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How to get a fair deal on your derivatives trades
| 15-6-2017 | Simon Knappstein | treasuryXL
We discovered the article ‘Are you getting a fair deal on your derivatives trades” on treasurytoday. In the article derivatives are described as a good tool to mitigate risk and protect the company’s financials from moves in the market. However, derivatives come at a cost and often these costs are also hidden, which means that the treasurer cannot be sure that he is getting a fair deal.
Price of the deal
Greater transparency is needed and that was the reason why company NEXTrioptima developed its triCalculate solution. When treasurers execute a deal with a bank they typically cannot see how the price of the deal is calculated and what the bank is charging them for credit risk.The tool triCalculate tries to change this by taking the corporate’s derivatives trade file, a credit curve file and a credit support annex (CSA) file (where one exists) and running these through a series of highly complex mathematical simulations. The result: an accurate XVA calculation that enables corporates to quickly identify and price the impact of a counterparty default and the cost of funding a derivative portfolio. This is the first Software as a Service (SAAS) on the market. The tool does not only provide companies with greater transparency over their current derivative portfolio, but also offers the chance to plan new deals much better.
We asked our expert Simon Knappstein if this tool is really worth the while.
All the capital a derivative trade consumes, or is expected to consume, over its lifetime is increasingly incorporated in the price of a trade. CVA, a valuation adjustment for counterparty credit risk was initially the major adjustment, soon to be followed by FVA (funding value adjustment) and many related adjustments that go under the umbrella name XVA. Properly calculating these adjustments for every trade on a portfolio basis is difficult and time consuming. So the new product offering TriCalculate by NEX TriOptima looks like a promising tool for corporate treasurers to help them gain insight in the pricing process of derivatives offered by their bank. By the way, being able to calculate a fair value on a potential trade does not guarantee you a fair deal, but it will certainly help.
Simon Knappstein
Owner of FX Prospect
More articles of this author:
FX global code of conduct
Negatieve interest rate policy: No lasting effect on FX
PSD2 is coming soon: Some information about PSD2 summed up
| 14-6-2017 | Mark van de Griendt | PowertoPay |
PSD2
With the coming of PSD2, banks are obligated to provide these (selected) third-party providers access to their customers’ accounts through open API’s. This will enable third-parties to create financial services on top of the banks relation data or banks’ infrastructure.
Banks get a different role and since these third-party companies can now be their competition, banks are working together with these FinTech companies. PSD2 will fundamentally change the order to cash value chain, what business models are profitable, and customer expectations. Through the directive, the European Commission aims to improve innovation, reinforce consumer protection and improve the security of internet payments and account access within the EU and EEA.
For banks, PSD2 might possess substantial business challenges. IT costs will increase dramatically due to new security requirements and the opening of API’s. And, as FinTech’s take over the customer interaction, banks may find it increasingly difficult to differentiate themselves in the market for offering loans. The first business cases show us successful new products for renewed loan offerings based on actual data, PSD2 will boost product development, end-users will take advance of new market propositions.
What exactly will PSD2 bring?
Sources:
SEPA for corporates
Evry
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Payment threat trends
| 12-6-2017 | Lionel Pavey |
Payment policies
Generally, companies will have a secure, written policy for making payments. These will be generated from the purchasing and bookkeeping systems and should be reconciled. Beneficiary static data should be restricted to view only for the staff – only authorized staff can make and amend the data.
Payments relating to creditors should only be processed if a purchase order has been originated internally and is approved. All payments should be uploaded to recognized bank systems and verified with a six-eyes doctrine.
The biggest area of concern relates to electronic payments outside of the abovementioned process – namely via credit cards. If inventory levels are not correctly monitored then it can occur that a one-off purchase order is made. Payment should be made through a recognized payment provider such as Ideal or PayPal. Furthermore, the issuing of credit cards to key personnel leads to many more risks that can not be directly controlled by the company.
Risks for companies
When using a credit card in a public area, there are a few obvious dangers:
Up to now, the majority of payments have occurred on stand-alone bank software. As we enter the electronic age of disintermediation, there are many companies offering payment services. Blockchain and bitcoin are the obvious examples. No system is completely secure but, in the past, banks have made good on any loses if it was shown that the banks systems were at fault. However, hacking into Blockchain wallets and taking electronic coins has occurred and the losses are not covered as they are not run by banks or governments.
For a company this leads to direct risks such as monetary loss, fraud and loss of reputation. Also of concern is the danger of company data being stored by external third parties.
Clearly defined doctrine
Despite all the technological advances being made that make payments easier, companies need to stick to a strong clearly defined doctrine for payments:-
Blockchain
Blockchain is a reality – its uses go far further than just payments. The technology can not be stopped – the major issues (in my opinion) revolve around the electronic currencies (Bitcoin).
Companies would do well to investigate the advantages that Blockchain offers and consider how it can be implemented within a company. Some of the potential uses include compliance, insurance, finance, energy, supply chain management, human resources, accounting, data, taxes etc.
As for payment threats – stay alert, identify and manage risks, and keep abreast of changes.
Lionel Pavey
Cash Management and Treasury Specialist
Safety of payments
Payment fraud – Leoni case