Forex Derivatives: interesting developments

We continue to selectively support SME clients in their dealings with banks on Interest Rate Hedging Products (SWAPS) although most of the cases coming up now involve their consequential loss claims. However the focus of the media and the lawyers is now shifting to Forex Derivatives, not least with the unfolding story about how Local Authorities have entered into complex deals with banks.

‘Forex Derivatives’ sounds like something that only the largest of companies or financial institutions get involved with, however many SME’s have these contracts, particularly those importing or exporting and wanting to fix their costs. These could be just be basic ‘Forward’ deals but when you see the level of complexity with some of the more ‘sophisticated’ products they make SWAPs look simple!

As with SWAPs (where the recent findings about LIBOR manipulation has added another dimension to claims against the banks) the disputes have been complicated by the findings that the Foreign Currency markets have also been manipulated by ‘rogue traders’.

The key question is whether SME’s have been entering into contracts which were hedging their risk or whether the nature of the deals meant that they were ‘speculating’ in currency (and was that their intention).

Will the FCA introduce a redress scheme as with SWAPs? The expert consensus seems to be that they won’t – or can’t. There will be complex evidential requirements and of course currencies have been subject to much more volatile fluctuations in either direction (unlike interest rates)¬†– which will make it difficult for companies to have a valid fact based claim