Restoring Health to an Ailing Balance Sheet Hedging Program

Minneapolis-based medical device manufacturer Medtronic has a straightforward, six-word mission: Alleviate pain, restore health, extend life.

That mission has served the company well. From its formation as the inventor and producer of the world’s first implantable pacemaker in the 1950s, Medtronic now makes devices that treat 70 different conditions, has sales in more than 150 countries, and does business in 60 currencies. However, as it grew into a global organization, its foreign exchange (FX) risk management processes began causing pain, not alleviating it.

Medtronic hedges balance sheet exposures in about 30 currencies. “We hedge to offset the risk to the balance sheet when one of our legal entities has a balance—monetary assets less liabilities—in a currency other than their functional currency,” explains Tim Husnik, senior treasury director. “For example, if a legal entity in Europe has balances in Swiss francs, we consider that to be a balance sheet exposure. If the balance in a given currency is significant, we consider hedging with derivatives. Overall, the program is about $5 billion in size.”

Six legal entities execute balance sheet hedges, with a cadence ranging from weekly to daily. “It’s the most active foreign currency risk management program within Medtronic,” Husnik says. “Because our exposure profile changes daily, the hedges need to be updated on at least a weekly basis.”

A few years ago, Medtronic’s treasury group managed the balance sheet hedging program manually. They used the FXall trading platform, “but we determined all our exposures manually,” Husnik says. “Three people would spend about 10 hours a day in SAP, running reports on our balance sheet exposures. Then they would build FX forecasts in Excel files and upload that information to FXall. Basically, we were doing everything manually except for the initiation of trades, which happened in FXall.”

FXall was connected to Medtronic’s Reval treasury management system, but the lack of information sharing with SAP and other software tools meant Husnik’s team wasted a lot of time moving data from one system to another and reconciling information among the technologies. “Every team member was spending a huge amount of time dragging and dropping, copying and pasting, so we didn’t have time for more strategic work,” he says.

Not only that, but “there was much room for manual error,” he adds. “If we had a $100 million euro exposure and someone accidentally keyed in that positive number as a negative number in Excel, we might place a hedge in the wrong direction. Not only would that not eliminate risk, it would actually double the risk. Even if our data entry was 99 percent accurate, the 1 percent that might have some kind of mistake had the potential to cause a huge and costly problem.”

Intercompany hedging was even more fraught. “In that environment, our system of record for intercompany hedging was actually Excel,” Husnik reports. “Treasury staff would create and account for the hedges entirely in spreadsheets. Clearly, we needed a more sophisticated solution that would reduce the staff time required as well as the risk of errors.”

The treasury team performed an informal needs assessment and decided to implement the AtlasFX risk management platform. Vivi Zhou, a treasury staff member, took over as the single point of contact working with Atlas Risk Advisory to connect AtlasFX with FXall and Reval. Although she retained other responsibilities throughout the project, Husnik was able to set aside “a big chunk of her capacity” to manage the project. She built a team of internal stakeholders, and together with the vendors, they developed a novel three-way connection among the solutions.

“This was a cross-functional project that involved many people in treasury, because these are systems that we all use regularly,” Husnik says. “It also required a lot of coordination among AtlasFX; the configuration team at FXall, which is a Refinitiv company; and Reval. There were numerous sub-projects happening at once, and having a team member dedicated to the project helped us keep everything on track.” Despite the project complexity, Medtronic deployed AtlasFX and set up all the necessary interfaces within just three months.

Now, straight-through processes automatically move information about currency exposures and hedges from each of the solutions to the others. Medtronic staff can log into the AltasFX platform and have immediate visibility to the company’s global FX exposure data across all its legal entities and currencies. With a few clicks, they can align exposures to hedges, determine needed trade adjustments, and send the trade requests to FXall for execution.

“It sounds like a dream compared with what we had before,” Husnik says, “but we click a few buttons, and the external trades are generated. There’s a control pause where someone has to sign off on the trade, but once it’s approved, it just executes. Then the trade data flows back into AtlasFX—and, to my understanding, this was the first implementation to do that. Most companies have trades flow directly to the treasury management system, but we wanted to automate internal trading as well.”

Once Medtronic’s external trades are complete and their data is in AtlasFX, the treasury team clicks another button to generate internal trades using the same exchange rates as the external trades. Then all the trade data flows through to the Reval treasury management system. “The internal trades, between our external trading entity and the internal legal entities requiring currency risk management, happen back-to-back with the external trades,” Zhou reports. “That moves the hedge to the legal entities but without the staff time or risk of error we experienced when managing this in spreadsheets.”

In fact, she adds, the overall process has dramatically reduced the amount of time treasury staff spend on FX risk management: “We have completely eliminated all the offline, ad hoc, and manual work that used to be central to our balance sheet hedging program. The automation is saving our team from having three people pulling data for 10 hours a day, multiple times a week. Now those team members can spend a lot more time building reports and analyzing data related to FX risk. One of them has even built a dashboard that makes it easy for executives to visualize Medtronic’s FX exposure profile.”

“Now we can assess the company’s FX exposures on demand, in real time, which leads to better risk management decision-making,” Husnik adds. “As the U.S. dollar appreciated against other currencies this year, the cost of all our hedges increased substantially. But with all the time this initiative has freed up, we’re able to do things like deploying efficient-frontier Value at Risk (VaR) modeling to help us figure out which of our 60 currencies we should hedge. We can make more strategic decisions to get the most bang for our buck.”

The newly connected systems also provide better visibility into Medtronic’s banking relationships. “We have been able to approach lower-performing banks to get them to optimize their pricing,” Husnik concludes. “That is something we just never had time for before. Ultimately, this initiative gave the treasury team the ability to add value in new ways.”