The impact of regulatory change on corporate FX management
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Thomson Reuters participated in a meeting of US multi- national corporate FX managers March 2014, facilitated by The NeuGroup, a leader in peer knowledge exchange for treasury and finance professionals. One of the goals was to get a read on just how regulatory change in FX markets was impacting corporate FX management processes.
In a survey leading up to this year’s FX Managers’ Peer Group 2 meeting, The NeuGroup asked its members how their internal processes for trading in FX markets have changed since the advent of increased regulation (in line with the Thomson Reuters Euromoney poll). About 93 percent of their members said that trading processes had become at least slightly more onerous, with 27 percent saying much more onerous — and this is before the bulk of new regulations has kicked in. For example, MNCs that conduct FX trading outside of the EU, e.g., Switzerland, still did not know what rules they will need to follow.
Indeed, the extent of new regulation and its impact on corporate FX management was cited as the number one area of uncertainty causing FX managers concern (60 percent cited it as a top concern), topping market concerns like emerging market political uncertainty and its resulting volatility (20 percent) and pricing/liquidity (13 percent).
More than one member also tied the regulatory impact to pricing/liquidity concerns, noting “between Basel III and other ‘Credit Charges’ we are seeing huge price differentials on trades out beyond a year.” Accordingly, one of the takeaways for the FX sell side is that their customers might seek more tangible explanations for the pricing discrepancies they see across derivatives trading partners on longer-dated transactions. This will be all the more true as collateral, margining and clearinghouses are understood to harmonize credit/counterparty risk.
The trend toward e-trading will continue, even if the transition, for those concerned, to fully functioning, compliant SEFs has created some hiccups. Among these hiccups are the new challenges for trading options and NDFs on electronic platforms and the clarifications needed between details in corporate ISDA agreements with banks and SEF rules, which have left some major FX banks on the SEF sidelines, initially. The number one driver of e-trading is that it is just more efficient with the limited treasury headcount available to most corporates (and some members report being asked to cut staff further).
In response, more corporates will increase spending on IT/systems. Regulations only help justify it: 80 percent expect to increase IT spending due to regulation in the coming year. End-user exemption or not, credit charges and collateralization coupled with market liquidity moving to SEF venues should prompt corporates to prepare to manage the growing range of contracts “made available for trade” on a SEF along with reporting and other compliance burdens imposed by Dodd-Frank, EMIR and the rest of the G20 rules to follow.
However, looking at the bigger picture, MNCs also undertake spend on IT/systems to gain a better understanding of their exposures so that they might cut back on hedge contracts that regulators are making more onerous to trade. MNCs with FX hedging programs that rely heavily on options, in particular, are taking a more strategic view on both their cash flow and balance sheet exposures. Accordingly, efforts are underway to find natural offsets, reduce notional amounts hedged, fine-tune tenor and strike selection and generally become more efficient with regulated hedge contracts.