Option Tales: Cheap Options Part II

| 24-05-2016 | Rob Söentken |

bankingToday in Rob Söentken’s Option Tales: When buying options it is tempting to see if the premium expenses can be minimized. A number of solutions are possible, which will be discussed in four articles. In the previous article I talked about the first two solutions: Choose the strike further OTM and Choose shorter tenor. Today I will be discussing the next two solutions: Choose the longer tenor and the Compound option.

 

3- Choose longer tenor

Following the comparison between a 3-month and a 12-month option, it should be remembered that a 12-month option will have some remaining value after 3 months have passed, at least theoretically. If we assume ‘ceteris paribus’ (everything remained unchanged) the remaining option value of a 12-month option would be 1.1%. If we diagram1pt2bought the option for 1.5%, we could sell it after 3 months at 1.1% and buy the USD through an outright forward transaction. This approach shows that the net cost of option protection would be only 0.4% (1.5% – 1.1%). Which would be cheaper than the premium of a 3-month option with the same Delta. Also, because the option has a higher Delta than a 3-month option with the same strike (25% vs 10%, see diagram 2), it will follow the spot market much better. The bottom line of paragraph 3 is that a longer dated option can be bought with the intention to sell it again at some point, the net cost being less than buying a shorter dated option. While it serves as a hedge against price changes.

4- Compound option

A compound option is the right to buy an option against a certain premium. For example we could be considering todiagrampt2 buy the 1-year option in diagram 2 for 1.5%. Alternatively we could consider buying a right to buy this option for 0.4% in 3 months time. At that time the 1-year option will only have 9 months remaining, but the strike and 1.5% premium are fixed in the contract. On the expiry date of the compound option we can decide if we want to pay 1.5% for the underlying option. Alternatively, assuming nothing has changed, we could buy a 9 month option in the market for 1.1% (see diagram 2). In such a case we wouldn’t exercise the compound option.

An alternative to the compound option would be to buy the 3-month option for 0.2%. On expiry, assuming nothing has changed again, we could buy a 9 month option in the market for 1.1% (see diagram 2).

In my next two articles I will discuss the last two solutions for minimizing premium expenses when buying options:

  • Conditional Premium option
  • Reverse Knock Out

Would you like to read more in Rob Söentken’s Option Tales?
1. Options are for wimps
2. ATM or OTM
3. Cheap options part 1

 

Rob Soentken

 

 

Rob Söentken

Ex-derivatives trader

 

Cash flow forecasting (CFFC)

23-05-2016 | by Udo Rademakers |

In recent years and months, we have seen quite a few companies coming into liquidity problems, leading in worst case scenario to insolvencies. This brings us to the question: how important is cash flow forecasting? How to anticipate adequately and to avoid facing “surprises” at the last moment and how should you implement it?
The Cash flow forecast (CFFC) estimates the timing and amounts of cash in- and outflows over a specific period and in different time buckets (day, week, month, year). It provides you with an actual overview of the cash position and with a forecast.

Why is a cash flow forecast important?

  • based on the CFFC you can assure the timely payment to your suppliers, employees and finance providers (at all times as you want to avoid liquidity problems!)
  • it can act as a management tool and “early warning system”
  • the analysis of actuals versus forecast helps you to identify possible problems  (e.g. delay in invoicing to customers, late payments to suppliers)
  • the analysis of forecasts versus forecast helps you to identify the trend and to understand the business much better
  • the aggregated information shows if you are able to cover your financial obligations towards finance institutions/investors in the longer term and if your cash flow could meet the covenant targets or whether there will be a breach of credit facility limits. In case of a “cash rich” position it helps you to decide how much money and for which period you could invest it
  • A CFFC helps to identify foreign exchange exposures and it supports hedging decisions.

How to implement a CFFC?

Depending on the turnover, leverage, growth, systems, number of employees, internationality and currencies, the approach (and time effort) should fit the size of the organisation.

Cash flow forecasting often doesn’t have priority within organisations. However, as a treasurer, we realize the added value and need of it but also do realize that making a good CFFC could cost a lot of (time) effort. So how could we get a timely and reliable CFFC process in place without using all precious time of the finance managers?

  1. automate where possible: use either sophisticated spreadsheets, but even better, a sophisticated web based application or use the functionalities of your Treasury Management System (and fine-tune it)
  2. import centrally (via MT940) the actual banking balances where possible
  3. use your (invoice payment due dates) AP/AR data for the short term FC
  4. let fill out the “gaps” by finance managers based on their business knowledge
  5. make sure everyone reports the latest data in time with an explanation of high impact changes and actual versus realisation differences
  6. undertake actions where needed
  7. consolidate the data, analyse the information and report the highlights to the senior management on a regular basis.

