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Basel III and the impact on cost of hedging

| 30-3-2017 | Arnoud Doornbos | Treasury Services |

Corporates will save hedging costs and administrative costs significantly if they shift their hedging activities to exchanges such as CME (Chicago Mercantile Exchange).
In the summer of 2007 a large number of defaults on U.S. mortgage loans did arise. The banks were hit hard by the global domino effect that resulted. A major financial crisis which was followed by an economic crisis led to a revision of the capital requirements of Basel I and Basel II.

New Basel III

The core of Basel III is that many banks have to hold more capital and liquidity to their outstanding investments than they used to in the past. The rules are implemented as from 2013 and should eventually be fully effective in 2019.

Basel III will be a huge challenge for banks in the coming years. The impact on the pricing of financial products and transactions between banks and their clients will be significant.
Since July 2008, the Basel Committee for Banking Supervision has been working on Basel III for all banks worldwide. The European Commission has introduced three Capital Requirements Directives which contains concrete actions and requirements in terms of risk, capital and liquidity management within a bank. The new requirements, part of Basel III, aim to improve the quality and level of capital reserves of banks.

The capital requirements of certain products have increased and banks are encouraged to create additional capital buffers during good economic times so that they are better positioned to absorb losses during periods of economic stress.

Impact of Basel III on liquidity management

Besides sharpening the capital requirements Basel III has a major impact on liquidity management. The new liquidity standards are based on a stress test. In addition Basel III also introduces new long-term liquidity standards that reduce the mismatch between the maturities of assets and liabilities.
Banks will have to increase their reserves sharply in the coming years. Previously, banks only had to keep 2 % capital to their outstanding investments. Now with Basel III this capital requirement has been increased to 7 % (4.5 % hard buffer and an additional 2.5 % margin in bad times) . As a result banks will probably not distribute their profits in the coming years but will add to their capital buffers. Furthermore many banks will have to issue new shares in order to attract extra money in order to meet the new demands.

Counterparty risk

Within Basel III it has been determined that capital must be held for the credit risk on a counterparty a bank is exposed to in OTC derivatives or equity financing transactions. In addition, market participants are encouraged to take one central counterparty (clearing houses) for OTC derivatives. Any time a bank takes a risk against another party the probability of default exists. To offset this concern, and to support on-going stability within the interbank market, banks have long emphasized the importance of measuring and managing counterparty risk. Now banks have becomes noticeably less comfortable trading with other counterparties including other banks.

The recent deterioration in credit ratings that has hit many U.S. and European banks has led to a heightened sensitivity over counterparty risk. These apprehensions may not be voiced directly, but they become evident when front office trades that would have cleared in the past, no longer do because credit lines have been reduced. There is increasing focus on limiting exposures, even among global banks. And that is starting to affect the way we do business.
CVA (Credit Valuations Adjustment) desks have grown in popularity, as banks seek more effective ways to manage and aggregate counterparty credit risk.
The market has changed now in terms of how counterparty credit risk was calculated. Now, no client is assumed to be truly risk free. Different prices are now expected for different clients on that same interest rate swap, depending on variables including the client’s rating and the overall direction of existing trades between both parties.
On all new interest rate, FX, equity, or credit derivatives, CVA desks price the marginal counterparty risk for inclusion into the overall price charged to the client. CVA is a highly complex calculation.

CVA looks at default through the spread of the counterparty. A swap facing a single B credit that trades at 1200 in CDS is going to be charged a lot more than the same swap facing a AA counterparty. The CDS spread is normally a core input of CVA pricing.

What we see in practice is that in the manual process, the CVA desk team of a bank often passes along suggestions to the salesperson for improving the credit risk in a trade and enabling the sales person to offer the trade at a lower credit price. Examples of that would include improving the collateral agreement with a client, or inserting a break clause.
In the traditional CVA approach, a bank accepts a new trade, takes a fee and uses that fee to buy good hedges for all the risks in that trade. These hedges should eliminate all of the bank’s risk, but this is not necessarily the case once Basel III is taken into account.

Basel III does not recognize all types of hedges that the bank might want to use. Therefore the regulatory capital for certain trades will not be zero, even if the bank has used the full CVA fee to hedge all its risks.
The first impact Basel III has on CVA desks is on pricing. Pre-deal pricing needs to be reviewed to ensure the costs of imposed regulatory capital are covered. If not, additional pricing may need to be added. And the decision on which risks are efficient to hedge also becomes affected not just by strategic or business reasons, but also by the regulatory capital impact.
As part of Basel III’s updated regulatory capital guidelines, a new element has been added: V@R on CVA. Regulators have specified very precisely how the underlying CVA must be calculated for this charge. Banks will therefore need to decide whether to adjust their pricing and balance sheet CVA to match the Basel III rules, or to use different CVA calculations for pricing and regulatory purposes.

EMIR / Dodd-Frank

The Dodd-Frank / EMIR financial reform bill gives a new set of derivatives rules that either will clean up the market or send the world spiraling off the deep end. The truth is probably somewhere in between. The crux of the derivatives regulation is the requirements that standardized swaps be centrally cleared and traded on a Swap Execution Facility, or SEF. This moves derivatives from bilateral agreements between bank and client to centrally cleared products where credit risk is no longer bank-held, but is centralized in a clearinghouse where daily margin is managed. Once clearing is in place, customers no longer are locked into a single dealer, long and short positions can be netted, and SEFs can begin to match buyers and sellers without having to worry about the credit lines of each counterparty or dealer.

This will begin the migration of the derivatives business from a principal-based OTC market toward an agency-based bid/offer SEF market.

