Forex options software boosts exotics appetite, say bankers

The use of independent foreign exchange options pricing software by corporates may have narrowed banks' margins, but it has given a substantial boost to the exotics market, bankers told RiskNews sister publication FX Week .

"Clients are more informed, so this opens the door to more complex hedging and leveraging tools in FX options, such as digitals with knockout, contingent accruals and volatility swaps," said Derek Sammann, London-based global head of FX options at Credit Agricole Indosuez.

Corporates represent a growing client base for FX options pricing software vendors, as companies prepare for changes to international accounting standards next year that require them to mark derivatives positions to market on a regular basis. These prices must be independent, precluding the use of free software from banks.

The heightened price transparency this brings has resulted in reduced margins for banks, but it also offers an opportunity to enhance their business, said Sammann. "If banks treat this as a threat then they will suffer," he said. "This is an opportunity to improve customer service by delivering increasingly sophisticated bespoke solutions to meet our clients' needs."

Price transparency has already increased over the past few years as a result of the distribution of free software and e-commerce, said Sara Sullivan, senior manager in FX options sales at ANZ Bank in London. "But banks are not just there to give prices, they also add value in terms of understanding the FX markets."

Corporate clients are not able to devote the same level of resources to monitoring the market, so it is up to banks to advise their clients of how movements can affect their portfolio, she added.

The changes have ultimately been beneficial for banks, as corporates are more comfortable using options, said CAI's Sammann. This has led to a natural shift towards greater customer service and a requirement for sales staff to have a better understanding of derivatives across asset classes, he said.

It was feared that some corporations would reduce their level of options trading as a result of the impending accounting changes, but this has not occurred, said officials. "Many clients have been reviewing their treasury policy, in anticipation of the introduction of IAS 39, so they may have suspended new work, but none have stopped," said ANZ's Sullivan.

Scaling back occurred following the introduction of FAS 133 for US corporations in June 2000, said Drew Gross, head of corporate sales at BNP Paribas in New York. This has changed significantly in the past year, however, as significant moves in the dollar have shown corporate clients that using forwards alone does not provide the same level of protection from currency moves as using options.