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How startups and SMEs can mitigate currency risk

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By David Hodge, OANDA

Whether your company is a fledgling start-up or a rapidly-expanding SME, your organisation is likely exposed to currency risk. Even if you don’t have an overseas operation or sell directly to international customers, you may be importing goods or services or working with suppliers and vendors with overseas connections, which can leave your organisation vulnerable to FX risk and significantly reduce your profit margins. And given the recent spate of global trade wars has significantly increased volatility in the currency markets, now more than ever small companies need to be aware of risk associated with currency movements and understanding how to mitigate that risk while limiting losses.

By implementing an effective foreign exchange risk management strategy, your company can minimise FX exposure, limit foreign exchange losses and better manage the unpredictability of the currency markets. To avoid incurring an unexpected black hole in your balance sheet, you should consider these five practical steps to managing your FX strategy.

  1. Calculate risk exposure against profit potential

As a small or mid-sized company decision-maker, is it worth your while to expose your firm to foreign exchange risk? That’s a fair question to ask. If you’re primarily making smaller payments overseas, the need for a substantial FX risk program is relatively low. Yet if foreign exchange transaction activity is high, you’ll need a strong risk and volatility FX campaign in place, if only to accurately gauge the downside of rates decline against your currency position.

  1. Mitigate risk outside the FX market

Smaller companies can reduce FX rate risk and volatility by hiking costs for their goods and services in foreign markets. They can also curb potential downside risk by reaching out to international business partners and customers and asking to transact in a different currency, such as GBP or a reserve currency.

  1. Ensure you have accurate information

Given that information is paramount when conducting business overseas, you’ll want to connect with accurate and reliable foreign exchange data sets. For example, OANDA offers an Exchange Rate API[1] so rates are automated with the exact data companies need, when they need it. Make sure your forex data provider offers a reliable flow of accurate real-time spot and forward FX rates, providing everything you need to make an effective FX trading decision. This will not only make it much easier to track and transfer foreign currencies, but level the FX playing field so you can benefit from currency swings in your favour.

  1. Keep transactions in widely-used currencies

To reduce risk, SMEs should invoice overseas business partners, suppliers and customers in major currencies such as the pound, US dollar or euro. This reduces currency volatility and paves the way for overseas clients to grow more accustomed to dealing with major global currencies, which further eases the burden of FX risk for smaller companies.

  1. Be more aggressive about FX hedging

Working in tandem with foreign exchange specialists, small and medium-size domestic businesses should seek out opportunities to purchase foreign currencies when rates are in their favour. This gives companies a valuable hedge against weaker foreign exchange rates.

With proper strategies in place to mitigate foreign exchange risk, SMEs can not only limit losses, they can also open up a host of opportunities overseas. This may even enable them to profit from FX volatility in some cases. As such, it is essential that you create a blueprint outlining what FX risk means to your company, while establishing crystal-clear risk management goals and guidelines. Seek out experienced financial service providers who are accustomed to dealing with FX rate issues overseas.

David Hodge, Chief Executive Officer EMEA

David Hodge is OANDA’s Chief Executive Officer EMEA and Chief Marketing Officer, responsible for driving company growth across the region, as well as spearheading the firm’s marketing efforts worldwide. He has spent 10 years facilitating profitability, long-term growth and digital transformation with some of the world’s leading brokerage firms.

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Finance

Why indirect tax continues to cause headaches for the finance, IT, and tax teams

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By Roger Lindelauf, Director, SAP Centre of Excellence, Vertex Inc

 

Businesses across Europe continue to navigate a complex tax landscape as they attempt to automate their indirect tax determination and calculation requirements. However, many tax professionals use the limited functionality offered by their organisations’ ERP systems, or the in-house software developed by their IT departments to perform the task.

Unfortunately, these solutions are just not sophisticated enough to keep up with the frequent changes to the tax rules and regulations businesses are often subjected to across Europe.

Companies need to deliver accurate and timely finance reports to avoid being fined by tax authorities or being ear-marked for an audit. As a result, tax teams are under increasing pressure to make sure their calculations are right first time, every time. But with organisations typically reliant on the solutions available to them to automate the process, errors are all too frequent and leave businesses wide open to compliance failures.

To look in more depth at the raft of challenges experienced by tax, finance and IT professionals across Europe who use SAP to manage their indirect tax automation process, we recently surveyed their views. The research showed that one of the biggest challenges for 38% of our respondents, is managing tax requirements for multiple geographic jurisdictions, and for a 30%, it’s staying on top of legislative changes to tax and ensuring they’re applied effectively within the solution. And if the tax landscape wasn’t already complicated enough, 30% of respondents cited managing disruption caused by COVID-19 as an ongoing issue, closely followed by Brexit for 29%. Managing accounts payable (AP) determination was also highlighted as a painful task for 29%.

Another cause for concern flagged in the research is the lack of connection between the needs of the tax team and IT’s ability to understand and act upon these requirements using their tax automation solutions. Almost 30% of respondents admit that IT’s lack of knowledge in recognising how to keep up with the solution updates is a real issue. When asked about the limitations of their current indirect tax solutions, 41% agree that there are insufficient internal skills within the business to manage them effectively.

 

Joining forces for a future-proofed tax automation

The frustrations felt by tax and IT when it comes to tax automation are made abundantly clear in the research. Along with finance, tax and IT need to work together to find a better way to manage their indirect tax calculation and determination needs. They also need to agree on a future-proof solution capable of managing whatever changes are likely to be applied to tax rules and legislation further down the line.

