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How should multinational companies manage currency risk? What is the proper governance structure between headquarters and foreign affiliates? Is there a trend towards FX centralisation when it comes to currency? My name is Agustin Mackinlay, I’m the Senior Financial Writer at Kantox and your host. In this episode we have the pleasure to welcome Enric Hosta, one of the leading minds behind Kantox's newly launched Kantox In-House FX, an automated solution for the management of currency risk between headquarters and subsidiaries.
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And a very warm welcome to you. And thank you for joining us in this episode of CurrencyCast. Thank you for inviting me. It's a pleasure to be here. Enric, can you start by introducing yourself to our audience? Absolutely. I joined Kantox four years ago and I work as a product owner. I’m responsible of two of our products, the brand-new In-House FX and Dynamic Pricing.
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Along with all the initiatives we then impact on external stakeholders.
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Every day that passes by we seem to encounter a new article, a new piece of research work, a new Treasury survey pointing in the direction of centralising Treasury operations. Now, every major Treasury survey agrees on the following point the need for better cash and liquidity management solutions has surged after the events of recent years, and that makes war, inflation and even some high-profile bank failures.
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Now, the most talked about episodes of policy crises, mega threats and predictable unpredictability have so far failed to derail the world economy. Yet treasurers are taking no chances. They're actively responding to those perceived risks by centralising Treasury operations, and FX centralisation is an integral part of that move. Now, Enric, assuming that FX centralisation is here to stay, how should CFOs and treasurers go about and implement it?
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Should they do it in an arbitrary way? The advantages of FX centralised management are overwhelming, and this is something that we'll discuss later on in this CurrencyCast. But it's true that it should never be implemented in an arbitrary manner. On the contrary, before implementing centralised FX management, it's very important to fully to deeply understand the business needs and the business characteristics of each one of the subsidiaries, including the pricing components, that type of exposure with currency risk. And only then deploying an FX consolidated policy and centralised external trade executions.
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To what extent is size a consideration? Some surveys appear to show that companies with less than 2 billion in revenue tend to have a decentralised approach to currency risk management. What is your view? I would say that the benefits of centralised management are strictly related to the size of the business, but more to the business itself. This means that, in our experience, centralised FX management has the potential to become a game changer for all businesses, with only one requirement that it's having subsidiaries generating their own FX, regardless of the volumes.
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It's true that the main one of the main benefits of centralisation is the netting that we can generate on the headquarters side. But at the same time, there are other benefits that go well beyond that. For example, it could be enhancing liquidity for the subsidiaries, improving the liquidity terms on the headquarters side, or providing more control and visibility on the headquarters.
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This could be easily another example of benefits that are not related to the volumes. Right. What are the main concerns expressed by group treasurers when it comes to foreign exchange risk management? Is it a matter of visibility and control or are there other factors at play? I agree with you that visibility and control have always been top, top priorities for good treasurers.
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And now with centralisation, it become both topics even more crucial. Here we need to consider that with centralisation, headquarters would be acting as a liquidity provider of the subsidiaries. And at the same time most likely taking the risk generated on the suppliers and the day-to-day business. In order to maximise even more the financial and operational efficiencies now.
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So these two topics indeed are very important. Additionally, the conditions, the liquidity terms that the subsidiaries are trading with their own liquidity providers and a lack of a consolidated FX policy are also serious concerns for treasurers. And both are addressed, tackled with centralisation. Kantox is launching Kantox In-House FX, an automated solution for the management of currency risk between headquarters and subsidiaries.
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But how did the idea originate? It all started with a company in the Travel industry. Is that right? It's right. Everything started back in 2021, when Kantox started to design, to scope a solution in order to help our clients to move towards centralisation. But it's true, at the same time, that a very important client for us, with 23 subsidiaries all around the world, decided to do this important step with us.
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So they were very interested in centralising all the exposure on just one trading entity in order to maximise the netting before trading externally with their banks. And at the same time, they were very interested in simplifying the process as much as possible on the subsidiary side by offering 24/7 liquidity. What are the main pain points addressed by Kantox In-House FX?
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I would like to split between subsidiaries and corporates, the two that they have completely different realities now. First, on the subsidiary side, the main pain point is subsidiaries are spending too much time, too many resources on a task that at the end is not adding any value to the business now, as it's managing the FX. On the other side, the lack of influence, the lack of power from a subsidiary with their banks, with their liquidity providers in order to negotiate better terms.
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And then on the headquarters side, the lack of having a consolidated FX policy has a strong impact on the control and visibility of the group and the day-to-day trading activity of the subsidiaries. And then last but not least, not capturing from a headquarters point of view all the potential FX gains generated by centralisation, as we discussed earlier, with topics such as netting or forward points optimisation.
