RISK MITIGATION: What are Updates & Proposals on Risk Mitigation Products?

Product Name TCX The Currency Exchange Fund
Link to Product Website
Provider Name FMO (Netherlands Development Finance Company)
Product Definition The Currency Exchange Fund (TCX) is a special purpose fund that provides OTC derivatives to hedge the currency and interest rate mismatch that is created in cross-border investments between international investors and local borrowers in frontier and less liquid emerging markets. The goal is to promote long-term local currency financing, by contributing to a reduction in the market risks associated with currency mismatches.

To achieve this objective, TCX acts as a market-maker in currencies and maturities not covered by commercial banks or other providers, notably where there are no offshore markets, no long-term hedging, or, in extreme cases, no markets at all. This activity spans 70 currencies in Sub-Saharan Africa, Eastern Europe, the Middle East & North Africa, Central Asia, South East Asia, and Latin America.

TCX is usually unable to hedge itself. The core risk management principle is the risk-reducing effect of running a globally diversified pool of currency exposures. This is supported by a conservative capital base provided by patient investors and donors. TCX’s investor base predominantly consists of development finance institutions and microfinance investment vehicles active in the long-term debt markets of emerging and frontier markets.

The Fund applies state-of-the-art valuation techniques to track its exposures on a daily basis.

The products available include:

1. Fx Forwards and Cross Currency Swaps
2. Floating Rate and Fixed Rate
3. Non-Deliverable and Deliverable Contracts
4. Tenors and Benchmarks
5. Countries and Currencies Map
6. Guide Books

Product Type Other
Defined Risks Covered n.a.
Eligible Form of Investments Bonds
Bank Loans
Non-Bank Loans
Eligible Currency of Underlying Investment Covered by this Product Local Currency of developing host country
Eligible Countries & Regions All
Eligible Applicants All
Eligible Sector n.a.
Maximum Tenor 0 to 5 years
Max. Absolute Amount (USD) 0 to 50 MM
Max. % of Project Costs Covered Max./under 25%
Max. % of Export Content Covered Max./under 50%
Fees Market-based
TCX prices hedging instruments with reference to observable market data such as Reuters, Bloomberg or central bank websites. Allowance is made for observed distortions to derive comparable and risk-neutral levels.

TCX quotes (from the most liquid to the least liquid markets) on the following basis:

1. Pegged currencies: TCX prices off the more liquid currency to which the local currency is pegged, plus a risk premium (ex : XAF, XOF, NPR)

2. Developed Markets: TCX uses the available offshore screen rates. Because these markets are deemed to be liquid and widely covered by commercial banks (ex: INR, IDR, PEN, COP, UAH), TCX is not meant to provide liquidity in these currencies. TCX needs to be additional to the market to make usage of its capital to quote. Notable exceptions would apply for investors having no credit lines to trade with commercial banks, or facing high bid-offer spreads when market liquidity dries up.

3. Undeveloped offshore markets with existing onshore curves: TCX uses the onshore curve, plus a spread derived internally based on the assessment of the prevailing circumstances (ex : UGX, TZS, KES, NGN, BDT). TCX will separately derive the spread (premium or discount) needed to correct for observed distortions in local market conditions such as implied credit risk in the local reference rates, local liquidity effects, or extreme political risks feeding through to markets. This spread will be currency specific and subject to change.

4. Inexistence of offshore and onshore curves but availability of a benchmark: TCX prices floating rate swaps only based on an approved benchmark plus an internally derived basis risk spread. This spread is based on the maturity of the transaction and the historical correlation between the selected benchmark and the exchange rate, to cover the transaction’s price roll-over risks and instability in the selected floating rate benchmark. This spread will always be positive (premium).

5. Inexistence of offshore and onshore curves or even a benchmark: In the presence of very thin or inexistent markets, TCX prices fixed swaps only based on internal macro-economic models for a selection of countries.
More on Fees

Other Conditions Sovereign Counterguarantee: No
Anti-Corruption and Governance Standards: No
Environmental standards: No
Social standards (incl. Human Rights Standards; Labor Rights Standards): No
Source(s) n.a.
For more information, contact
TCX Investment Management Company
Email: info@tcxfund.com
Phone: +31 (0)20 531 4851
Attachments TCX - January 2013 Update.pdf
Additional Links www.tcxfund.com/products/guide-books
Deals n.a.

Provider Name FMO (Netherlands Development Finance Company)
Institution Type PUBLIC: Multilateral Development Bank
Ownership n.a.
Head Office TCX Investment Management Company Sarphatikade 14 1017 WV Amsterdam The Netherlands
Provider Home Country Netherlands
Rating n.a.
Main Risk Mitigation Products n.a.
Attachments n.a.
Additional Links www.tcxfund.com/library
Entered On: 02/19/2008 at 01:38 PM
Updated On: 05/02/2013 at 01:50 PM