The lure and pitfalls of the foreign exchange market have claimed their first victims this year. Two officials of ING Vysya Bank have been suspended after the private bank discovered disguised positions and losses in currency trades. One of the traders kept on building new positions when the market turned against him, with the hope that he would eventually salvage the losses — a folly that traders across financial markets in the world have committed in different points of time.
“About two months ago, the officials in question went on leave. ING has informed RBI about the development,” said a person familiar with the development. ING officials were not available for comments.
It is understood that the trader entered into proprietary trades where it was receiving premium from counterparties. These are forward or swap deals, where the transactions have a near and a far leg. Here the bank buys dollar in the spot market and sells in the forward market where it receives a premium. When forward premium starts rising, the position shows a loss, as the deal struck by the bank generates a lower premium than the market rate.
“It’s unclear whether such trades took place on a sustained basis and for how long, but the losses may have surfaced when the forwards started moving up in anticipation that the central bank will raise interest rates,” said a dealer with a foreign bank.
Forward premium (or, the premium over the spot market foreign exchange rate) was 2-2.7% in January and February, but moved up 3-3.5% in March and around 4-4.3% in August. Somewhere along the way, the trader either breached the loss limit it was internally permitted by the bank or the total exposure allowed to him. “Normally, this should show up in the system, but there have been occasions in the past with other banks where traders find ways to hide such positions temporarily,” said a trader.
In case of ING, the extent of loss is not known, but bankers said it may not be too high. Banks have to stick to intra-day limits and overnight exposure limits, and the losses or gains in dealing rooms are recorded on a daily basis. “The person heading the proprietary desk of the bank is among those who have resigned, even though it is widely believed that he was neither involved in trades, nor sanctioned the trader who was reporting to him to overstep the limits. But I guess he had to take the responsibility,” said a banker.
“There have been too many surprises in the market this year. Banks burnt their fingers in May when they built large short positions as they had bet that the rupee would rise amid foreign inflow and good growth numbers. But at that time, the financial crisis faced by Greece caused bankers all over to scramble for dollar and the currency surged,” said a treasurer of an MNC bank.