MicroFX: The next generation of currency risk management

Posted:
11 Jan 2022
Author:
James Arnold

If we had a penny (or cent) for every client that asked us should they buy FX now or should they wait (for the rate to improve), then I think we could retire. It’s not that it’s a bad question at all, in fact it’s a good question. The problem is that the response is only an informed guess and if we really knew the answer then we would retire. This article isn’t about retiring or even us dreaming of retiring, we have far too much energy and drive to change the face of FX markets. It’s more about the black and white nature of FX markets for many clients. Too often, the volatility of the market and the lottery of leaving requirements unhedged versus the obligation of long-term hedging leaves corporates with decision paralysis and consumes time

We would like to welcome you to next generation of currency risk management with the introduction of MicroFX. MicroFX is already being used by corporates and institutions to satisfy a broad range of needs from substituting spot purchases through to management fee hedging for funds.

So, how does MicroFX work? Designed for clients craving a low touch solution to their currency needs, removing decision fatigue, and saving time to achieve an average of the market rate from start date to the maturity date.  Clients simply provide their final delivery amounts and delivery dates for up to 24 months, leaving MicroFX to do the rest by automatically and incrementally fixing every day at a published fixing rate. This will culminate in their full amount for the delivery date and a rate to reflect the average of their given time period. Below we explore the six advantages of MicroFX:

Time

Time, the most precious commodity we have. We know that currency management is towards the bottom of the list for so many companies, yet the risks associated with getting it wrong are severe. MicroFX uniquely allows for one instruction of final delivered amounts and settlement dates, taking no longer than minutes to finalise. Over the course of a year, it changes the time invested in a governed FX strategy from days to just hours, whilst crucially not sacrificing the ability to flex with the market rate.

Transparency/Control

MicroFX works as a regulated product, fixing off published rates to provide governance and transparency. This means that once the instruction is given and confirmed, you can focus on the important stuff; driving your business forward, knowing your FX is being managed in a consistent manner that you can check at any time.

Smooth Averages

There is no right or wrong way to managing currency as it will change for every business and it’s circumstances. However, at Birchstone we do believe a more systematic approach can go some way to taming the volatility of currency markets and provide comfort it’s never going to be boom or bust. For companies that know their exposures but leave requirements to the spot market to be able to participate with a percentage, this could be particularly revolutionary as it provides that flex in the rate without the possibility that an adverse market move could heavily cripple their average rate.

Decision fatigue

“The more decisions you have to make, the worse the quality of your decisions will be” said Martin Meadows. A sure-fire way to not only make improved decisions in your FX management but across your business, is to make less of them. The advantage of MicroFX is that is can take up as much of your exposure as you instruct, in the knowledge it will allow you to participate in favourable moves without the need to constantly check rates or deal with multiple salespeople telling you multiple things about where the market may go.

A Leap Forward in Portfolio Management

At Birchstone, we are proud to be deliberately different in all that we do, inclusive of how we support our clients design the optimum FX strategy for their business. The addition of MicroFX to our portfolio suite sits well alongside forwards, flexible hedging tools and outperformance products to enable the modern-day business to build and manage the most effective currency strategy they can. The more effective your portfolio approach, the less binary outcomes occur which allows for improved governance and performance.

Governance

As we referred to in detail in an article last year, the challenges of satisfying the board that FX is being adequately managed can be gruesome. Inconsistency is so often the downfall of a sound FX strategy, often brought about through the endless multi-tasking of finance directors with little patience given by demanding boards. MicroFX provides finance teams a route to manage a given portion of their currency management in a totally systematic and governed way, leaving no room for error, miscalculations, or misunderstanding. Demonstrating how it’s done, when it’s done and at what rate it is fixed upon is all seamless; a word not typically associated with FX management.

Why MicroFX may not be suitable for everyone

Whilst MicroFX can increase governance and smooth the volatility in FX markets it is also important to understand that there may be circumstances where it is not appropriate. By its nature the solution only offers a partial hedge and therefore whilst it provides more certainty than leaving to spot, it does not provide the certainty of a forward. On this basis it is often wise to consider using it within a portfolio approach, alongside guaranteed hedging. Also, in the event that the market rate were to move considerably in the clients favour it is also important to note that the average rate achieved would lag behind the market rate, which may be prohibitive to certain types of companies.

As finance teams pull on technology and outsourced services in a multitude of disciplines, we believe FX management can be no different in so many respects. Depending on the nature of a clients risk it may be used for their entire exposure or simply a percentage which can be designed in a strategy. Either way, the Birchstone team are excited to be leading the charge into a world of greater governance and choice for our clients, with the gift of time as the cherry on top.

Birchstone Markets Limited is a provider of Foreign exchange services. The material and information contained in this document are for general information purposes only and is subject to change. If you were to choose the MicroFx product, the final FX rate would not be known to you until the end of the month. You should not rely upon the material or information provided by us as a basis for making any business, legal or any other decision. Whilst we endeavour to keep the information up to date and correct, Birchstone Markets Limited makes no representation or warranties of any kind, express or implied about the completeness, accuracy, reliability, suitability, or availability with respect to, product or services contained on in the material. Birchstone Markets Limited does not accept any liability for any loss or damaged suffered through interpretation of any information contained or related to this article. Please ensure you carry out your own due diligence before entering into any contract with parties mentioned in the material or information. Birchstone Markets Limited is registered as a Limited Company in England. Companies House No. 13146432. Registered Office is 103 Wigmore Street, London, United Kingdom, W1U 1QS. Birchstone Markets is an Agent of Hamilton Court Foreign Exchange Limited, which is registered with the Financial Conduct Authority under the Payment Services Regulations 2017 (FRN 810625) for the provision of payment services. Birchstone Markets is an Authorised Representative of Hamilton Court Foreign Exchange Limited, which is Authorised and Regulated by the Financial Conduct Authority (FRN 810631) to deal in certain Investment services. Birchstone Markets is registered with the Information Commissioners office under the 2018 Data Protection Act and GDPR (Registration Number ZB147227)

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