 

 

 

Udo Rademakers

Treasury Consultant

Uitgelicht: Angst voor brexit jaagt bedrijven naar de beurs

| 20-05-2016 | treasuryXL |

brexit

 

Recentelijk lazen we een aantal berichten over de angst voor Brexit die meerdere bedrijven naar de beurs jaagt. (bron: FD, NRC) Onder andere Philips, Basic Fit en ASR kondigden aan naar de beurs te gaan.  treasuryXL vroeg een drietal experts om hun mening;

 

Is het inderdaad de angst voor Brexit die bedrijven naar de beurs drijft?

Douwe Dijkstra

 

Douwe Dijkstra – Owner of Albatros Beheer & Management
“Angst voor een Brexit jaagt bedrijven naar de beurs” lees ik op een aantal sites en hoorde ik in het journaal. En de beoogde investeerders dan? Die hebben dit nog niet door? Ik geloof wel in een Brexit en daardoor een eenmalige spike naar beneden van GBP en beurzen maar verwacht daarna snel herstel. Naar mijn gevoel zijn beurzen wel toe aan een rit naar boven.

 

Roger Boxman

 

Roger Boxman – Interim Risk Management Consultant
Bedrijven houden rekening met een ongunstig beursklimaat. De verwachte opbrengst zal tegenvallen bij een ‘no’ vanwege een lagere Britse Pond en een hogere vereiste risicopremie bij beleggers. Enige nuancering is op zijn plaats. Zo is Zwitserland geen lid van de EU, maar herbergt vele succesvolle multinationals. En zo heeft de Griekse toetreding tot de EU en de Euro na aanvankelijk succes de nodige rampspoed gebracht.

 

Rob Soentken

 

Rob Soëntken – ex-derivates trader
De komende maanden gaan er verscheidene Nederlandse bedrijven naar de beurs. De onzekerheden omtrent een mogelijk Brexit spelen daarbij zeker een rol. Helemaal nu het kiezer sentiment in de VS de republikeinse kandidaat Trump sterk in de kaart speelt, lijkt ook een door het volk afgedwongen Brexit een reëel mogelijke ontwikkeling. Toch moet niet vergeten worden dat deze informatie reeds in de markt is verwerkt. Dus zou men kunnen stellen dat zodra dit achter de rug is, ongeacht het resultaat, de neerwaartse druk op de beurs zou wegvallen. Niet direct, maar langzaamaan. Natuurlijk zijn er momenteel risico’s, maar die zijn ingeprijsd.

 

When plain crazy just isn’t mad enough

| 19-05-2016 | Pieter Jan van Krevel |

pieter jan krevel

So everybody knows about cat bonds. No, not corporate bonds issued by Caterpillar, but bonds linked to catastrophes. Sounds exciting, right?

Cat bonds were originally devised in the mid-1990s after Hurricane Andrew and the Northridge earthquake, both wreaking (financial) havoc in the U.S.
The financial havoc befell insurers, and the inception of the cat bonds stemmed from these events that cost the insurers a combined estimated USD 39 – 66 bn (1990s dollars). This hurt, so they devised a way to shift this risk in case disaster struck (in lieu of traditional reinsurance).

The principle is simple: investors get a handsome coupon (+300-2,000 bps spread) on a, generally, short-dated sub-investment grade bond (up to 3 yrs BB/B), if and only if, disaster does NOT strike. If it does strike, however, the investors forego their principal (let alone the coupon), and the insurers use this ‘windfall’ to pay the claims emanating from the disaster. These catastrophes, and therefore the cat bonds, are pretty much totally uncorrelated with any other asset class in a portfolio, and thus interesting and effective diversification material.

So far, so good.

But what if we take this a little further: in a way, a CDS can also be considered a cat bond. After all, we’re talking binary pay-off here. While I will not go into the (de-)merits of CDSs here, ‘disaster’ is a word that comes to mind when looking at the bloodied and mangled remains of many a CDS. But let’s leave that for another day

However for the final leap of faith we need to look at the Swiss: Credit Suisse has apparently invented the ultimate capital-relief instrument. Recently, news got out that Credit Suisse intends issuance of a special cat bond, linked to ‘operational risks’ by, amongst others, ‘failed internal processes’. We’re talking about external events, business disruptions (e.g. cybercrime), trade processing errors and, hold on to your seats, failures in regulatory compliance and rogue trading. So, when a Credit Suisse trader screws up its book (or someone else’s for that matter), the cat bond will be triggered and the trading losses will be (partly) absorbed. I fully agree to the premise that a screw-up in proprietary trading spells disaster nowadays – just think of Mr. Kerviel and JPMorgan’s London Whale to name but two.