Treasury Services’ analysis:

Hedging is penalized decreasing the liquidity in the markets leading to increased costs to hedge financial risks for corporations. This is further emphasized by the penalization of the interbank markets through requirement of more capital, and additional constraints on liquidity on interbank transactions.
There will also be an increase in administration costs for corporates costs due to EMIR.
Corporate credit by banks is penalized: More capital is required in general. For back-up facilities on commercial paper programs it is required that banks will have to have 100% of liquid assets whilst these facilities are fully undrawn. The cost of carry will obviously be invoiced to the client. The ability of the bank to borrow long term will determine the availability of back-up facilities.
Restrictions in maturity mismatch (including for repayments) are introduced. This may mean that the risk of borrowing short term to finance long term investments will be transferred to the corporate sector.

The advantages of the OTC market compared to exchanges has become questionable. High cost savings can be achieved by shifting your hedging activities to exchanges such as Chicago Mercantile Exchange (CME).
Shifting hedging activities to an exchange such as CME requires changes in your risk management function. This supplies the possibility to bring the cost of hedging back in your control.

Arnoud Doornbos

Associate Partner

Managing treasury risk: Liquidity Risk (VI)

|13-3-2017 | Lionel Pavey |

There are lots of discussions concerning risk, but let us start by trying to define what we mean by risk. In today’s article I will focus on liquidity risk. Many companies have very significant credit needs and this needs to be formally addressed with a credit analysis procedure in place. In my former articles I dealt with risk management, interest rate risk, foreign exchange risk, commodity risk and credit risk. See the complete list at the end of today’s article.

Liquidity risk comes in 2 distinct forms – market liquidity risk and funding liquidity risk.

Market Liquidity Risk

This relates to assets and potential illiquidity in the market and, as such, can be considered a market risk. In a normal functioning market it is always possible for market participants (buyers, sellers, market makers and speculators) to find each other and negotiate a price for their transactions. Assuming that the transaction is of a normal market size, there should be no dramatic change to the price of the asset after the transaction.

At the time of a crisis, participants could be absent from the market, making it difficult – if not impossible – to trade an asset. Sellers are left frustrated as there are no opportunities to sell the asset they are holding and vice versa for buyers. This can occur due to a financial crisis, changes in legislature, scarcity of an asset or someone attempting to corner the market. An asset generally will have a value, but if there are no buyers in the market that value can not be realised.

Liquidity risk is not the same as falling prices – after all prices are free to rise or fall. If an asset was priced at zero then it means that the market considers its value to be nothing. This is different from trying to sell an asset but not being able to find a buyer.

Markets for Foreign Exchange, Stocks, Shares, Bonds and many Futures and other derivatives are generally highly liquid. Off balance sheet products related to physical settlement can be less liquid as there is a need to actually provide physical settlement. Bespoke products like CDO’s can be considered illiquid as their size is normally small (relatively speaking) and not freely tradeable. Also the complexity needed to value the product affects its liquidity.

Housing is an asset class with very low liquidity – sometimes a property could be sold as soon as it hits the market. At other times the same property could be available for sale for many years and the price reduced regularly, without attracting a firm buyer.
The easiest and quickest way to see if there is a heightened market liquidity risk is via the bid – offer spread. If this is suddenly seen widening, this would imply that there appears to be more risk. In a normal, liquid market, the spreads are fairly constant and small, allowing participants to easily step in and transact. A widening of spreads occurs in a normal market when government data is published – nonfarm payrolls, balance of payment, etc. Within a short time the market will return to a normal spread as the information is properly digested and the market makers return. However, if the spreads widen without a publication event taking place, it is reasonable to assume that the risk has increased.
Additionally, risk could grow if reserve requirements were increased. In markets such as Futures, it is necessary to pay margin to the exchange. If these margin payments were increased, this would lead to transactions being more expensive and so lead to less liquidity in the market.

Market makers can also observe the market depth. This is shown by the quantity available for transacting at a particular price in their order books. When a market is perceived as being deep, it means there are many orders and, therefore, a large number of orders would be needed to move the market price significantly. The deeper the market, the more liquid the market.

Funding Liquidity Risk

This relates to the risk of not being able to settle debts when they are due. Treasury specialists in a corporate environment are acutely concerned with funding risk. Every month wages must be paid, together with tax and social premiums (pensions, insurance etc.) Additionally, it would be advantageous to pay trade creditors on time. Future liabilities also have to be funded after they have been recognized. This could mean arranging external financing.

If there is a liquidity crisis in the market, it becomes difficult and expensive to arrange to borrow the necessary funds. The price may be so high that the intended profit provided by selling the goods, is negated by the increased cost of funding. A reduction in the credit rating of a company can also lead to increased costs and a reluctance to lend.
If a company is known to have problems making payments, then the liquidity risk is specific to the company – the rest of the market will function normally.

Funding risk can also occur if creditors fail to pay you, or if an unforeseen event has occurred that leads to an outflow of cash from the company.
A company can initially perform a quick spot check to ascertain its current ratio. This shows if a company can meet its current liabilities with its current assets. A ratio of less than 1 would imply that the company can not meet all its obligations at the same time. However, this could also be because there is no short term finance arranged at that moment.
It is possible to arrange a line of credit with a financial provider. He defines a maximum loan (line of credit) that can be extended which the company may utilize. While it is normal to pay a standing charge for the balance of the line that is not being used, this can be offset by the knowledge that it is possible to drawdown against the line when needed (in normal circumstances). There is greater flexibility with a line of credit than with a traditional bank loan.

Other methods include –

i) Sell assets like stock that are slow moving and tying down cash

ii) Analyse all overheads – office equipment, expense claims

iii) Increase efficiency in the debtors’ administration. Be proactive

iv) Renegotiate with suppliers – better that you talk to them before it is too late

v) Design contingency plans

vi) Subject your business to stress testing

vii) Apply the techniques of ALM (asset and liability management)

Some very well known companies have fallen to liquidity problems – Bear Sterns, Lehman Brothers, Northern Rock, ABN Amro, AIG, etc. While the risks were prevalent before the crises, the main liquidity problems occurred when it was determined that there was no more time allowed for the situation to remain.
Time is the soul of business.

