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Navigating the Complexities of FX Execution and Currency Risk

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Hans Jacob Feder, Ph.D., Global Head of FX Services at MUFG Investor Services

The challenges of managing currency hedging programs in today’s global landscape are multifaceted. Navigating the complexities of price execution and currency risk can be significantly time-consuming and costly for in-house teams. In particular, managing currency hedging programs in the Japan and China foreign exchange (FX) markets requires a unique approach, as timing and strategy are crucial given the FX markets’ complexities in these evolving financial ecosystems.

The FX Landscape in Japan and China

Japan and China, two of the world’s economic powerhouses, possess distinct FX market dynamics. Japan has a well-established financial sector and a lot of liquidity, which means that Japanese investors can invest a large proportion of their assets abroad while still having a strong and advanced domestic economy. Hedging FX risk is increasingly important, as it allows these domestic investors to focus on the investment strategy and the return of the foreign currency denominated assets without the volatility of the exchange rate getting in the way. The market requires a provider capable of delivering a highly efficient operating solution with prompt response times in domestic and investment time zones.

China operates a restricted currency regime, with the Yuan trading in a fixed band against the US dollar. It is a rapidly growing market with evolving regulatory frameworks. Since the domestic Yuan is a restricted currency, FX management uses the deliverable offshore Yuan, settling in Hong Kong. The domestic market in China is evolving independently from the local market, so many local participants are looking for a partner with a long heritage and strong balance sheet who can help them navigate the complexities and challenges of hedging FX across currency pairs. It’s essential that providers in this market have flexibility and are committed to servicing the Asian markets for the long term.

How MUFG Investor Services Can Help

It is critical for FX clients to work with a trusted provider with deep experience in both markets. This approach typically combines fully multi-broker/dealer electronic execution with complete transparency, ensuring clients obtain competitive prices and adhering to the best execution standards so that clients are not confined to a single pricing structure.

With the MUFG FX Overlay solution, clients gain access to a comprehensive, cost-effective, and transparent currency overlay hedging solution that mitigates FX exposure risks within portfolios or hedged share classes. It is an automated, flexible, and cloud-based service that empowers clients to tailor every aspect of their FX overlay program—ranging from hedge ratios, frequency and NAV triggers to tenors and execution methodology.

Client Feedback

Client feedback regarding MUFG FX Overlay Services has been overwhelmingly positive. By entrusting the process to MUFG Investor Services, clients can concentrate on their core business and services. Cost efficiency is optimized through deep experience in trading FX and providing passive currency overlay, eliminating the need for clients to take on operational risks.

The dynamic markets in Japan and China demand a specialized approach to currency hedging programs, especially in the face of the complex challenges presented by FX management. MUFG Investor Services is committed to transparency, cost efficiency and continuous improvement as a trusted partner for businesses navigating these intricate FX landscapes.

Focus on the Future

For customers in China, bespoke solutions for execution are necessary due to the lower liquidity in their markets compared to Japan. Being able to execute in multiple time zones is helpful as the offshore Yuan trades in Asia and Europe. The timing, method and form of execution are critical factors that must be considered.

As volatility increases, and markets become more complex and fragmented over time, MUFG Investor Services’ unique platform that sources liquidity from a diverse panel of banks across time zones, while having a single counterparty relationship with the customer, is becoming increasingly relevant. Having MUFG Investor Services own the FX process end-to-end—from data and calculation to execution and reporting—and keeping up to date with the changing landscape will prove to be vital to customers in both markets.

The FX team is committed to improving the client experience by increasing features and capabilities to ensure clients continue benefiting from our solutions. MUFG Investor Services provides exceptional attention to detail and a proven track record of delivering solutions to clients worldwide.

This article was originally posted in Funds Global Asia.