In the intricate maze of foreign exchange (FX) markets, managing FX risk has emerged as a vital concern for businesses engaged in international operations. The FX market’s inherent volatility poses potential threats, leading to substantial financial losses if not adeptly navigated. Faced with persistent inflation and ongoing geopolitical tensions, corporations are increasingly adopting FX centralisation to monitor and manage currency exposures across their subsidiaries.
Centralising the path
A prevalent obstacle in managing FX risk across multiple subsidiaries is the decentralised approach to treasury operations. In this labyrinth, subsidiaries may independently execute external FX transactions, resulting in elevated trading costs, constrained cash visibility, fragmented management, and diminished control.
In its recent FX centralisation report, Kantox highlights how most treasury surveys agree on this point: there is a need for better visibility and control regarding cash and liquidity management. While the much-heralded episodes of ‘mega-threats’ and ‘poly-crisis’ have failed to derail the global economy, business managers are taking no chances. Finance teams are responding to perceived risks by making a critical shift to centralise treasury operations. In practice, this means having Head Office/Headquarters (HQ) take responsibility for the liquidity needs and policy definition of affiliates/subsidiaries.
Centralised FX management enables HQ to oversee and control FX transactions across multiple subsidiaries. By doing so, they can establish uniform FX policies across the group, consolidate external FX transactions, and create a clear path through the increasingly complicated FX maze.
“We are seeing an increasing number of corporate clients interested in centralising their FX risk management processes”, comments Xavier Gallant, Co-head EMEA Corporates Rates and FX Sales at BNP Paribas. “Having a centralised system allows clients to be more agile in the way they manage their currency risks and to further optimise liquidity across their subsidiaries.”
The benefits of centralising FX management
“In a centralised FX management setup, HQ is the only entity that executes ‘external’ FX transactions”, explains Antonio Rami, Co-founder and Chief Growth Officer at Kantox. “While subsidiaries carry out internal FX transactions, HQ is the liquidity provider at the group level, providing liquidity to subsidiaries according to the group’s risk appetite and needs – regardless of market conditions.”
This leads to several potential benefits:
- Enhanced visibility and control: Centralising FX management allows HQ to exercise complete control over subsidiaries’ FX policies and trades. This may lead to better end-to-end traceability, improved risk management, and increased operational efficiency.
- Reduced costs: By centralising FX management, companies have the option to negotiate better terms with banks, leading to potentially lower bid-ask spreads and reduced transaction costs. Additionally, centralisation enables exposure netting, which can result in substantial savings by offsetting mutually opposite exposures within the group.
- Improved risk management: A centralised approach to FX management allows for the systematic hedging of FX exposures, which may reduce the risk of accidents from selective or speculative hedging at the subsidiary level. Moreover, HQ can better manage forward points by optimising the time gap between FX trades.
- Enhanced operational efficiency: Centralising FX management can lead to reduced operating costs, as subsidiaries no longer need to execute external trades, thereby minimising the need for FX expertise and IT infrastructure at the subsidiary level.
Centre of attention
Kantox’s FX centralisation report highlights the growing trend towards FX centralisation. It states centralisation as the key driving force in treasury operations, with PWC suggesting it’s the most significant interest for treasurers over the next 12 to 24 months.
Centralisation and standardisation are the most significant interests for treasurers over the next 12 to 24 months.
PWC
Although it has been decades in the making, the move to centralise treasury operations has become more urgent in recent years due to concerns over cash visibility following a pandemic, wars, inflation, and disruption in the banking industry.
As a result, there is growing demand from corporates to identify solutions to tackle FX risks across their subsidiaries.
Kantox In-House FX
Kantox, which was fully acquired by BNP Paribas in 2023, recently launched a new service, Kantox In-House FX, which allows corporate HQs to centralise FX risk management with enhanced automation, visibility and control. Kantox In-House FX provides a seamless platform for companies to centralise their FX management in the most optimal and automated way.
Kantox is committed to empowering businesses to navigate the complexities of foreign exchange with efficiency and confidence, providing a competitive edge in today’s global marketplace.
Find out more about Kantox In-House FX.
A pathway to success
Decentralised treasury operations have created a mixing pot of higher trading costs, limited cash visibility, and diminished control. FX centralisation provides a clear pathway, with headquarters orchestrating the liquidity needs of subsidiaries, and is becoming a popular approach for many corporates in today’s environment. The recent launch of Kantox In-House FX underscores the urgency of finding the best path through the currency maze.