Empowering Médecins Sans Frontières (MSF)/Doctors Without Borders to take control of FX uncertainty

Médecins Sans Frontières (MSF)/Doctors Without Borders is an international humanitarian organization, best known for their medical assistance in conflict zones and in countries affected by endemic diseases. MSF manages operations in more than 70 countries, providing medical support in the afore-mentioned areas. As a non-profit organization, MSF receives funding from individual donors and private institutions from all around the world. This global footprint generates significant cash flows and financial transactions in multiple currencies, resulting in high foreign exchange (FX) exposures. Previously, these were not adequately managed through a structured FX risk management process.

Three key problem areas

The decentralized and informal nature of MSF’s FX risk management process increased their exposure to currency uncertainty, with both inflows and outflows lacking an aligned approach. Zanders highlighted the following three problem areas:

• No centralized FX hedging strategy. Incoming flows, such as funds and grants, received globally by MSF entities with fund-raising activities (“funding entities”) were directed to one of the five Operational Centers headquartered in Europe to fund field operations. Funds were transferred in their received currency which often differed from the functional currency of the Operational Centers (EUR). The Operational Centers then bore high FX exposures on the received funds as there was no FX hedging strategy in place. The market fluctuations of unhedged currencies resulted in deviations from MSF’s annual target budget.

• Funding of field operations with limited FX risk management. From the Operational Centers, quick transfer of funds to the relevant field operations was prioritized, often without considering FX implications. This posed challenges to the Operational Centers when applying FX risk management techniques as date and amount of outgoing funds was not always known. 

• Insufficient provisions for funding unpredictability. Managing the FX exposure at the Operational Center level was challenging due to uncertainties in the timing and size of grants, variation in income due to inconsistent global performance, lack of internal communication on currency needs, seasonal income peaks and unpredictable funding requirements from their field operations.

A two-step solution

Through discussions, it became clear that MSF’s priority when it came to FX risk management was to safeguard the income from grants and the distribution to field operations, by protecting their annual budget rate. We applied two-steps from our Zanders’ Financial Risk Management Framework to deliver this objective.

• Step one: Identification and Measurement

In the first step, our objective was to identify the FX exposures to determine the correct approach to manage the FX risks. This led to a high-level quantification of the FX risk for each of the five Operational Centers.

To manage this risk, we advised MSF to establish an FX risk management function to manage the FX risk in a coordinated and centralized manner. This allowed for the creation of an FX hedging program consisting of a 12-month rolling forecast of inflows and outflows. This enabled MSF to hedge their net exposures for the next budget year. If the forecast had a high level of accuracy, MSF could hedge a high ratio of this forecast.

By centralizing the FX exposure, net amounts could be hedged centrally to protect the organization from large FX volatility. The hedging contracts would then determine the annual budget rate for that year, and thereby achieving the objective of protecting the annual budget rate.

• Step two: Strategy & Policy

Here, we designed a future FX risk management process and guidelines, incorporating best market practices. We developed an ‘in-common platform’ concept, enabling MSF to centralize and standardize their FX risk management process. This was formalized in an FX risk management policy.

A structured approach to FX risk management

The introduction of an FX hedging program has given the MSF team more clarity on their FX risk exposure. This enables them to manage fluctuations in currency more proactively and pragmatically to minimize the impact on their budgets and optimize funding for their field operations.

“The result is extremely positive,” says MSF’s Treasury Lead. “We used the FX hedging program to determine the annual budget rate for next year. With this, we are very close to our budget, and we have managed to protect at least 80% of the funds and grants for the budget.” Furthermore, the FX hedging program inspired MSF entities to tackle other treasury challenges collectively as opposed to addressing them individually.

However, there are still further improvements ahead. “There are challenges we still face around the accuracy of the forecast,” added the Treasury Lead. “This is something we still need to work on. MSF is now sometimes over hedged or underhedged. To accommodate this, I ask the entities to update the rolling forecast on a regular basis.”

For the future, MSF is considering hedging more than 80% of their budget, but this is dependent on further analysis and improved accuracy of the forecast and performing variance analysis comparisons on the forecast.

The introduction of a comprehensive FX risk management policy has also been crucial in giving MSF more control over their cashflows. By clearly defining stakeholder roles and responsibilities and emphasizing the principle of segregation of duties, MSF has introduced a centralized approach for managing their FX exposures. The group-wide FX hedging program promises significant financial and operational benefits. This strategic shift empowers MSF with greater control over its financial landscape. With a solid variance analysis mechanism on the horizon, MSF is assured to enhance cash flow forecasting and expand its FX hedging program with confidence.

Leverage our FX risk expertise

For organizations eager to navigate the complexities of FX risk and enhance their financial resilience, Zanders stands ready to share its insights and expertise. Contact us today to explore tailored strategies that can transform your financial operations and secure your organization's future. Together, let's unlock the potential of strategic FX management.

For more information, visit our NGOs & Charities page here, or contact Daan de Vries.