DERIVATIVES -- UBS and Deutsche Bank share the derivatives spoils in volatile market

UBS ranked top for options and Deutsche Bank topped the poll for forwards. Corporate clients ranked ABN Amro highest in both categories.

Raymond Koole, head of FX forwards trading for Deutsche Bank in London, said that the bank’s size has been a great asset in terms of client service.

"When we ask customers what they value most they say it is the consistent delivery of liquidity and a quick response to price requests," said Koole. "We always try to be there for our customers, so when liquidity has been up and down like this year, clients appreciate us."

And with big moves in all major currency pairs during the year more clients are using derivatives to hedge their FX exposures.

Data released earlier this month from the Bank for International Settlements showed that, in the first half of 2003, derivatives usage increased by 22% year-on-year, led by a massive surge in options usage by corporates.

Some of this rise can be explained by a notable lack of hedging activity the previous year, as corporates in the US faced the hurdle of accounting standard FAS 133. But the increase this year also relates to new business coming from clients that had not used derivatives before, said officials.

"Clients use forwards to either lock in an advantageous spot price or to borrow or lend money," said Koole. "Lending [activity] has been little different this year but for those looking to lock in prices, the volatility has shown their potential exposure and increased activity."

However, further demands of accounting standards on non-financial companies, as negotiation continues over certain clauses in IAS 39, may cause a reduction in the hedging of foreign flows by corporates despite the up-tick in the first half of 2003.

The Association of Corporate Treasurers has lobbied on this point and some options managers believe corporates will avoid hedging as much as possible due to the continuing confusion over standards.

ABN Amro has helped corporate clients to deal with these issues through its FX analytics and risk advisory group that works alongside sales. Kenrick Ramlochan, European head of FX analytics and risk advisory at ABN Amro in London, said that a lot of the work the group does with corporate clients looks at accounting issues. "Some clients believe that having to mark hedges to market could cause volatility in their accounts. We work with them, through modelling, to help mitigate that effect," he said. This process is aided by the various skills in the team, especially Matthew Daniel in New York who is able to draw on his consultancy background to communicate with corporates.

Similarly, Ed Hulina, head of FX marketing at UBS, said the bank has been advising corporates on accounting and tax issues and on the regional differences between the US, Europe and Asia. "Not all sales staff are capable of doing this as it requires a special skill set and this is an area we are building in," he said.

Increasing transparency in the derivatives market has also led to increased volumes generally but particularly for those firms that have invested in technology.

Deutsche’s Koole said that clients have benefited since the bank added streaming prices to its autobahnFX platform this year. "Once you do that it gives a speed advantage and also means clients can view the market without having to request a quote," he said.

Yvan Ducrot, head of FX forwards and short term interest rates at UBS in London, said that by investing in technology, sales teams are able to spend more time speaking with clients to understand their needs as they structure trades.

Hans-Ueli Berger, head of exotic options at UBS said: "Particularly with options, good advisory goes beyond the initial deal, and continues through the life of the option structure. Positions can often be restructured advantageously as needs and market conditions change."