Assignment Task: Derivatives & Financial Markets
You are a member of the legal department in Best Bank plc. After months of sales activity, a new client contacts BestBank plc - and confirms to your relationship manager, Stephanie Engles, that they would like to trade certain product types. They themselves are a small bank - Banque Geneva AG - incorporated in Switzerland and have decided to expand the scope of their trading activities.=
They tell Stephanie Engles that they want pricing for a repurchase trade that they are keen to enter into shortly as they want to use some bonds that they have on their balance sheet from an investment banking deal. Additionally, as a result of the bond deal they need to enter into interest rate swaps and FX transactions to help manage their risks in these areas.
Finally, they are interested in entering into a highly structured equity swap. Your Sales Team are very excited about these new opportunities and call you to ask what documents, if any, they will need to put in place to allow trading to take place. They want to start discussions immediately and are not happy to wait for documents to be drafted. This is worth a lot of money to them and will help them reach their budget targets for the year. Also, the client is talking to at least 3 other financial institutions! They need to move now!
What documents do you think would need to be put in place to allow trading to take place, if any?
What would be the benefit of putting these documents in place - sales need to move quickly so why not let them trade without documents in place? After all there are competitors prepared to do so!
The risk department is keen to understand how you can protect BestBank Plc from a default under the equity swap. How would this impact any repurchase transaction and interest rate swap?
Six months later Banque Geneva AG contacts Stephanie Engles to say that one of their other branches has been in touch as they will need certain securities to allow them to honour obligations to another client. They don't want to go into the market and buy the securities as they will only need them for a relatively short time - is there anything Sales can do for them? They have other securities that they could use as collateral.
What would you suggest to Sales?
How can you give the risk department comfort that you can protect the financial institution across these different transactions under so many different documents?
Some months later, Sales call you again to say that Banque Geneva AG has approached them again as they have a client who needs to hedge power requirements in one of their power plants. Banque Geneva AG do not want to take the risks involved in that as they are not very familiar with the power market. They ask if Sales can come back to them with a suggestion to allow them to stand between their client and BestBank plc so that they can maintain their client relationship but not have the risk of trading.
What documents would you want to put in place with the client in this case?
The Risk department are keen to keep exposure to a minimum - what can you suggest to assist with this from a documentation perspective?
A key concern for the Risk department is that the client may have its long-term credit rating reduced in the near future and they are worried that any documentation put in place now would not give them adequate protection if this were to happen.
What can you do to deal with the Risk department's concerns?
One of the Risk officers is new to these documents and asks you what can be done if Banque Geneva AG were to fail to make a payment because their client doesn't pay them?
What protections are in the document to reduce risk and allow the financial institution to protect itself going forwards?
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