A survey of UK-based CFOs printed in October by MilltechFX discovered that 62% believed there was a scarcity of transparency within the FX market that may very well be attributed at the very least partly to a reliance on a small variety of counterparties. A mean company was working with simply three counterparties and just one% had 5 or extra counterparties.
Virtually three-quarters (73%) of the UK-based CFOs surveyed mentioned they had been trying to diversify their FX counterparties, a determine that rose to 88% in an analogous survey of North American CFOs printed in July.
Company Technique for FX Counterparties
Eric Huttman, CEO at MillTechFX
“It may well take months, even years, to arrange banking relationships and our analysis reveals the vast majority of corporates solely work with three banks,” says Eric Huttman, the CEO of MillTechFX. “It’s subsequently constructive to see that almost all corporates want to diversify their FX counterparties. This isn’t solely useful from a danger administration perspective however has the additional advantage of offering corporates with the flexibility to check costs, aiding transparency and enabling greatest execution.”
Antoine Jacquemin, the International Head of Market Threat Advisory & Head of Company Gross sales Europe Ex-France (FX and charges) at Societe Generale agrees that the transfer by corporates to diversify their pool of FX counterparties has been pushed by firms trying to change some banks that had been of their FX panel group and disappeared throughout the first half of the yr.
“The common company shopper would have someplace between ten and 20 banks on their panel,” he defined. “I might be stunned in the event that they had been making an attempt to double the quantity of banks they’re doing FX with, however they’re including numbers on the margin.”
Jacquemin reckons the variety of banks that aren’t essentially high FX counterparts to corporates however want to turn out to be extra vital can also be contributing to this pattern. That is very true for individuals who lend to company shoppers as a result of shoppers are likely to share their ancillary enterprise with the group of banks which might be lending to them.
Antoine Jacquemin, International Head of Market Threat Advisory at Societe Generale
“Then we’ve got to contemplate that corporates have FX necessities in rising and even frontier markets,” he mentioned. “The common treasurer or CFO will need ample competitors for each foreign money, which by definition would require a fairly large panel group as a result of totally different banks have totally different capabilities.”
Focus of Counterparty Dangers
Corporates who restrict their banking partnerships profit from not having to handle and divide their finite FX pockets throughout quite a few counterparties. In so doing, they’ve additionally turn out to be extra comfy asking for evaluation, recommendation, and bespoke content material.
Nevertheless, working with a small variety of banking companions results in a larger focus of counterparty danger noticed Scott Sinawi, the Head of Company Gross sales for International Markets Americas at BNP Paribas.
“This may be managed by solely buying and selling with the best credit score high quality banks and likewise managing positions – and resultant exposures – throughout banks,” he talked about.
“One other draw back to working with fewer banks could be the potential for gaps in pricing sure foreign money pairs and buildings. This too will be offset by cautious number of banking companions who can present liquid and aggressive pricing in each G10 and rising market international change merchandise.”
When requested whether or not March’s banking disaster within the US and the collapse of Credit score Suisse inspired corporates to assessment their FX banking relationships, Sinawi advised complete counterparty assessment pre-dates the occasions of 2023.
Scott Sinawi, Head of Company Gross sales, International Markets Americas at BNP Paribas
“The 2008 international monetary disaster was the true impetus behind corporates giving larger scrutiny to counterparty danger,” he said. “Credit score Suisse – and to a lesser extent the US regional financial institution disaster – was simply one other reminder of the significance of sustaining a various, creditworthy group of FX financial institution counterparts.”
“We didn’t see the necessity from corporates to diversify and/or enhance the variety of FX banks they work with,” Sinawi added. “A lot of the company shoppers we see don’t work with US regionals for his or her FX hedging wants.”
A Conundrum
On one hand, working with a smaller group of FX banks means managing fewer relationships and having fewer ‘mouths to feed.’ Nevertheless, this additionally results in much less aggressive bidding for trades and fewer alternatives for analysis and different banking sources.
Julie Ros, the Strategic Advisor to the International Alternate Professionals Affiliation, identified that the affiliation has observed a pattern in direction of prioritizing partnerships with international systemically vital banks, reasonably than than increasing the variety of banking relationships, notably within the early a part of this yr.
Deciding on the variety of counterparties is a collaborative course of for corporates. CFOs sometimes favour a comparatively tight roster of banks identified for his or her execution reliability. But, banks aiming to spice up their FX revenues should consider whether or not the potential enterprise justifies the partnership. Companies should additionally interact with quite a lot of monetary establishments that may present ample credit score and guarantee complete protection of their FX necessities whereas fostering aggressive pricing.
Companies might consider the extra banks they work with the extra likelihood they’ve of getting one of the best value, however Jacquemin mentioned this doesn’t take account of operational concerns.
“The extra banks you go to, the extra advanced your processes are – and if it takes you rather more time to execute offers, you might be sitting on extra danger,” he noticed.
“For probably the most liquid pairs, I might be very stunned if the common fee was materially totally different throughout any variety of banks.”
Elevated counterparty diversification means larger competitors, which Sinawi has accepted can enhance pricing for the shopper. “Nevertheless, it might turn out to be more durable for banks to justify restricted capital and human sources to expend on shoppers because of this,” he added.
