by KERRY STAVILECI
Jul 3, 2015
With Greece now in “arrears” with the International Monetary Fund (IMF), albeit not an “event of default”, but the recurring negotiations between the Eurozone governments and the Greek Government failing to reach agreement, the risks of a Greek exit (Grexit) from the Eurozone have increased substantially. The question is whether financial institutions are prepared to support the operational tasks required to process an orderly move from being part of the euro to not. Financial institutions should understand impacted transactions, risk exposures, contractual changes, and infrastructure requirements to support the change.
One of the main expected outcomes from a Grexit would be their change in currency. The Greek government would need to introduce a ‘new drachma’ currency to replace the current euro currency. The “new drachma” is expected to run in parity with the euro on day one (ie 1 euro = 1 ‘new drachma’), although it is predicted to fluctuate independently after 2016. Parity is welcomed on day one from an operational processing perspective, as existing notionals on transactions that might be redenominated would not need to change. However, there are a number of other operational tasks that would need to be performed to support a new currency code.
A change in currency – 5 core areas that need to be considered…
- Trade Capture: any existing transactions that might be redenominated would need their currency code changed. These trades would need updated financial centres (Athens as opposed to Target) and holiday calendars to ensure correct accrual periods. Static data changes would also be needed to book new transactions to this new currency code, including new floating rate indices (Greek interbank offering rate (IBOR) instead of EURIBOR). Trade Capture teams should also be adequately resourced for these rebooking exercises and the new volume of trades in this new currency.
- Settlement: settlement infrastructure would need to be updated with this new currency code. Cashflows on trades that have been redenominated would need to be suppressed and converted into the new currency before settlement date. Net settlement amounts would need to be recalculated due to these cashflows now settling in a different currency. New bank accounts in the new currency would need to be opened, and funding infrastructure updated to fund the new currency and accounts. The effort to support these operational changes; the additional cashflows due to increased trading volume; and the increase in settlement breaks, should be considered and carefully planned for.
- Confirmations: the ability to understand the impacted trades of a change in currency will put tremendous pressure on confirmations departments to retrieve, review and analyse confirmations, and report impacted transactions to multiple parts of their organisation. Depending on contractual terms the repapering of existing confirmations may occur. Static data changes in confirmation infrastructures will need to occur to support both the repapering and the generation of trades in the new currency. New templates, clauses and definitions to support the new currency will need to be set up. Both the generation of old and new transactions and the time it takes parties to become experienced with the new terms, will increase outstanding confirmations straining resource capacity within confirmation departments.
- Collateral: the rebooking of transactions and inclusion of a new currency will impact the shape and size of the portfolio that is margined on a daily basis leading to increased portfolio reconciliation disputes and the time it takes to resolve disputes. Understanding the impact of the change by reviewing, analysing existing Credit Support Annexes, and replacing the current collateral with eligible future collateral will require collateral departments to be adequately resourced.
- Transaction Reporting: similar to the impact on collateral departments as a result of rebooking transactions and inclusion of a new currency, resources will be required to review, remove and re-report redenominated trades. This may result in new UTI’s being issued and associated trade pairing requirements adding to the existing industry challenges and stretched resources in this space.
Most of the above are some of the inward facing areas institutions should consider. However, in parallel there will be a tremendous client outreach effort to manage. Both contacting clients to renegotiate terms, agree positions, cashflows, collateral amounts and new bank account details, as well as inbound queries from clients. Setting up a dedicated Grexit team, reaching out to clients with standard information packs on the impacts and changes required, whilst also being able to respond to client queries, may be one way to effectively help tackle the industry and operational challenge.
The above seems daunting but with good preparation and planning it can be managed, coupled with collaboration and proactive dialogue across all industry participants, as the industry demonstrated with the successful conversion to the euro on the 1st January 1999 for 11 EU currencies. Identifying and having access to the appropriate number of resources to support the changes and inevitable clean up, whilst in parallel delivering the technology changes will ensure financial institutions are prepared to support an orderly Grexit from the euro.