FX for Corporates: 5 Best Practices for Treasurers

5 Best Practices for Treasury

Far and away, the largest financial market on the planet is the foreign exchange currencies market, where on average individuals and organizations trade more than $5 trillion daily. As NASDAQ reports, “By comparison, this volume exceeds global equities trading volumes by 25 times."

It's primarily up to corporate treasury departments to handle key elements linked to foreign exchange, including risk management, cash management, FX exposure, hedging practices, and data analysis. In the FX world, the ability to master the market isn't considered a luxury for treasury officers–it's a necessity.

How can treasury departments
be proactive instead of reactive?

How can treasury departments be proactive instead of reactive on the foreign currency exchange front? By adhering to the following list of five FX treasury best practices that every corporate financial executive should know.
 

1. What are the unique needs of each FX market?

Treasury officials need to get out of the gate quickly in evaluating the issues and challenges in operating a treasury management operation in each FX market. That analysis should include:

  • Situational foreign exchange risk

  • Financial liquidity management

  • Developing key local contacts

  • Managing intracompany operations

Treasury professionals should also get up to speed on key internal issues, like hiring and setting up staff overseas and establishing joint FX operations with companies overseas.
 

2. Know what the local regulations mandate

Each global foreign exchange market is unique and comes with its own set of rules and regulations, and treasury teams need to hit the ground running to adhere to local FX directives. For example, some countries like Brazil have multi-tiered, more complex tax systems. Or some local currencies may not even be fully convertible. Key issues to cover include:

  • Whether the local market exchange rate is fixed, floating, or pegged to a specific currency?

  • What critical capital controls are already in operation–and which ones need to be?

  • Are there any particular paperwork and tax requirements involving currency conversion? What key contractual FX documents will you need to bring to the table?

  • What are the pros and cons of billing in the local currency versus U.S. dollars?

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3. Which financial institution will be your best overseas Forex partner?

Choosing the best local, regional, or continental foreign exchange provider to partner with on the foreign currency market should be a big priority for U.S. corporate treasury managers. Is a large, global banking partner with massive technological, financial and operational assets the way to go? Or should your company opt for a regional bank with closer local contacts who can run interference and cut through logistical red tape that's common in overseas FX trading markets?

Don't make that decision until your research is done, since “after the fact" problems with trading foreign currencies outside of the U.S. are often a cumbersome, complicated, even chaotic process.


4. How much, if any, of your Forex operations should be outsourced?

Gauging the global foreign exchange landscape may lead corporate treasurers down the path to outsourcing some or all of its FX operations. If you go that route, make sure the outsourcing platforms offer the following necessities:

  • Complete access to a comprehensive online trading platform, with real-time currency exchange rates.

  • The ability for FX payments to be processed in myriad foreign currencies, across multiple payment technology platforms.

  • Complete risk management services, including spot transactions, the availability of non-deliverable forward (NDF) and forward contracts, and the ability to hedge in multiple currencies.
     

5. Do you have a firm grip on data in overseas foreign currency markets?

Data analytics is playing a more prominent role in evaluating risk and opportunity in global FX markets. Treasurers will need comprehensive data solutions to properly hedge risk on rates of return; weigh the economic fundamentals, trading habits, and regulations in each country they trade; and run hedge calculations or price forwards. Treasurers should be regularly running FX testing simulations before switching the “on button" overseas, and they'll need a comprehensive data analysis program to run those tests. (OANDA offers a comprehensive tool to manage foreign currency data via Exchange Rate API, which can meet all of your FX data needs–find out more here.)
 

In summary...

Corporate treasury departments need to be at the helm in steering company foreign exchange trading operations overseas.

Outlining and defining the best practices involved in global FX trading—especially in key “game changing" areas like risk management, operations, cash management and data analysis technology—is a first, vital step in successfully trading foreign currencies in far off lands.