However, there is one minor detail that sets this kind of catastrophe apart from the natural disasters that cat bonds started out to ‘reinsure’: these are man-made (financial) catastrophes, and can (and should) be mitigated by the checks and balances that financial institutions claim, and are obliged, to employ these days. Not to mention the fact that offloading risks by banks to insurers went a long way to melt down the global financial system in 2008. Who needs Andrew or Katrina when you’ve got quants and prop traders?

Sounds like a ‘Get out of jail free’ card to me. Although I am not quite sure whether Messrs. Leeson and Kerviel agree…

Pieter Jan van Krevel

 

Pieter Jan van Krevel

Owner at Slàinte Mhath!

EUR/USD Outlook

18-05-2016 | by Simon Knappstein |

 businesspaper

The US Dollar is currently going through a soft spell. Most markedly against EM, but also against the EUR. Upside seems contained so far by the very easy monetary policy of the ECB. The question is if we are witnessing simply an extension of the ranging price movement as seen in the last 5 quarters or whether this is the start of a lasting recovery?

 

 

FX Prospects consensus forecast for EUR/USD is 1.1020 in 3 months and 1.0810 in 12 months.

outlook eur/usd

Let’s take a closer look at the arguments that argue for a higher EUR/USD than consensus.
Danske Bank is in the longer term the most bullish, forecasting a shallow move lower to 1.12 in 3 months and a subsequent move higher to 1.18 in 12 months.
Nordea is looking for a move to 1.16 in 3 months only to see the pair fall thereafter to 1.05 in 12 months.

Danske is expecting for relative rates to play a more important role in the near term where the ECB will be challenged once again on its mandate by market inflation expectations and the Fed might turn out a bit more upbeat on a September rate hike. This, coupled with a Brexit risk premium weighing on the EUR as well, should lead to some downside in the next 2 or 3 months. Further out, they expect valuation to drive the EUR/USD higher to 1.18.

Nordea on the other hand, sees the EUR strengthening in the near term on a combination of a diminished likelihood of deeply negative rates by the ECB, potential risk aversion that leads to some EUR short covering and a dovish shift in the Fed’s reaction function. Further out then, as this dovish shift is reflecting an undue focus on domestic- and global risks (Brexit, China) that do not materialise, a hawkish re-pricing of the curve will support the USD at the same time that increasing inflation in the EZ is lowering real rates and leading to EUR-negative portfolio outflows. Bringing EUR/USD to the aforementioned level at 1.05 in 12 months.

These are two very different views on where EUR/USD is heading. It is not though, a matter of who is wrong and who is right. Opposing opinions help you make up your own mind and improve on your investment decisions.

 

Simon Knappstein - editor treasuryXL

 

Simon Knappstein

Owner of FX Prospect

 

 

 

Option Tales: Cheap Options Part I

17-05-2016 | By Rob Soentken |

banking

 

Today in Rob Soentken’s Option Tales: When buying options it is tempting to see if the premium expenses can be minimized. A number of solutions are possible, which will be discussed in four articles. Today I’m discussing the first two solutions: Choose the strike further OTM and Choose shorter tenor.

 

1-Choose Out of The Money (OTM) Strike

Hedging the purchase of a certain amount of USD could be done by purchasing a USD call option with the strike set At The Money (ATM). In diagram 1 it shows that such an option would costs about 2.0%. The strike is 0% OTM, so ATM. A strike further OTM would cost less premium. For example, a strike set at 3% OTM would costs only 0.8%. The cost saving is 1.2%, but also the protection kicks-in only after USD has appreciated by 3%. Should we need to exercise the option to get our USD, it still means a combined hedging cost of 3.8%. Which is more than if we had bought the ATM option for 2% premium. Conclusion: Buying an OTM option reduces the up-front cost versus buying an ATM option. But ex-post hedging with an OTM option could result in total hedging cost which are higher than an ATM option.