Lionel Pavey

Cash Management and Treasury Specialist

More articles of this series:

Managing treasury risk: Risk management

Managing treasury risk: Interest rate risk

Managing treasury risk: Foreign exchange risk

Managing treasury risk: Commodity Risk

Managing treasury risk: Credit Risk

Blockchain and derivatives: Re-imagining the industry

| 10-3-2017 | Carlo de Meijer |

Since the first meetings organised by the Technology Advisory Committee of the US Commodity Futures Trading Commission (CFTC) on January 26 and February 23, 2016, on “Blockchain and the Potential Application of Distributed Ledger Technology to the Derivatives Market”, we have seen a lot of activity in this area.

The Depository Trust and Clearing Corporation (DTCC) last month – so a year later – launched its plans to develop a blockchain-based post-trade framework for derivatives processing with tech firms R3, IBM and Axoni starting in January. The US-based clearing institute aims to replace the technology underpinning its Trade Information Warehouse database with a distributed ledger. The announcement by DTCC of its plan to transition its Trade Information Warehouse (TIW), into a blockchain platform is described as a “watershed moment” for the industry in deploying distributed ledger technology (DLT) in production at this scale and a “reimagining” of credit derivatives processing.

DTCC and TIW

But for an idea of the scale of this operation, first something about DTCC and TIW. The Depository and Clearing Corporation focuses on post-trade financial services, providing clearing and settlement services to the financial markets. It provides central custody of securities and ways for buyers and sellers to make their exchanges in a safe and efficient way.
The Trade Information Warehouse (TIW) , a central part of its financial infrastructure, and a a major component in the credit derivatives market, currently automates recordkeeping and other workflow functions, such as lifecycle events and payment management for more than $11 trillion of cleared and bilateral credit derivatives annually, among 2,500 buy-side firms located in more than 70 countries. This is roughly 98% of all transactions in that asset class.

DTCC involvement with blockchain

DTCC has been in the forefront of early-stage experimentation, notwithstanding this technology could disrupt this industry and might make obsolete or reduce the role of a number of clearing and other business parties in the post trade market infrastructure. Already end 2015 DTCC expressed its interest in blockchain technology and became a founding member of the Hyperledger Project, an open-source blockchain development project managed by The Linux Foundation and aimed at driving the adoption and standardization of distributed ledger technology in the financial services sector. Last year DTCC also invested in and partnered with Digital Asset Holdings (DAH).

The decision to go ahead with a blockchain-powered “revamp” of the DTCC’s Trade Information Warehouse follows a successful trial of this technology by the company last year. In April 2016, DTCC announced the successful completion of a proof of concept of blockchain technology and smart contracts to manage post-trade lifecycle events for standard North American single-name credit default swaps (CDS) in partnership with Axoni, Markit, Bank of America Merrill Lynch, Citi, Credit Suisse and JPMorgan.

Soon after their partnership, DTCC and DAH started a collaboration to develop and test blockchain-based solutions for the $2.6 trillion US repurchase agreement (repo) market. DTCC and DAH said “they wanted to streamline U.S. Treasury, Agency and Agency Mortgage-Backed repo transactions and thereby lower costs and risks”.

The DTCC TIW blockchain project

In their plans the DTCC’s Trade Information Warehouse is to be “re-platformed” through a distributed ledger framework based on blockchain technology to drive further improvements in derivatives post-trade lifecycle events. The project has been developed with input and guidance from a number of market participants including Barclays, Citi, Credit Suisse, Deutsche Bank, JP Morgan, UBS and Wells Fargo, and infrastructure providers IHS Markit and Intercontinental Exchange. These parties helped develop the technology by providing workflow guidance. The final goal of the project is to develop a permissioned distributed ledger network for derivatives, governed by DTCC, with peer nodes at participating firms.

Cooperative effort

The whole project is a cooperative effort of a number of partners. By mid-2016, the DTCC submitted a request for proposal (RFP) for interested parties to “re-platform” the warehouse and cut back on reconciliation costs. DTCC has selected a series of firms including IBM, startup Axoni and bank-backed R3CEV to help integrate distributed ledger technology into its first large-scale, real-world application.

Under the DTCC agreement, IBM is the primary contract holder for the DTCC implementation and will lead the initiative, provide program management, contribute DLT expertise and integration services as well serving as the solution-as-a-service (SaaS) provider. Axoni is to provide distributed ledger infrastructure and smart contract applications, while the blockchain bank-backed consortium R3CEV is acting as a “solution advisor” from both a technological perspective and from a banking workflow perspective. R3 is thereby charged with “really helping validate that the architecture is sound, but also making sure that the feedback from this big R3 global network is heard”.

“The combined expertise of IBM and our partners enables us to provide DTCC with a resilient, open and innovative new technology platform to support this groundbreaking opportunity.” Bridget van Kralingen, SVP IBM Industry Platforms.

Phased approach

Development on the technology started in January and is expected to go live in early 2018. Over the course of 2017, the partners will work collaboratively to “re-platform” the existing Trade Information Warehouse (TIW) to a permissioned distributed ledger network custom-built for cleared and bilateral credit derivatives – governed by industry-owned DTCC with peer nodes at participating firms.

“It enables a distributed network to be built on this where, ultimately, participants could have nodes in-house,” Schvey, Axoni.

The distributed ledger technology being used for the DTCC TIW project is the AxCore protocol, created by New York-based Axoni. Deployment of the AxCore protocol will be done in phases, and even after it goes live next year, may only be adopted slowly. When the AxCore protocol goes live in early 2018, Axoni intends to submit the software to Hyperledger Project.

