Last year, some of the largest firms among the Am Law 100 blamed tepid growth the prior year on unfavorable exchange rates. Currency woes for many firms only got worse in 2016, especially after the United Kingdom’s surprise decision to withdraw from the European Union. The euro is now worth about $1.06, while the British pound has dropped to about $1.23, flirting with historic lows.
Even before Brexit and the election of Donald Trump, events such as financial turmoil in Greece and China’s decision to devalue the yuan had been contributing to rising exchange rate volatility. These challenges followed a period of global expansion for law firms, forcing them to acknowledge their vulnerability to currency swings.
To mitigate the uncertainty that comes with earning revenue in varied currencies, some law firms have started hedging currency, a practice that is more common among big multinational companies.
Weil, Gotshal & Manges began hedging currency in 2015 and did it again in 2016, said executive partner Barry Wolf. The firm hedged its profits in the U.K. and Europe, which Wolf said turned out to work in the firm’s favor since both currencies depreciated compared to the dollar.
Overall revenue suffers when one or more of the currencies that make a firm’s revenue declines against the dollar, while pay discrepancies between partners in different countries widen if the foreign based-partners are paid in local currency. Several global firms, including Hogan Lovells, White & Case and Mayer Brown, said last year that currency volatility depressed their financial results in 2015. (The firms didn’t respond to requests or declined to comment for this article.)
Still, only a “minority” of Am Law 100 firms have begun to hedge currency, said Paolo Clemente, director of foreign exchange and commodities for the Americas at Citi Private Bank. “Without a doubt, it’s been growing, slowly,” he said. He declined to identify specific firms.
“This is part of the way that firms are learning to become global businesses as opposed to very local operations,” Clemente said. “We’ve been educating law firms on how to mitigate their foreign currency exposure.”
When firms hedge currency, they enter an agreement with an institution, such as Citi, to change future revenue into dollars at an agreed-upon rate, no matter where the exchange rate stands when that revenue comes in the door.
“There’s an agreement today to exchange certain amounts of monies at a particular maturity date in the future,” Robert Hodrick, an international business professor at Columbia Business School, said. “If [a law firm] is doing a lot of work in London, and they’re generating pound revenues, they would lock in a dollar-pound exchange rate.”
So if the revenue comes in pounds and the value of the pound drops, the firm is insulated from the decline. Likewise, the firm would forego any gains from a rising pound in relation to the dollar.
Citi said it does not charge law firms any fee for the service, which involves relatively negligible sums in the scope of global currency trading. Over $5 trillion is traded on average per day in the foreign exchange market, according to data released in September by the Bank for International Settlements.
Still, many law firms with large footprints abroad have so far decided not to hedge currency. Some firm leaders said privately that they are naturally hedged, meaning they earn revenues and profits in a particular foreign office in the same currency. They also say they’re simply not in the business of predicting what currencies are going to do.
In 2015, Citi Private Bank told The American Lawyer that a recent survey of 17 global law firms found that most firms were not doing anything differently in response to volatile foreign exchange rates. Some were considering hedging at that time, however.
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