Ask the Expert

What exactly is the FX Code, in a nutshell?

The Global FX Code of Conduct is a comprehensive set of principles and guidelines designed to promote a robust, fair, liquid, open, and appropriately transparent foreign exchange (FX) market. Developed through a collaborative effort among central banks and market participants, it aims to enhance integrity and effective functioning of the FX market.

The FX Code establishes best practices for market participants, covering areas such as ethics, governance, execution, information sharing, risk management, and compliance. It emphasises the importance of maintaining high standards of conduct, fostering a culture of professionalism, and ensuring adherence to applicable laws and regulations to sustain market confidence and protect market participants from misconduct.

Treasurers are already drowning in regulation – do we really need voluntary codes as well?

Voluntary codes, such as the FX Code, are not the same as regulations. Rather, they are essential elements of good governance – and therefore also represent the ‘G’ in ESG. These codes, where applicable, can therefore serve as a robust foundation for treasury policy and procedures.

By using voluntary codes in this way, alignment with best practice can be achieved, and ongoing adherence is integrated into regular policy and wider review cycles. This approach ensures that the policy is based on a framework maintained and updated by industry experts, which can be followed and adapted as necessary. Additionally, it provides evidence to stakeholders of a deeper commitment to governance and risk management.

What are the usual sticking points for a corporate to signing up to the Global FX Code?

According to research by Coalition Greenwich, over half of corporates surveyed are unaware of the Code entirely. Other respondents suggested that they either don’t consider themselves active enough in the FX marketplace or do not understand the potential benefits. Some also perceive the FX Code as an additional burden.

As such, there are many misconceptions to dispel.

The key point to emphasise is that most corporates are already largely aligned with the standards of the FX Code through the maintenance of their existing standards. Moreover, the evaluation of which principles of the FX Code are applicable – and how to proportionately apply them to market interactions – is at the discretion of the corporate entity. This can, however, be challenging as there is no definitive right or wrong answer.

The use of the proportionality tool is recommended to help a business understand where the FX Code can apply to them, and how their current processes align with it. Going through this process can highlight areas where some minor adjustments are needed. An external sounding board can provide valuable additional feedback if desired.

Finally, embedding the FX Code within the treasury policy as a foundational element makes it a core aspect of operations rather than a supplemental resource. This approach can mitigate resistance from legal and compliance departments, as it integrates the FX Code into the fundamental policy framework.

How can corporates ensure codes of conduct are implemented? And whose role it is to ensure implementation and monitoring compliance? Is it the treasurer’s duty?

When it comes to ensuring codes of conduct are implemented, incorporating the FX Code into the next policy review is a crucial step. Adding a governance section is an effective way to explain the FX Code, its relevance to the organisation, and how best practice principles are proportionally integrated throughout the policy.

Accountability should fall to the existing delegation structure. For instance, treasury can own the policy, which is then reviewed by the risk committee and approved by the board. This systematic approach ensures that implementation and compliance monitoring are managed efficiently.

In addition, using the proportionality tool annually – as part of the policy review cycle – can help update the policy where necessary. The output from this tool can support the review process, making sure that the code remains relevant and is effectively integrated into the organisation’s governance framework.

Where can I sign up to the FX Code?

After having completed the self-assessment using the proportionality tool, conducted a gap analysis, and obtained management approval, the next step is to sign and submit a Statement of Commitment on the FX-Hub (https://fx-hub.org/companies).

The wording is available on the Global Foreign Exchange Committee website.
Discover more:https://fx-hub.org www.globalfxc.org

How is the increased FX volatility of 2024 impacting corporate treasurers?

In many currency pairs we have been trading in very tight ranges, with FX option volatility certainly far from elevated – so one could say “what volatility?” – at least in some markets! With many central banks working on the same page and being remarkably coordinated, the volatility feeding through the markets have been muted – however future policy divergence or other unexpected data or events may change this, the recent snap French (&UK) election testament to the “unknown” risks.

Whilst volatility in some markets may be unexpectedly lacking, there is certainly no lack of uncertainty considering elections around the globe, geopolitical tensions and macro updates.

This heightened uncertainty has affected corporates by adding a layer of unpredictability to their financial planning and risk management strategies, necessitating more dynamic and responsive FX management practices to mitigate potential adverse impacts on the company's profitability and financial stability. Treasurers should be more vigilant, being ready to adapt to rapid currency fluctuations, ensuring they can protect the company's margins and maintain competitive pricing.

How flexible should treasury FX policies be? Is consistency across all markets important, or should policy be tailored to each specific market/currency?

