The Last Look…

With TARFs like these, who needs enemies? Or the dilemma of a sales person.

On a sunny summer day in 2019 a PR note from Western Union dropped into my inbox, breathlessly explaining the surge in demand for sophisticated hedging contracts, such as target redemption forwards, among small businesses.

A survey of these SMEs had clearly shown that business owners in the UK were fighting back against the challenges posed by the complete nightmare that the pound’s exchange rate had become in the midst of never-ending Brexit negotiations. TARFs, the PRs said, were a crucial tool in this battle.

As currencies correspondent for the Financial Times, this struck me as a rather stupid thing to advertise. Sure, we were more than a decade on from the global financial crisis, but it occurred to me that shouting about selling complex(ish) derivative contracts to small businesses might not be such a great idea, just a few years after the mis-selling scandals involving interest rate swap products to, you guessed it, SMEs.

I decided to investigate. Two articles later, I got word that Deutsche Bank had initiated an investigation into its FX structuring practices, an initiative dubbed “project teal,” as a result of my reporting, with the aftershocks lasting well into 2021.

Aside from regaling readers with my glory days as a journalist (you mean they’re over? -Ed), I’m talking about TARFs now because (well, because Colin dragged it up, didn’t he?) for me, they encapsulate some of the tensions that exist in OTC markets and specifically, in FX. Because if one of the most often talked about features of currencies markets is caveat emptor, the other is relationship-driven. But how can the two really co-exist and why?

Consider this: Rahul Sharma, who with his wife, ran a travel company, banked with a UK entity, where the sales person assigned to his firm did such a good job that Mr Sharma regularly dined with Mr Sales who over the years became a firm family friend. Mr Sales was doing really well in his career, selling interest rate and FX hedging products to SMEs so effectively that he moved jobs regularly to benefit from better offers. Every time he moved, Mr Sharma agreed to buy a new contract facing the new employer of Mr Sales.

The old adage warns about mixing business and friendship, and yet in FX, there is an illusion that they co-exist, allowing one or the other to dominate depending on the situation

By 2019, Mr Sharma and his wife were facing financial ruin as a result of the tangle of complex bets they had on currency prices and interest rates. They lost all their pensions and they were involved in a bitter legal fight with a handful of UK banks around their debts as a result of these TARFs and TARNs they took out from someone they considered to be a friend. At points, this debt amounted to hundreds of millions of dollars, an impossible sum to a mid-size UK corporate.

“I trusted our banks,” Mr Sharma told me. “I viewed them as part of my business and I just didn’t think they would put me in a situation that exposed my business to collapsing.”

Now it’s entirely possible to argue that Mr Sharma should have known better and that caveat emptor applies (trusted a bank?!). Many have also pointed out that he had no complaints when the contracts swung in his favour and he gained, rather than lost, from the exercise. And while this is all true, how does this square with the values of a relationship-driven industry?

Was Mr Sales right to maximise his employer’s profits by selling these contracts to a client? Yes, that was his job. Was Mr Sales right to have a good and friendly relationship with his client? Yes, because that prevented his employer losing a client to a rival. Was Mr Sharma right to believe a sales person? Yes, because he thought he was paying for a service that would be in his best interest. Was Mr Sharma wrong to trust the words of Mr Sales rather than think for himself? Maybe, because caveat emptor applies but also, he paid for the advice which he had cause to believe would benefit his business.

The old adage warns about mixing business and friendship, and yet in FX, there is an illusion that they co-exist, allowing one or the other to dominate depending on the situation. Of course, the relationship doesn’t exist between the institution and the client, rather the sales person and the customer, leaving Mr Sales torn between the prospect of good comp on the one hand and maintaining a positive vibe with business owners on the other. Mr Sharma wasn’t trusting his “bank,” he was trusting his friend Mr Sales.

It’s a complex picture and it’s entirely possible to argue both sides, but in the end it all comes down to information, in my view. Sharing market colour is part of having a good relationship and so is letting your mate know that there is a scam going around, or that products have high risks.

Since it is indisputable that large banks have an information advantage compared with a small travel agency when it comes to FX and interest rate markets, shouldn’t it be that it’s the sell side that has a duty to apply caveat venditor?

Maybe. But nobody ever got paid for that.

eszalay@thefullfx.com