New financial regulations will have a big effect on managing foreign currency for multinational corporations and many companies are concerned. As a result companies are gearing up to buy more technology to comply, according to Anne Friberg, senior director of Peer Knowledge Exchange at The NeuGroup.
Writing in Thomson Reuters’ annual FXExchange, Ms. Friberg reports that “the extent of new regulation and its impact on corporate FX management was cited as the number-one area of uncertainty causing FX managers concern.” These worries topped those related to emerging markets as well as pricing and liquidity, according to a survey conducted by The NeuGroup of members of its FX Mangers’ Peer Groups.
But the pricing/liquidity concerns are not without significance. That’s because some survey respondents also mentioned that regulatory uncertainty has led to “huge price differentials on trades out beyond one year.” This means FX managers will have a lot more questions on pricing for their banks, which means banks will have to have a clear and consistent way of explaining their rationale for prices. “This will be all the more true as collateral, margining and clearinghouses are understood to harmonize credit/counterparty risk,” Ms. Friberg writes.
One other concern is the move toward e-trading, a trend that will continue due to its efficiency and the reality that many treasuries continue operating under the mandate of “do more with less.” Still, the transition continues to vex practitioners as moving to fully functioning, compliant swap execution facilities (SEFs) has created more than a few hiccups, Ms. Friberg writes. These include “new challenges for trading options and non-deliverable forwards on electronic platforms and the clarifications needed between details in corporate ISDA agreements with banks and SEF rules.” Further, hiccups have resulted in some major FX banks sticking to the SEF sidelines as they wait for clarity, she notes.
But in the end, Ms. Friberg writes, the pain of regulation implementation will lead to easier FX management in the long run. That’s because companies will spend more on IT to keep up with the regulatory changes; this will likely be followed by investment in solutions to help companies “gain a better understanding of their exposures so that they might cut back on hedge contracts that regulators are making more onerous to trade,” she writes. “MNCs with FX hedging programs that rely heavily on options, in particular, are taking a more strategic view on both their cash flow and balance sheet exposures.”
This ultimately could go a long way toward to relieving MNCs and their treasury and FX managers of the heavy burden of compliance and reporting that Dodd-Frank, Basel III and host of other regulations promise.
For more information about The NeuGroup’s FX Managers’ Peer Groups, please contact Anne Friberg at [email protected]