Nick Pedersen, managing director, Equiniti International Payments looks at why companies are eliminating foreign exchange (FX) derivatives from their services and why integrated international payments solutions are becoming the preferred focus for 2017.
The recent pull back from various currency derivative based contracts offered from both bank and non-bank providers has been noticeable. The latest provider to do this, reported recently by Reuters, is WorldFirst, following the closure of its corporate options business in a move it said would affect up to 50 staff members.
Taking a step back for the moment, it is fair to say that currency derivatives are a very complex and murky world. With this in mind, it’s clear that the understanding of more complicated products throughout the FX market, and not just currency derivatives themselves, is usually lacking at both the seller i.e. the FX brokerage and buyer i.e. corporate ends of the deal.
From experience, we’ve seen that quite often currency derivative based contracts are disguised as hedging products but are really sold for the purpose of speculation on currency markets. This is a certain aspect of FX based activity that should only be recommended for hedge funds, or sophisticated investors who have a wealth of experience and therefore a strong understanding in what they are doing and trying to achieve.
This strong understanding of these types of products is key for a successful running of any FX based programs. However when cross border markets are particularly volatile, as they have been since the vote to leave the EU, currency derivatives designed to remove the risk of currency fluctuations can and often backfire, resulting in exposure for companies to levels of risk and financial losses they never anticipated and may not have planned for.
As history has shown us, the main high street banks have historically been subject to very aggressive fines for the miss-selling of these types of complex FX products. Conversely, what we are seeing now is a shift in regulatory focus from these main high street banks, towards the non-bank providers, resulting in several providers removing their FX services, as mentioned previously with the example of WorldFirst.
As we enter further into 2017 and with the political and financial landscape not looking anymore less uncertain, small business owners and corporates should look to seek out integrated payment solution providers and not the complicated risky currency derivatives designed with hidden margins, charges and risks that are unclear.
These integrated payment solution providers, such as what we aim to achieve here at Equiniti International Payments, look to offer a full range of assured and simple to execute payments solutions, at the same time as utilising the latest technology to achieve accurate delivery.
Forward contracts are simple, straightforward, and effective products that reduce risk, and in uncertain times, the simpler the product the better. Here at Equiniti International Payments we aim to marry simple, clear products like forward contracts, with an integrated end to end payment solution that can let a company focus on running and growing their business. Risky, speculative derivative contracts are more hassle than they are worth.