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FX-market risk management will prompt closer bank-treasury monitoring

The treasury divisions of banks and other financial institutions running large FX market positions are poised to assume a larger role in the management of the trading business, according to a report released on Friday.

At issue is a myriad of incoming regulatory reporting requirements set to come online soon in the EU and US, where the European Market Infrastructure Regulation plan and the Dodd-Frank Wall Street Reform and Consumer Protection Act are poised to lay out new rules for the multi-trillion dollar FX forward and options trading markets. Adding to the incoming regulatory burdens is an environment of broad-scale macro uncertainty about the future of the eurozone, political instability in the Middle East, economic concerns in China and potential policy gridlock in the US, according to the report produced by Chicago-based consulting firm Treasury Strategies.

“New risks are emerging from unexpected places,” the report states. “These FX, commodity and counterparty risk-management issues are complex and global in nature, which has elevated their importance.

“Treasury organizations are now called upon to do much more than the operational activities of a traditional treasury function. Treasury now answers to a wider array of stakeholders with a growing list of needs.”

However, as the growth of financial risk management or hedging activity, such as FX trading, has grown in recent years, the treasury divisions of banks and corporates have struggled to keep pace with the weight of anticipated regulatory monitoring demands, as the macro environment becomes more volatile, the report finds.

“Today’s corporations are finding that data [are] trapped or siloed,” the report states. “Too often, treasury struggles to obtain real-time, accurate data and activity forecasts from business units.”

The solution: greater development and integration of new technology systems – bespoke or otherwise – designed to efficiently connect trading activity to treasury division monitoring activity.

For example, SWIFT platforms for the reporting of balances, payment execution, trade and securities matching, payment exceptions and investigations messages and bank account administration documentation are quickly becoming a risk management industry standard, the report said.

“To effectively manage these risks, treasury divisions need to evolve into a financial nerve centre … to ensure they understand the organization’s overall objectives and how the financial function can strategically support all of its stakeholders,” the report said.

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