A roundup of issues International Treasurer is investigating.
The Senate finally took up debate of financial reform legislation today. Republican senators’ obstruction of the bill fell prey to the Democrats’ charge that their rivals were in the pocket of Wall Street, a position that was ever-more politically tenuous in the wake of Congress’s Goldman Sachs inquisition on Tuesday. Current language in the bill being considered gives corporates an exemption from the clearing and exchange trading rules for OTC derivatives, and forces banks to spin off their derivatives businesses. The latter issue is in the cross-hairs of industry lobbyists; the Wall Street Journal estimated the five biggest banks earn about $26 billion a year peddling derivatives.
Meanwhile, the issue of how to benchmark and—if necessary—fire external managers is becoming more important to treasurers as the persistent low-rate environment makes cash management particularly difficult, and the probability of higher rates in the near future makes decision-making problematic. Attendees at this week’s Treasury Investment Managers’ Peer Group meeting mulled different ways to evaluate performance and how best to use information from best-of-breed managers to inform decisions.
Finally, the next issue of International Treasurer will feature an article on FX delta hedging. This can be particularly appropriate when executing a large option deal structured in several tranches to different expiry dates. Over the time that it takes to execute a series of hedges, the spot rate used for pricing the deal will move some, and can move significantly, potentially impacting the premium greatly. Delta hedging allows a company to lock in the spot reference rate for all the individual tranches of the deal. This makes for a more efficient competitive-bid situation, since the bank’s risk is concentrated to the implied volatility and not the spot movements, which in turn puts the bidding banks on an even playing field and allows the company to compare premium bids more easily.