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Control staff urged to consider secondary effects of Swiss National Bank move #traderfundingrisk #CHF

Control staff urged to consider secondary effects of Swiss National Bank move #traderfundingrisk #CHF

Nicolas Corry, Managing Director, nicolas.corry@skadilimited.co

As the dust settles from thursday’s shock move by the Swiss National bank, news is beginning to emerge of the impact the Franc’s appreciation has had. As Product Controllers and Market Risk Managers get to grips with traders’  exposures, and whether internal risk limits and stress tests have proved adequate, they would do well to consider wider areas of exposure. We take this opportunity to highlight potential areas of risk which warrant consideration. We have been warning that FX along with Funding represent two areas where scope remains for traders to take significant risk in their trading books. Owing to the pooled nature of currency booking which still exists at many Financial Institutions, and the fact that FX booking systems often stand alone from the primary booking engine for many businesses there is wide scope for error and abuse. We recommend Control Staff turn their attention to verifying that derivative structures have been booked correctly. Quantos booked as Composites and vice versa represent a significant area of risk. Rehedging within Legacy Businesses is a cause for concern as staff with responsibility for managing portfolio wind downs may not be aware of the need for currency rehedging through the life cycle of structures – last week’s move will make this apparent. Counterparty credit will be recognised since a number of brokerages have already failed, however staff must now consider the impact on derivative contracts which had seemingly benign payoffs, as well as the exposure of Mortgage customers who have been sold out of currency products offering yield advantage though Swiss Franc borrowing. Legal and Compliance as a priority should review how these products were solicited, marketed along side the supporting documentation.

Dollar strength poses Trader Funding Risk

Dollar strength poses Trader Funding Risk

Nicolas Corry, Managing Director, nicolas.corry@skadilimited.co

http://www.bloomberg.com/news/2014-10-01/has-dollar-strength-only-just-begun-.html The continued strength of the US$ has caught the headlines. The charts of Brazilian Real, Korean Won and Singapore Dollar confirm that the move is universal. Continued weakness in world currencies raises the risk of rate increases to protect their trading level with the dollar. Auditors should review cash management processes as part of their continuous assessment of businesses. They must ask themselves what line of sight do control functions such as Treasury and Market Risk Management have over funding versus assets? Can these areas distinguish between duration of funding positions or are traders exposing the firm to short term funding risk? During the Asian Crisis of 1997 equity derivative businesses which funded using overnight rates learned the hard way about how fast Central Banks move to defend their currencies. Juniorisation of trading staff since the recent Credit Crisis mean that few will remember the lessons of the Asian Crisis.

Germany finds evidence of forex rate-fixing

Traders Join Exodus as Forex Probes Add Pressure on Costs

Traders Join Exodus as Forex Probes Add Pressure on Costs