iceberg, however. On top of automation, we can add analytics to provide actionable data and insight around the performance of the execution. The analytics’ interface that Kantox has built, Dynamic Hedging Analytics, is a live, data-rich dashboard that goes far beyond what any treasury function could achieve in Excel – offering at-a-glance overviews of hedged and unhedged exposures, as well as the ability to dig much deeper. The more in-depth functionalities can be leveraged to significantly improve the execution rules that companies are using on a daily basis. For example, the analytics might highlight that it would be beneficial for a client to execute hedges more often, but in smaller amounts.
EH: This brings us to the topic of micro-hedging – something that Kantox often talks about. Why might treasurers want to consider this?
PG: First, it’s important to remember that hedging strategies are not ‘one size fits all’. What works for one company in one sector cannot always be applied with the same results in another. With that in mind, micro-hedging is essentially a currency management strategy that consists of hedging each transaction as it occurs. Unlike other strategies whereby users take protective action after reaching a certain nominal threshold, micro-hedging protects against individual exposures immediately, regardless of the underlying value of the receivable or payable.
Companies operating a micro-hedging strategy use tools such as forward and spot transactions to immediately lock in the exchange rate. This then enables them to protect expected foreign currency cash flows from exchange rate volatility, locking in margins and improving forecasts in the process. In essence, it is real-time hedging on an item-by-item basis. This strategy can be particularly beneficial for companies with low-value but high-volume FX transactions, such as e-commerce firms or travel agencies.
To make the workflow around this easier for corporates, our Dynamic Hedging solution facilitates straight-through processing of micro-hedges. Not only does this remove a significant amount of manual processes, thereby freeing up treasury to spend more time on strategic tasks, the automated solution also provides greater visibility over FX exposures – with the added benefit of the analytics that I mentioned earlier.
EH: In the past year, Kantox has made the headlines for some interesting partnerships with banks. What is the strategy behind this?
PG: Yes, we’ve certainly been busy! We have entered into agreements with BNP Paribas, Citi, and Silicon Valley Bank – all of which are strong in FX, but acknowledge that building plug-and-play technology is quite challenging. Through these partnerships, the banks can offer their corporate clients the benefit of Kantox’s technology expertise and track record, while keeping the existing relationship intact from a liquidity standpoint.
Of course, for Kantox, we are also gaining exposure to a much broader client base. So where previously our solution might have been more popular among smaller clients, it is now coming to the attention of large corporates, thanks to these bank partnerships. It’s the best of both worlds – and treasurers ultimately benefit from having easy access to a fully automated hedging solution that will help them to improve their treasury processes.
I must add here that we were delighted to win TMI’s 2019 Award for Solution Innovation – FX Risk on the strength of our partnership with BNP Paribas. It’s one thing to believe in a collaboration yourself, it’s another to have it validated by the market.