Driving innovation and simplicity in currency management

The concept of managing foreign currencies is intimidating to many corporations, with a widespread belief that it requires sophisticated skills, techniques and technology. As organisations, and their treasury functions, expand, they often introduce a dedicated FX function with specific competencies. However, currency management does not need to be difficult, or the domain of specialists. With emerging solutions designed specifically to handle multiple currencies, treasurers can now deliver significant efficiencies and cost savings, and manage currency exposures, in a much simpler way than in the past.


Implications of currency management

As we enter 2018, managing foreign currencies effectively has never been as important. Supply chains in most industries are extending internationally, so corporations of all sizes need to deal with currencies that may be different from their functional or home currency. Almost every company now has customers and/or suppliers located outside of their home market, even if they operate primarily on a domestic basis. Secondly, heightened currency volatility among major world currencies has elevated the importance of foreign currency risk management, a material cause of unpredictability of corporate earnings as well as a potential determinant in the competitiveness against peers operating with a different supply chain strategy.

Consequently, treasurers and finance managers need the ability to manage collections and disbursements in their non-functional currency securely and cost-effectively without adding to their administrative burden. However, holding bank accounts in non-functional currencies, particularly those that are used only occasionally, adds risk, cost and inconvenience, and fragments liquidity. From the perspective of foreign currency exposure, the larger the non-functional currency flows, the greater the risk to the P&L, together with the associated P&L volatility, until the exposure is crystallised and mitigated.

Many companies, particularly those that have only recently started to extend their supply chains internationally, find it difficult to collect data at the point of origin of an FX exposure (i.e. when the commercial/contractual commitment is made with a supplier or a customer) so the exposure is typically recognised only when a supplier invoice is due for payment or when a customer payment is received. This results in a much narrower opportunity window to mitigate these risks, with the FX conversion effectively determined by the transaction event (an international payment or receipt). As supply chains extend, and the size and frequency of non-functional currency flows increases, currency management practices tend to become more effective in reducing the time gap between the origin of the FX exposure and the point when a risk mitigation action is taken. Such changes require the timely access to information on approved purchase orders for supplier purchases and on invoices issued for customer orders, in non-functional currencies. By identifying and managing exposures earlier, treasurers can be more effective in mitigating or hedging FX risks before they crystallise, and can separate the non-functional currency transaction event (the making of a payment or the receipt of a collection) from the hedging of the risk.

The challenge for treasurers, however, whether considering the transition from one practice to the other, or those already operating in this manner, is how to avoid creating complicated and inflexible arrangements to enable an efficient currency management process. Multi-currency accounts are proving a compelling response to this challenge.


Introducing multi-currency accounts

Multi-currency accounts help treasurers to manage non-functional currency transactions easily, whilst also understanding and managing their exposures without specialist skills or complex techniques and technology. As the name suggests, a multi-currency account is a single account with a number of currency wallets underneath it. This means that the treasurer or finance manager needs to manage just one account, rather than separate accounts for each currency, removing the need for additional account opening and Know Your Customer documentation, as well as the cost, compliance and bank account management required for multiple accounts. The process of making and collecting payments is the same as for functional currencies, avoiding complexity and fragmentation in cash management operations.

Each wallet effectively lies dormant but can be automatically activated when a transaction takes place in a non-functional currency. A balance is then held in each separate wallet, so treasurers have immediate and accurate visibility of their holdings in each currency. These balances can be exchanged back into the functional currency whenever required, offering treasurers complete flexibility in the way that they manage their currency positions. For example, a SGD-based company may receive HKD from a customer, which is settled into the HKD wallet within the account. Treasury could decide to maintain this balance, for example if they anticipate making HKD payments, or exchange it back into SGD.

In addition to offering handling future and unforeseen currency flows without the need to set up physical bank account, multi-currency accounts also enable treasurers to disconnect the FX conversion execution from the underlying payment or receipt, taking the decision on when to buy or sell a non-functional currency separately from the point that a transaction is processed. This gives treasurers control over the execution of the conversion and the benefit of avoiding unnecessary conversions when opposite flows occur. It also provides them with the foundation for implementing a FX hedging strategy by establishing a convenient way to settle the hedging transactions.

“Although multi-currency accounts are familiar in some parts of the region, such as Singapore and Hong Kong, particularly for retail accounts, they are a new proposition in markets such as China, Taiwan and India. Since DBS launched multi-currency accounts in Q3 2017, we have seen significant levels of adoption and we expect that it will become a common, default choice of account for treasurers in the future.”

Mario Tombazzi, Group Head of Liquidity and Liabilities Product Management, DBS


Multi-currency notional pooling: a group-wide approach to liquidity

Using multi-currency accounts is a very straightforward, easy way to manage non-functional currencies and in many cases, it offers treasurers an efficient and flexible platform to enhance their currency management practices. Although this applies particularly to companies that operate on a predominantly domestic basis, multi-currency accounts provide a solid foundation for companies that have a more established international presence or extensive non-functional currency flows, and also allow them to build on additional solutions in the future.

