Dear SAP Banking community members.
As we’ve commented several times in this forum, growing by wasting solvency is not an option any more and Capital Optimization is the main objective of the new Financial System.
Today, I’d like to talk about http://kantox.com/ an innovative concept for Capital Optimization on Foreign Exchange Risk Management.
Kantox value proposition is quite simple and valuable; Peer to Peer Foreign Currency Risk Hedging.
Simplifying with an example (more detailed information available in Kantox website).
1) A European company exporting luxury products to the US expects receivable Cash-Flows in US Dollars due in 6 months.
2) An American company, exporting software to Europe expects receivable Cash-Flows in Euros due in 6 months.
3) Via Kantox, both companies enter in to a digitally signed contract in which they agree to exchange their foreign currency flows in 6 months (Over the Counter Forward Contract).
4) On due date both companies will transfer their foreign currency flows to a segregated client account, managed by Kantox .
5) Once Kantox has received the funds from both counterparties it clears the currency flows by transferring the needed funds, in the currencies required, back to the counterparties thus settling the FX hedge transaction.
6) The netting of Forex exposures can be achieved also with two counterparts using the same local currency and inflows and outflows in the same foreign currency. For example an American company exports to Europe expecting future inflows in Euros and an American company imports from Europe expecting outflows in Euros. They can net the inflows and outflows in Euros using Kantox.
This process represents several advantages for Capital Optimization, in front of a standard Forex Risk Hedging process with a Bank.
In a standard process, the bank will sign two contracts with the two counterparts and it will consume Regulatory Capital, according to the Market Risk (Value at Risk) and Credit Risk of the exposures. In the new era in which Capital is a scarce resource, Capital consumption of the hedging will be translated in high fees to the European and American Company.
On the contrary Kantox does not assume any market or credit risk as the counterparts don’t sign the Forex forward contract with Kantox but amongst them. As a consequence, Kantox should offer lower fees than the banks.
Both counterparts have effectively mitigated Market Risk and they’re assuming only the Credit Risk of the Counterpart.
The critical point of the model relies here as the European and American companies are potentially exposed to a higher Credit Risk by signing a Forward contract with another company than doing it with a Bank.
Kantox guarantee that the clearing of the forward contract is happening in segregated client accounts and it will happen only after both parts have honored their obligations. In case one of the parts fails to pay, Kantor will return the other part their cash-flows and it will not charge any fee. Obviously one of the companies will support the losses of Market Risk as it will have been unable of hedging their potential Foreign Exchange losses. Resuming both parts are assuming the Credit Risk of the potential Foreign exchange losses.
I had the opportunity of talking to Philippe Gelis (CEO of Kantox) some days ago and he’s very aware that Kantox main asset is information. Efficient management of information for mitigating Credit Risk described above will be the success factor on Kantox value proposition.
Once again, disclosure is the word.
Looking forward to read your comments.
Kindest Regards.
Ferran.
As we’ve commented several times in this forum, growing by wasting solvency is not an option any more and Capital Optimization is the main objective of the new Financial System.
Today, I’d like to talk about http://kantox.com/ an innovative concept for Capital Optimization on Foreign Exchange Risk Management.
Kantox value proposition is quite simple and valuable; Peer to Peer Foreign Currency Risk Hedging.
Simplifying with an example (more detailed information available in Kantox website).
1) A European company exporting luxury products to the US expects receivable Cash-Flows in US Dollars due in 6 months.
2) An American company, exporting software to Europe expects receivable Cash-Flows in Euros due in 6 months.
3) Via Kantox, both companies enter in to a digitally signed contract in which they agree to exchange their foreign currency flows in 6 months (Over the Counter Forward Contract).
4) On due date both companies will transfer their foreign currency flows to a segregated client account, managed by Kantox .
5) Once Kantox has received the funds from both counterparties it clears the currency flows by transferring the needed funds, in the currencies required, back to the counterparties thus settling the FX hedge transaction.
6) The netting of Forex exposures can be achieved also with two counterparts using the same local currency and inflows and outflows in the same foreign currency. For example an American company exports to Europe expecting future inflows in Euros and an American company imports from Europe expecting outflows in Euros. They can net the inflows and outflows in Euros using Kantox.
This process represents several advantages for Capital Optimization, in front of a standard Forex Risk Hedging process with a Bank.
In a standard process, the bank will sign two contracts with the two counterparts and it will consume Regulatory Capital, according to the Market Risk (Value at Risk) and Credit Risk of the exposures. In the new era in which Capital is a scarce resource, Capital consumption of the hedging will be translated in high fees to the European and American Company.
On the contrary Kantox does not assume any market or credit risk as the counterparts don’t sign the Forex forward contract with Kantox but amongst them. As a consequence, Kantox should offer lower fees than the banks.
Both counterparts have effectively mitigated Market Risk and they’re assuming only the Credit Risk of the Counterpart.
The critical point of the model relies here as the European and American companies are potentially exposed to a higher Credit Risk by signing a Forward contract with another company than doing it with a Bank.
Kantox guarantee that the clearing of the forward contract is happening in segregated client accounts and it will happen only after both parts have honored their obligations. In case one of the parts fails to pay, Kantor will return the other part their cash-flows and it will not charge any fee. Obviously one of the companies will support the losses of Market Risk as it will have been unable of hedging their potential Foreign Exchange losses. Resuming both parts are assuming the Credit Risk of the potential Foreign exchange losses.
I had the opportunity of talking to Philippe Gelis (CEO of Kantox) some days ago and he’s very aware that Kantox main asset is information. Efficient management of information for mitigating Credit Risk described above will be the success factor on Kantox value proposition.
Once again, disclosure is the word.
Looking forward to read your comments.
Kindest Regards.
Ferran.
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