Highly Customized FX Risk Management System Brings ‘Infinitely’ Better Results Than Excel

When General Electric announced in 2021 that it would be separating into three businesses—GE HealthCare, GE Aviation, and GE Vernova—the new companies’ treasury teams faced a huge amount of work. Historically, core treasury activities had been centralized within GE corporate, but each of the divested companies would need its own treasury organization, optimized to serve the needs of its business.

GE HealthCare (GEHC) manufactures MRI and CT scan machines; ultrasound equipment; and contrast media, such as dyes that patients ingest to help doctors understand what is happening inside their bodies. GEHC sells these devices to hospitals, clinics, universities, and research facilities around the world.

“We serve the entire spectrum of the medical industry,” says treasury operations manager Andrew Walecka. “We do business in 160 countries and have material FX [foreign exchange] exposure across 40 currencies.” As GEHC was preparing to spin off from GE, its FX hedge portfolio totaled $16 billion. These hedges derived from two primary types of exposure.

“The first area of currency risk is our long-term P&L,” Walecka explains. “Depending on where we sell goods and where we manufacture them, we may have a net risk to earnings based on our currency profile until we recognize revenue and expenses. So we hedge that P&L risk over a period ranging from three months to six quarters.

“The second leg of our currency risk management is our balance sheet hedging program,” he continues. “In just about every country, we have legal entities with some sort of remeasurement risk. Prior to this project, we would hedge all those risks one-to-one and go to Wall Street with a lot of trades. We might have dollar entities going to the Street with their euro exposures and euro entities going to the Street with dollar exposures. We had a very grossed up set of derivatives, which we needed to resolve as we stood up our new treasury function.”

Walecka and his colleagues decided that a many-to-one approach would improve the efficiency of hedging operations for the newly independent GEHC. “Reducing our derivative notional was a priority for our treasurer,” Walecka says. “We decided to build out our FX risk management to aggregate exposures and go to the Street with fewer external trades, carving out internal trades as appropriate. To reach this end state, we needed to undertake an end-to-end overhaul across resources, processes, and technology.”

As GEHC’s treasury team designed their desired future state, it became clear that deploying the right technology would be crucial, especially since the team would be leaner after the divestiture. “Mother GE had a variety of exposure-management tools, many of which were custom and homegrown, that had built up over time,” Walecka says. “We couldn’t take those tools with us, nor were we going to have the IT infrastructure to support an array of highly customized tools.”

Increasing the challenge, the new company had less than a year to build out the treasury—and currency risk management—function. Through workshops with key stakeholders, the treasury team defined a set of detailed requirements. Then they participated in demos for various FX risk management solutions and assessed them using a predefined scorecard. In the end, the team selected AtlasFX and worked with AtlasFX and PwC to tailor the solution to GEHC’s unique needs.

“The healthcare business is tightly regulated in most places, so we require distinct legal entities in nearly every country where we do business,” Walecka says. “Our corporate structure is a large web of group companies in 160 countries selling to distributors around the world, with FX risk falling out at varying points. We needed to be able to replicate our complex legal entity matrix and forecast against it so that we could consolidate information while also isolating relevant flows and choosing which flows to hedge.”

Incorporating the legal entity matrix into AtlasFX was one of the most challenging aspects of the deployment. “We had to define internal settlement timing for all our different exposures,” Walecka says. “We have very unique rhythms for internal settlement between legal entities, and the timing of internal hedges determines the rates used for those transactions. The sheer number of entities in our matrix, combined with the need for many-to-one aggregation, in addition to the need to be able to perform specific settlement actions during finite time periods, meant we required a significant amount of customization to the AtlasFX platform.”

The team made a wide range of small trades to test the new system. “When you’re designing a system, even if you think you’re capturing every possible scenario, you’re not,” Walecka asserts. “So we had a period where we did lots of penny tests, trying to test every possible scenario: early closeout of a trade, changing the amount, shifting the maturity dates early, etc. It sometimes felt like we were running through infinite scenarios—we tested every different type of trade, trade action, and legal entity jurisdiction.”

Now that the project is complete, AtlasFX ingests data on corporate financials—including historical data—from both of GEHC’s enterprise resource planning (ERP) systems. It pulls in data on outstanding derivatives from the company’s accounting system. And then the treasury group adds forecasted transactions to the mix.

