One year on from the 2023 banking crisis, European corporates are still reliant on too few FX counterparties. A report from FX-as-a-Service provider, MillTechFX reveals that this leaves them at risk of serious short-term liquidity issues should a banking partner fail.

On average, European corporates have just 2.67 counterparties and only 0.4% have more than five. MillTechFX says that this is surprising. The 2023 crisis impacted Credit Suisse. Its failure affected vital expenditures including payroll and supplier invoices, highlighting the risks of having a small pool of counterparties.

However, the data suggests change is afoot. 77% are exploring adding more FX counterparties. The second biggest operational challenge for European corporates when it comes to FX was onboarding liquidity providers. This may explain why the intention to diversify counterparties hasn’t translated into action yet.

Hedging is a top priority for European corporates

FX volatility has decreased since peaking at the end of 2022. But uncertainty remains and hedging is at the top of the priority list for European corporates with 67% hedging their forecastable risk. This is despite it getting more expensive. 59% of respondents surveyed by MillTechFX report that FX costs have risen in the past year, compared to just 5% who said they had decreased.

The average hedge ratio among European corporates was 40-49%. 61% of businesses say their ratios were higher than last year. Only 1% of respondents had lower hedging ratios. The average hedge length was 4.3 months. Looking ahead, 43% of European corporates are increasing their hedge ratio. Some 32% are increasing their hedge window, with 18% decreasing their hedge ratio and 20% are decreasing their hedge window.

Other notable findings

A reliance on manual processes is draining resources. 34% of European corporates still instruct financial transactions via phone, and 24% still use email. They task nearly three people with FX-related activities and spend 2.25 days per week on FX.

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78% of European corporates are exploring automating their FX operations. This demonstrates a potential shift away from cumbersome traditional FX processes. 89% of CFOs are exploring automation, suggesting this is a C-suite imperative.

59% suffer from a lack of transparency in the FX market. They are battling against hidden fees and struggle to get comparative quotes, making it difficult to know if they’re getting a good deal.

ESG credentials of increasing importance for corporates

Meantime, 92% of European corporates take ESG credentials into account when selecting FX counterparties. 44% said that counterparties must have strong ESG credentials.

Eric Huttman, CEO of MillTechFX said: “After last year’s banking crisis sent shockwaves throughout the industry, it’s noteworthy to see European corporates are still relying on too few counterparties. The data does provide some optimism with the vast majority of corporates globally moving to expand their counterparty pools to both spread their risk but also to achieve best execution.

“Despite lower volatility and rising FX costs, it’s positive that European corporates are still prioritising hedging. With interest rate changes and geopolitical volatility expected in 2024, hedging currency risk is one of the primary ways that businesses can mitigate the risk posed by this uncertain financial climate. More are increasing their hedge ratio and window than reducing them, which indicates their risk-sensitive mindset for the year ahead.”

The report is available via this link