Multilateral Netting Approaches to FX Risk Management

By Andrew Deichler June 2, 2022

With currency volatility on the rise, organizations are looking to improve the efficiency of their FX programs. For companies with operations all over the world, a proven method for mitigating the impacts of FX volatility is through an intercompany netting program.

In a KyribaLive 2022 session, Wahl Clipper described how it lowered currency risk and significantly reduced costs by undergoing a multilateral netting transformation though Kyriba. This initiative, which was guided by RSM, streamlined Wahl Clipper’s invoice collection, automated multicurrency and multi-entity netting calculations, and aggregated FX trading to reduce the number of trades, resulting in significant cost savings.

Establishing a Program

A world leader in professional and personal hair clipping products, Wahl does business in 165 countries and operates six manufacturing facilities and 11 sales offices around the world.

Wahl had recently begun to implement Microsoft Dynamics 365 as its new ERP system. Logan Wacker, director of RSM US LLP, noted that by integrating with Kyriba, there was an opportunity to expand the value of Wahl’s investment in Dynamics 365. This allowed the Wahl team to support more complex treasury functions, like intercompany netting.

The first step in the process involved connecting all of Wahl’s banks to deliver one global view of the company’s cash. “Automating bank balance and transaction reporting improved visibility and access to cash,” Wacker said. “This allowed us to then focus on modernizing payments to facilitate the physical cash settlement of multilateral netting.”

From there, RSM implemented 360T’s FX trading solution. This provide critical insight into FX spreads and the types of trades Wahl was making.

Multilateral Netting

Wacker noted that less than half of RSM’s clients implement multilateral netting programs, as the largest value is realized when organizations have pockets of cash all over the globe. In Wahl’s case, however, there was a clear need to get better control over FX exposures and the fees around them. “And that is where we got to the point of saying, ‘You need to implement multilateral netting,’” he said. “It’s going to deliver a host of benefits for you.”

The project had multiple goals:

  • Increased Efficiency: Providing structure and automation for Wahl’s netting and supporting processes would result in less time spent on manual tasks and more time on strategic work.
  • Accelerated Netting: Automating multilateral netting close processes can reduce disconnected FX settlement processes and deliver significant visibility gains to management.
  • Robust Controls: Strict roles and responsibilities, segregation of duties, and IT general controls help to reduce errors and fraud in financial statements.
  • Lower Processing Costs: Centralizing the buying/selling of currency globally reduces trade execution price and bank fees and consolidates FX exposure reporting into a single platform.

Increasing efficiency was particularly important. As Wacker explained, Wahl had a number of business units that were executing FX transactions on their own—and in many cases—in a less efficient way. “You had regional groups executing at above market FX spreads that just were not very beneficial and were costing Wahl a lot of money,” he said. “So, by creating a structure where we could bring all that under one umbrella, it really helped increase the efficiency of the reporting and their visibility into the FX exposure and gave them a lot of benefits around overall execution with their bank partners globally.”

However, the goal of the project wasn’t to completely remove the business units’ autonomy, explained Frank Bukowski, director of treasury and FP&A for Wahl. The agreement we made was, ‘You keep your current banking relationships. We’ll move everything to Kyriba, but you’re still going to be responsible for driving cost reductions in your banking relationships. If for some reason you can’t do that, then headquarters will step in and support you,’” he said.

Wahl is currently onboarding all of its subsidiaries to use the 360T system so that they can purchase and sell FX for any third-party vendors. “However, on an intercompany basis, all transactions, all intercompany payables and intercompany receivables are going through the FX netting process in Kyriba and then we buy and sell the foreign exchange here to settle those positions,” Bukowski said.

Intercompany Complexity

In an organization the size of Wahl, business units have agreements with other business units that allow for intercompany transactions. Once these transactions are booked and exist within a regional ERP application, that’s when the netting process begins with Kyriba. On a mid-month basis, intercompany payables and receivables are collected from each business unit and matched and settled, and disputes are resolved.

Multilateral Netting Process

“We can then report to Frank and his various team members exactly what we need to buy and exactly what we need to sell and what the overall currency needs are across the globe for those participants,” Wacker said.

Even though Wahl is in the process of transitioning fully to Microsoft Dynamics 365, that integration is still ongoing. As such, many business units are still running on different ERP systems. Fortunately, Kyriba has the capabilities to integrate with multiple ERPs. “There’s a prescribed flow of intercompany invoices from all ERP systems, not just Microsoft Dynamics 365. Those invoices flow into the Kyriba platform. Kyriba settles and produces the reporting that helps give [treasury] a lot of insights into what they need to buy and sell and what the details are between business units.”

Two Netting Centers

As anyone with an understanding of netting knows, companies can’t freely sweep funds across any border. As such, Wahl has now established two netting centers.

The U.S. netting center, based out of Sterling, Ill., handles netting for most countries where Wahl has operations. The corporate treasury team manages the collection and upload of invoice details, executes the Kyriba netting processes, and reports to each subsidiary as notification of their net settlement position for the cycle.

Wahl also set up a second, regional netting center in China, due to the high volume of purchases from Chinese entities and local regulations that complicate netting. This netting center facilitates gross settlements through Kyriba for entities that purchase from China subsidiaries.

“It’s also important to realize which countries you’re not going to be able to net settle with at all,” Bukowski added. “So, make sure that you’re aware of that ahead of time because that will save a lot of headaches upfront.”

All in all, adopting Kyriba proved to be the perfect solution for a treasury team that needed to gain more control over FX exposures and their related costs, while also adjusting to a new ERP system. With greater visibility into its cash and currency spreads and a streamlined intercompany netting process, Wahl is better positioned to make FX trades in the future.

For further insights, you can view the entire Kyriba Live 2022 session on demand here. Wahl Clipper, RSM and Kyriba will also be presenting at AFP 2022 in Philadelphia, PA.

img
Enterprise Liquidity

Transform how you use liquidity as a dynamic vehicle for growth and value creation

Find out how