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These are potential gains that headquarters is not capturing. Enric, describe, if you will, how Kantox In-House FX works. Sure. The process starts with subsidiaries tending to conduct via API or csv, the exposure that they generate on a day-to-day business. Once immediately after the exposure is received at Kantox and its managed according to a FX policy set at the subsidiary level, but very important, previously defined by headquarters. Depending on the market conditions on the FX policy,
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at some point Kantox will be triggering internal trades, with headquarters as a liquidity provider. At this very point, some conditions will apply if headquarters decides to do so. One of them is the mark-up. Headquarters can decide depending on the volume, the currency bear or the ten or apply one mark-up to the other that will be embedded in the rate of the internal trade.
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At the same time, headquarters can also set validations related to the same conditions that I said. If the internal trade bypassed these conditions or headquarters decides to don't apply it, the internal take would be immediately executed and it will be created a piece of exposure equivalent on the headquarters side. And here we will replicate the same process as we did with a subsidiary that the exposure will be managed according to the FX policy of the headquarters.
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And here's where headquarters can generate the FX gain that we were talking before. Because we will be receiving exposure coming from different subsidiaries, with same currency pairs but different directions. So before trading externally, headquarters here can apply netting in order to significantly reduce the volumes to be traded with the banks. And all the process ends with just having one trading entity that will be executing all the netted volume of the group with the liquidity providers of headquarters.
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What are the main differences between Kantox In-House FX and the solutions that already exist in the market? From what we've seen, the key differentiator for In-House FX is the empowerment that we give to headquarters. Basically, we built the entire solution around this entity, as they are the ones defining the policy for the subsidiaries, monitoring the day-to-day trading activity of the subsidiaries and basically consolidating all the exposure and trading externally.
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So for us it has become priority number one to maximise the traceability, control and visibility over the day-to-day transactions on operations inside the group. Additionally, on the subsidiaries, we guarantee that each subsidiary will have its own independent space in Kantox to see the policy that they use, to see the exposure that they send and also to have full traceability and control over their day-to-day trading.
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And last but not least, what we were mentioning about the netting becoming the main benefit, the main advantage of centralisation. So netting can be applied also on the subsidiary side and on the headquarters side. And this is something that we haven't seen on the market and that we are very proud to have it available for you. How does Kantox In-House FX deal with FX risk and traceability?
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There are several possible setups in terms of both holding and back-to-back, is that correct? That's correct. And it's very related, with what I was saying before that we built this program, the solution around a headquarters in order to give them as much flexibility as possible to manage the risk coming from the subsidiaries. So these are the two main topics of this FX policy that they can define back-to-back or bookholding.
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It's more related to the willingness of headquarters of taking the risk of the subsidiaries. This means that if they decide to call basically headquarters will be confirming the internal trade request as soon as they receive it immediately after. And then headquarters will take that exposure and will manage it according to their own policy, no, we say that they will be taking the risk of subsidiaries because they would be confirming the liquid to the subsidiaries before doing the equivalent trade externally with the bank.
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So on the other side, we have non-bookholding that it means that headquarters doesn't want to take the risk for whatever the reason of the subsidiaries. So the subsidiaries keep waiting until headquarters do the equivalent trade with the liquidity providers, with the banks, and then headquarters will take that rate, apply a mark-up if needed or not, and using that rate to give liquidity to the subsidiaries now.
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So there can be a kind of a gap between the internal trade request and the internal trade confirmation. On the other side, we have to back-to-back that is fully related to traceability. If we are using back-to-back this means that every internal trade has its own external trade equivalence relation 1:1. If we don't have back-to-back, it means that headquarters is aggregating the exposure, entering from the subsidiaries and managing it as a whole for currency pair and value date.
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So this means that if we are using back-to-back, headquarters cannot do netting at the same time. As I said, every piece of exposure entering from the subsidiaries will be managed independently in order to guarantee this 1:1 relation. So I am happy that you ask for this, because these are two new topics, two new configurations that we can do, and that I believe that gives a lot of room to headquarters to build a set-up according to their needs.
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Now, here's our last question to Enric. In any large consolidated group, there is bound to be a large number of pieces of exposure, both small and large. How can you possibly deal with such an amount of data? It's true that with In-House FX, as you said, the amount of data can be crazy. For example, we have a client already using the product that sends us 6 million of entries per day.
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So as you can imagine, it's not easy to process this amount of data. Thanks to the amazing work done by our engineering team, we are very proud to say that we offer two very solid integration methods that in record time we upload all the data that the clients send us, one of them it’s, I said it before, it's via API. Here after generating every piece of exposure, you immediately send it doing an API call to Kantox and on the other side we have SFTP.
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Here you generate the csv file, you drop it in a shared folder and you send it. And here we are very proud of the last improvement that we did because basically what we do is we split the file in currency pairs, maximum 2000 rows per file, in order to be able to process huge, huge, huge amounts of data at the same time.
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And this is something that internally and externally with our clients, we felt from the very beginning that it's a huge improvement. And we are also very happy to communicate with you that the solution is also very solid from an exposure capture perspective. Perfect! Enric Hosta, thank you very much for being with us today on CurrencyCast.
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I'll see you next time. Thank you. It's been a pleasure.