Rollout of the new blockchain-powered platform won’t be immediate. Initially, the distributed ledger will run in parallel with the existing settlement infrastructure. The latter can take as long as a week to close compared to the nearly instant settlement times expected from the blockchain solution. Upon launch, the DTCC will run a node that updates the TIW ledger, and other participants will also be able to run a node to support the network or to just get a feed of the information. “Not all of our clients will be moving into the world of distributed ledger at the same pace”. Large participating firms are expected to run their own individual “peer nodes” on the private ledger, with smaller DTCC clients being given the option to tap into DTCC’s own node.

By the time the Axoni technology is fully implemented, the entire life-cycle of a credit derivative will be captured as a smart contract or a “suite of smart contracts”.

Main goals ….

The new-to-create blockchain-powered platform is intended to enable DTCC and its clients to further streamline, automate and reduce the cost of derivatives processing across the industry by removing the need for “disjointed, redundant processing capabilities and the associated reconciliation costs”.

The present processes are arduous with current paper contracts in the form of computer documents still being issued. Blockchain and smart contract technology that will allow buyers, sellers and central clearing houses of derivative trades to share information, such as KYC (Know Your Customer), in real time across various distributed ledger platforms, may unleash great efficiencies. At scale, peer-to-peer networks that secure digital assets would allow parties to identify, transact, and settle with each other in expedited workflows.

Streamline derivatives processing
“Distributed ledger technology is a natural fit for derivatives processing. By recording and automatically managing shared records of financial agreements in the cloud without error, it can minimize the steps required for post-trade processing and free up middle- and back-office staff from the onerous task of reconciliation.” Rutter R3CEV
Improvement to settlement times
With regard to the settlement of derivative transactions, presently the system entails a three to five day process involving many third parties. This represents a significant opportunity cost that parties can recapture with a blockchain-based system that enables even real-time settlement.
“In a future where they move their infrastructure from what I imagine is a complex environment of interconnected software with a ton of proprietary adapters and middleware to a blockchain, the cost savings and improvement to settlement time – currently as long as a week for some of DTCC’s trades -will be pretty monumental to their business.”
Cost saving
Blockchains are “uniquely suited” to reduce costs associated with reconciliations, settlement, and security. According to industry executives cost savings can come from eliminating redundant IT systems and trading and risk management overhead. The finance industry currently spends roughly $150 billion annually on IT and operations expenditures in addition to $100 billion on post-trade and securities servicing fees. A 2015 report by Santander estimated the global savings to banks more generally speaking could be as high as $20bn a year.
To provide an example, parties that own identical records in a single, shared ledger would reap explicit cost savings around reconciliations. Similarly, parties that transact obligations in a wholly digital, peer-to-peer network underpinned by such a ledger would reap explicit cost savings around settlement activities as well. Furthermore, parties would be able to manage implicit costs in different ways, like exceptions management, regulatory reporting, know-your-customer (KYC) and anti-money laundering (AML) that stand to be streamlined in ways that provide maximum value in a peer-to-peer workflow.

… and other possible opportunities

Other possible benefits of the use of blockchain in the derivative space include increased transparency, lower counterparty risk, and easier accounting. This may ultimately lead to lower collateral needs and improved liquidity.

Improved transparency
In addition to providing streamlined processing by supporting self-executing code, or smart contracts, it is “widely heralded as a bastion of transparency”. This is especially relevant for regulatory bodies. Since the distributed ledger’s record is immutable, a regulatory node has the potential to give government observers access to real-time data about transactions, instead of having to wait for reports from market participants.
Improved risk management
The use of blockchain technology for derivatives could also improve risk management. It could provide market participants a degree of control over risk and versatility over the balance sheet that is unachievable with today’s paper assets. As an example, parties might consider cash flow exchanges every 30 seconds instead of every 30 days, reducing counterparty and credit risk commensurately, as well as changing how these risks are measured.
Improved collateral management
Under blockchain, dealers will post collateral to the clearing house in the form of initial and variation margin by escrowing cash on a distributed cash ledger or by allocating assets held on other asset ledgers to a distributed collateral ledger. Smart derivative contracts that bind both seller and buyer will be stored on a distributed derivative ledger along with information from the cash and asset ledgers. This will lead to efficiencies for calculating derivative positions and obligations, leading to lower collateral needs.
“The smart contract can automatically compute exposures by referencing agreed external data sources (e.g. S&P 500, NASDAQ) that recalculate variation margin. Interoperable derivative and collateral ledgers would automatically allow the contract to call additional collateral units on asset ledgers to support these needs. At maturity, a final net obligation is computed by the smart contract, and a payment instruction automatically generated in the cash ledger, closing out the deal”
Improved liquidity
Transparency, alongside reduced transaction and trade maintenance costs, could, in turn, enhance trading liquidity. In present situation in order to maintain liquidity levels firms nowadays have to overcompensate where the money has to be tied up for some time before the next transaction. The improvement in funds settlement and counterparty risk assessment in a blockchain environment may shorten the liquidity cycle for various derivative positions, allowing banks to inject liquidity into the system for other transactions much more quickly.

Remaining challenges

Despite all the positives around blockchain and smart contract technology, still many challenges exist. These are mostly the same as for other financial transactions, including lack of scalability, no common standards, no legal and regulatory certainty and the arrival of multiple distributed ledgers. But also smart contracts are at an early stage of development. Defining exactly what they are and how they would work is still a challenge. Regulators and standards bodies across many different industries will need to come together to define what they mean for each transaction and sector.

“The industry assumption is that there should not be one ledger to rule them all, there will be different ledgers and we need to work together to make sure they interoperate, not just from banks.” Braine Barclays

Are there opportunities for derivatives CCPs?

An interesting question is: why is DTCC so active in the blockchain arena: for defensive or offensive reasons? Blockchain technology is seen by many as a disruptive factor for a number of market infrastructure players such as CSDs, repositories and CCPs.

