Opening up derivative locks in Ghana and Mongolia


Emerging markets governments and, to a lesser degree, corporates have borrowed heavily in US dollars, exposing them to a currency risk in a world in which US rates appear only to be rising. There is a clear need for these issuers to hedge against this risk, and that derived from raising funds in foreign currency.

Ghana and Mongolia both availed themselves of cross-currency swaps in January.

In Ghana, Fidelity Bank Ghana completed the first cross-currency, total return swap in that country: a one-year US$40m swap whereby Fidelity Bank receives US dollar-denominated cash funding in return for Ghanaian Cedi government bonds, with the latter transferred free of payment at the local Central Securities Depositary in a deal that is 100% guaranteed by Frontclear.

Frontclear, a development finance company, has spent the last two years working with regulators on a technical assistance programme for the development of the local money market in Ghana. “The success of this deal confirms that with the right blend of institutions, instruments and market knowledge, local institutions can competitively access and benefit from the international capital markets,” said Hugh Friel, a vice president at Frontclear.

The coupons on the local government bonds are paid to FCC Securities BV, the counterparty and a special purpose vehicle created by the development finance company to intermediate transactions in countries where the netting opinion has yet to be divined.

Frontclear was also present in a back-to-back, cross-border cross currency (US dollar/Japanese yen) swaps created for the Development Bank of Mongolia to hedge a portion of the interest rate and currency risk on a ¥30 billion (US$277m) due 2023 Samurai bond that was issued by the development bank in December 2013.

Encouraged by the success of this first transaction, The Development Bank is planning for more in an expansion of its treasury operation, according to Amgalan Battulga, head of treasury management at the bank.

In this case, the swap transactions were documented under an International Swap and Derivatives Association agreement, through which the development agency customised the swap confirmation to overcome legal issues in the Mongolian financial market and offered further clarification for close-out netting. The trade was originated by Frontclear on the back of a previous trade it completed earlier last year in Mongolia.

“The transaction strengthens Mongolian banks’ ability to mitigate legal and operational risks and sets a benchmark for the development of Mongolia’s money market going forward,” said Andrei Shinkevich, senior vice president at Frontclear.

While FCC Securities has a back-back trade with Fidelity Bank Ghana, the derivative components were originated by Societe Generale, which is the swap counterparty against FCC Securities BV and receives a guarantee on the total return swap from Frontclear. “The transaction is a further illustration of Societe Generale’s commitment, through its ‘Grow with Africa’ programme, to foster positive transformation across the African continent,” said Jérôme Sabah, global head of rates, credit and forex sales for financial institutions at Societe Generale.

Acting in similar roles to those it had on the Ghana deal, Societe Generale was a swap counterparty to FCC Securities BV and receives a guarantee from Frontclear, while FCC Securities has a back-to-back trade with the Development Bank of Mongolia. “The transaction illustrates the strength of our collaboration with Frontclear, which shares the common objective of participating in the development of capital markets in emerging countries,” said Sabah.