2- Choose shorter tenor

Hedging the purchase of a certain amount of USD in 1-year time could be done by purchasing a USD call option with 25% chance of exercise. In diagram 2 it shows that such an option would have a strike 6.2% OTM and would cost 1.5%. Options with the same strike but with a shorter tenor would cost less up front. For example: choosing a 3-month time to expiry would make the option premium 0.2%. It must be noted that while the 3-month option has the same strike as the 12-month, its chance on exercise (Delta) is substantially less. By itself choosing a 3-month tenor is not ‘wrong’ when hedging a 12 months USD flow. It is just the on the expiry date of the option either the option is exercised, or the USD must be purchased from the market at the prevailing rate.

 

 

In my next two articles I will discuss the following solutions for minimizing premium expenses when buying options:

  • Choose longer tenor
  • Average rate option
  • Conditional Premium option
  • Reverse Knock Out

Want to read more in Rob Soentken’s Option Tales?

Option Tales – Options are for Wimps
Options Tales – ATM OR OTM?

 

Rob Soentken

 

 

Rob Soentken

Ex derivates trader

Business case – Funding strategy : how Fastned uses Nxchange

| 09-05-2016 | interview with Claire Tange from Fastned

Fastned’s growing and they’re giving investors the chance to directly buy and trade in certificates of shares via Nxchange. We’ve asked Fastned’s CFO Claire Tange to explain this type of financing.

 

What is new about this type of financing?

Fastned is now listed on a new pan-European regulated stock exchange called Nxchange. This new stock exchange cuts out the middleman (the broker). This means that investors in Fastned can directly buy and trade in certificates of shares via the Nxchange website. Also, there is a strong social component to the exchange. It’s like Euronext meets LinkedIn.

How would you describe the process?

Because Nxchange is a fully regulated stock exchange, Fastned has to comply with all the regulations that also hold for companies listed on e.g. Euronext. That means that a.o. we changed our accounting to IFRS reporting and that we filed a prospectus with the AFM. This was an intense process, but we did it.

Which alternatives did you consider?

Fastned already had a listing on NPEX, but we felt that we needed a bigger exchange to raise more capital. Given the fact that Nxchange is a fully regulated stock exchange this opens the doors to funds that hold this as a prerequisite. Also, the new exchange offers benefits to our investors, such as vastly improved liquidity.

What are the risks in comparison with other types of financing?

Nxchange is a step between crowdfunding and Euronext. It offers the comfort of a regulated market without the illiquidity of crowdfunding. Like any investment, an investment in Fastned has risks associated with it. We are a new company in a new market. On the other hand, Fastned is infrastructure. Investments are backed with tangible assets. And in the end, the business model is ‘good old’ retailing. We sell electricity on location. Perhaps not so exotic after all.

What are the benefits for you?

Fastned has a very strong community that wants to support the company and the mission we are on. Nxchange is the way to engage and expand our community. We started with the EV enthusiasts but now more and more ‘regular’ investors are joining in.

What are the benefits for people joining?

For Nxchange: Investing in fast growing companies directly on the exchange. Fastned is the first but definitely more will follow. For Fastned: Investing in a huge growth market. If you believe in the transition from fossil fuel powered cars to electric cars you will realise that this will create huge opportunities. In Europe alone 500 billion Euro worth of sales of diesel & petrol annually will shift to electric. Fastned is one of the leading companies in this transition.

If you want to know more about investing in Fastned please visit their website.

Claire TangeClaire graduated as chemical engineer at the TU Delft. After an internship with JP Morgan she decided to pursue a career in the financial sector. She continued as investment banking trainee with ABN Amro / RBS and for almost six years, half of which in London, she worked in M&A and Corporate Finance. Since 2006 Claire was increasingly involved in renewable energy projects in faraway places (Antarctica, Himalayas) and from there on it was a small step to join Fastned and strengthen the team with her financial expertise.

 

 

Short note on interest rate derivatives

16-05-2016 | by Ad van der Plas |

 

They are often in the news, but what are they and how do they work? Interest rate derivatives are derivatives of the money- and capital markets and are especially designed to give assurance on the interest rate you will have to pay or receive in the future. Best known is the interest rate swap, a swap between the fixed and variable interest rate. All other interest derivatives are calculated on the interest rate swap. How does this swap work?

The interest rate swap is a two party agreement, usually in ISDA model, in which the fixed and variable interest amounts are swapped. The swap period, the fixed and variable (reference) interest rate are defined. The interest is calculated on the agreed notional principal amount and the interest amounts are payable on the payment dates. One party receives the fixed rate amounts and pays the variable rate, and the other party receives the variable rate amounts and pays the fixed rate.

