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FOCUS: Banks welcome changes to exchange controls
Johannesburg, April 19 (I-Net Bridge) - Changes to the exchange controls applying to forward cover and currency hedging have been widely welcomed by banks which say that it will add much needed liquidity to the country’s foreign exchange markets.
According to Rand Merchant Bank (RMB) the new active currency management framework, approved by the Minister of Finance, allows for any currency risk to be hedged and actively managed on an over-the-counter basis, using forward exchange contracts or currency option and derivative structures.
This means that managing currency exposure will be more flexible and easier to administer, it adds.
The major change is that the owner of the currency contract can renegotiate the terms and the price of the hedging contract as many times as is felt necessary. Previously, parties could not alter or cancel their currency hedging contracts unless the underlying obligation changed or fell away, as doing so was considered to be speculation.
“This is a considerable shift in exchange control policy,” says Rand Merchant Bank and FirstRand Bank’s Head of Foreign Exchange Control, Hannes Vos, who was instrumental in the implementation of the new legislation. “The introduction of these changes will add some much needed liquidity to the foreign exchange markets in South Africa and will hugely benefit our clients whose business activities expose them to currency risk.”
The changes only apply to contracts managing or hedging currency risk of up to six months. Historically most customers’ contracts have had maturities of less than six months. Once the process has been implemented, and the impact on the foreign exchange markets assessed, further relaxations may be considered.
Active currency management will also allow participants a more flexible and less cumbersome way of managing currency exposures. Administrative procedures have been eased with customers now required to provide documentation only once, at the time of physical transfer of funds, rather than a number of times during the foreign currency hedging process, putting
the onus on the “payaway” bank rather than the bank which originally established the contract. The previous requirement to provide documentary proof of commitment within 14 days of the establishment of the contract also now no longer applies for contacts of less than six months to maturity.
Banks will now also provide new currency management products, which were previously not allowed - leaving the door open for an array of innovative products.
“We welcome these changes as we believe it will benefit our customers as well as the banks. The new exchange control rulings will increase flow and reduce the administrative burden placed on participants in this market,” says the head of RMB’s Fixed Income Currency and Commodities division, CJ Giddy.
The country’s biggest bank, Standard Bank (SBK), says dynamic hedging will allow the bank to service all clients’ hedging requirements, including certain transactions that had previously been denied. The benefits of the changes made will include:
- Hedging permitted for all direct underlying exposures;
- Active hedging for all short-term commitments, which will provide greater flexibility; and
Reduced administration, as trade documentation will no longer be required in order to justify a trade.
These benefits will apply to all contracts traded with a six-month tenor or less. No announcements have been made on hedges for longer than six months.
Says Richard de Roos, Director Foreign Exchange at Standard Bank: “This liberalisation represents significant progress for the local foreign exchange market, but it is not meant to encourage speculation. Entry into the foreign exchange market although now entailing less administration will still necessitate a direct underlying exposure or embedded currency
risk.”
All active hedging should therefore not extend the nominal value required in relation to the underlying exposure. Standard Bank will provide the SARB with regular trade reports on the active hedges. Any suspected speculation will be scrutinised by the SARB.
Dynamic hedging will help limit risk to import and export payments, tenders, acquisitions, balance sheet risk and loans. This also includes any exposure to the market by individuals who may now hedge travel or offshore investments.
Contracts may be entered into or exited at the client’s discretion, and need not run for the full length of the commitment period.
Prior to this announcement, any negative or positive cash flows resulting from the early surrendering of a forward exchange contract could only be settled on maturity of the instrument. Clients may now surrender or cancel contracts traded or partially reverse some of the initial trades prior to the expiry date and the resulting cash flow can be settled
immediately.
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