One of the original goals of blockchain technology is to remove the need for central governing bodies. Traditionally, financial exchanges have required clearing houses to provide a guarantee to the winning party of the derivative contract in case the loser does not pay. The clearing house is able to provide this guarantee by requiring both parties to make cash deposits during the pre-trade phase.

The ledger will replace today’s process by which multiple parties reconcile proprietary books and records to accurately represent the custody and value of a financial instrument at any given point in time. With respect to the derivatives markets, blockchains would ultimately come to be used as digital asset registries, as a record residing in a single, shared ledger. So the mechanisms by which parties maintain custody of their obligations and the smart contracts that enshrine those obligations.

….. Yes there are!

A number of industry analysts however reason traders will continue to novate derivative trades via a Counterparty Clearing House (CCP) in order for dealers to net their exposures and monitor the financial well-being of counterparties (ensuring problems like double-spending are eliminated).

Also Nasdaq thinks there are opportunities for derivatives CCPs.

“The concepts of DLT – in its fundamental form with decentralised recording of asset ownership – and derivatives CCP clearing are inherently different. At first, it appears counterintuitive for a derivatives CCP to pursue a technology aimed at decentralising the processing of transactions and removing the need for a CCP. However, derivatives clearing consists of several processes such as position keeping, reconciliation, collateral management, risk and default management, and settlement. While margining and default management do not benefit from a decentralised process, position keeping and settlement could do – and here DLT can increase efficiency.” Fredrik Ekström, Nasdaq’s Clearing President in “Blockchain Tech for Derivatives CCPs — Friend or Foe?”

Final remarks

If this first large-scale implementation of a distributed ledger proves successful, there’s plenty of room to expand. In my mind one should be optimistic of further developments in this space, especially in consideration of the rising cost of reconciliations, post-trade operations, and security issues that market participants confront today.

It seems very likely that the DTCC initiative, once it becomes operational, will have a significant impact on the derivatives world and may open doors to massive adoption of distributed ledger technology for financial services including derivatives.

“This will be one of the first [instances] globally where we are using distributed ledger technology to become a piece of the infrastructure in a very critical market, in the credit default swaps market, and use it across the entirety of multiple players” “By recording transactions in a distributed ledger, everyone uses that same piece of information, that same trade batch, in the same exact way.” DTCC CEO Bodson.

The entire global credit derivatives market in 2016 was $544tn, according to the Bank for International Settlements (BIS), much of which is processed by the DTCC.

Carlo de Meijer

Economist and researcher

Uniform Herstelkader Rentederivaten MKB

| 21-2-2017 | Simon Knappstein |

Op 19 december van vorig jaar is het definitieve herstelkader rentederivaten gepubliceerd door de Derivatencommissie. Dit is een update van de versie die al in juli van 2016 werd gepubliceerd. De update is inhoudelijk onveranderd maar bevat een aantal toelichtingen en bijlagen om de werking van het herstelkader te verduidelijken.
De opdracht om dit herstelkader op te stellen is door de Minister van Financiën in maart 2016 gegeven. Alle Nederlandse banken hebben zich aan dit herstelkader gecommitteerd.

Tegelijk met deze publicatie heeft de Derivatencommissie ook een informatieve brochure uitgegeven. Banken zullen deze gaan opnemen in hun brieven die ze naar klanten met renteswaps gaan sturen. Hierin wordt op hoofdlijnen de werking van de compensatieregeling uitgelegd.
Eerst wordt het toepassingsbereik geschetst, voor wie geldt dit herstelkader?
Dit herstelkader is van toepassing op niet-professionele partijen die niet aan deskundigheids-eisen voldoen. Dat betekent in de praktijk dat het met name gaat om MKB-ondernemingen en particulieren. Verder gelden er voorwaarden met betrekking tot de looptijd van de rentederivaten. (Een interessante ontwikkeling is dat het gerechtshof in Den Haag gisteren geoordeeld heeft dat een groot bedrijf toch recht heeft op schadevergoeding voor renteswaps die de bank heeft verkocht, als vooraf duidelijk was dat het bedrijf geen speciale kennis had over dit soort financiële instrumenten.)

Vier stappen

Vervolgens zijn er vier stappen gedefinieerd om de hoogte van de compensatie te bepalen.

In stap 1 worden gestructureerde, complexe derivaten door de banken aangepast naar een renteswap, een rentecap of een rentecollar. Het verschil in netto cashflows wordt in deze stap gecompenseerd.

In stap 2 worden alle verschillen tussen het derivaat en de onderliggende financiering aangepast. Denk hierbij aan een overhedge in omvang, een overhedge in looptijd of afwijkingen in referentierente. Ook hier worden de verschillen in netto cashflows gecompenseerd.

In stap 3 bieden de banken een coulancevergoeding aan. Deze vergoeding bedraagt maximaal 20% van de rente die per saldo onder een renteswap dan wel rentecollar aan de bank is betaald en naar verwachting nog zal worden betaald. Deze vergoeding is gemaximeerd op €100.000,-. Mijn ervaring is dat met een looptijd van 10 jaar en een hoofdsom van €2,0 mio a €2,5 mio dat maximum wel bereikt wordt.

In stap 4 vergoeden banken onverwachte verhogingen van renteopslagen op financiering(en) die door een renteswap worden afgedekt.
De banken verwachten dat zij in de loop van 2017 hun klanten kunnen informeren met concrete compensatievoorstellen. De exacte timing zal per bank verschillen. Als de bank een voorstel heeft gedaan, kan de klant beslissen of hij van het voorstel gebruik maakt. Bij acceptatie van het voorstel, verleent hij finale kwijting aan de bank.

Toezichthouder AFM gaat er op toezien dat de banken en de externe beoordelaars dit proces zorgvuldig en volledig uitvoeren.

