ASSET AND LIABILITY ON COURSE
WHAT'S NewS Issue 10 October 1996
info exchange
7
The bank - like a seagoing vessel - is most intelligently steered from a high
vantage on its bridge rather than from the engine room. Passing through stormy
waters of competitive change, you need to see over the wavetops if you wish to
follow a prudent course toward the horizons of opportunity that lie ahead.This
basic principle led to the formation of the Asset and Liability Management
(ALM) unit within Financial Markets, staffed by Jacque Buysse and Bart Roelofs.
'One of the tasks of ALM is to take an
active overview of the risks -
particularly the interest rate risks - that
the bank regularly assumes in
lending money to its corporate and
middle-market clients,' explains Buysse.
Among other things, ALM is responsible
for insuring that the bank funds its
^Hustomer lending at the lowest possible
rates, and making sure that all of those
assets are then fully hedged against market
risk. These twin tasks depend vitally on a
full and timely exchange of information
between ALM and the various account
managers who engineer deals.
CARE AND CAUTION
Jacque Buysse suggests a cautionary tale.
'Say the account manager offers his cliënt a
loan based the rate published in Rabogram
plus 50 basis points. That market rate
might well change substantially during the
time that his customer is making up his
mind and the deal is finalized. As financial
markets cannot hedge until the transaction
Jacque Buysse - no misapprehensions
is done, that seemingly profitable loan
could actually produce a loss.' The only
way to avoid such situations is by adhering
to the procedures for information
exchange that were established along with
ALM. When interest rate risks are being
assumed - a sanction must first be
obtained. 'As long as ALM is apprised of
the strike price and the execution date,
then financial markets can actively insure
that the deal works profitably for all
parties concerned,' Buysse says.
instrument,' says Maarten Rosenberg of
financial markets. The warrants give the
buyer an opportunity to buy or sell - on a
given strike date and at a fixed rate -
before the actual maturity of the bond.
Based on the September Dutch 5 3/4 state
loan, maturing in 2002, the warrant issue
is divided into two series. The first series
expires on 16 December 1996, and offers
an investor the right to buy or sell at face
value. The second series has a strike date
of 17 March 1997 and carries the option
to buy or sell at 99 percent.
Listed in Luxembourg (and thus more
transparent for valuation purposes), the
warrants have much in common the more
familiar European options. They are an
added value product for portfolio
managers seeking another vehicle for
trading on their view of anticipated
market movements. The NLG 7 billion
size of the original state bond issue insures
that the warrants themselves should also
have a highly liquid secondary market.
new products J
STRIKING HOT
The financial markets team has rolled out
another product to help meet the
insatiable market demand for ever more
finely targeted financial instruments. We
are now offering institutional and private
investors the opportunity to buy warrants
on Dutch state bonds. 'These warrants
will appeal to any investor who is
attracted by the security of a sovereign
issue, but who is also intent on gaining the
additional flexibility of a traded market
Warrant officer - Maarten Rosenberg
BEST PRICES
'There is occasionally a misapprehension
that financial markets takes a margin on
funding such loan, but nothing could be
further from the case. The funding quotes
that the account managers receive from
financial markets in Utrecht are the
sharpest prices they can find,' says Buysse.
'Their task is not to make a margin but to
enable the account managers to offer the
best possible rates. Everyday, they take the
two cheapest funding sources and average
them out to arrivé at a quote,' he explains.
(The differential serves to equalize short
term market movements over time.)
COST CONSCIOUS
ALM began its work one year ago.
Watching the dynamics for some time, it
became clear that a lot of work was
needed to improve the management of fees
on early loan repayments. The exact costs
of such redemptions are now being
calculated in every case. At the end of the
day, it is the account manager who is
responsihle for these costs. Whether they
are passed on to the customer, however, is
discretionary. 'We in ALM can well
understand there may be compelling
reasons for the account manager not to
pass on these fees. That's fine. But in such
cases, they have to be prepared to assume
those costs on their own books.'
FLEXIBLE COOPERATION
As always, enlightened asset and liability
management depends as much on
flexibility as it does on fixed rules. But in
our voyage across the competitive seas,
the goal of combining inspired account
management with prudent control is
one in which every crewmember has a
share.
ASSET AND
LIABILITY
0fc' MANAGEMENT (ALM)
ALM heeft als taak om met
name de renterisico's in kaart te brengen
die de bank loopt bij het uitlenen van geld
aan (middel)grote bedrijven. Ook zorgt de
afdeling voor het zo voordelig mogelijk
opnemen van geld uit de markt en dekt
men de risico's af zodra het geld is uitgezet.
Een probleem is echter de tijd die verloopt
tussen het offreren van een rente aan een
klant en de acceptatie daarvan. In de tijd die
hier tussen ligt kan de rente stijgen,
waardoor een deal die aantrekkelijk leek
voor de bank opeens verliesgevend kan
worden. Om dit te vermijden dient ALM
altijd op de hoogte te zijn van de
geoffreerde rente en de uitoefeningsdatum,
zodat zij dit risico kan afdekken.
