NeuGroup FX Groups Set Agendas

By Anne Friberg and Joseph Neu

FX Managers set top priorities for September meeting agendas

Members of The NeuGroup’s FX Managers’ Peer Groups 1 & 2 set agendas in recent weeks for their meetings in September. The resulting agendas overlap on topics of high importance, starting with the implications of financial reform and necessary action items for corporates.

immediate concerns of reform

The principle concern for FX managers is the impact of OTC derivatives reform to be ushered in by the Dodd-Frank legislation. Members of the FX groups give priority to the immediate practical concerns, such as:

• Will ISDAs need to be renegotiated if banks have to “push out” certain activities to a separate legal entity, and what happens to bilateral CSAs? Naturally, they want to know what steps their bank counterparties are required to take and how it will impact them from a process, credit risk, and cost point of view.

There are already reports circulating of dealers changing the processing entity for derivative trades, which has got FX managers’ antennae up to see if master agreements need to be amended to avert settlement issues. Treasuries that have CSAs in place also are asking about changes required for these, including regulatory margining requirements vs. the negotiated terms of their CSA.

• How to navigate potential OTC market shifts offshore? There has long been the expectation that derivatives dealers would look to figure out how to move OTC trades offshore to circumvent at least some of the reform regulation. If this shift happens, it will be starting soon, so FX managers want to know how to manage attempts at jurisdictional arbitrage from their perspective.
• Understanding the various mechanisms available to clear exempt and non-exempt derivative trades, including connectivity to exchange CCPs and alternatives. Standardized contracts will be migrating to exchange clearinghouses as well as electronic multilateral clearing platforms. The latter may also accommodate some forms of remaining OTC derivatives. As corporate end-users, FX managers will want to know how current clearing will work and evolve over time to capture new efficiency opportunities (e.g., STP) and mitigate operating and counterparty risks.
• What are the available derivative processing solutions? A related point for discussion involves the specialty applications, new treasury system functionality and services by external providers that are or will be offered to FX managers to help them process derivative trades under the new market rules. This includes a comparison of in-house vs. outsourced solutions offered by dealers and custodial banks. With new derivatives trading rules as a backdrop, FX managers also are eager to digest the FASB’s proposed update on hedge accounting guidance currently out for comment.
• Will the proposed hedge accounting guidance be the net benefit to hedgers that early assessments indicate? While the new guidance would make it easier for hedges to qualify for hedge accounting, the P&L impact requires a shift in focus to measuring the difference in fair value between hedge and hedge item.

rEPORTING fx iMPACTS

The results of hedge programs are also part of the discussion of FX managers’ interest in reviewing management and external reporting of FX impacts.

The impact of high FX volatility on company earnings has generated increasing focus on being able to explain to management and outside stakeholders both the impact of FX and how the FX team’s actions mitigate the swings. The bullet points for this discussion include:

• How to calculate FX performance: How do you do it and what is best practice?
• What is included in management reporting packages for FX. What do reports look like and how frequently are they produced?
• How is the impact of FX and mitigating actions communicated to investors?

Concerns about what is being hedged and the value of hedging is also influencing FX managers’ interest in taking deep dives on cash-flow hedging strategies. Also, how are companies tweaking their cash-flow hedge programs due to changes in their business or management attitude?

While subject to change, these topics indicate the current priorities of leading FX managers as they look to the second half of the year.