Often, when discussing currency risk management for a company, we talk about the hedging strategy. This is, of course, an important part of the currency policy and requires increasing attention in more volatile currency market conditions, where, for example, the EURUSD exchange rate fluctuates more strongly. However, the entire setup of FX services (so-called ‘FX infrastructure’) with your bank also needs attention. There is much to gain here.

The FX infrastructure must be well-organized both quantitatively and qualitatively. To a large extent, this is determined by whether you meet a ‘professional’ status or a ‘non-professional’ status according to MiFID legislation. Three criteria are used as a basis: i) turnover of ≥ EUR 40 million per year, ii) total assets of at least EUR 20 million, and iii) equity of at least EUR 2 million. If a company meets at least two of these three criteria, it is (automatically) qualified as ‘professional’. This firstly reduces the bank’s ‘duty of care’ towards the company, but also the bank’s ‘duty to advise’. In short, do you still receive optimal advice from your bank?

Quantitative assessment

A quantitative assessment looks at the total foreign currency exposure you trade annually with your bank. Additionally, the number of currency pairs (e.g., the EURUSD currency pair) associated with your company is important. Other factors include types of FX transactions and quantities, and finally, among others: the ‘quotation’ of the buy/sell rate, the (‘transaction’) costs, and the FX margins. This whole process is often a ‘black box’ for a company. And especially, what is market conform? In short, what does my bank charge for this now and what total amount is acceptable on an annual basis?

Qualitative assessment

A qualitative assessment involves the ‘conditional’ aspects of FX services with the bank. This is not unimportant, as it ultimately determines under which conditions (so-called ‘framework’) you can optimally manage your currency risk. Consider, among other things: the hedge instruments provided by the bank, the ‘obligo line’ to be maintained, the maximum available hedge duration, and ‘online trading platform’ vs. trading via the bank’s treasury department. There is also much to gain here, and by looking at this carefully, you optimize your total currency policy.

ICC

How do you achieve the desired implementation? You can contact your bank directly, but experience shows that this does not yield the best results on both fronts. Together with ICC, you prevent unnecessary issues, achieve optimal implementation, and save on costs & bank margins. ICC has decades of experience as an independent advisor to (family) businesses, (semi-)public organizations & institutions, private equity firms, small & midcap companies, and listed companies in optimally managing currency risks. From co-determining an optimal hedging strategy, advising on the setup of your FX services, the ‘timing’ of the hedging, to checking and negotiating market-conform bank margins when closing hedges with your own bank.

Are you interested? Contact Damian Honders to schedule an introductory MS Teams meeting.