Als u meer wilt weten over dit herstelkader kunt u mij mailen op [email protected]

Simon Knappstein

Owner of FX Prospect

Flex Treasurer: The life of an interim treasurer

| 16-2-2017 | Patrick Kunz |

An interim treasurer is just like a normal treasurer. The difference is that he has a flexible contract and changes “jobs” more often. Assignments can be to replace the existing treasurer due to leave or sickness. This means that he gets to take an operational role and be part of the normal organization, often until a “permanent” solution is found. I did several of these roles, which often last between 3-6 months and 1 year.

Treasury Support

Another option is to provide support to an existing team/treasurer/CFO on a treasury related project. These can be short term or longer projects. Often the projects cannot be filled with the existing capacity of the team and hiring a permanent FTE for this is not an option. Another reason can be to finish the project quicker due to nearing deadlines. These projects are often several weeks to a couple of months. For example I helped a big semi-profit organization from Rotterdam to investigate into embedded derivatives in the firm to comply with new regulation. The project was finished in several weeks and the accountant accepted my conclusions in the annual report. Also I build a RAROC model for one client to periodically rank their banks based on return versus risk adjusted capital. A powerful tool to compare banks and their profitability compared to their lending.

Treasury Expert

An interim/flex treasurer does not have to be a fulltime position. At big corporates and multinationals this is often the case but smaller firms often don’t have fulltime treasurers. Sometimes the controller or the CFO fulfills the treasury position “parttime”. A part time (external) treasurer could potentially add value here. The controller/CFO has extra time for his “normal” activities and an expert is hired for the treasury task. This can be from a couple of hours a day to several days. For example I helped a real estate company with the valuation and (weekly) margin calls on their interest rate derivative portfolio, their cash management optimalisation, treasury reporting and ad hoc work. 8 hours a week.

Treasury Scan

Are you not sure if treasury is optimal at your company? A treasury scan might be a solution. A ‘quick and dirty’ scan is possible in 1 day if treasury data is collected beforehand. The costs of a treasury scan are therefore limited and often earned back from treasury savings which were identified by the scan and later realized by either the flex treasurer or the company itself; often in combination.

Do you recognize one the above situations? Do you want to know more about an (interim) Flex Treasurer?
Please click on this link or visit my expert page on treasuryXL.

Patrick Kunz

Treasury, Finance & Risk Consultant/ Owner Pecunia Treasury & Finance BV & Flex Treasurer

Rentederivaten in de ban… of toch niet?!

| 9-12-2016 | Rob Bekker |

Er staat op dit moment veel in het nieuws over rentederivaten en de ontwikkelingen rond deze producten. Rentederivaten kunnen nuttig zijn om het renterisico af te dekken, het zijn echter ingewikkelde producten. Als treasurer zult u de werking en de risico’s van het product goed begrijpen. Als u toch behoefte heeft aan voorlichting kunt u zich laten informeren door uw bank. Daarnaast kunt u kennis over de werking van deze producten in huis halen, bijvoorbeeld bij een advieskantoor dat zich specialiseert op het gebied van rentederivaten.

Wij hebben onze expert Rob Bekker gevraagd om kort in te gaan op de ontwikkelingen rond rentederivaten:

Al enige jaren lijken rentederivaten volledig in de ban gedaan, wellicht mede door de veelal negatieve aandacht in de media. Daarnaast gaven de ontwikkelingen op geld- en kapitaalmarkt niet direct aanleiding om in te dekken tegen stijgende rentes (vanuit leningperspectief bekeken dan). Nu het er (opnieuw) op lijkt dat de rentebodem is bereikt, is het toch zinvol om concreet na te denken over de renteafdekkingsstrategie die men binnen een onderneming wil toepassen.

Staan er toekomstige investeringen op stapel die financiering behoeven, dan zijn er prima renteproducten te hanteren om binnen het risicoprofiel (én strategie) van een onderneming de rentelasten op flexibele wijze in toom te houden. Zorg dat u weet wat u te doen staat als de rente daadwerkelijk weer gaat oplopen. Regeren is vooruit zien.

Met de binnenkort van de Derivatencommissie te verwachten nadere uitwerking van het herstelkader zal in elk geval duidelijk worden hoe de toepassing van rentederivaten, die in het verleden op onjuiste basis of onjuiste gronden heeft plaatsgevonden, dient te worden gecorrigeerd. Daarbij zullen de banken dan een passende compensatie moeten gaan aanbieden aan haar cliënten binnen de specifieke doelgroep. Dit zal naar verwachting opnieuw veel aandacht in de media opeisen, maar hopelijk in het juiste perspectief en dus zonder rentederivaten in de ban te doen.

Rob Bekker

Associate Partner at Treasury-linQ”

Herstelkader rentevaste MKB leningen ?!

| 25-07-2016 | Rob Bekker |

De compensatieregeling voor ondernemers met een rentederivaat blijft stof opwerpen. Gisteren verscheen het nieuws dat de Deutsche Bank zich waarschijnlijk moet verantwoorden voor de rechtbank omdat deze zich als enige weigert aan te sluiten bij de compensatie regeling die onlangs werd voorgesteld door een onafhankelijke commissie. (bron: telegraaf.nl)

Wanneer gaat de AFM een herstelkader presenteren met betrekking tot in het verleden met MKB relaties afgesloten rentevaste leningen ? Immers, ook deze leningen zullen, net als de renteswaps, over het algemeen een negatieve marktwaarde kennen. Het verschil echter met de variabel rentende lening in combinatie met een renteswap is dat de “pijn” van de hogere rentebetalingen bij rentevaste leningen minder zichtbaar is. Immers, de vaste rentebetalingen liggen al vanaf dag één onveranderlijk vast. Beide vormen bieden bescherming tegen een rentestijging, waarbij de combinatie met een rentederivaat aanvullende flexibiliteit biedt

Dat het vooral gaat om de zorgplicht die bancaire partijen in acht dienen te nemen ten opzichte van hun klanten in met name het MKB segment bij het aanbieden en afsluiten van rentederivaten moge duidelijk zijn, maar met het beoogde doel wil ik toch wel een lans breken voor de bancaire partijen die thans aan de bak moeten met de herwaardering van hun derivaten portefeuille en een daaruit volgende (mogelijke) compensatie aan de tegenpartijen uit het MKB segment.

