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Jill Headford

Posted 21 February 2017
by Jill Headford

Foreign Exchange Derivatives



Often called forex or FX, foreign exchange trading can be an important tool for businesses involved in volume or high value transactions in foreign currencies.

Used properly, it can guard against the risk of adverse changes in the value of currencies such as that seen post Brexit. Done badly, the costs can far outweigh the benefits.

The simplest form of foreign exchange trading involves purchasing foreign currency at ‘spot rates’ meaning the rate offered by the seller at the time of transaction, whether the seller is the businesses’ own bank or a counterparty to the transaction.  The cost of doing this on any given date is impossible to predict and so could expose businesses to significant risk. Buying currency using a simple ‘forward’ is can mitigate this risk, allowing businesses to purchase currency a future date at a rate agreed in advance, thereby obtaining certainty over costs.

The currency market has been described by some as a ‘wild west’ of salesmen seeking to introduce more complicated, structured products which are entirely unsuitable. Instead of allowing businesses to hedge against currency fluctuations and have certainty over currency costs, these products are effectively bets which turn ordinary businesses into speculators.

Some can be so complex it is entirely normal for even the financial director of a multinational to require specialist advice. Some of the adverse features include:

  • almost unlimited downside risk to the business
  • unpredictable events such as the Brexit vote which trigger a requirement for the business to purchase large amounts of currency far in excess of what they require
  • options for the bank or broker to exit early, reducing benefit to the business
  • ‘margin calls’ where brokers can required businesses to pay large amounts of money in when markets move against them

What can businesses do if they find themselves suffering large losses as a result of foreign exchange transactions?

Brokers and banks may be under a duty to provide proper advice. If they act in breach of that duty, if losses have been incurred it may be possible to bring a legal claim against the broker or bank.

Most terms of business provided by the sellers of these products will include clauses that state advice is not provided. The seller of the product will attempt to rely on those cluases to exclude any liability for giving advice but they are not always effective and can be overcome.

Often where there is an ongoing commercial relationship, settlement can be obtained without the requirement to issue legal proceedings. Taking expert advice early is crucial because as markets move, the collateral brokers require customers to post can become unsustainable.

To speak to our specialist lawyers about foreign exchange products call 01392 207 020 or email enquiries@tozers.co.uk

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About the author

Jill Headford

Jill Headford

Partner

A partner in the firm since 1994 and an experienced Court and Tribunal advocate, Jill specialises in resolving disputes and is a member of the Property Litigation Association