UK businesses stepped up FX hedging pre-Brexit

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Hedging against currency volatility by the UK’s mid-sized companies was widespread in the run-up to the country’s June 23 referendum of its European Union (EU) membership, a survey suggests.

Research firm East & Partners surveyed 2,200 British firms with annual turnover of £20m to £100m and found that all had used foreign exchange (FX) options to protect themselves against fluctuating values of the currencies they buy or sell in the first half of 2016, against just under 90% a year earlier.

Nearly every company surveyed had also made either regular or occasional use of FX forwards since January. However, East noted that many were probably still exposed to the renewed volatility in the value of sterling since June 23.

“We saw it in a round of research we did earlier this year, that there was an increasing move towards hedging, and obviously the referendum was a key driver for that,” East & Partners head of European client services, Simon Kleine, told Reuters. “That trend has been coming through; it looks like this has been the tipping point.”

However, East also surveyed small to medium enterprises (SMEs) with annual revenue of below £5m to £10m and micro businesses (£1m-£5m) and found that only around one in five had used FX options and up to one in four used forwards. Earlier research by the firm carried out last April found that only 17% of these smaller business were anticipating a vote for Brexit and a weakening pound.

“What this survey says is that UK small business really needs to wake up now and be a lot smarter about how it manages its FX needs,” said Kleine. “You are getting those who are thinking about it, but if you look nationally, you are still seeing a lot who are completely exposed.”

Among the survey’s other findings was that non-bank providers still have no more than a 15% share of the forwards market and 12.6% of options. Three banks, Citi, Deutsche Bank and HSBC, still dominate the FX hedging market, with a combined market share of around 30% in both options and forwards products.

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