Winning the Battle Against Won Exposures

For more than two decades, the digital marketplaces of eBay Inc. have brought together buyers and sellers around the world. The company’s Korean platform is a top brand in Korea and one of the top five e-commerce marketplaces in the world by sales volume. That explains why exposure to the Korean won presents a significant foreign exchange (FX) risk for eBay globally.

“Revenue and income derived from our Korean operations are denominated in Korean won,” says Shan Anwar, director of investments and payment integration for eBay Inc. “Depending on where FX rates are, Korea is usually in the top five markets for us in terms of currency risk.”

eBay won an Alexander Hamilton Award several years ago for its innovative approach to mitigating exposures of the dollar-functional parent company to European subsidiaries’ FX risk. If, for example, a euro-functional sub is carrying exposure to the British pound (GBP), the subsidiary mitigates its own risk by executing a standard hedge that sells pounds and buys euros. Then a euro-based eBay entity buys a security that delivers an equivalent amount in dollars at the same time the euro-pound forward expires. The solution mitigates FX risk and allows for hedge accounting at every level of the company.

“Conceptually, for the treasury group, our first thought was: ‘We’re doing this in Europe, and it’s working. Let’s just lift and shift that into Korea,’” Anwar says. “We wanted to have Korean won hedges, then implement a corporate-level investment strategy that would generate a synthetic forward hedge with a U.S. dollar investment placed at a different legal entity.”

In reality, it wasn’t that simple. “Our local Korean business would need to buy the forwards that hedge the won risk as well as purchase the investments to complete the hedging strategy,” Anwar explains. While the Korean leadership team understood the benefit to eBay as a whole, they wanted to make sure they understood the FX impact that the proposed program might have on eBay Korea. The corporate tax team was also concerned that the program at the local level could have unintended tax consequences for parent company eBay Inc.

Having the Korean entity purchase the synthetic U.S. dollar hedges was not an option. “There were legal issues prohibiting eBay Korea from buying U.S. securities directly from the market,” says Minju Lee, FX trading manager in eBay treasury, who was located in Korea at the time. “eBay Korea would have to buy U.S. securities through a broker, which would reduce the cost-effectiveness of the program.”

To be sure the FX program would satisfy the objectives of the treasury, accounting, and tax functions, as well as meeting the needs of eBay Korea, corporate treasury proposed executing an internal derivative between eBay Korea and a corporate eBay treasury entity. This would mitigate FX risk at the local level. However, it was soon clear that local rules prohibited derivative transactions to be executed with a non-financial entity.

“Corporate treasury went back to the drawing board,” Anwar says. They worked with an external financial partner to come up with a solution: eBay Korea would execute its won-denominated trade with a bank, then eBay Inc. would execute the offsetting U.S. dollar trade with the same institution.

The approach was not without complications. “We would have to clear each trade with the regulator,” Lee says. “We understood that we would have to list all the securities we were interested in, then report anytime we would buy or sell.”

Corporate treasury began pushing the idea internally. “We engaged with our local Korean leadership team and external counsel in Korea, walking them through the program,” Anwar says. “It was clear that what we were doing was unique among multinationals operating in Korea, so there were a lot of questions. My philosophy is that if an idea is the right one, you should continue to push it, politely but persistently, until all avenues are exhausted.”

After extensive conversations, the eBay Korea leadership team better understood the benefits for eBay Korea as a standalone entity, and eventually the eBay Korea leadership team was able to independently approve the proposal. “Then we had informal conversations, through counsel and the local team, with the Central Bank of Korea,” Anwar says. Once they got approval, they moved forward with implementation.

“Setup of the process required quite a bit of effort, from coordinating the FX trades on the FX team side to coordinating the purchase of the investment securities with the investment team,” Anwar reports. “Given the time zones, operationally we had to make sure that we let the local team in Korea know a full day in advance of when we needed to purchase a security. We also had to develop the reporting infrastructure.”

The project took about two years, from start to finish, but eventually eBay Korea executed a pilot trade to test the process with Korean regulators, as well as with internal reporting and accounting groups. The pilot demonstrated that handoffs were successful among the treasury investment team, the FX team, middle office, and accounting. eBay leveraged bank reporting to automate as much of the process as possible and to minimize the risk of errors.

Shortly thereafter, eBay Inc. made a strategic decision to hedge exposures via a net investment hedge. (For more information on that project, look for the upcoming article about the 2020 Alexander Hamilton Awards in Financial Risk Management, due to publish next week.) Because of this change in direction, the company is not routinely using the FX process it developed for eBay Korea. Still, says Anwar, the initiative was worth the effort.

“We solved the technical challenge of getting the appropriate accounting treatment when we implemented the euro program several years ago,” he says. “But the Korean version brought up a slew of issues, both internally and with regulators. Moving forward with the program in Korea required us to navigate fairly complex regulations.”

Anwar believes the solution was successful primarily because corporate treasury took the time to develop relationships with the local team in Korea. “We are all one eBay,” he says, “but there are specific rules, specific thought processes, that the local team may be aware of that we at headquarters might miss. Sometimes it’s easy for the treasury function in a large multinational to lose sight of the fact that treasury activities can be very different in different countries. A centralized treasury may gloss over the importance of engaging with the local team, and may look at treasury processes as one-size-fits-all. That is a mistake. The way we engaged with the local team in Korea was the number-one driver of this initiative’s success.”

Lee concurs: “The corporate treasury group partnered with the local Korean leadership team and clearly communicated the program’s strategy and goals,” she says. “But they deferred to the local team to decide the best route to achieve those goals, and to ultimately have the final say in bringing the project to successful completion.”