New role for treasurers as FX transactions get automated

INTERVIEW | With foreign-exchange hedge volumes exceeding 1.5 billion euro per year, Lerøy Seafood Group had a good reason for automating them. Now, as soon as a sales order enters the group’s ERP system, an FX hedge is automatically executed with the bank offering the best rate. But how do you minimize the risk of errors, or reduce their impact by detecting them early if they happen? Head of Treasury Hans Ljøen tells Treasury 360° about the project – and how it exemplifies a shift in the nature of treasury work, from manual execution, to overseeing and setting the right business rules for systems. Meet Hans in Malmö on 20 April.

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“When I joined Lerøy two years ago, one of the things I noted was that – although the FX hedging strategy was in line with best practice, the execution of the strategy involved several manual steps,” says Hans Ljøen.

Perhaps as many as 15,000 manual inputs were made into different systems every year, he estimates.

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“So, it was inefficient, and there were many places where it could go wrong. Furthermore, the time lag between the sale of seafood and corresponding foreign-exchange hedge meant that our gross margin sometimes vanished due to FX rates moving to our disadvantage.”

“That resonated very well with my thinking.”

Coming in from a fintech, he had a different reference. And soon, he became alerted that there are providers around for the automated solution.

“That resonated very well with my thinking. We had this process of hedging individual sales contracts, and we have thousands of those every year. In the ERP system, it is booked in the same way every time … and when you have a very homogeneous, streamlined process that repeats itself very often, then that’s the perfect case for technology and automation, right?”

The big challenge: chase the errors

The chain of linked systems is long. A sales contract for seafood from Lerøy to a customer is booked in the ERP. A foreign-exchange automation software, by Swedish fintech Sealfx, translates it into an FX contract order – which is then automatically executed through the platform FXall, with the bank offering the best rate. The trade details are returned and booked automatically in the ERP system.

Even so, the most challenging part has not been the system integration as such – but to implement strong governance, internal controls to minimize the risk and impact of errors. This takes constant monitoring when running, and also made up a large part of the implementation effort. The error could be, for example, an erroneous currency amount, the wrong currency pair, a faulty date – or non-execution. Even a single error could cause significant negative effects.

“So basically, the most challenging question is ‘how do we set up a framework for validating the entire system, both its inputs and outputs?’. For example, when we sell seafood, how can we be sure that the amounts and the currency that is input into our ERP system are correct?” says Hans Ljøen.

Insights – translated into rules

Fundamentally, the answer must still be based on knowledge of the business and the risks facing it. The treasury staff will need to understand how foreign-exchange risk arises, how it is measured and managed. However, a much deeper understanding of business processes and operational risk inherent in such processes is needed. In practice, you implement “business rules” in the systems, in order to stop an error from transmitting through the chain.

“So, the new skill set is different,” says Hans Ljøen, describing the system rule setting as something that has traditionally been more common in IT departments.

“You need to understand operational risk much better than in the past. You need to understand what can go wrong,” he says. “One simple but important example is not allowing the system to sell your home currency. Another example is to reject any sales order exceeding a threshold amount, to protect against ‘fat fingers’.

As the process results in trades being automatically performed through the day, the team still needs to check that the outcome looks reasonable in relation to what would be expected.

“Generating relevant test cases takes business acumen.”

Hans Ljøen also mentions the added complexity that a change in one system can generate errors in some other one.

“Now, you as a treasury person need to understand these risks and come up with good business rules to address them. And you need to test the business rules. You feed the system with artificial contracts and see if everything works as intended. Generating relevant test cases takes business acumen.”

In more general terms, Hans Ljøen sees the tasks of treasury staff transitioning – from being about executing them manually, to being about controlling and overseeing systems that increasingly take over the heavy lifting.

Ready to meet you in Malmö

In the Treasury 360° Nordic 2023 conference program, in Malmö on 20 April, Hans Ljøen will present his project, as one of the sessions within the track “Technology-driven transformation at the treasury”. So what are his personal reasons to join?

“I think it’s fantastic to meet some of our peers in the Nordics. There aren’t a lot of meeting places in the treasury community. It’s an arena to get some fresh ideas on how to improve treasury operations,” he says.

“My understanding is that specifically in the Nordics, this is sort of a one-of-a-kind treasury event.”

 


Hans Ljøen’s session in the Treasury 360° Nordic program, in Malmö on 20 April 2023, is scheduled for 14:50 (as of this article’s publication – find the current agenda on the event website here). Titled “Hands off. Fully automating FX trading at Lerøy Seafood Group”, it is part of conference track A, “Technology-driven transformation at the treasury”.

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