In today’s highly-volatile global currency climate, multinationals are looking to leverage automation and technology to facilitate a more cost-effective hedging program.
Given the choice, treasury departments would generally choose to manage and account for foreign exchange (FX) impacts at company level in order to minimize trading volume and the related transactions costs. However, treasury departments often have to contend with a complex set of risk management, accounting, tax and management reporting requirements and constraints that can make it difficult to execute hedges at the level they desire.
In order to allow for allocation of hedge ownership to legal entities, generation of entity-level offsets of derivative gains/losses (g/l) in the same tax jurisdiction, analysis of FX g/l results on a per entity basis and support of an in-house bank, treasury is often left with no other choice but to manage risk at the entity level.
Implementing a Process to Facilitate Optimal Hedging & Meet Requirements
Although it seems difficult, it is possible for treasury teams to hedge at their desired level (be it at the regional or company level) and minimize trading costs while supporting entity-level accounting and reporting requirements.
This can be done by leveraging one of two methods:
- Back-to-Back Hedging with Grouping
A centralized trading process using back-to-back transactions that groups entity-level trades by currency pair for execution as a single trade through a trading platform. In the back-to-back hedging with grouping process, trades are executed by a corporate trading entity on behalf of the legal entities.
- Trade Netting and Allocation
A centralized trading process that automatically nets external trades by currency pair. These trades are executed by the corporate trading entity, then trade pricing is automatically calculated and allocated to each legal entity through internal trades.
Trade Netting and Allocation – The Most Effective Method
While back-to-back hedging with grouping does achieve some transaction cost savings, it does not reduce the back-office costs associated with entity-level hedging as each entity still has to settle with the banks individually.
As such, the most effective way for treasury to manage their FX impacts is by leveraging trade netting and allocation in their risk management process. By netting trades from multiple entities, facilitating internal trading opportunities and allocating the value back to the individual entities, FiREapps Trade Netting and Allocation solution enables corporations to reduce their trade volume, decrease transaction size and minimize back-office costs.
Trade Netting and Allocation Automatically Delivers:
- Full visibility of exposures at a company and legal entity level
- Netting of external trades into a single trade per currency pair at the company level (or any other user-defined level)
- Distribution of trades to leading trading platforms
- Creation of internal trades with allocation of external trade pricing to individual legal entities
- A decrease in transaction and back-office costs as a result of reduced trade volume
To learn more about how FiREapps Trade Netting and Allocation can help your company reduce trade volume and decrease transaction size, download the FiREapps Trade Netting and Allocation Solution brief.
Or request a customized demo, and we will walk you through FiREapps Trade Netting and Allocation one-on-one to show how this solution can help drive a more effective hedging program.
- Trade Netting and Allocation