Treasury Professionals Discuss Getting the Best Rates on FX

  • By AFP Staff
  • Published: 6/30/2022
Getting the Best Rates on FX _Header

AFP recently met with a group of treasury professionals from the Asia-Pacific Region (APAC) to find out which methods their companies are using to get the best rates on FX (foreign exchange) contracts and derivatives. The methods used include very robust (automated) with pricing established, semi-automated with some manual calling of banks, and very manual where they are calling banks for rates. The responses were quite diverse, but that is understandable given the highly centralized nature of foreign exchange management/pricing. Multinational corporations based in APAC look to their U.S. headquarters for direction, and tend to act primarily as trade executioners.

Without Bloomberg or Refinitiv is how one treasury professional is managing their foreign exchange purchases. And, without these two services, his choices are to call providers, perform a Google search, or reverse engineering — create a valuation structure/pricing agreement with the bank, thereby pitting banks against each other. The banks know the market and can accurately determine the margin. What he’d like to do is rely on the third option: reverse engineering. By having a spread in place for certain currencies and large values, this professional figures on being able to get the best pricing available. However, understanding the pricing is very difficult as the market is constantly changing, and the capital cost, credit charge, etc. are different. 

Another treasury professional said their method is very effective and includes no formal contract. He said, more or less, the fees are small, and the company is able to make up for them in volume; currency is like a commodity they use to trade their position in the market. In terms of trading with a bank, the control FXall, Refinitiv, etc., have on the bank side has increased. Using rankings helps them keep pace with the 28 banks they use for the currency purchases. They ran a month-to-month comparison and decided that, for the next month, more liquidity is closer to the screen price. That said, local banks have wider margins, i.e., they’re further from the screen rate. The company also practices fair pricing: leave the price on the counter to get to the price you want.

Using a fully automated solution with data feeds from Bloomberg and their main bank is how another corporate treasurer manages it. They have a signed master agreement worldwide and tiered pricing, depending on the daily volume in currency pairs. This method is too complex to try and use a manual process to set rates one off. Instead, the benchmark rate is fixed on Bloomberg, fully transparent, and reconcilement is done on a monthly basis, at which time they collect from the bank if the rate is incorrect.  While the amounts are tiered, if it’s over $5 million, it’s done on a spot basis. The spot rate timing is on the trade ticket, so it’s easy to go back and check that rate at a later point in time. 

The treasury manager of a holding company said they don’t do many FX transactions, but at the group subsidiaries they do. The company performs a competitive tender process for banks to get on the panel; it’s like a mini-RFP with qualitative and quantitative information requested through an online portal. Once on the panel, each bank gets the same quote, so it’s all very transparent and similar to any procurement process used. Only the company can see the rates/pricing, and there are 3-5 banks on the panel. 

One treasurer wouldn’t even join her company until they agreed to use Bloomberg. Why? Because she had worked in a bank for 16 years and understood the pricing from the bank’s methodology. Her company has agreed-upon pricing with their banks, and they use Bloomberg as a means of capturing the transparent pricing. Bloomberg keeps track of the mark to market (MTM), and she matches it against what the bank charges to determine the bank charges. Reconciliation is done on a per trade basis. The large banks have compliance requirements they have to abide by, and they don’t deviate from their pricing agreements. Also of note, a treasury management system (TMS) can also capture the mark to market; however, auditors might not validate the TMS without a Bloomberg feed.

Using a hybrid model is the option a senior treasury manager prefers. Under this model, free market trades are booked under the company in the U.S. Data then flows back to their bank for the mark to market. They also use FXall, something the auditors have approved of since the market rate was used. She added that FX-regulated countries such as China and Malaysia work on a manual basis, mixing and matching to make it work for MTM. A payment run is performed once per week, so they know what the AP currency needs are. Larger, strategized payments are handled internally once per week, and lesser amounts are handled by the bank. 

The manager of treasury and finance for a multinational corporation said her process is performed directly through each bank, though they do go through the FX portal with their relationship banks. If a bank is not on a portal, then they take the rates from each bank, compare them and pick the best. She’s found that with some portals, you can’t log in to make a large trade, and when that happens, the larger banks might manipulate the rate. Another treasury professional said he has the same issue and has found that being on good terms with an FX trader, getting a quote from an intermediary source, is the best way to deal with this. He also advised that if a rate is volatile, take a “wait and see approach” for the next day. It doesn’t always work, especially if the payment is urgent. He also mentioned that another avenue to discuss with your trading partner is using the cash rate (today’s rate) versus the spot rate, which is different. 

Another treasury manager said his company also has a master agreement with global banks and predetermined rates. However, there are some countries Bloomberg doesn’t cover, which makes automation more difficult. In these cases, dealing is performed in a trading system, sent to the TMS via Finastra, and payments are dispatched. His team covers 16 markets in Asia, and they’ve found that some Asian markets have complex FX markets, such as Indonesia and the Philippines, which means they need additional information; automation doesn’t always work. 

FX Best Practices from the AFP APAC Treasury Advisory Council:

  1. Have predetermined pricing for select currencies and thresholds established with your bank with an agreed upon pricing benchmark.
  2. Utilize a transparent third-party reference tool, such as Bloomberg/Refinitiv, either fully automated or semi-automated through a system like FXall.
  3. Timestamp each trade for pricing reconciliation.
  4. Reconcile pricing to be within an allowable, established pricing range, and if it’s not, follow up.
  5. Conduct a relationship review with banks/providers that participate in FX pricing.
  6. Review your process on a regular basis for maximum efficiency, keep tabs on exception processing and address it accordingly.

Do you want to know more about treasury management in the APAC region? Check out the AFP APAC Treasury Handbook


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