Key global trends shaping corporate FX hedging
This article was written in 2025 by our partner, MillTech In an increasingly volatile global economy, managing currency risk has become a top priority for businesses worldwide. As exchange rates fluctuate and financial pressures mount, firms are turning to FX hedging strategies to safeguard their bottom lines. This blog explores the key trends shaping corporate FX hedging in 2025, including the growing adoption of hedging practices and the impact of local currency movements on corporate decision-making. Hedging is crucial for tackling currency risk Why is hedging becoming more important for businesses? As financial uncertainty grows, an increasing number of businesses worldwide are taking proactive steps to protect themselves. In fact, 81% of companies across Europe, North America, and the UK are now actively hedging their currency exposure. Leading the charge is Europe, where a remarkable 86% of corporates are now hedging their FX risk—a dramatic rise from just 67% in 2023. This surge is likely driven by a combination of tangible market forces: rate differentials and sustained dollar strength have created persistent volatility, making it increasingly important for corporates to manage their FX exposure. What are the consequences of not hedging currency exposure? As market conditions continue to shift, 52% of businesses globally that don’t currently hedge their currency exposure are now reconsidering their approach. UK corporates are at the forefront this rethink, with 68% exploring new hedging strategies. What’s prompting the change? Most likely the financial consequences of inaction: three in four businesses worldwide have recently reported losses due to unhedged FX risk—underscoring the urgent need for more proactive and robust currency risk management. A cohesive approach to hedging strategies How consistent are hedging strategies globally? Corporate hedging strategies are demonstrating notable consistency across the globe. The average global hedge ratio is 48%, reflecting a broad alignment in hedging practices. Here’s a closer look at how different regions compare: When it comes to hedge duration, the variation is minimal, which further points to a uniform approach in managing currency risks: What do longer hedge tenors and consistent hedging strategies indicate? Longer hedge tenors typically indicate that firms are aiming to secure protection over an extended period, likely reflecting their efforts to gain stability amid a turbulent year for the pound. The limited variation observed in hedging strategies suggests that corporates globally are responding in a broadly uniform manner, adopting consistent risk management approaches as they navigate shared global uncertainties. How are domestic currency movements impacting businesses? Domestic currency movements are having a pronounced impact on corporates bottom lines, with 88% of firms globally reporting effects. North American firms have borne the brunt, with 92% citing challenges tied to a stronger U.S. dollar. How have trade tariffs affected currency movements? Tariffs imposed by the the Trump administration, alongside retaliatory levies from global trade partners, have added pressure to markets. These developments have disrupted markets and raised the cost of cross-border trade for both large and small economies. Interestingly, in the immediate aftermath of U.S. tariff announcements, the dollar has shown unexpected weakness—suggesting that the financial repercussions may initially be felt domestically before reverberating abroad. How have the euro and pound movements affected firms? Meanwhile, in Europe, 88% of corporates reported being affected by euro volatility. Similarly, in the UK, of firms felt the impact of a strengthening pound. However, there’s a notable difference in the consequences: Tighter lending criteria and heightened FX costs How is access to credit affecting corporates? Access to credit has emerged as one of the top concerns for corporates worldwide: “Tighter lending criteria is a common feature of turbulent economic times. If the average corporate earnings take a downturn, then lenders perceive a higher risk of defaulting on loans. This causes them to allow only the most creditworthy companies to borrow, particularly given higher interest rates. This tends to cause liquidity headaches and restricted investment opportunities.” Tom Hoyle, Head of Corporate Solutions at MillTech How have hedging costs changed for businesses? Another key trend impacting businesses globally is the rise in corporate FX hedging costs, with four out of five corporates reporting higher costs over the past year: Higher hedging costs demand a more proactive and considered approach from treasury teams, given that hedging decisions now carry more weight. CFOs must carefully assess their exposures, determine their hedging capacity, and be sure to choose the right financial instruments. Most importantly, they must strike a delicate balance between the rising costs of hedging and the potential risks of leaving exposures unprotected. Also Read Join our Treasury Community Treasury Masterminds is a community of professionals working in Treasury Management or those interested in learning more about various topics related to Treasury Management, including Cash Management, Foreign Exchange Management, and Payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Notice: JavaScript is required for this content.
