Italian companies focus on derivatives

New Angles

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Italian utility company Enel has a “tactical component” to its hedging activities that tries to exploit market opportunities, according to Cesare Chiabrera, its head of financial planning and risk management within the finance, administration and control department, speaking at Risk’s Risk Italia conference, held in Milan in May.

“We have a tactical component [to our treasury business] that exploits market opportunities,” said Chiabrera, a keynote speaker on the first day of the conference. “The aim is to optimise the risk-cost profile of the financial portfolio of Enel, Risk’s corporate risk manager of the year, and to benefit from special opportunities in the market,” he added.

Chiabrera said the trading team will act at specific times, such as when volatility in swaptions suddenly increases. “Then we could sell swaptions, and if exercised this would force us to go for a hedging swap. We try to exploit opportunities with these steep volatility curves.”

Chiabrera added, however, that Enel tends not to use more exotic derivatives. “We avoid second- and third-generation instruments,” he said. “They are not really needed. We use swaps, futures, caps, floors, forward rate agreements and swaptions.”

He said Enel’s treasurer, financial manager and analysts meet to review the market situation, current hedging ratios and future hedging ratios every week. They also then decide on a strategy for the following days and agree on steps to be taken to implement specific transactions.

Keynote speaker Stefano Peirini, head of financial markets at Italy’s national railway company, Ferrovie Dello Stato, provided delegates with an overview of what he thinks a risk manager’s main goals should be. “Something that you will hear very often when you speak to people is that they will say their company does not have risks. But of course there are so many risks in reality, and these are not just confined to the financial sector – think of Parmalat for example.”

Peirini said the risk manager should not just be concerned with derivatives. “That is the end stage,” he said. “You must monitor the risk management of the entire company. So it’s not just hedging. The risk manager should assess the risk of a loss of sales, of staff leaving and so on.”

He continued: “You should be able to evaluate the exposure of each factor to each risk. Often at times there is only qualitative analysis to be made, for example in sales. This is what I’m trying to do, but it’s very difficult. I’m trying to understand the embedded risks in the cost structure.”

Peirini was then asked if he regarded exotic derivatives instruments as being too expensive. “The risk manager should be able to unbundle the components themselves,” he said. “If he succeeds in this, he could really manage the single risk elements.”

Christoph Aellig, head of counterparty risk financial solutions at Zürcher Kantonalbank, said that if banks enhance their risk management then they will also enhance shareholder value for the company. “And trading counterparties also look at your risk management capabilities,” he added.

Aellig said that if a bank’s aim is to have a truly integrated risk management system in place, then it is not sufficient to buy an off-the-shelf product for each type of risk – market, credit and operational risk. “Measuring risk is not where you want to stop, it’s where you want to start,” he said. “A good system must be comprehensive – you must catch the big risks.”

Mauro Maccarinelli, head of the portfolio management department within the risk management group at Banca Intesa, said that one of the main risk management challenges for his bank is the introduction of new financial products and how this affects internal risk measures. “New products are not introduced into the value-at-risk assessment immediately. A business plan has to be worked out for when they can be introduced.”

Marcello Minenna, enforcement officer at Consob, Italy’s securities market regulator, said market abuses do not only cover insider trading but also rigging of the market to manipulate prices. Consob is about to be given more power by the Italian state, and this centralisation will bring Italy’s regulatory structure more in line with that of the UK and the US. “In a few months, Consob will be allowed to penalise any possible [market] breaches, rather than having to refer them to the courts,” he said. He added that Consob, through its quantitative measures, can help to identify market abuse.

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