How are Fund Managers in France managing their FX risk?

In this blog, we delve into the report’s insights into fund managers’ FX risk management in France, including their FX exposure, pain points, hedging strategies and priorities. 

A founding pillar of the euro 

France adopted the euro upon its launch in 1999, with hard cash currency beginning circulation in 2002 as the country said ‘au revoir’ to its national franc.

The new currency grew steadily to its peak of 1.6 EUR to 1 USD in 2008, before beginning a slow and fluctuating decline after the financial crisis.

Although the euro now hovers at around 1.1 EUR to the dollar, recent years have seen significant levels of volatility. For example, in 2022, the currency’s value dropped below the dollar for the first time since the year 2000.  

Being one of the major EU economies, and given that the country carries out 54% of its trade within the EU, France is a key supporting pillar of the euro. However, polls over the last decade show that there is some underlying sentiment for the return of the franc.

Needless to say, currency management is a key consideration in France, especially for fund managers.

The importance of FX to French fund managers 

Of all the European countries surveyed, France held the highest proportion of fund managers that said that FX was significant to their business (97%). This compares with an average of 88% across all surveyed countries.

The report also found France to have one of the highest proportions (97%) of fund managers who said their returns had been impacted by EUR volatility, a tenth higher than the European average of 89%.

In addition, 48% of French fund managers’ businesses are exposed to foreign currency. This was slightly lower than the average of 51% across all countries but still demonstrates the significance of FX to French fund managers’ businesses.

French reliance on manual processes and appetite for automation

Our research revealed that France has a heavy reliance on manual processes, with 67% of fund managers still using email to instruct financial transactions, and 42% using phones. This was by far the highest of all countries surveyed, with French use of these instruction methods being 24 and nine percentage points higher than the report’s averages for email and phones respectively.

These processes are a significant burden on human capital and are reflected in the findings, with French fund managers also spending the highest number of days per week (3.19 on average) on FX-related matters and holding the second-highest number of people tasked with FX activities – nearly three per team.

However, our report found that 89% of French fund managers are exploring new technology and platforms to automate their FX operations, showing that change is on the horizon. This puts France slightly ahead of the average of 87% when it comes to exploring automation.

The majority of French fund managers struggle with a lack of FX transparency 

Our research also asked fund managers whether they thought there was a lack of transparency in the FX market and 82% of respondents said there was.

Although the proportion of French fund managers that agreed with this was the lowest of the surveyed countries (67%), the majority still said there was a lack of transparency in the market.

Hedging trends in France

Despite having one of the highest proportions (97%) of fund managers who said their returns had been impacted by EUR volatility, only 72% of French fund managers, by comparison, currently hedge their forecastable currency risk. Of those that don’t hedge, France had the highest proportion of fund managers not considering hedging given market volatility (30%).

While 19% of French fund managers hedge all their FX exposure, 42% state they hedge a large proportion. This is significantly below the European average of 60% hedging a large proportion of FX exposure.

Fund managers in France did, however, have a roughly average hedge ratio of 48%, with 65% saying that this was higher than the previous year – slightly above the 61% norm.

All countries stated that their hedging costs had increased over the last year, and France was no exception to this, with 84% reporting increased costs – in line with the European average.

Diversification of FX counterparties in France 

The banking crisis in 2023 sent shockwaves throughout the finance industry. Credit Suisse, a globally systemic bank, stood on the brink for the first time since Lehman Brothers and in the US, three regional and specialised banks failed in rapid sequence. 

Whilst the banking sector has seemingly stabilised since the turmoil of Spring 2023, many senior finance decision-makers at European fund managers are taking lessons from the crisis on board. 

Our research found that 90% of fund managers are looking to diversify their FX counterparties. France positioned itself marginally higher than this average, with 92% looking into diversifying their FX counterparties since the banking crisis.

ESG is a priority in France

Driven by increased pressure from investors, governments and consumers, ESG criteria are now central to the decision-making process for many fund managers. Our survey found that the trend has also begun to play an increasingly important role in selecting FX counterparties and service providers. 

94% of senior finance decision-makers at European fund managers said that ESG credentials impact their selection of FX counterparties, while 56% said they have a big impact. 

A relatively high proportion of French fund managers also said ESG credentials impacted counterparty selection to a great extent (64%). 

FX should be a key priority for French fund managers in 2024 

With uncertainty set to stay, we believe the management of FX currency risk should be considered a top priority for French fund managers in the year ahead. 

Fortunately, there are several ways they can improve their FX risk management infrastructure and protect their returns in these uncertain times:   

Transaction cost analysis (TCA) – TCA was specifically created to highlight hidden costs and enable fund managers to understand how much they are being charged for the execution of their FX transactions. Ongoing, quarterly TCA from an independent TCA provider can be embedded as a new operational practice to ensure consistent FX execution performance.  

Comparing the market – We believe that fund managers should seek alternatives to the traditional single bank-based approach. Instead, they should look for solutions that enable them access to live rates from multiple banks and execute at the best rate, all whilst reducing the operational burden traditionally associated with this kind of market access.  

Outsourcing – There is a growing recognition that outsourcing does not necessarily mean a loss of control, less transparency or reduced quality of FX activities, but when using the right partner outsourcing can improve transparency and execution quality. Outsourcing can therefore enable fund managers to dedicate more time to core business matters, which is all the more important amidst inflationary and volatility pressures.  

Strong governance – FX is one of the largest and most liquid markets in the world, but also one of the most complex. Setting up and onboarding new FX counterparties, centralising price discovery and navigating the post-execution phase require a team of people and often have their own complications. Harnessing solutions which can enhance transparency and governance can help fund managers improve the cost, quality and transparency of their FX execution.  

Diversification of liquidity providers – Recent events in the banking sector show that reliance on one or two counterparties can be an extremely risky strategy, as the loss of a major FX counterparty could render firms unable to trade. We believe fund managers should begin exploring technology-driven alternatives to the single bank-based approach that enable them to transact in FX in a way that addresses risks associated with a single point of failure. 

Automation – Despite the rising threat of currency movements, many fund managers continue to rely on manual processes like phone and email to execute FX trades which may make it harder to mitigate the impact of currency volatility. Harnessing automated solutions can offer end-to-end workflow, greater transparency and faster onboarding, helping finance departments streamline their FX functions. 

How MillTech FX can help 

MillTechFX is an FX-as-a-Service (FXaaS) pioneer that enables fund managers to access multi-bank FX rates via an independent marketplace.  

MillTechFX’s market access, pricing power and operational resource enable it to deliver a tech-enabled integrated solution that delivers transparency, cost reduction and operational burden reduction for senior finance decision-makers at fund managers.  

It is end-to-end at no additional cost, offering easy and quick onboarding, multi-bank best execution and hedging management, and connectivity into clients’ bank accounts, internal systems, administrators or custodians.  

To speak to us directly please reach out to our EU sales team at eusalesdesk@milltechfx.com, phone number +33 1 88 24 98 90, or request a free TCA here. 

Find out more at https://www.milltechfx.com  

This blog post examines & refers to the data and results of a survey by Censuswide on MillTechFX’sbehalf conducted between 10 November and 27 November 2023 based on a survey of 250 senior finance decision-makers at mid-sized asset management firms in Europe (described as those with assets under management ranging from €500m to €20b). The full survey can be found here.