Striking a balance in FX management
Strategic FX management vs operational FX management
FX+ Payments in EMEA,
Treasurers generally have had two options when managing cross-currency payments and receipts. These options can be broadly defined as:
Strategic FX management to hedge present or future cash flows. To process a cross-currency transaction, a treasurer will often book a foreign exchange (FX) trade via phone or a single or multi dealer platform to currency exchange. For cross-currency payments, they will then send the purchased currency to the beneficiary. This is a two-step process and necessitates currency accounts and credit lines and limits.
Operational FX management using international payments. In this case, the FX trade and payment are combined into one simple transaction. The payment instructions are received via the bank payment platform SWIFT or host-to-host connectivity and are straight-through-processed (STP).
Typically, treasurers are familiar with, and very good at, strategic FX management. Increasingly, however, treasurers are developing treasury policies that strike a greater balance between strategic FX management and operational FX management. The result is increased efficiency while also delivering against cost and control objectives. The best of these treasury policies take into account:
Size: is there a notional size at which the advantages of strategic FX management outweigh the advantages of operational FX management? For example, when do the cost savings achieved by executing the FX trade via a multi-dealer platform outweigh the administrative burden and cost of a two-step process, the maintenance of currency accounts and credit lines? Treasury policies are increasingly setting a threshold to determine whether a cross-currency payment will be handled using strategic FX management or operational FX management (i.e. amounts <1mil EUR are processed STP as FX Payments)
Currency: what currencies are required, particularly outside the corporate’s main functional currencies? The expense of opening and maintaining a currency account include account fees, audit and reconciliation costs, KYC, and maintaining idle balances vs. an FX Payment solution
Account structure: what activity in transaction frequency and volume can an account expect to receive? Many corporates are undertaking programs to reduce the number of bank accounts they hold to reduce fees and idle balances. By integrating the FX risk management into an outgoing or incoming payment, cross-currency payments reduce the administrative burden and cost of maintaining multiple foreign currency accounts and reduce the FX risks to which the company would otherwise be subject
Credit: what is the cost of credit to a corporate? An ongoing consideration for corporates is credit availability and how to best utilise that credit
Opportunity: How would a corporate’s workforce and suppliers like to be paid? With ongoing globalisation corporates are taking advantage of greater options to pay in local currency which enhances the relationship with the beneficiary and potentially creates an opportunity for improved supplier pricing
Predictability: are the future cash flows known to the treasurer? Even if cash flows are well known, corporates may still choose not to hedge dependent on the above considerations
In developing our STP cross-currency payments solution, FX+ Payments, BNP Paribas has been guided by three principles: simplifying treasury, flexibility and transparency. We continue to develop our cross-currency payments solution using these guiding principles and ensure our focus remains on both payment and receivable solutions.
Designing an FX policy is just one example of how we work proactively with clients to explore and optimise end-to-end processes and add value. In doing so, our aim is to optimize our clients’ experience of international payments and receivables, and facilitate the international business models of today and the future.
Have you seen the BNP Paribas Currency Guide, providing comprehensive regulatory and technical information on 132 currencies globally? Go to cashmanagement.bnpparibas.com/cg
About the Authors Wim Grosemans is global head of product development for payments and receivables at BNP Paribas Cash Management and has been active in the payments and cash management domains within BNP Paribas and its predecessors since 2004. He has end-to-end experience in business development, product management and platform integration and also acts as a client advisor. Wim holds an MSc in Commercial Engineering from Hasselt University, Belgium. Reuben Kane is responsible for distribution of FX+ Payments in EMEA. He has more than ten years’ experience in foreign exchange, international payments and electronic markets, across both bank and non-bank platforms. He holds a BCA from Victoria University of Wellington, New Zealand.