Rob Bekker

Associate Partner at Treasury-linQ”

AFM hat es gewusst! AFM krijgt er van langs in het A&M rapport

| 01-07-2016 | Frank Wijn |

AFM krijgt er van langs in het A&M rapport over toezicht op derivatendossier. De kranten meldden woensdag jl. dat de AFM de derivatenellende onderschat had. Ook de Wet van Murphy zou van toepassing zijn, aldus het AFM bestuur. Lariekoek. AFM wist hoe groot de derivatenellende was.

Kenniscentrum Rentederivaten heeft 2 jaar (!) lang, individueel en gezamenlijk, vele MKB-derivaten klantdossiers (met toestemming van deze klanten uiteraard) met AFM besproken. Al snel werd duidelijk dat de benodigde technische en praktische kennis niet direct voor handen was bij AFM. Organiseer dat dan, denk ik dan. De bank- en klantbelangen zijn immers groot genoeg. Net als de ellende.

Typisch ook dat een van de AFM medewerksters de verhouding ‘toezichthouder-banken’ typeerde als David tegen Goliath. Ja, en? Als je Goliath tussen de ogen raakt, kun je als David gewoon winnen, heb ik ooit eens gelezen. Daarnaast heb ik vriend Murphy nooit aan tafel gehad bij al die KCR-AFM gesprekken en discussies.

Vaak spraken wij (erg) jonge personen in wisselende samenstellingen. En de twee gedreven AFM medewerkers die hun tanden er goed in hadden staan, gingen tijdens dit project bij ABN Amro Bank werken. Allemaal louter toeval natuurlijk.

Zo stuurde ik op 30 juli 2013 AFM dit mailbericht:

“Bijgaand de standaardteksten bij de advisering/verkoop van een renteswap door de Rabobank. Let op het verschil van 2008 en 2010! In 2008 is het structureel verkocht door te stellen dat de klant ‘een vaste rente gaat betalen’.

In 2010 zijn ze wél duidelijker, maar beginnen hun verkooptekst nog stééds met ‘u bent niet meer onderhevig aan rentefluctuaties’. Ik, jullie en bankklanten weten inmiddels dat dat lariekoek is……. Zie het Follow The Money-artikel. ”

Op 3 november 2013, in het programma Brandpunt, ontkent AFM glashard dat zij de brochure kent:

Ook het feit dat AFM accepteerde dat de banken hun oud-verkopers van rentederivaten verantwoordelijk maakten voor de landelijke herbeoordelingen, zei en zegt mij genoeg. De Britse toezichthouder ging daar al direct voor liggen. Hier in Nederland niet. Hier mag de ‘draaideurcrimineel’ zijn eigen handelen beoordelen en zelfs mede de strafmaat bepalen door mee te praten en onderhandelen over het Algehele Herstelkader. Bizar. Minister Dijsselbloem had 2 jaar nodig om tot de conclusie te komen dat een slager beter zijn eigen (rottend) vlees niet kan en mag keuren. Twee jaar!

Dit Algehele Herstelkader komt een dezer dagen naar buiten en ook met de door Dijsselbloem aangestelde Commissie Rentederivaten heb ik hierover gesproken. Slimme mensen met duidelijke inhoud en visie. Of zij bestand zijn tegen de enorme bankenlobby? We’ll see.

De timing van de release van dit A&M rapport heeft ook niets met Murphy te maken. Dit ‘toeval’ stelt de banken zo direct toevallig in staat om bij het uitkomen van het Algehele Herstelkader (dat zij al lang hebben ingezien) met hun vinger te gaan wijzen naar de gebrekkige toezichthouder. “Ik reed weliswaar door het rood, maar ik ben nooit adequaat terecht gewezen door de agent. Dus, tsja wat wil je dan”?

Wel zo lekker……een bliksemafleider voor jouw eigen verantwoordelijkheden.

Kortom, zowel de banken, de AFM (waar is DNB in deze?), het KiFiD en de politiek kunnen niet zeggen dat ze niet wisten hoe groot de zak ellende was en is. Laat de banken hun verantwoordelijkheid nemen. De winst op deze fout verkochte producten hebben ze al.

Frank Wijn

Expert in financiële duidelijkheid

In de praktijk: Derivaten in de zorgsector

| 30-05-2016 | Willem van Overveld |

Willem van Overveld beschrijft hoe een simpele SWAP constructie zonder margin calls toch lastig kan worden: de menselijk organisatorische kant van derivaten constructies krijgt vaak te weinig aandacht. Een voorbeeld uit de praktijk:

Het jaar 2012-2013: In een niet nader te noemen financieel zeer rendabel en solvabel ziekenhuis in midden Nederland was een bouwproject gaande ter grootte van 280 mln. euro. Het was vanwege marktomstandigheden niet mogelijk geweest om het financieringsvolume met gangbare leningen aan te trekken. De externe treasury adviseur had aangegeven dit tekort op te kunnen lossen met een renteswap. Onder toeziend oog van toezichthouders werd een renteswap aangekocht, die stapsgewijs opbouwde tot deze 280 mln., en in twintig jaar tijd weer afloste.