“GEHC forecasts our revenue and cost profile en masse,” Walecka explains. “My team then isolates the main entities that have material FX risk and, in essence, we plug the macro forecast into our legal entity matrix and load that into AtlasFX. Hedge accounting would not allow us to just hedge an exposure or flow at the top of the house, so we have to specify the legal entities with the associated risk profile before we place the hedges.”

The system develops an actionable forecast of FX risk, calculates each operating entity’s net exposure, and produces a hedging recommendation. For balance sheet hedges, GEHC treasury generally initiates a derivative transaction in the suggested amount, Walecka says. “From the P&L perspective, it’s a little more subjective, since we take a layered approach to hedging: In the current quarter, we hedge a high percentage, but that drops off in each subsequent quarter. So, when we get the P&L hedging recommendations, we discuss them and look at market factors, at the carry we can earn on forward hedges, as well as our confidence in the forecast. Then we determine how to get to specific hedging targets over specific upcoming quarters, to build that P&L coverage over time.”

GEHC analysts enter the trades, then Walecka reviews and approves them. Trades over a certain dollar amount, or for a longer duration, require a second approval. Approved trades are transferred into 360T, and the company’s traders in Dublin make them happen.

GEHC also developed custom AtlasFX reports. “Within our legal entity matrix, we have a labyrinth of cross exposures, many of which net out,” Walecka says. “Some of the reports that we developed translate all exposures to the dollar and consolidate them so we know our overall exposure. For example, we have a big manufacturing entity in Norway that sells into Europe. Those relationships create NOK-euro exposures and vice versa, but it would not make sense to hedge NOK-euro one way and euro-NOK the other.

“It would be utter madness to forecast and hedge everything on a currency-pair basis,” he adds. “A lot of the reporting involves rolling exposures up to a consolidated basis so we know where we are in terms of P&L and balance sheet exposures on a netted USD basis. And then we go to the Street with a finite number of trades, which we carve out internally to give each legal entity its own internal hedge. This enables the entities to mitigate their risk while not taking steps that don’t make sense for GE HealthCare on a consolidated basis.”

Treasury works closely with the GEHC tax team to ensure that rates are reasonable on the internal transactions. “Tax and transfer pricing authorities tend to look at internal transactions fairly closely,” Walecka explains. “If FX made an entity’s profit percentages too high, there would be tax consequences in certain jurisdictions. But if the entity’s profits are too low because of FX, they might accuse us of profit shifting and tax us anyway.”

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See also:

• How One of the World’s Largest Conglomerates Brought FX Under Control

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Walecka says this approach has reduced the notional of GEHC’s FX trades by $8 billion to $10 billion a year, “which inherently saves us effort in the number of trades we make—and money in the bid-ask spread we’re paying. Consolidating company trade settlement with our middle office results in significant efficiencies, with real dollars saved.”

The new process also provides the treasury group with much better visibility into currency risks companywide. “It helps us isolate oddities much quicker and analyze results, particularly the exposures around balance sheet remeasurement,” Walecka says. “The improved efficiency in our processes has freed up time we can use to investigate anomalies. So when stuff pops up as we’re closing the books, we can better understand what is happening.”

GEHC’s new approach to FX risk management is a huge improvement over its legacy method of calculating exposures. Walecka attributes this partially to close collaboration among the affected teams. “Years ago, GE HealthCare treasury would determine—in spreadsheets—what hedges to take and enter that into the GE system, which would basically throw it over a fence,” he says. “The Dublin team would do their thing, and GE accounting would do their thing. Now, as an independent company, everyone involved is on the same team. Sitting together, in the same room, and going through considerations was really beneficial to this project. We put a lot of effort and focus into understanding what was important to each function. It’s very important in a project like this to get out of your silo.”

It’s also important to properly scope the initiative. “I vastly underestimated how much work this project would be,” Walecka says. “When we first got started, my initial thought about all the PwC resources who were helping was, ‘Do we really need all these people? Is this overkill?’ But it was not overkill at all. Fortunately, our treasurer understood the complexity of what we were planning to do—better than some of us who were down in the weeds and looking only at our respective silos.”

Despite the complexity, Walecka believes, the initiative was well worth the effort. “Being a publicly traded company, we need to ensure everyone has confidence in the accuracy and security of the numbers rolling through,” he says. “The accuracy, speed, and confidence in the exposure data we are now generating are infinitely better than with our manual, Excel-based approach. We are in a much better place, and we continue to improve.”