With buying an interest rate swap, you can change the interest rate risk of an underlying loan from an uncertain variable rate to a certain fixed rate. That is….if during the swap period there are no changes in the loan itself. Since you aim to obtain certainty you should be aware of potential uncertainties during the swap period, such as:

  1. A change of the reference rate in terms of content or effective representation (Libor).
  2. A change in the interest rate calculation of the loan caused by regulatory changes in the financial markets (Solvency) or due to balance sheet effects of the lending company itself like a liquidity surcharge.
  3. The lender changes the surcharge because he has revised the credit rate of your company.
  4. The underlying loan is canceled or restructured.
  5. The counterparty in the swap agreement requires an additional payment if the swap has a negative value.
  6. Possible P&L and Balance sheet effects due to changes in the valuation of the swap because of changes in regulations, for example IFRS.
  7. A different interpretation of the regulations when changing your auditor.

Please also note that the outstanding swap agreements will have effect on your total financing capacity. And finally, a warning: improper use of derivatives can be a big risk. Be sure to have a professional opinion when using derivates.

Ad van der Plas

 

 

Ad van der Plas

Independent Treasury Consultant & Interim Manager

UItgelicht: KNAB crowdfunding

| 13-05-2016 | Erna Erkens |

KNAB bank start met crowdfunding voor ondernemers (bron: RTL Z). treasuryXL vroeg expert Erna Erkens te reageren op dit nieuws:

Dat vind ik knap! Een eigen platform voor crowdfunding van KNAB Bank. De eerste bank die hiermee komt. Complimenten! Gerrit Zalm riep 2 jaar geleden nog dat hij geen toekomst zag in crowdfunding, dat er wel mee geëxperimenteerd werd bij ABN AMRO, maar dat dit nog niet het gewenste resultaat had. Ik ben benieuwd of hij daar nu nog hetzelfde over denkt. Ik was het met hem oneens.

Wat is crowdfunding?

Crowdfunding is een vorm van financiering waarbij ondernemers, stichtingen maar ook particulieren een beroep doen op “the crowd” om hun kredietbehoefte ingevuld te krijgen. Crowdfunding is sterk in opkomst. In het Verenigd Koninkrijk lopen ze ongeveer 3 jaar voor op Nederland en daar werd in het eerste kwartaal van 2016 voor GBP 700 miljoen ‘gecrowdfund’. Er worden daar al bedragen van GBP 5 miljoen gefinancierd. Crowdfunding of ook wel ‘crowdfinance’ genoemd verliest in rap tempo het predicaat ”alternatief” en wordt in snel tempo mainstream. Een goede ontwikkeling volgens mij. Steeds meer partijen van de financieringsmarkt gaan samenwerken met partijen die gespecialiseerd zijn in crowdfinance. Dit betekent dat een kerndienstverlening van banken aan het begin staat van een enorme verandering. Ik weet niet zo goed wat de taak wordt van de bank(en) maar zij lopen dan in ieder geval een veel kleiner of geen risico.

Voor wie, wat en hoe?

Crowdfunding is grotendeels geschikt voor het MKB bedrijf. Er kan bij KNAB Crowdfunding geleend worden van EUR 50.000 tot EUR 100.000. Er zijn 100.000 potentiële investeerders. Een rekening bij KNAB bank is niet nodig. KNAB Bank werkt samen met Collin Crowdfund. Samen met partijen als OnePlanetCrowd zijn zij in Nederland de specialisten op dit vlak. Zij werken ook samen, voor wat betreft crowdfunding, met de Rabobank. De Rabobank heeft alleen geen eigen platform voor crowdfunding maar is een samenwerkingsverband aangegaan met deze twee partijen.
Je ziet dus bij meer partijen een verschuiving ontstaan. Wat is er nog onduidelijk? Wie loopt welk risico? Er wordt bij KNAB bank een kredietbeoordeling uitgevoerd en de kosten daarvoor zijn EUR 350. Na betaling krijgt het bedrijf dat op zoek is naar financiering een Crowdfund coach aangeboden, die gaat samen met dit bedrijf kijken naar de cijfers. Deze worden ingevuld in een Credit Score. De uitkomst hiervan is belangrijk voor de kredietbeoordeling en bepaalt de bandbreedte waarbinnen de rente mag worden vastgesteld. Vervolgens schrijft het bedrijf een korte pitch voor op de website. Daarna wordt gekeken of de leningsaanvraag wordt goedgekeurd. Bij goedkeuring komt de aanvraag op de website en als de aanvraag is volgeschreven krijgt het bedrijf het geld op de rekening gestort. Klinkt eigenlijk heel eenvoudig.

