Foreign exchange (FX) policies are a cornerstone of corporate treasury. They define how exposures are identified, measured, and hedged. But here’s the contrarian question: Are most FX policies too rigid, too static—and ultimately too disconnected from business reality to be effective? Should treasury rethink how these policies are designed and applied?
The Case for Rethinking FX Policy Design
- Markets Move Faster Than Policies
- FX markets are dynamic. A policy reviewed annually—or worse, every few years—may not keep pace with real-world volatility, interest rate shifts, or geopolitical changes.
- One-Size-Fits-All Doesn’t Work
- Applying the same hedge ratio or exposure threshold across all currencies, regions, and business units ignores the nuances of different markets and operational needs.
- Missed Opportunities
- Overly conservative policies may prevent treasurers from taking advantage of favorable market conditions. A rigid “hedge everything” approach could lead to unnecessary costs.
- Lack of Business Integration
- FX policies are often designed in isolation from commercial and operational teams. As a result, exposure identification may be inaccurate, and hedging strategies misaligned with real risks.
The Case for Structure and Discipline
- Risk Control and Governance
- A clear, consistent FX policy ensures that treasury doesn’t take unnecessary risk. It protects the company from speculative behavior and sets expectations with stakeholders.
- Audit and Compliance Requirements
- Regulators, auditors, and boards expect defined FX governance frameworks. Flexibility is useful, but without structure, companies face reputational and regulatory risks.
- Predictability in Financial Reporting
- Consistent hedging strategies support smoother P&L results, reducing FX-driven earnings volatility and improving investor confidence.
- Global Alignment
- In large organizations, a unified FX policy provides coordination across business units and regions, avoiding fragmented or conflicting strategies.
Toward a More Adaptive FX Policy
Rather than choosing between rigid policy or total flexibility, companies can aim for:
- Dynamic policy frameworks that allow for adjustments based on market triggers, exposure levels, or business conditions.
- Segmented approaches for different types of exposures (e.g., forecasted vs. booked) or regions with varying risk profiles.
- Better collaboration between treasury and business units to ensure accurate exposure identification and strategic alignment.
- Periodic policy reviews aligned with business and market changes—not just tied to the annual calendar.
Let’s Discuss
- Is your FX policy helping or hindering effective risk management?
- How often does your organization review and adapt its FX strategy?
- Where is there room for more nuance or flexibility in your current policy?
We’ll be gathering views from treasurers, FX strategists, and policy architects—share your experience and thoughts!
COMMENTS
Alex Charles, Co-founder Bracket, comments:
As someone who’s worked with over a thousand CFOs and treasurers during my time managing FX strategies, I’ve seen just about every kind of hedging policy out there , the good, the bad, and the ones that raise more questions than they answer.
Now at Bracket (www.bracket.co.uk), we’re building tools that help corporates manage FX risk with more clarity and control but it’s still clear that the foundation is policy.
The best FX policies I’ve seen strike the right balance , they’re concrete enough to offer governance and clarity (often board-approved, with defined hedge ratios and a layered approach), but built with just enough flexibility to react to market moves.
A great example I’ve seen is a layered hedging strategy where Q1 is hedged at 80%, Q2 at 60%, Q3 at 40%, and Q4 at 20%, with the intention of topping up quarterly to meet those targets. If the market moves materially ,lets say, 5% above the budget rate it triggers a policy-led conversation with the board. The company might then top up that quarter’s hedges by another 20% to lock in gains. It’s still disciplined, still within policy but adaptive enough to respond to real world volatility (a tweet from Trump)
Too rigid, and you miss opportunities. Too loose, and you lose control. Getting that balance right is where I have seen the best results.
Royston Da Costa, Treasury Masterminds Board Member, comments:
An effective FX (Foreign Exchange) Treasury Policy sets the framework for how an organization manages its currency risk, ensuring financial stability and compliance with governance standards. I have listed below an outline of the main points typically included in an FX Treasury Policy:
1. Purpose and Scope
- Objective: Define the purpose (e.g., to manage and mitigate FX risk, protect earnings and cash flows).
- Scope: Outline which entities, business units, currencies, and types of exposures the policy covers (e.g., transactional, translational, and economic exposures).
2. Governance and Responsibilities
- Policy Ownership: Who is responsible for maintaining and updating the policy (e.g., Group Treasurer, CFO).
- Decision-Making Authority: Delegation of authority for FX decisions, including approval thresholds.
- Roles and Responsibilities:
- Treasury team
- Business units
- Finance/accounting
- Risk management
3. FX Risk Identification and Measurement
- Types of FX Risk:
- Transactional (e.g., foreign currency receivables/payables)
- Translational (e.g., foreign subsidiaries’ financial statements)
- Economic/structural (e.g., competitiveness due to FX moves)
- Risk Measurement Tools:
- Sensitivity analysis
- Value-at-Risk (VaR)
- Forecasting methods
4. FX Risk Management Strategy
- Hedging Objectives: Protect cash flows, reduce volatility in earnings, comply with accounting standards.
- Hedging Principles:
- Natural hedging (matching cash flows)
- Financial hedging (derivatives)
- Instruments Permitted:
- Forwards
- Options
- Swaps
- NDFs (Non-Deliverable Forwards)
- Hedging Horizon: Typically aligned with cash flow forecasting (e.g., 3–12 months).
- Hedging Ratios: Define coverage levels (e.g., hedge 80% of confirmed exposures, 50% of forecasted).
- Currency Prioritisation: Focus on material/volatile currency pairs.
5. Dealing and Execution
- Counterparty Management:
- Approved list of counterparties
- Credit limits
- Execution Protocols:
- Competitive bidding (e.g., minimum 2–3 quotes)
- Centralized dealing via Treasury
- Platforms and Tools: Use of electronic platforms (e.g., FXall, 360T).
6. Accounting and Reporting
- Hedge Accounting:
- Criteria for designation (e.g., IAS 39, IFRS 9)
- Documentation requirements
- Valuation and Reporting:
- Mark-to-market processes
- Reporting frequency (daily/weekly/monthly)
- P&L impact monitoring
7. Compliance and Controls
- Policy Compliance:
- Internal audits
- Exception reporting
- Limits and Thresholds:
- Exposure limits by currency or region
- Counterparty and dealer limits
- Segregation of Duties:
- Clear separation of execution, confirmation, and settlement roles
8. Review and Updates
- Review Frequency: At least annually or upon material changes in FX exposure or market conditions.
- Policy Updates: Who can initiate and approve changes.
Lee-Ann Perkins, Treasury Masterminds Board Member, comments:
Governance & Controls
- Roles & Responsibilities:
- Treasury: Execute hedges, maintain market rates, track P&L impact.
- Business Units: Provide timely exposure forecasts and documentation.
- Finance/Accounting: Ensure hedge accounting treatment under IFRS/US GAAP.
- Internal Audit: Test control effectiveness bi-annually.
- Approval Matrix: Transactions above set limits require CFO or Treasurer sign-off.
- Documentation: All trades documented with Global Master Agreements and confirmed in the treasury system.
Reporting & Review
- Monthly: Exposure reports, hedge coverage analysis, P&L attribution.
- Quarterly: Policy compliance dashboard presented to Finance Committee.
- Annual: Policy review and update approval by CFO.
Treasury KPIs
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