A survey of UK-based CFOs printed in October by MilltechFX discovered that 62% believed there was a scarcity of transparency within the FX market that may very well be attributed at the very least partly to a reliance on a small variety of counterparties. A mean company was working with simply three counterparties and just one% had 5 or extra counterparties.
Virtually three-quarters (73%) of the UK-based CFOs surveyed mentioned they had been trying to diversify their FX counterparties, a determine that rose to 88% in an analogous survey of North American CFOs printed in July.
Company Technique for FX Counterparties
Eric Huttman, CEO at MillTechFX
“It may well take months, even years, to arrange banking relationships and our analysis reveals the vast majority of corporates solely work with three banks,” says Eric Huttman, the CEO of MillTechFX. “It’s subsequently constructive to see that almost all corporates want to diversify their FX counterparties. This isn’t solely useful from a danger administration perspective however has the additional advantage of offering corporates with the flexibility to check costs, aiding transparency and enabling greatest execution.”
Antoine Jacquemin, the International Head of Market Threat Advisory & Head of Company Gross sales Europe Ex-France (FX and charges) at Societe Generale agrees that the transfer by corporates to diversify their pool of FX counterparties has been pushed by firms trying to change some banks that had been of their FX panel group and disappeared throughout the first half of the yr.
“The common company shopper would have someplace between ten and 20 banks on their panel,” he defined. “I might be stunned in the event that they had been making an attempt to double the quantity of banks they’re doing FX with, however they’re including numbers on the margin.”
Jacquemin reckons the variety of banks that aren’t essentially high FX counterparts to corporates however want to turn out to be extra vital can also be contributing to this pattern. That is very true for individuals who lend to company shoppers as a result of shoppers are likely to share their ancillary enterprise with the group of banks which might be lending to them.
Antoine Jacquemin, International Head of Market Threat Advisory at Societe Generale
“Then we’ve got to contemplate that corporates have FX necessities in rising and even frontier markets,” he mentioned. “The common treasurer or CFO will need ample competitors for each foreign money, which by definition would require a fairly large panel group as a result of totally different banks have totally different capabilities.”
Focus of Counterparty Dangers
Corporates who restrict their banking partnerships profit from not having to handle and divide their finite FX pockets throughout quite a few counterparties. In so doing, they’ve additionally turn out to be extra comfy asking for evaluation, recommendation, and bespoke content material.
Nevertheless, working with a small variety of banking companions results in a larger focus of counterparty danger noticed Scott Sinawi, the Head of Company Gross sales for International Markets Americas at BNP Paribas.
“This may be managed by solely buying and selling with the best credit score high quality banks and likewise managing positions – and resultant exposures – throughout banks,” he talked about.
“One other draw back to working with fewer banks could be the potential for gaps in pricing sure foreign money pairs and buildings. This too will be offset by cautious number of banking companions who can present liquid and aggressive pricing in each G10 and rising market international change merchandise.”
When requested whether or not March’s banking disaster within the US and the collapse of Credit score Suisse inspired corporates to assessment their FX banking relationships, Sinawi advised complete counterparty assessment pre-dates the occasions of 2023.
Scott Sinawi, Head of Company Gross sales, International Markets Americas at BNP Paribas
“The 2008 international monetary disaster was the true impetus behind corporates giving larger scrutiny to counterparty danger,” he said. “Credit score Suisse – and to a lesser extent the US regional financial institution disaster – was simply one other reminder of the significance of sustaining a various, creditworthy group of FX financial institution counterparts.”
“We didn’t see the necessity from corporates to diversify and/or enhance the variety of FX banks they work with,” Sinawi added. “A lot of the company shoppers we see don’t work with US regionals for his or her FX hedging wants.”
A Conundrum
On one hand, working with a smaller group of FX banks means managing fewer relationships and having fewer ‘mouths to feed.’ Nevertheless, this additionally results in much less aggressive bidding for trades and fewer alternatives for analysis and different banking sources.
Julie Ros, the Strategic Advisor to the International Alternate Professionals Affiliation, identified that the affiliation has observed a pattern in direction of prioritizing partnerships with international systemically vital banks, reasonably than than increasing the variety of banking relationships, notably within the early a part of this yr.
Deciding on the variety of counterparties is a collaborative course of for corporates. CFOs sometimes favour a comparatively tight roster of banks identified for his or her execution reliability. But, banks aiming to spice up their FX revenues should consider whether or not the potential enterprise justifies the partnership. Companies should additionally interact with quite a lot of monetary establishments that may present ample credit score and guarantee complete protection of their FX necessities whereas fostering aggressive pricing.
Companies might consider the extra banks they work with the extra likelihood they’ve of getting one of the best value, however Jacquemin mentioned this doesn’t take account of operational concerns.
“The extra banks you go to, the extra advanced your processes are – and if it takes you rather more time to execute offers, you might be sitting on extra danger,” he noticed.
“For probably the most liquid pairs, I might be very stunned if the common fee was materially totally different throughout any variety of banks.”
Elevated counterparty diversification means larger competitors, which Sinawi has accepted can enhance pricing for the shopper. “Nevertheless, it might turn out to be more durable for banks to justify restricted capital and human sources to expend on shoppers because of this,” he added.
