Creating A Culture of Elevated FX Risk Awareness
Many organizations responded quickly to the volatile currency markets over the past six to twelve months, and certainly deserve credit for taking swift action to reduce FX risk. However, what if I were to tell you that the best run treasury functions are even a step above that. Rather than being just responsive to foreign currency risk, they have achieved currency awareness.
Being quick to respond to changes in markets, operations, accounting rules, regulations, and industry trends is a component of being currency aware, but without awareness it’s a reactive rather than prepared response. Without awareness the responses can occur after some degree of pain has already been inflicted. A currency aware culture across the organization is one that has the foresight to challenges in their FX risk landscape. An organizational structure and response framework can be designed and trigger quick response to threats and changes from altered assumptions, externalities, and business decisions. This combination results in more consistent mitigation of FX risk before P&L impacts have already been felt.
The two most critical steps to designing a currency aware culture are bringing the right people to the table and creating a feedback structure that encourages dialogue and action.
The Currency Roundtable
While an organization commonly looks at the treasurer for FX answers and results, there are many other perspectives in the organization that are critical in driving the most effective risk management programs. We will call this collective group of perspectives the Currency Roundtable. The following list outlines each executive area that should have a seat at the table, and the key perspective attributes that make their presence valuable. Each organization of course has different titles and org structures but use this as a guide to make sure these perspectives have a seat at the table when FX risk management strategy is discussed.
The key to designing the most effective roundtable is to branch out beyond just the corporate finance organization. Although the corporate finance team may have the most technical expertise when it comes to FX related accounting and tactical hedging processes, they can lose sight of both the big picture and the operational risk objectives when in a vacuum. Complimenting the corporate finance team should be local finance (either by geography or business segment), key operational areas that influence contracts and foreign currency denominated business activity, and always remember that at the end of the day strategies and governance starts at the very top Board level.
When creating the roundtable think both in terms of 1) who are key stakeholders of the risk management program. Those you are mitigating risk for or need to present reporting to; and 2) who are key contributors to risk management mitigation efforts. Those who report exposures and risk or are subject matter experts that influence risk management approaches (such as Tax). Both sides of that coin are needed to create a comprehensive feedback structure and ensure a currency aware culture can be supported.
The Feedback Structure
Once the right people for the roundtable are identified, currency aware organizations do not simply put the group on call for when FX risk issues occur (reactive culture), but rather empower the group to act. The best practice is to structure the roundtable into a more formal internal committee, which meets regularly (at least quarterly). This committee should additionally be incorporated into the organization’s FX risk management policies, to formalize their oversight/influence over FX risk management strategies and procedures. All members of your roundtable should participate regularly on internal discussions, with exception to the Board who represents the top level of oversight on the roundtable. The Board will get key updates from the roundtable and steer high level strategy and objectives but is not as directly involved in the ground level operational aspects of the risk management program.
The agenda of a roundtable meeting should include:
- Review of hedge program performance since last meeting,
- Overview of FX markets
- Feedback on new business activity that could impact FX risk
- Discuss pain points that contributed to ineffective risk mitigation results
- Reaffirm strategies or decisions outside of standard policy
- Discuss if any strategy or policy changes are necessary
- Confirm new action items
Meeting regularly with the above-mentioned agenda items will generate a continuous feedback loop that both learns from the past and looks to the future, with all the right minds at the table.
Here is an example of a working process. Treasury reports the FX hedge program results from last quarter and notes that they had challenges with several APAC countries in exposure forecast accuracy. With the CFO in the audience, and the APAC finance director having known this was an issue, the finance director was prepared to report that a few of the local finance teams struggled with the forecast due to several new contracts that had been executed without the finance teams having visibility of the foreign currency nature of the new business. The roundtable also includes the head of procurement, who takes on the task of ensuring that a future process is in place to identify contracts with foreign currency activity and notifying the appropriate finance teams in advance of and when signed. Over time, the members of the group who considered currency risk an afterthought will build an awareness and start presenting the roundtable with questions and considerations ahead of time.
The roundtable also presents treasury with an opportunity to discuss any resource and process challenges in running a best-in-class risk management program. A business case for necessary solutions to attain improved exposure visibility and efficient hedging processes will have enhanced buy-in given that key people in the organization will have more awareness of the critical impacts.
The positive influence of a currency aware culture is often immediately recognizable, but most importantly pays off when an organization is navigating volatile markets with more ease and confidence while their reactive peers and competitors are facing currency stress and explaining major headwinds. The next time global volatility hits, the currency aware culture will have already contemplated key risks and made preventative adjustments to strategies. A currency aware culture cannot predict the future but can certainly be better prepared for it.
Taking Steps to Address FX Volatility and Unexpected Earnings Impacts
Kyriba’s FX Risk and Advisory Services help CFOs and treasurers at the world’s most sophisticated multinational corporations handle complex exposure and hedging issues through the creation of impactful, targeted currency risk management programs to directly effect improved results across the organization.
Kyriba’s FX Risk solution gives organizations and executives the ability to aggregate big data into currency analytics for the right level of FX exposure hedging, hedge accounting treatment, correlations across currency pairs (Correlated VaR) and flexible reporting resulting in intelligent decision-making.
Learn how to transform FX Risk Management processes to deliver more predictable and effective results with Kyriba’s leading FX Risk Management solution. Reach out to our team of FX Risk Management professionals at: [email protected]