When asked about their key requirements from a third-party indirect tax automation solution, tax and finance pointed to reliability, usability, and efficiency for integration as their key priorities. APIs are another future requirement to help build system implementation processes that are more streamlined and create scalability throughout all business and global operations.

Increasingly, we’re seeing more and more businesses across Europe turn to more sophisticated third-party tax automation solutions, accelerated by the adoption of SAP S/4HANA. There’s been a real shift towards organisations opting for a solution that integrates into SAP, improving accuracy for VAT applications on transactions, automatically.

Joining forces with key stakeholders is a crucial step to finding an approach that works successfully for all. However, with tax regulation complications showing no signs of diminishing any time soon, can businesses really afford to stay as they are and take a chance on tax compliance or is it time to invest in a new, more reliable, efficient, and future-proofed approach?

A study carried out by independent market research specialist Vanson Bourne. 420 finance, tax and IT decision makers were questioned across Europe.

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Banking

Cryptoassets and the European Central Bank’s new “PISA” Framework

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Alpay Soytürk, Chief Regulatory Officer Spectrum Markets

 

The European Central Bank has published a new oversight framework for electronic payment instruments, schemes and arrangements: “PISA”. In doing so it is further expanding its supervisory portfolio and entering into an area of significant public interest as the framework includes crypto-assets.

Crypto payments

The PISA framework will cover crypto-asset-related services but only to the extent they are relevant to the task of promoting the smooth operation of payment systems, which is as central an element of the ECB’s mandate as the definition and implementation of monetary policy, foreign exchange operations or the management of the euro area’s foreign currency reserves.

As an example of the scope of crypto-payments subject to the PISA framework, the ECB has highlighted the acceptance of crypto-assets by merchants within a card payment scheme and the option to send, receive or pay with crypto-assets via an electronic wallet. There seems to be a clear focus on payment tokens that does not include utility tokens, security tokens, Initial Coin Offerings or Security Token Offerings.

 

Out of scope

PISA excludes services where the transfer of value has only an investment focus. It also excludes services for which the transfer of value is executed solely in banknotes and coins, paper cheques, paper-based bills of exchange, promissory notes or similar. Paper-based vouchers or cash card issuance are also not in scope. The latter refers to cards that are issued for the purpose of depositing funds on it at the disposal of the receiver of a payment.

In other words, PISA focuses on all mechanisms that are based on electronic payment instruments with a general purpose, i.e., whose value transfer function is not limited to a single type of payment recipient or specific use, including instant payments and payment mechanisms in the B2B-sector, plus the usage of electronic payment instruments to place or withdraw cash.

 

Regulatory context

The ECB defines electronic payment instruments as (sets of) personalised devices, software or procedures agreed between the end user and the payment service provider to request the execution of an electronic transfer. In practice, this covers payment cards, credit transfers, direct debits, e-money transfers and digital payment tokens.

Consequently, there are overlaps with the PSD2[1] rather than with the MiCA[2] or the DLT Pilot Regime[3] proposals. As such, the ECB is expanding the scope of definitions to take into consideration the technological progress of recent years.

For the ECB, all representations of value backed by claims or assets denominated or redeemable in euros are in scope as well as other digital assets that are accepted under the rules of a scheme for payment purposes or to discharge payment obligations in euros.

 

Oversight and enforcement

The ECB maintains a Crypto-Assets Task Force, and it was this body’s analysis that led to the conviction that there are potentially material financial stability risks, and risks to the safety and efficiency of the payment system as a whole, should payments via stablecoins remain unregulated.

Following a 2020 public consultation, this finally led to the establishment of the PISA framework. However the ECB lacks the infrastructure to perform all the relevant surveillance and enforcement tasks to ensure the very highest levels of governance.

Consequently, for oversight purposes, i.e. the collection and assessment of information and implementation measures, the ECB assigns primary oversight responsibility to the national central banks within the Eurosystem.

The ECB has explained that, in this assignment, it emphasises proximity to the entity subject to oversight (e.g., the country of incorporation, national laws attributing specific oversight responsibilities to central banks concerned, subject to any Treaty-based requirements).

“Schemes” and “Arrangements”

PISA aims at the governance bodies of so-called “schemes” and “arrangements”, ensuring they behave in compliance with the ECB’s oversight expectations.

A scheme is defined as “a set of formal, standardised and common rules enabling the transfer of value between end users by means of electronic payment instruments”, managed by a governance body – while in practice, the governance body and the payment services provider are identical. Examples of schemes are card payment schemes, e-money schemes, digital payment token schemes, credit transfer schemes and direct debit schemes.

The ECB defines an “arrangement” as “a set of operational functionalities which support the end users of multiple payment service providers in the use of electronic payment instruments”. An example of an arrangement is an electronic wallet. The definitions, which are cryptic in the most literal sense, are designed to cover the entirety of the relevant area which would be difficult with classic categorisations where a service is provided organisationally and physically decentralised.

Looking to 2022

PISA was approved by the ECB’s Governing Council on 15 November 2021 and becomes applicable as of 15 November 2022 for schemes that are already subject to oversight by a national central bank within the Eurosystem. New schemes and arrangements have to abide by the PISA rules within one year after being informed that they fall within its scope.

 

[1] Directive (EU) 2015/2366, the “Payment Services Directive (PSD2)”
[2] Regulation on “Markets in Crypto-assets”
[3] Regulation on a “pilot regime for market infrastructures based on distributed ledger technology (DLT pilot regime”)

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