Treasury Management: NeuGroup FX Groups Set Agendas

FX Managers set top priority for September meeting agendas.

Members of The NeuGroup’s FX Managers’ Peer Groups 1 & 2 set agendas last week for their meetings in September. The resulting agendas overlap on topics of high import, starting with the implications of financial reform and necessary action items for corporates. The principle concern for FX managers is the impact of OTC derivatives reform to be ushered in by the Dodd-Frank legislation. Members of the FX groups give priority to the immediate practical concerns, such as:

• Will ISDAs need to be renegotiated if banks have to “push out” certain activities to a separate legal entity, and what happens to bilateral CSAs? Naturally, they want to know what steps their bank counterparties are required to take and how it will impact them from a process, credit risk, and cost point of view. There are already reports circulating of dealers changing the processing entity for derivative trades, which has got FX managers’ antenna up to see if master agreements need to be amended to avert settlement issues. Treasuries that have CSAs in place also are asking about changes required for these, including regulatory margining requirements vs. the negotiated terms of their CSA. (See related story here.)
• How to navigate potential OTC market shifts off-shore? There has long been the expectation that derivatives dealers would look to figure out how to move OTC trades off-shore to circumvent at least some of the reform regulation. If this shift happens, it will be starting soon, so FX managers want to know how to manage attempts at jurisdictional arbitrage from their perspective.
• Understanding the various mechanisms available to clear exempt and non-exempt derivative trades, including connectivity to exchange CCPs and alternatives. Standardized contracts will be migrating to exchange clearinghouses as well as electronic multilateral clearing platforms. The latter may also accommodate some forms of remaining OTC derivatives. As corporate end-users, FX managers will want to know how current clearing will work and evolve over time to both capture new efficiency opportunities (e.g., STP) and mitigate operating and counterparty risks.
• What are the available derivative processing solutions? A related point for discussion involves the specialty applications, new treasury system functionality and services by external providers that is or will be offered to FX managers to help them process derivative trades under the new market rules. This includes a comparison of in-house vs. outsourced solutions offered by dealers and custodial banks.

With new derivatives trading rules as a backdrop, FX managers also are eager to digest the FASB’s proposed update on hedge accounting guidance currently out for comment.