FCIB Jamaica sees derivatives as a growth market for the bank
Published:Friday | April 1, 2011 | 12:00 AM
Sabrina Gordon, Business Reporter
Ahead of the introduction of the trading of futures and options on the Kingston stock exchange, FirstCaribbean International Bank Jamaica, which has been offering derivatives to clients for more than three years, says it is now seen as a growth area for the bank.
"This business has been evolving, dated back to 2007 when we began offering hedging solutions in interest rate and foreign currencies," said Gregory Samuels, associate director of treasury products and sales.
"We developed our commodities capabilities in March 2010, and we will continue to prioritise this as a segment of growth for us," he said.
While Samuels would not say how much business the bank does in this area, he says the size of the market itself is significant.
Portfolio managers and investors use hedging techniques - derivative products - to reduce their exposure to various risks, such as movement in commodity prices, interest rates, and foreign currency, which are seen as the main areas where the market lies.
"Our products are not meant for speculation, meaning we offer hedging solutions to clients with real exposure to foreign currency, interest rate and commodities risks," said Samuels.
"A client who imports cars from Japan may want to fix their yen payment due in three months, or a client with a floating rate loan may want to convert that loan into a fixed rate to protect against rising interest rates," he said, illustrating FirstCaribbean's operation.
Similarly, he said, a client who exports coffee may want to lock in a minimum price for a shipment that is due to be sold in three months.
"For clients with these exposures, our products could not have been timelier given the volatility in commodity prices and events taking place in the Middle East," he told the Financial Gleaner.
FirstCaribbean says these products are provided in Jamaica and other regions in which the bank operates.
While Samuels refused to disclose individual client's name base on confidentiality agreements, he said they span corporate entities and government agencies from across the region.
Cibc expertise
Samuels said that FirstCaribbean acts as the counterparty for all its contracts and manages the risk working closely with Canadian parent, CIBC.
"We also leverage our parent bank CIBC's expertise because of its strong global presence in the leading financial markets such as New York, Toronto, London and Singapore," he said.
But for derivative trading business to become an entrenched part of the Jamaican financial landscape, it will require educating investors, as well as dealers and the writers of contracts, including the pricing of instruments.
"There would need to be a period of bringing people up the learning curve. Some investors are savvy enough, but I suspect a period of education would be necessary to ensure people understand the embedded risks in derivative instruments," said Dr Adrian Stokes, vice-president, strategic planning, projects and product development at Scotia DBG Investments Limited.
Dr Stokes also contends that an enhanced regulatory framework is needed.
"In principle, the introduction of futures and options is meant to 'deepen' the market. Derivatives give investors, hedgers and speculators more options to express a particular view in the market," he said.
"Because of the nature of derivatives, a robust regulatory environment is needed to protect participants in the market; so I suspect we would need to enhance the current regulatory environment."
The Financial Services Commission has not responded to requests for comment.
The Jamaica Stock Exchange said two weeks ago that it hopes to introduce futures and options trading through the exchange by the end of this year.