Execution Strategies for Managing FX Risk

Given their strategic function within their companies,
corporate treasurers are becoming increasingly cognisant of the need to manage
foreign exchange (FX)-related risks that arise from the corporate’s treasury
management needs. One of these tangible risks is execution risk. For treasurers,
achieving the best price through best execution has a demonstrable and direct
impact on the company’s balance sheet. In addition, a corporate’s ability to
demonstrate a thoughtful process for their complete execution workflow has
become a valuable part of their FX operations and can also become a key

As a result, corporates are becoming increasingly
driven towards thoughtful execution strategies and are realising the need for a
complete end-to-end solution for their FX trading. Increasing numbers of
corporates are connecting their treasury management systems to multi-bank FX
platforms, which have done much to improve execution standards in FX trading. FX
platforms provide corporate treasurers with advanced workflow, choice of
execution method, robust audit trails and straight-through processing (STP), as
well as deep liquidity and tighter pricing. This, in turn, has made hedging
accessible at lower costs and reduced processing times, leading to faster
execution as well as greater transparency and control of FX exposures.

To ensure treasurers are achieving best execution, best practice guidelines
should be put in place that detail in which scenario a trade should be competed
for, and from how many banks prices should be requested. Ideally, a corporate
should seek a range of prices to ensure that there is a sense of where the
market is trading. Typically, this tends to be between two and four prices. That
said, there may be times when, in order to minimise market impact, large trades
need to be executed quickly and corporates may decide that the most effective
route is to deal with a single counterparty. Indeed, multi-bank FX trading
platforms have not supplanted the need for corporates to nurture their bank
relationships – these relationships are vital for those corporates who wish to
execute bespoke trades. By leveraging collaborative trading tools within those
platforms which offer them, treasurers can receive all the STP, control and
reporting benefits of a multi-bank platform even when the trade is done with a
single relationship bank.

With best practice guidelines successfully
put in place, corporate treasury departments are increasingly integrating
execution quality analysis tools into their execution workflow as a way to
measure their performance. With the ability for electronic trading platforms to
record the price, time and market references for trade executions, numerous
venues have begun offering these services. These tools offer insight into FX
investment decisions and execution strategies and allow institutions to better
understand how to achieve their best execution goals.   

quality analysis reports provide detailed information about a client’s most
actively traded currency pairs, spreads by time of day, response times by trade
size and currency and counterparty performance, which can highlight how
corporate treasurers can improve their FX execution performance. Additional
performance assessments identify opportunities to net trades for increased
process efficiency and cost savings, as well as a comparison of a firm’s trading
activity against the market high and low for the day. Corporate treasury
departments can also evaluate their execution performance in relation to a
reference rate.

As more treasury departments have begun to integrate
these types of reporting, analytics and tools with the benefits of an electronic
FX trading platform, the improvements to execution performance have been
significant, allowing corporate treasurers to capitalise on new opportunities in
the fast changing FX marketplace.  

Regulatory Reform: Preparing
for Change

Current regulatory initiatives that are intended to
enhance stability, growth and confidence in the global financial markets will
have both direct and indirect effects on the FX community. Corporate treasurers
must evaluate how regulation will impact their FX trading and determine what
changes are necessary as a result. Utilising a trading platform that provides
access to a swap execution facility/options trading facility (SEF/OTF) will
ensure they have compliant trading solutions in place to deal with future
implementation of US and European legislation.

The global nature of
the FX market means that clearing infrastructure and processes need to be as
harmonised as much as possible across the world’s financial centres, to enable
corporates to trade quickly and efficiently with their global counterparts. The
need to evaluate counterparty risk is stronger than ever before and corporate
treasurers are becoming increasingly cognisant of this as they spend more time
interpreting and understanding the impending regulation to ensure that their FX
exposures are suitably managed.

FX is a highly visible risk that
corporate treasurers need to manage as part of their daily responsibilities.
These challenges present themselves in a variety of forms, and with the over the
counter (OTC) regulations looming worldwide, the drive towards better risk
management remains top of the agenda. There are tools and techniques available
for treasurers to mitigate FX risk – including execution risk – and it is
essential that treasury departments evaluate what their needs are in this area
and select the appropriate tools that best meet their execution and settlement


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