Corporates have been avoiding the use of electronic platforms in the execution of their foreign exchange (FX) trades, with most showing a preference for traditional voice trading.
According to the latest FX financial risk management survey conducted by Citi and the Association of Corporate Treasurers, only 41% of the 287 multinational companies surveyed used electronic platforms to execute their trades. The survey results were released in April this year, and mainly constituted European companies, which accounted for 42% of the group.
“I was surprised to see that only about 40% of respondents used electronic systems to execute their trades,” said Stephane Knauf, the global head of the corporate risk advisory group at Citi in New York.
Knauf said he had expected to see a much larger number, pointing out that 80% of the corporates in the San Francisco area use electronic FX platforms.
"For many corporates, there is still this notion that phone pricing is better, especially for options, exotic currencies or larger amounts,” said Knauf. Of the 59% that did not use electronic platforms for trade execution, 28% said phone pricing was better. Another 20% blamed a lack of infrastructure, and 11% said the costs exceeded the benefits. Only 8% felt they had no need for the platform.
Mark Warms, a London-based European managing director at the electronic FX trading platform FXall, commented: “There is a difference between the behaviour of larger versus smaller corporations in terms of how they manage FX risk. If the Citi survey looked at the groups in terms of volumes traded, it might see a different result," he said. The Citi survey covered corporations of revenues of $500 million or more, with the largest proportion, 56%, being made up of corporates with revenues of over $5 billion.
"Most large corporations executing more than $200 million a month are using electronic trading systems,” said Warms. “If corporations of this size are not using electronic systems, with the full audit and compliance capabilities they offer, their shareholders should be concerned.”
However, Knauf, who was part of the team that conducted the survey, mentioned the need for corporates to have a one-to-one relationship with their bankers was a driving factor. "I think there is still a big need for relationships; treasurers still wish to have contact with the salespeople," he said. The survey showed that of the corporates surveyed, 93% were highly centralised in their hedging strategies, and 60% maintained a primary relationship with five banks or less. "Advisory is still highly valued by corporations, which is something a machine can't give," said Knauf.
The survey also revealed that corporates are highly influenced by market views in their hedging strategies. Eighty-one percent are influenced by market views in their choice of derivatives to hedge FX risks, with 66% influenced in their timing of hedges and 77% influenced in their hedge ratio. Forwards are the main tool used for fair value and cashflow hedging, with 92% using them to hedge forecasted foreign currency exposures, and 87% to hedge existing net monetary FX assets and liabilities.
Options, used by only 51% of the respondents, are widely used to manage contingency risk, which includes bid-to-award risk in mergers and acquisitions, whether linked to the market or the exposure’s actual size. Of the respondents using options, 52% use European-style options, 46% use zero-cost option combinations, and 29% use barrier options. The majority, 72%, spend premium to purchase these options, but only 40% indicate a defined budget spend. Debt and cross currency swaps are the most common strategies to manage risk where net investment hedging corresponds to a funding strategy.
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