Client Forward Request Without Commercial Underlying
A UK corporate client has a €10m payable due in six months and asks your FX desk for a 12-month EUR/USD forward on €30m. The client says it expects further European purchases but has no signed contracts for the extra €20m. Your bank’s policy requires documented commercial underlying for forwards above €5m. The relationship manager pressures you to accommodate the client, noting the bank earns good deposit business from the company. Current spot is 1.0850/1.0855. Twelve-month forward points are 85/90; six-month points are 40/45. The client asks for a ‘sharp’ rate and says it will compare with two other banks. Your desk’s EUR/USD position is flat. The client has not provided any hedge documentation. The RM suggests booking the whole €30m as a ‘treasury’ forward and sorting the paperwork later.
1. Calculate the six-month and twelve-month forward rates available to the client, and explain which one matches the known exposure.
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The client needs to buy EUR and sell USD, so it deals on the bank’s offer side.
- Six-month forward: spot offer 1.0855 + 6-month points 45 pips (0.0045) = 1.0900.
- Twelve-month forward: spot offer 1.0855 + 12-month points 90 pips (0.0090) = 1.0945.
The known commercial exposure is €10m payable in six months. That matches the six-month forward at 1.0900. The extra €20m has no signed contracts and no documented underlying, so the twelve-month rate of 1.0945 is not a hedge for a known exposure; it would be a speculative position. The forward points reflect the interest-rate differential between USD and EUR and are not a forecast. Using the 12-month rate for the whole €30m would mismatch the hedge tenor and notional to the actual liability.
2. Is it acceptable to book the full €30m and complete documentation later? Explain the conduct and policy issues.
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No. Booking the full €30m without documentation would breach the bank’s policy and create conduct risk.
- Policy breach: the bank requires documented commercial underlying above €5m. The client has documentation for only €10m. A ‘treasury’ label does not cure the absence of underlying.
- Suitability and mis-selling risk: a forward is a binding obligation, not an option. If the client has no underlying for €20m and EUR/USD moves against it, the client faces a real loss. The bank could be found to have sold an unsuitable speculative product.
- Documentation risk: ‘Sorting the paperwork later’ means the bank may be unable to enforce the trade properly and may breach its own controls. It also creates an incentive to backdate or misdescribe the purpose.
- Conflict and pressure: the RM’s deposit-business argument is irrelevant to the hedging decision. Relationship pressure must not override policy.
The correct approach is to execute the €10m six-month hedge and decline the unsupported €20m, or escalate for an approved exception with proper credit and client documentation.
3. Draft the key points of your response to the RM, including an alternative structure that serves the client without breaching policy.
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Key points to the RM
- We can execute a six-month forward for €10m at 1.0900, matching the signed payable. That protects the known exposure.
- We cannot book the additional €20m as a forward without documented underlying. A forward is a binding commitment, and booking it before paperwork would breach policy and expose the client and the bank.
- I am happy to review the additional exposure as soon as contracts are signed. If the client wants protection for anticipated but unsigned purchases, the appropriate route is an approved currency option or a smaller disclosed facility with credit approval, not an undocumented forward.
- Please do not communicate a firm rate for the €30m to the client until the policy issue is resolved.
Alternative structure Offer the €10m six-month forward now, and arrange a review date or a framework that allows additional forwards once purchase contracts are available. If the client genuinely needs contingent protection, price a EUR call option for the extra €20m; the premium buys a right, not an obligation, and avoids the documentation mismatch. Escalate to compliance if the RM continues to press for the full amount.