Arnaud Lhoste, Global Head of Corporate Sales at Societe Generale, explains how to meet the different FX needs and risk appetites of large and small companies.
Global Finance: How does your algo suite fit different business profiles and do you think algos are the best way to manage large FX risks more efficiently?
Arnaud Lhost: We have a fairly simple but very efficient algo suite that fits most of our corporate client profiles. We have clients who are looking for passivity and discretion, some who are looking for an average price over a period of time and some who want to get out of risk quickly.
In the corporate space, we meet customers who use Algos several times a day and are very experienced. They can manage their execution themselves and change algo parameters many times during execution. Conversely, some customers only use an algo once or twice a year.
In this environment we think that each of our algos can meet customer needs and expectations: a TWAP (TWAP+), a passive (Nightjar) and an aggressive (Falcon). For each of them we added features to improve execution performance by changing speed, stealth, cap price and many other parameters. For even more flexibility, our customers can switch from one algorithm type to another during execution. In addition, we offer key analysis and execution advice from our eFX sales team before, during and after execution.
Algos are a very good tool when it comes to managing large forex risks. The first thing to understand is the client’s goals. If the customer does not want to take any risks, there is no point in choosing an algo. However, if the client is okay with holding the risk for a period of time, then this is indeed an effective tool. It offers a wide range of external liquidity pools as well as our own internal pool aimed at discretion and reduced impact.
GF: What opportunities does a corporate treasury have to counteract extreme market fluctuations and liquidity declines?
You will: A prerequisite is a well-defined and systematic hedging policy that offsets adverse exchange rate movements. But we have seen in recent years that this is not always enough as some external shocks affect FX and client order books at the same time. The best example of this is Covid-19, which has hit both the FX markets and the order book in certain sectors such as air travel, tourism or aircraft construction. This meant that our clients had to adjust their hedging program very quickly in volatile markets.
To prepare for this, we help our clients to identify “wrong way risks”, which are the worst possible combinations of market and business risks. If such risks are identified, we propose to adjust the hedging policy for such risks. Typically, this means adjusting the hedging rate, the duration of the hedging program, or using other tail risk protection options.
GF: How do FX tools and strategies differ for large and small companies?
You will: Large and small companies have very different needs when it comes to tools. For large companies, the priority is to access the largest pool of liquidity. The best tool for this is multi-dealer platforms. Large companies also have many market competitors, so they need a consistent process with all traders to minimize operational risk.
On the other hand, smaller companies with only a few core banks trade smaller volumes. They sometimes need more advice/market color and prefer to trade via voice or simple single dealer platforms connected to their bank accounts. FX strategies are quite similar, most clients now have a well defined FX hedging policy. Smaller companies or unlisted companies sometimes have a bit more flexibility when using options because they are less focused on managing earnings volatility. This means they can accept mark-to-market impact on hedging strategies.
GF: What additional FX services has your partnership with Kyriba brought to your corporate clients?
You will: Our partnership with Kyriba is a great opportunity to offer more services to our customer base and an opportunity for Kyriba to offer their Treasury Management System (TMS) to our corporate customers. We also have other exciting projects with TMS providers in our pipeline. Our goal is to make our customers’ lives easier. We know corporate treasurers rely on their TMS to carry out most of their day-to-day tasks, so we need to offer more forex trading and reporting tools within TMS systems. This means improving connectivity between our trading platforms and TMS systems. We have been working to implement these changes that will bring innovative solutions to the market in 2023.
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