Wat zijn de risico’s?

Daar vind ik nog weinig informatie over. Bijvoorbeeld: wie loopt welk risico? Stel een bedrijf kan niet aan zijn rente- en aflossingsverplichtingen voldoen? Wie loopt dan welk risico? En stel dat een bedrijf die een financiering heeft gekregen failliet gaat? Ben je als investeerder dan al je geld kwijt? Hoe hoog zijn de rendementen of rentelasten voor de betrokken partijen? Als de klant 6% betaalt krijgen de investeerders dan ook 6%? Ik zie ook onmiddellijk kansen voor verzekeraars voor crowdfunding. Misschien iets voor banken??

Mijn conclusie

Er zijn veel voordelen aan crowdfunding / crowdfinance. Er zijn wat mij betreft ook wat dingen onduidelijk en het is nog wat kostbaar. Ik denk toch dat hier een grote toekomst ligt. Als het aanbod groeit, er meer ervaring is en de markt is groter, dan zullen de kosten ook wel wat minder worden. Want dat vind ik nog wel een punt. Ik vind het nog wel prijzig. Als je EUR 100.000 wilt lenen ben je, zonder de rentebetalingen, bij KNAB  bij aanvang EUR 3.300 kwijt en per jaar, los van de rentebetalingen, EUR 600. Ik vind toch dat het beter is om met elkaar de economie op gang te houden en elkaar te steunen. Dat maakt de betrokkenheid bij elkaar ook groter. Zo zorgen we met elkaar voor elkaar. Dit zal in de maatschappij op andere vlakken ook nog veel meer gaan voorkomen denk ik.

 

Erna Erkens

 

Erna Erkens

Owner at Erna Erkens Valuta Advies (EEVA)

 

Is this the solution to solving the derivatives mis-selling issue?

12-05-2016 | by Victor Macrae |

EuroRecently the Dutch Ministry of Finance appointed three independent experts to solve the long-lasting issue of derivatives mis-selling in the Netherlands. This is important for both firms and banks as the dispute puts severe pressure on their relationship. Moreover, judges are reaching more and more verdicts in favour of SME’s. In several cases interest rate swap transactions were declared void and the firm was compensated for its losses. Therefore the stakes are high. Is this last step permanently going to solve the issue?

The derivatives mis-selling problem originates from the fact that banks have been selling interest rate swaps to SME’s as an alternative to fixed rate loans. If market interest rates would not have dramatically decreased to unprecedented lows, there might have been no issue at all! But the reality is that buyers of interest rate swaps face various problems that they were apparently not aware of when signing the contract. For instance, in contrast to fixed rate loans, a bank can increase the interest margin when it deems a higher counterparty risk. Furthermore, when a firm wants to repay the underlying loan, it will also have to pay a possible negative market value of the swap. Also, a swap’s negative market value can decrease the firm’s access to liquidity.

MiFID strongly protects non-professionals

A key fact in this issue is that SME’s are deemed to be non-professional investors according to MiFID, a powerful EU directive that protects customers that purchase financial instruments. When selling interest rate swaps to non-professionals, banks should in advance inform them whether it acts as an advisor or as product seller. Furthermore, the bank should upfront provide sufficient information about all risks involved. Last but not least, banks should check that the non-professional investor understands the proposition and that the product is in the best interest of the customer.

Overarching solution

The Dutch financial conduct authority AFM first asked the banks to review their files of derivatives sales to SME’s and to pay compensation if necessary. Thereafter, the AFM concluded that the reviews were not ‘in the best interest of the customers’ and demanded that banks do it all over again. Recently the Dutch Minister of Finance intervened because he was unhappy with this process. As a consequence, to solve the issue once and for all the Ministry of Finance appointed three independent experts. I’m pleased with the idea of appointing three ‘outsiders’ as it makes it easier to reach a sound overall solution for all parties involved. SME’s would be fairly compensated and further financial and reputational damage of banks would be limited.

Disturbing signals

What bothers me is the fact that in the procedure set up by the AFM the banks will create an overall recovery plan together with the independent experts. This gives far too much power to the banks and undermines the independency of the experts! Having said that, the Minister of Finance has already softened this statement of the AFM. We will see how it works in practice. As an alternative SME’s can always go to court as judges have reached verdicts that are beneficial to them…

Victor Macrae

 

Victor Macrae

Owner of Macrae Finance