De renteswap wisselde 3 maands Euribor voor 3,5% lang met een risico-opslag. Tranches kasgeld onder de renteswap werden aangetrokken met de bouwfacturen die wekelijks binnenstroomden volgens een vaststaand schema. Voordat er een bouwfactuur werd goedgekeurd, werd er een rondleiding op de bouwlocatie gehouden met een bouwkundig opzichter die ook affiniteit had met bancaire diensten. Een extra bankmedewerker was ingehuurd om de verlenging van de kasgelden voor ons uit handen te nemen.

Zo op het eerste gezicht leek de derivatenconstructie een win-win situatie voor alle partijen. Het ziekenhuis kon bouwen en betaalde een vaste nette rente, de bank kon financieren, verdiende op het hoogtepunt 2,8 mln. per jaar (1% winstopslag op een volume van 280 mln.) en de groeiende Vinex wijk was verzekerd van passende zorg. De ratio’s van het ziekenhuis liepen netjes en voorspelbaar binnen alle grenswaarden die met de banken en WSF waren afgesproken.

Voordat ik aantrad als vaste treasury officer was de situatie aan het kantelen. De bedenker van de constructie en de HEAD waren van baan gewisseld en het ziekenhuis had er geen rekening mee gehouden dat er schaarse kennis nodig is om een dergelijke constructie goed te kunnen administreren. De enige persoon die die kennis had was de HEAD zelf, gesteund door externe adviseurs. Zo was men in het ziekenhuis wel op de hoogte dat de IRS (de swap van Rob heette die inmiddels) steeds hogere rentebetalingen vergde, maar men wist niet dat er ook daadwerkelijk geld opgenomen moest worden. (Er is voldoende liquiditeit op de bank en lenen doe je zo min mogelijk toch?) Het gevolg was een SWAP met een verschil tussen werkelijk opgenomen kasgeld van zo’n 60-70 mln. euro.

Een inefficiënte SWAP, waarbij je rente betaalt voor bedrag ‘x’ en kasgeld hebt opgenomen voor bedrag ‘y’ is prettig voor een bank, en hoeft ook nog geen echt probleem te zijn voor een ziekenhuis als de rente niet te hoog of te laag is. Bij mijn aantreden was de Euribor al hard op weg om naar 0 te gaan. Het gevolg was dat de marktwaarde van de SWAP zeer negatief was. We wisselden 3,5% rente voor 0% Euribor: een dure verzekering. Mede ook omdat de effectieve rente over het opgenomen bedrag tussen de 6 en 7 procent lag ontstond er een situatie die aan de toezichthouders niet meer uit te leggen was.

Ik kreeg de instructie om dit probleem op te lossen. Tijdens mijn proeftijd begon ik al de noodzakelijke beleidsrapporten te schrijven, bouwfacturen te verzamelen en liquiditeiten ter grootte van 40 mln. op te nemen. Doel daarvan was om niet in de jaarrekening te hoeven vermelden dat de marktwaarde van de swap 60 mln. negatief was. De accountant kreeg de opdracht een RFP uit te schrijven. Kostprijs hedge accounting kun je alleen toepassen bij een swap die redelijk nominaal loopt. Omdat facturen voorspelbaar waren, was dat gedeelte in een paar weken door mij opgelost. Echter er was ook een vrij te besteden tranche van 23,5 mln. voor vaste medische apparatuur in het nieuwe ziekenhuis maar er was geen investeringsbegroting naar de inkoopafdeling gegaan. Inkopers zijn opgegroeid met Hollandse zuinigheid. Zij moesten tegen hun vakprincipes in zoveel mogelijk geld uitgeven voor medische apparatuur die zij wellicht in goede staat elders in het ziekenhuis konden vinden.

Op het hoogtepunt van mijn interventie stond er 60 mln. aan liquiditeiten op de bankrekening. Om ons heen vielen allerlei bedrijven om door liquiditeitsproblemen. Bij ons liep het geld langs de muren naar beneden. Even hebben we getwijfeld of we zelf geen bank moesten spelen. Dat leverde meer op dan de 0,2% rente die we zelf ontvingen op onze rekening courant. Ik kreeg geen mandaat om gedeelten van het geld elders onder te brengen: te lastig, risicovol, niet conform treasury statuut etc.

Ook in de rentenacalculatie waren er dingen mis gegaan. Ik ontdekte dat er 1,5 mln. euro te weinig was nagecalculeerd aan de broodheren van het ziekenhuis: de zorgverzekeraars. Ook hier had de Hollandse zuinigheid een rol gespeeld: bruto swapbedragen betalen en netto bedragen nacalculeren. NZA (Nederlandse Zorg Autoriteit) oordeelde dat er een lek in de wetgeving was ontstaan en ze geen middelen hadden om een ziekenhuis te ontzeggen de bruto SWAP bedragen in rekening te brengen. Wij zetten door en kregen ons gelijk. We hadden snel 1,5 mln. verdiend. Na deze reparatie actie werd mij een andere baan aangeboden.

Ik hoorde dat de NZA was ingevallen in de week nadat ik van baan was gewisseld. Dit had niets met treasury te maken, maar met verkeerd gedeclareerde zorgproducten. Het ziekenhuis kreeg 20 mln. euro boete opgelegd. Gelukkig had het betreffende ziekenhuis genoeg liquiditeit op de bank staan op dat moment.

De veelbelovende, maar wat stagnerende Vinex wijk waarin gebouwd werd, is later qua bouwvolume woningen ook bijgetrokken.

Willem van Overveld – Allround finance / treasury professional
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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:

A change of the reference rate in terms of content or effective representation (Libor).
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.
The lender changes the surcharge because he has revised the credit rate of your company.
The underlying loan is canceled or restructured.
The counterparty in the swap agreement requires an additional payment if the swap has a negative value.
Possible P&L and Balance sheet effects due to changes in the valuation of the swap because of changes in regulations, for example IFRS.
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

Independent Treasury Consultant & Interim Manager