For example, a related solution is multi-currency notional pooling. This is a familiar technique amongst large multinational corporations, but it has evolved considerably in recent years, with far more clarity over pricing, documentation and credit requirements. As a result, treasurers and finance managers from a wider spectrum of organisations are using notional pooling both to manage non-functional currencies, and to put these balances to work from a liquidity perspective. Unlike physical target or zero balancing, where balances are swept into a header account, balances remain on the original account and in the original currency of denomination. These balances are then included in a notional calculation when computing the overall net surplus or deficit balance (performed in a base or reference currency for computation purposes only), and the degree of balance compensation which is achieved. This technique is interoperable with multi-currency accounts as currency wallets can be included within the notional pool.


A multi-currency notional pooling structure provides the following benefits:

  • As multiple currency positions across multiple legal entities are consolidated into a single arrangement, treasurers can inject funding or deploy surpluses in a convenient way without affecting the underlying currency positions;
  • Treasurers can process transactional flows as they occur, irrespective of whether there is sufficient funding available in the disbursement currency;
  • The impact of inaccurate or incomplete cash flow projections can be mitigated, while treasurers can identify ‘core’ or ‘more stable’ liquidity pools more easily;
  • Variations in FX hedging policy can be integrated with and overlaid on the underlying commercial flows without affecting the net aggregated pool position in the reference currency. In other words, the composition of the currency mix within the notional pool can be easily varied without impacting the overall pool position.   


“Multi-currency notional pooling offers major opportunities for self-financing, allowing currency balance surpluses to compensate for deficits in others. For example, many companies manufacture in some countries, but have sales and distribution in others. There is typically a mismatch in the timing of sales proceeds and manufacturing expenses, which has working capital implications. This is complicated further by the difficulty that many corporations face in creating and maintaining accurate cash flow forecasts.

By using multi-currency notional pooling, which can operate across traditional standalone currency accounts or in combination with one or more multi-currency accounts, the aggregated liquidity position is smoothed without the costs and inconvenience of physically exchanging non-functional balances to fund accounts in deficit. Furthermore, by bringing together positions into a larger ‘core’, the impact of cash flow volatility caused by unplanned payments, and particularly unpredictable collection patterns, is reduced, so treasurers are able to identify their overall group liquidity needs more easily.”

Mario Tombazzi, Group Head of Liquidity and Liabilities Product Management, DBS


A new generation of currency management solutions

As the concepts of multi-currency accounts and multi-currency notional pooling have developed and matured, the opportunity to extend these concepts further has also emerged. An example is a virtual account solution, which enables a company to use a single account for making payments to suppliers and receiving proceeds from customers using ‘virtual’ account details that are specific to that company (or to an entity, business line etc.). These virtual accounts are effectively partitions or sub-ledgers of the account they are linked to. This is a common offering that makes it possible for companies to identify, reconcile and optimise transactional flows automatically using the virtual account as reference information. However, by including a multi-currency dimension, the value of virtual account solutions becomes even greater, facilitating the flow of enriched information and automated processes whilst avoiding a proliferation of accounts.

Multi-currency virtual accounts are a powerful enabler for treasury process centralisation, from reconciliation of receivables to more complex structures such as in-house banking, intra-group netting and on-behalf transaction processing, amongst others. By using virtual accounts, treasurers avoid the need to implement complex IT processes and systems, and are able to accelerate the pace of business transformation.   

“Multi-currency virtual account solutions would have been inconceivable only a few years ago. However, as with multi-currency accounts and multi-currency notional pooling, these solutions are characterised by their simplicity and transparency, and are therefore rapidly becoming essential techniques for organisations operating internationally and/ or in multiple currencies.

Few, if any, corporations can predict what their treasury needs will be in five years’ time, but treasurers now have the flexibility to establish a currency management solution that meets their needs today and evolve this over time, as opposed to building complex, cumbersome structures to support their perceived future needs that may or may not be required. The key is to understand the company’s non-functional flows, and then determine with DBS how the process of managing the transactions and resulting exposures could be simplified and streamlined.”

Mario Tombazzi, Group Head of Liquidity and Liabilities Product Management, DBS


As the scale and complexity of corporations’ currency management needs evolve over time, there is a wealth of solutions available to them, from financing and investment solutions through to foreign exchange services to manage exposures and reduce P&L volatility. Increasingly, investment/ borrowing solutions can be structured very precisely to the needs of each business using term or fixed instruments, notice accounts etc. Similarly, even simple FX solutions can be tailored specifically to address each organisation’s exposures. As treasury increasingly becomes ‘real time’ with ever more rapid transactions, processes and information flows, the ability to implement transparent, straightforward multi-currency solutions quickly and conveniently can be a vital way of simplifying transaction and exposure management, allowing more opportunity for decision-making in areas that add strategic value to the enterprise and facilitate growth.


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Last updated on 08 Mar 2018