How to Choose a Treasury Management System for FX Risk Management

Choosing an FX TMS is not about finding the longest feature list

Selecting a Treasury Management System (TMS) for foreign exchange risk management can look straightforward.

Create a requirements list. Send it to potential vendors. Compare their responses. Invite the shortlisted providers to demonstrate their systems.

The difficulty is that most established TMS providers can answer “Yes” to many of the same questions.

• Can you manage FX exposures? Yes.
• Can you calculate mark-to-market valuations? Yes.
• Can you integrate with ERP systems? Yes.
• Can you support hedge accounting? Yes.
• Can you produce dashboards? Yes.

Those answers tell you surprisingly little about how the system will actually work in your treasury environment.

The more useful question is:

“Show us how.”

Can the vendor show how an exposure moves from your ERP into the TMS, how it is compared with existing hedges, how a policy breach is identified, how a trade is executed and captured, and what happens when the underlying exposure subsequently changes?

That is where the differences between Treasury Management Systems become much clearer.

TreasuryONE has developed a 40-question TMS Buyer’s Guide for FX Risk Management to help treasury teams structure that evaluation.

Get the 40-Question TMS Buyer’s Guide

Start with the exposure, not the FX deal

One of the most important mistakes to avoid when evaluating an FX TMS is starting with the dealing screen.

FX risk exists before treasury executes a hedge.

A South African company importing equipment from Europe, for example, may create its EUR exposure when it places the order, signs the contract or forecasts the purchase. By the time the supplier invoice reaches accounts payable, the economic exposure may have existed for months.

A good FX treasury process should therefore start by answering:

What are we exposed to?

The TMS should help treasury consolidate foreign currency exposures across entities, business units, currencies and time periods.

For organisations operating multiple ERP systems, this becomes particularly important. Group Treasury should not have to manually combine separate exposure spreadsheets before it can understand the group’s FX position.

Ideally, treasury should be able to start with the consolidated position and drill down through legal entity, business unit and currency to the underlying transaction.

What to ask the TMS vendor

Don’t only ask: “Can you import FX exposures?”

Ask:

“Show us how an exposure moves from our ERP into the TMS, how it changes as a forecast becomes a purchase order and then an invoice, and how you prevent the same exposure from being counted twice.”

That is a much harder question to answer with a simple “yes”.

Test how the TMS connects exposures and hedges

Once treasury knows what the business is exposed to, the next question is:

What have we done about it?

Suppose the organisation has a USD10 million exposure and USD7 million of existing hedges. The hedge ratio is 70%. But what happens when the underlying exposure changes? If new purchase orders increase the exposure to USD14 million, the same USD7 million of hedges now represents only 50% coverage. No hedge changed.

The risk position changed because the exposure changed.

A TMS should therefore do more than maintain a register of FX forwards. It should help treasury understand the relationship between:

Underlying FX exposure + existing hedges = current hedge position

Where the organisation operates within an approved FX policy, the system should also help identify when that position moves outside the permitted hedge range.

Ask the vendor to demonstrate the exception

Instead of asking:

“Does the system calculate hedge ratios?”

give the vendor a scenario.

“Our policy requires between 70% and 90% hedge cover for the next three months. We currently have USD10 million of exposure and USD8 million of hedges. The business has just increased its forecast exposure to USD13 million. Show us what happens.”

• Can the system recalculate the position?
• Can it identify that treasury is now below policy?
• Can it show how much additional hedge cover would be required to return to the minimum?
• Can users drill into the transactions that caused the change?

That is much closer to how treasury will actually use the system.

Look beyond execution to the complete FX lifecycle

Executing an FX trade is only one part of the process. The transaction still needs to be captured, confirmed, valued, settled, accounted for and reported.

A well-designed treasury environment should connect the complete lifecycle: the business transaction creates the exposure, the exposure informs the hedge decision, the hedge is approved and executed, and the resulting transaction moves through confirmation, settlement, valuation, accounting and reporting.

For organisations using electronic dealing platforms such as 360T or FXall, ask what actually happens after the dealer executes the trade.

