Corporates ‘complacent’ over FX hedging costs

Treasurers wrong to believe tight prices will last indefinitely, says senior treasurer at a global technology company

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A senior treasury official at a global technology company has fired a warning shot across the bows of his fellow corporate treasurers, branding them ‘complacent' about the future of FX hedging costs.

Prices on spot and FX derivatives contracts have tightened dramatically in recent years, fuelled by the rise of e-FX trading offered by banks internally or through access to platforms such as EBS or FXall. Banks are now offering prices on the most liquid trades to the seventh decimal place, a demonstration of increased competitive pressure.

"What the corporate world sees now is absolutely fantastic – hedging is cheap, transparent and fast. What is worrying is that we see total complacency among corporates," he says. "Many treasuries are not ready for the possibility of prices increasing. In fact, they don't believe they ever will. That's a dangerous belief."

This is a particular worry as the long period of low FX volatility appears to be coming to an end. Central bankers across the world's developed economies are choosing different interest rate paths, increasing economic differentiation and exchange rate movements.

While the pick-up in volatility has been welcome news for sell-side market participants, there are worries that unpredictable price swings will also lead to wider spreads. 

"Will the liquidity we see now on electronic platforms stick around when volatility returns?" asks the treasurer. He isn't so sure. For him, a swath of platform liquidity could prove to be ‘window dressing', lacking substance.

These fears are exacerbated by the decreasing number of principal risk-takers in the market, as banks pulled back from proprietary trading due to regulatory changes.

"Let's say the euro collapses, who is going to pick it up? There are only a dozen banks in the market in a serious way. How can the risk be distributed? How can prices stay tight?" he asks.

These concerns have been recognised by the sell side, with senior e-FX bankers admitting in private that the current generation of traders have been operating in a low-volatility market for so long that they may struggle to adapt when exchange rate moves get choppier.

Other corporate treasurers dispute the ‘window dressing' description of current e-FX liquidity.

"We use a platform that plucks in prices over 20 banks. This platform replaces the need for us to pick up the phone. It's not a new market-place, and it's not new liquidity. It's the same liquidity that has proved itself to be reliable on previous occasions, just on a different venue," says one corporate treasurer at a UK-based firm.

This article was originally published in sister title FX Week.

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