Treasury FX policies need to strike a balance between flexibility and consistency. While consistency across all markets provides a standardised approach, tailoring policies to specific markets and currencies is often necessary to address unique risks and opportunities. By utilising best practices – like the FX Global Code – to underpin the policy, a robust standardised framework can be achieved enabling corporates to stand ready to flex as the market/currency demands from a position of strength.

An effective hedging approach should include continual challenge and review, without this, policies risk becoming outdated and misaligned with market dynamics, changing exposures, or company strategy. A regular review cycle is critical to ensure that policies remain relevant and effective, and treasurers should be prepared to adjust policies to reflect current business needs, growth aspirations, and market conditions.

Cutting-edge corporate treasurers seem to be getting more sophisticated when it comes to hedging FX risk… what are some of the main ways you see this manifest? And what tip(s) would you give to treasurers who don't hedge or hedge a specific percentage of their exposure no matter what?

Those at the cutting-edge are recognising that markets have changed over the last few years - after the raft of black swan events - and are adapting to the new normal, upskilling or seeking out support from experts to adopt more sophisticated hedging techniques, employing advanced financial instruments and bespoke solutions to manage FX risk more effectively. Some of the main ways this sophistication manifests include:

• Use of Options and Forwards: By incorporating both options and forward contracts, treasurers can secure worst-case protection while also targeting better rates for future trades. Utilising options, focussing on creating value across the portfolio to manage FX risks more holistically – whatever the market throws up next!
• Managing Forward Curve Exposure: With longer-dated exposures, thinking about the components of the FX exposure is critical – for example looking at solutions to hedge interest rate differentials, capturing value from favourable forward curves – derisking future hedging against uncertainties including potential central bank divergence.
• Credit Risk Management: Using derivatives to limit or cap credit line exposure ensures that the ability to hedge remains intact, even when market conditions shift unfavourably for the existing portfolio positions. Noone wants to deliver the message that you have been stopped out on hedging when it is the most attractive to extend the hedge.

For treasurers who don't hedge or follow a rigid percentage-based hedging approach, the tip is to remain flexible and responsive to market changes. A fixed strategy might lock in losses which ultimately increases the risk to the business or prevent one from securing opportunities to de-risk, whereas a more dynamic approach can better align with evolving market conditions, demonstrating the need for flexibility.

The concept of netting to minimise corporate FX exposures has existed for many years. Have there been any recent developments that have increased netting efficiency as a treasury tactic?

Netting is a valuable tool when the offsetting exposures are of the same type and tenor. However, when there are differences such as exposure type, accounting treatment, tenor or profile of underlying exposures, netting should be approached with caution to avoid unexpected and unwanted volatility.

It is always best to understand what your gross exposures are first and foremost as well as what you are trying to achieve. By understanding your risk, how this will move in a stressed market event and how each will impact your company at a headline level you can best assess how to approach on a net or gross hedging basis to meet your objectives. For example – where exposures net over a 5year horizon in totality, that does not mean that you can net and have no FX volatility over the individual years within that horizon – y netting you may actually increase total volatility. Also intra period implications are often very important for wider reasons – tax consequences, covenants and credit ratings and liquidity.

How is technology helping to change how treasurers approach FX, both from an efficiency and a risk management perspective?

Technology is revolutionising how treasurers approach FX management, enhancing both efficiency and risk management. Automated trading platforms, advanced analytics, and algorithmic trading tools help treasurers to execute trades more efficiently and at better prices. Technology also facilitates real-time monitoring of FX exposures, automated hedging strategies, and improved reporting capabilities.

However, while technology enhances productivity, it's crucial for treasurers to maintain a deep understanding of the underlying processes and risks and not turn the management of risk into a process. The focus of technology should be on improving the quality and speed of data and efficiency of execution and supporting infrastructure to free up more time to consider the risk in the context of all other information available.

What does treasury best practice in FX management today look like to you?

Best practices in FX management today involve a combination of strategic foresight, flexibility, and technological integration whilst being underpinned on a policy governance foundation integrated with the FX Global Code of Conduct. Treasurers should:

• Regularly Review and Challenge Policies: Ensure that FX policies remain aligned with current market conditions and company strategies, integrating the FX Global Code as a policy requisite.
• Use a Mix of Hedging Instruments: Combine options, forwards, and bespoke solutions to manage different aspects of FX risk suitable to the risk and exposure that is being managed.
• Focus on Value Creation: Use derivatives not just to secure a P&L rate but to create a corridor of P&L certainty and unlock value.
• Maintain Strong Relationships: Build and maintain strong relationships with banking counterparts for smooth execution and better pricing.

By adopting these practices, treasurers can better navigate the complexities of FX management and contribute to the overall financial health and strategic objectives of their organisations.