Franklin
The Complete Guide to EMIR: European Market Infrastructure Regulation Explained
This article is written by Kantox What is EMIR and Why Does It Matter? The European Market Infrastructure Regulation (EMIR) is a comprehensive regulatory framework enacted by the European Securities and Markets Authority (ESMA), which came into force on February 12, 2014. Its primary aim is to more tightly supervise the trading of over-the-counter (OTC) derivatives through controlled initiatives, ultimately to mitigate the possibility of another global financial crisis and minimize risks associated with derivative markets. EMIR requires that over-the-counter derivatives—including interest rate derivatives, credit derivatives, fixed income derivatives, and foreign exchange derivative transactions (forward contracts, options, and swaps)—must comply with its regulatory processes. This regulation has an extensive effect on both corporate organisations and financial institutions, though corporates often find adherence more challenging than banks and other financial entities. The Three Core Components of EMIR There are three main components to EMIR compliance: EMIR includes both financial entities (banks, building societies, pension funds) and non-financial entities (any businesses that use derivatives under EMIR’s remit, regardless of sector). Both parties in each transaction must comply with the protocol conditions required. Which FX Transactions Fall Under EMIR? FX Spot Transactions Crucially for many FX derivative users, ESMA has confirmed that spot transactions are exempted from EMIR’s remit. Spots are generally trades settled within two days of the transaction (T+2). The Central Bank of Ireland understands that “all FX transactions with settlement beyond the spot date are to be considered Forward contracts and therefore fall within the definition of a derivative as provided for under EMIR and will be subject to the reporting obligation.” FX Swaps and Forward Derivatives Swaps must go through the EMIR mandatory reporting stage. A swap is a contract between two parties, where an agreement for a series of specified future cash exchanges on specified dates is made. Forward contracts, where two parties agree to a future trade of an asset at an agreed price on a future date, must also comply with EMIR reporting obligations. The main difference between a swap and a forward is that a forward is one transaction on one agreed future date, whereas a swap is a sequence of agreed transactions on various future dates. Note: There has been some ambiguity regarding the definition of forward contracts, particularly FX forwards. ESMA sought clarification from the European Commission on this matter. UK and EU Conflict Over EMIR FX Forwards In the UK, due to differences in how the Financial Conduct Authority interprets the EU definition of “derivative,” there has been uncertainty about whether foreign exchange forwards would be exempt from EMIR in the UK. However, as the EU classifies FX forwards as a “predominant risk,” it is expected that the UK will eventually align with EU requirements. The EMIR Compliance Checklist: Step-by-Step Guide To ensure full compliance with EMIR requirements, particularly the reporting component, follow these steps: 1. Obtain a Legal Entity Identifier (LEI) for each entity ESMA uses Legal Entity Identifiers to distinguish between different derivative users. You must obtain an LEI for your company from an authorized issuer. For more information, visit the LEI ROC website. 2. Identify all your derivative transactions This step is imperative in distinguishing which of your derivative transactions fall under EMIR’s remit. 3. Identify what EMIR stages each derivative class is subject to Determine which derivatives are subject to all three EMIR components (clearing, risk-mitigation, and reporting) and which are subject to reporting only. 4. Exchange data with counterparties For each derivative transaction under EMIR, both parties must fulfill the requirements. Obtain all pertinent information on your counterparties, such as their LEI, and provide them with your information. 5. Clarify UTI generation Each transaction requires a Unique Transaction Identifier (UTI), generated by one of the two counterparties. Discuss in advance who will generate the UTI for each transaction. 6. Decide how to manage EMIR reporting Your company can handle reporting internally or outsource to a third-party service provider. Many financial service providers offer complete EMIR reporting and advisory services to clients. 7. Select a Trade Repository (TR) Choose which of the six ESMA-approved Trade Repositories you will report to, based on your specific needs. Complete all necessary implementation steps once confirmed. 8. Begin the reporting process Start reporting either via a third-party service or through self-reporting. Understanding Trade Repositories Under EMIR A fundamental part of the EMIR framework includes the obligatory reporting of all applicable derivative transactions to registered Trade Repositories. TRs are entities that compile and store derivative transaction data in a continually updated database. Their importance in European financial regulation is attributed to the recognized need for improved transparency and reduced financial systemic risk. Current ESMA-Registered Trade Repositories: Selecting the Right TR for Your Business When choosing a Trade Repository, consider: The Impact of EMIR on Businesses EMIR’s main impact on entities trading FX derivatives is the significant costs and time spent on implementation and continual compliance. Another considerable challenge is understanding the specific requirements for each type of FX derivative transaction due to ambiguity in EMIR’s stipulations. For many businesses, especially non-financial entities, compliance can be resource-intensive, potentially diverting attention from core business activities. However, these measures are designed to create a more stable and transparent derivatives market, which should benefit all participants in the long term. Conclusion: Preparing Your Business for EMIR Compliance EMIR will undoubtedly have an extensive effect on your organization if you trade derivatives. Being properly prepared and understanding the requirements is essential to ensure smooth compliance and avoid potential penalties. For businesses looking to navigate EMIR requirements efficiently, consulting with financial compliance experts or partnering with service providers who offer EMIR compliance services can significantly reduce the burden of implementation and ongoing reporting obligations. This article combines information on EMIR and provides a general overview of EMIR requirements as of May 2025. For the most current regulatory information, please consult with financial compliance professionals or regulatory authorities. Also Read Join our Treasury Community Treasury Masterminds is a community of professionals working in Treasury Management or those interested in learning more…