Electronic Platforms Drive Advances in FX Risk Management
Key Takeaways:
- Daily FX volumes reach more than $7.5 trillion in 2024
- Electronic platforms have fundamentally enhanced FX risk management practices
- StoneX’s Gerard Melia said electronification has the potential to revolutionize hedging programs and improve overall effectiveness
In a recent article for e-FOREX, Gerard Melia, Head of FX Sales at StoneX Group, offered his insights into the advances in FX risk management brought on by using electronic platforms.
“Electronic platforms have the potential to revolutionize how companies implement systematic hedging programs and improve the overall effectiveness of FX risk management.”
According to the most recent Triennial Survey from the Bank of International Settlements, daily FX volumes are in excess of $7.5 trillion, making FX risk management vital for global operations.
With a volume of this magnitude, Melia believes risk management needs to adapt. Risk challenges now confronting treasury managers range from transactional risk to economic risk to operational risk, among others. While each risk offers its considerations, expertise, and technology tools are required to manage all these matters effectively.
Electronification is seen as a way to solve some of these challenges, as long as firms can manage these platforms effectively. “Managing FX risk is only one part of the responsibilities of a modern treasurer; and traditional treasury management systems while useful, often fall short in addressing the full spectrum of FX risks,” Melia said.
Firms are learning that inefficiencies -such as layers of seniority approval, order processing issues, and siloed communications - must be eliminated in favor of technology. “Electronic platforms have fundamentally enhanced FX risk management through real-time monitoring of FX positions, market movement, and transactional data,” Melia notes.
The speed of electronic platforms helps firms quickly grasp risk exposure and respond as the markets fluctuate. This marks a drastic change from traditional end-of-day risk assessments. Such technically means real-time monitoring, predictive analytics, and machine learning are being leveraged to improve risk quantification. Melia explained that this allows firms to move from a reactive stance to being proactive with their risk abatement.
Implementing these technologies and processes may not be as quick or easy as expected, Melia warns. “[I]n the near term, the pace at which AI and ML will be adopted, and the extent to which they will replace existing manual treasury processes, remains uncertain.”
Melia mentioned several challenges facing treasury departments in adopting these technologies, including “navigating complex regulatory and compliance requirements, addressing issues of data quality and accessibility, overcoming infrastructure limitations, and managing additional risks and costs.”
Melia advises caution. A successful outcome “depends on several factors, including the quality of the technology deployed, the configuration of hedging algorithms, the expertise within the treasury department, and the quality of the liquidity accessed,” he said.
As challenges to adoption remain, Melia himself is “bullish” on the technological advances electronification will bring to risk management.
While larger organisations often have the in-house expertise and technology to manage their FX risk, many small to mid-sized firms with limited IT budgets and liquidity management skills are increasingly turning to external brokers such as StoneX Pro. These brokers provide a comprehensive understanding of FX risk, access to tier-1 liquidity, and continuously invest in cutting-edge technology to support robust FX risk management strategies.
SMEs and even larger firms frequently find it more cost-effective to partner with a reputable expert like StoneX Pro that provides high quality FX liquidity and supports the structuring and execution of their risk management trades.
The digitalisation of FX trading has significantly enhanced transparency and price discovery, thanks to advancements in trading platforms and connectivity. With StoneX Pro, our clients gain access to pricing aggregated from a diverse pool of bank and non-bank liquidity providers. Traditionally, treasury managers needed direct lines to individual banks, even after the emergence of ECNs (Electronic Communication Networks). StoneX Pro simplifies this process by curating the most suitable liquidity for our clients. This eliminates the need for SMEs to invest heavily in technology and expertise to access top-tier liquidity, all through a single provider.
StoneX Pro caters to institutions and corporates and provides them with everything they need to transact in the global markets. We ensure that our clients’ FX liquidity, trading, and hedging needs are met in the most efficient manner leveraging our simplified and cost-effective turnkey solutions as well as our market maker capabilities.
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