• Does the transaction flow automatically into the TMS?
• Or does someone still need to capture it manually?

The distinction matters. Every time treasury manually re-enters the same transaction, another opportunity for error is introduced. An amount can be entered incorrectly. A rate can be transposed. A maturity date can be wrong. The incorrect counterparty can be selected. Straight-through processing should reduce unnecessary re-keying while preserving the approvals and segregation of duties required by treasury.

Don’t evaluate integration as a tick-box requirement

“ERP integration” is another requirement that frequently receives a simple Yes in an RFP. That answer needs to be unpacked.

Ask:

• What information can be imported?
• How frequently can it be updated?
• Is the integration file-based or API-based?
• How are rejected records handled?
• How are duplicate exposures identified?
• What happens if the interface fails?
• Can information flow back to the ERP?
• Who is responsible for supporting the integration?

The same applies to banks, electronic trading platforms, market-data providers and BI tools. A TMS does not operate in isolation. It needs to fit into an environment that may include ERP systems, banks, dealing platforms, market-data providers, accounting systems and Power BI or other reporting tools. The quality of those connections can be just as important as the functionality inside the TMS.

Ask what happens when something goes wrong

Software demonstrations usually show the perfect transaction.

• The exposure imports correctly.
• The hedge is approved.
• The trade executes.
• The payment settles.
• Everything turns green.

Real treasury does not always work like that. A better demonstration should include exceptions. Ask the vendor to show what happens when:

• an ERP exposure is imported twice
• a forecast changes after a hedge has been executed
• a hedge exceeds the underlying exposure
• a counterparty limit is reached
• an FX confirmation does not match
• a settlement fails
• an approval expires
• a user attempts an unauthorised action

Exception handling is often a better test of a TMS than processing the perfect transaction.

Treasury professionals should spend their time investigating the transactions that require attention, rather than manually checking every transaction to find them.

Make sure risk means more than mark-to-market

MTM is an important part of FX management. It is not the same as understanding FX risk. A negative MTM on a hedge does not automatically mean treasury made a bad decision. If the hedge protects an underlying foreign currency purchase, the economic impact needs to be considered together with that exposure. Depending on the organisation’s risk framework, a TMS may also need to support:

• open exposure analysis
• sensitivity analysis
• stress testing
• Value at Risk
• counterparty exposure
• concentration analysis
• projected future exposure

The key question for the CFO is ultimately not: “What are our FX derivatives worth today?”

It is: “What could happen to our cash flow or earnings if currencies move?”

Your TMS should help treasury answer that question.

If you use IFRS 9, ask the vendor to show the full process

“Supports IFRS 9” should never be accepted as sufficient detail in a TMS evaluation. Ask the vendor to demonstrate how the system connects the hedged item and hedging instrument, maintains the hedge relationship and designation, supports the required valuations and effectiveness assessments, and produces the resulting accounting information.

Then change the underlying exposure.

• What happens if a USD10 million forecast transaction falls to USD7 million after USD8 million has already been hedged?
• Can the system show the impact on the economic hedge position?
• Can treasury and finance see the relevant hedge relationship?
• How are changes, rebalancing or discontinuation handled where applicable?
• Can the accounting entries be generated and transferred to the ERP?
• And importantly, can an auditor reconstruct what happened?

The operational burden of IFRS 9 often comes from maintaining the relationship between the exposure, hedge, valuation, accounting and supporting evidence. A TMS should help control that process rather than create another reconciliation.

For South African treasury, include exchange control in the discussion

South African organisations may also need their treasury processes to accommodate relevant exchange control information, approvals and supporting documentation. The requirements will depend on the transaction and applicable regulatory framework, and the TMS does not replace the role of the organisation’s Authorised Dealer or appropriate regulatory expertise.

From a systems perspective, however, treasury should consider whether relevant approval or reference information can be associated with the transaction and, where applicable, whether the process can monitor:

• approved amounts
• utilisation
• available headroom
• expiry dates
• supporting documentation
• linked transactions

The objective is traceability. Treasury should be able to understand not only what FX transaction occurred, but also why it occurred and what underlying business transaction or authority supports it.

