Economic and political uncertainties make for volatile currency markets, placing pressure on corporate treasuries across the globe. With central banks more than willing to intervene, a long term USD strengthening, and diverging G20 economic policies, it is not uncommon for exchange rates to fluctuate by more than 150 bps in a single day, even for currencies perceived as low-risk.
While these macro-economic factors have increased FX risks, the volume of cross-border payments continues to grow rapidly for businesses of every size, driven in part by recovering global trade and the rise of borderless e-commerce, B2C payments, workforce mobility, and outsourcing.
Traditionally, the growing volume of small to mid-size trade payments – less than USD500,000. equivalent – to global supply chain partners have been handled by the Procurement or Accounts Payable teams. Great progress has been made in utilizing ERP and online tools for the payment process to enhance working capital cycles and reduce cost, but the cross-currency component is still treated as a by-product of the payment process, rather than as a priority. Managing and hedging these smaller payments using conventional methods is simply too inefficient for it to be common practice (both in terms of premiums payable and internal workflow).
We are now witnessing a change as CFOs and treasurers focus on the effects of FX volatility, not just on large value cross-border capital flows, but also on small value payments, and their impact on the organization’s bottom line. They want greater control over timing and rates associated with FX booking, but without compromising the speed or efficiency of the automated payments workflow.
One common explanation offered as to why treasurers don’t hedge more of their cross-border accounts payable risk is the difficulties in integrating risk management techniques into the A/P workstream. Any attempt to incorporate conventional FX strategies into the everyday process of paying suppliers and business partners could be disastrous if it results in delayed payments and a fractured supply chain. A treasurer who breaks the automated payment process to achieve control on FX risk management could potentially add significant costs, adversely affect supplier relationships, and negatively impact the bottom line.
To address this growing need, Bank of America Merrill Lynch’s CashPro® Foreign Exchange Services now offers a way to bridge the FX risk exposure without compromising the payments process.
FX Trade & PayTM is a new feature within our award-winning CashPro® Payments application. In addition to the current online FX booking process, the functionality allows a company to use the proceeds of pre-booked FX trades and FX hedges to fund cross-currency payments.
A treasurer or an FX specialist can book an FX spot, forward or swap through the BofA Merrill Lynch Advisory Desk or our proprietary online FX platform. These contracts can then be viewed on a Trade blotter within CashPro Payments.
A member of an organization’s payments team can view a list of all their eligible FX activity on their CashPro Payments screen and can simply draw down on these contracts for their international payments. This makes it possible for a user based in a shared service center, for example, who wants to execute a cross border payment, to take advantage of sophisticated currency trades made by FX specialists elsewhere in the organization, without sacrificing the speed and utility of their existing payment processes.
The design of the screens and integration of FX trades into the existing CashPro Payments portal provides a seamless client experience despite the complexity behind the scenes.
A Japanese car manufacturer makes regular payments to suppliers and manufacturing sites outside their home country. Currently, all funding to offshore manufacturing centers or payments to suppliers are made on a cash basis – JPY is converted to destination currency and a wire transfer is executed two days before the payment due date.
However, even a small variation in currency exchange rates could have a considerable effect on profitability, and longer term FX volatility on their 90 day order-to-pay cycles can ultimately affect profitability, and even influence the pricing offered on finished goods. Therefore, managing exchange rates for predictability, on even relatively small-value payments becomes crucial. An FX specialist in this organization can make a positive impact to the bottom line (or avoid a significant negative impact) by locking the FX rates by creating hedged trades based on their predicted payment flows. If those hedge trades are booked with their payments bank, Bank of America Merrill Lynch, then the proceeds of the trades would be available as the funding source to be used for payment activity.
How it works:
The Japanese firm has regular trade payments to precision part manufacturers in Germany, approximately 7.5mm EUR equivalent per month. The FX specialist buys JPY/EUR 90 day forward contract to protect against volatility for known upcoming orders. He schedules the trades to mature on the 15th of each month, knowing that their supplier invoices are due to be paid by the 18th.
Meanwhile, the A/P specialist is scheduling payments for the invoices due to the German suppliers each month. Once the Trade & Pay program has been activated, rather than debit money as usual from their bank account in JPY, or even from an offshore account held in EUR, the specialist can select as funding source the ‘EUR trade’ that matures on the 15th of the month.
Having a specialist lock in FX rates with their bank partner reduces the company’s exposure to FX volatility, and thus improves the bottom line. The integrated Trade & Pay functionality allows their Payables team to manage the invoice-to-pay cycle with minimal impact or change to procedures, personnel or payment systems.
Currency volatility may be a challenge for the foreseeable future, but with FX Trade & Pay, Bank of America Merrill Lynch can harmonize FX trading activity and accounts payable processing – bringing greater efficiency and better risk management to cross-currency payments and trade settlements.
- New holistic solutions can help mitigate FX risks while maintaining the integrity of payment processing
- Trade & Pay allows a company to draw down on pre-booked FX trades and FX hedges to fund cross-currency payments.
- Trade & Pay can harmonize FX trading activity and accounts payable processing – bringing greater efficiency and better risk management