Global Specialty Chemicals: FX Spreadsheet Risk and TMS Business Case
A global specialty chemical company hedges FX with spreadsheets. It has 22 currency pairs, 45 entities, and 300 monthly exposures. The treasury team of four uses a shared drive, email confirmations, and month-end manual consolidation. Last year, a $2.3 million EUR payable was hedged twice because two subsidiaries booked the same intercompany invoice, and a $1.1 million AUD exposure was missed entirely. The audit committee wants a TMS business case. Vendor proposals range from $450,000 to $1.2 million annually, with 9–18 month implementations. The company's FX policy requires 70–90% hedging of committed exposures and prohibits speculative positions.
1. Identify the root causes of the FX control failures and the specific risks they create.
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Root causes: no single exposure repository, entity-level spreadsheets, no intercompany elimination, and no pre-trade duplicate check. The EUR payable was hedged twice because two subsidiaries booked the same intercompany invoice and treasury could not see the offsetting entry. The AUD exposure was missed because exposure capture was incomplete, not because the hedge was wrong.
Risks: over-hedging creates speculative positions outside policy, under-hedging leaves earnings exposed, and manual email confirmations weaken audit trail and counterparty confirmation. The policy requires 70–90% hedging of committed exposures; without a consolidated exposure ledger, compliance cannot be demonstrated. The $2.3 million and $1.1 million items are symptoms; the control gap is exposure identification and netting before execution.
2. Build the business case criteria and recommend a phased implementation.
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Evaluate vendors on total cost, not license: implementation, integration to three ERPs and banks, FX exposure netting, hedge accounting, confirmations, SOC 1 report, and support. Quantify benefits: avoid duplicate and missed hedges, reduce manual effort, lower transaction costs from netting, and improve audit readiness. The four-person team may spend 30–40% of its time on spreadsheets; that is a real capacity cost. The $450,000–$1.2 million annual range is wide, so require a cost breakdown by module and user.
A phased approach reduces risk: Phase 1-exposure capture and intercompany netting; Phase 2-hedge execution and confirmations; Phase 3-accounting and bank connectivity. Do not buy the most expensive suite first. Require a pilot with one region and measurable control tests before full rollout. The business case should show payback from risk reduction and efficiency, not just headcount savings.
3. Design a dashboard to monitor FX policy compliance and hedge effectiveness.
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Dashboard fields: gross and net exposure by currency, hedge ratio versus the 70–90% policy band, hedge horizon, outstanding derivatives, counterparty credit exposure, and policy breaches. Add effectiveness metrics: prospective and retrospective test results, cumulative ineffectiveness, and forecast accuracy of exposures. Control metrics: exposures captured by source, intercompany eliminations, late or missing exposures, and confirmation matching.
Use red, amber, and green thresholds: a hedge ratio outside 70–90% is red; an unhedged committed exposure above a materiality threshold is red; a missed confirmation is amber. The dashboard should be daily for exposure capture and weekly for hedge performance. The audit committee needs evidence, not just totals, so drill-down to entity and invoice level is essential.