Don’t leave security to the IT team

Cybersecurity and technical architecture will naturally form part of the IT due diligence. But treasury should also test the operational controls. Ask the vendor to show you:

• Who can create an FX transaction?
• Who can approve it?
• Can the dealer amend an approved transaction?
• Can one person create and approve the same transaction?
• What happens when a user’s authority limit is exceeded?
• Can administrators change financial transactions?
• What does the audit trail record?

A useful test is to make a change during the demonstration and then ask:

“Show us the audit trail.”

You should be able to see who made the change, when it was made and, where relevant, the value before and after the amendment.

The most useful TMS demonstration may be one scenario

Instead of allowing every vendor to give you a different polished demonstration, give shortlisted providers the same scenario.

For example:

Your South African subsidiary expects to pay a supplier USD10 million in three months. The exposure enters the TMS from the ERP. Treasury policy requires 80% hedge cover. Treasury executes an USD8 million forward. Two weeks later, the supplier reduces the order and the underlying exposure falls to USD7 million.

Then ask every vendor to demonstrate the following:

1. Import the original USD10 million exposure.
2. Show where the exposure originated.
3. Apply the 80% hedge requirement.
4. Execute or import the USD8 million forward.
5. Link the hedge to the underlying exposure.
6. Show the resulting hedge position.
7. Reduce the underlying exposure to USD7 million.
8. Recalculate the hedge ratio.
9. Identify the resulting over-hedged position.
10. Show the policy exception and audit history.

Then continue the scenario.

Ask them to show how the hedge is valued, what happens at settlement, what accounting information is generated and how management sees the resulting position. One realistic scenario can tell you more about a TMS than hundreds of feature-list responses.

Beware of the word “Yes” in your TMS RFP

When evaluating vendor responses, distinguish between:

• Available as standard
• Available through configuration
• Requires integration
• Requires custom development
• Planned on the product roadmap

These answers are not equivalent. A critical requirement that depends on future development carries a very different implementation risk from functionality that can be demonstrated today. For important requirements, ask for evidence.

Don’t only ask whether the system can do it. Ask the vendor to show you.

So, what should you ask before selecting a TMS?

The questions will depend on your treasury operating model, but a robust evaluation should cover at least five areas:

1. Exposure visibility: Can we accurately identify and consolidate the FX exposures created by the business?

2. Hedge management and risk: Can we connect exposures with hedges, monitor policy compliance and understand what remains at risk?

3. Integration and processing: Can information move reliably between our ERP systems, TMS, dealing platforms, banks and accounting environment without unnecessary manual intervention?

4. Accounting, regulatory requirements and controls: Can the environment support our IFRS 9, governance, audit and applicable regulatory processes?

5. Reporting and decision-making: Can treasury, the CFO and other stakeholders quickly see the information that matters and identify what requires action?

If the TMS cannot provide convincing answers across these areas, a long functionality list is unlikely to solve the underlying treasury problem.

Download the 40-Question TMS Buyer’s Guide

We’ve taken these principles and converted them into a practical evaluation tool for treasury teams. The TreasuryONE TMS Buyer’s Guide: 40 Questions to Ask Before Selecting a Treasury Management System for FX Risk Management gives you a structured framework to use during an RFP, vendor workshop or TMS demonstration.

The guide includes:

• 40 practical TMS evaluation questions
• key FX treasury evaluation areas
• vendor response and scoring fields
• evidence and notes sections
• a vendor evaluation scorecard
• an end-to-end FX demonstration scenario

Selecting a TMS for FX risk management? Don’t start with the software demonstration. Start with the right questions.

Get the 40-Question TMS Buyer’s Guide

The objective is not to buy a TMS. The objective is to create a better treasury environment. A successful TMS should help treasury answer five questions with confidence:

• What are we exposed to?
• What have we hedged?
• Are we within policy?
• What remains at risk?
• What requires action today?

The technology is there to help treasury answer those questions more accurately, consistently and efficiently. That is the standard against which a Treasury Management System should ultimately be evaluated.