By Sascha O'Sullivan
[Re:UK banks face wave of ‘exotic’ forex derivatives claims after collapse of Pound, yesterday]
Businesses, which were scrambling to protect their bottom lines against the dollar’s record highs and the euro, pound and yen’s record lows, have been let down by traditional banks.
This “wave” of “exotic” forex derivatives highlights that despite fierce fintech competition, banks are still up to their old tricks of chasing down profits at the expense of their customers. This can have dire consequences, particularly for smaller businesses on tighter margins. One bad hedge or backfiring derivative can leave them in the red.
Genuine partners would advise the majority of businesses to keep it simple when it comes to hedging. It shouldn’t be about taking advantage of market volatility but should be used as a security mechanism allowing business to lock in rates ahead of buying and selling goods and services to bring certainty to the currency chaos.
Vanilla FX products are growing in popularity as they offer security but also flexibility in that they are easier to unwind if the market moves against you or risk appetite changes. Exotic derivatives, on the other hand, are complex instruments which are difficult to sell to others as there isn’t as big a market and can lead to bigger losses than not hedging at all.
Stories like this will continue to push businesses away from traditional banking partners towards fintech partners which can offer more flexibility and have their customers’ interests at the heart of their business.
Laurent Descout
Neo
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