The Central Bank of Egypt (CBE) has set controls for financial derivatives at banks, in a preliminary step to launch the new tool in the Egyptian market.
The Central Bank revealed last Thursday that it will develop the financial derivatives market, with the aim of deepening the foreign exchange market and raising the liquidity of foreign currency.
The new controls allow banks to carry out “FX Forwards” operations for corporate clients, to hedge against risk as they protect customers from unexpected or adverse movements in the currencies’ future spot rates, resulting from commercial operations represented in documentary credits, collection documents, supplier facilities, transfers of profits of foreign shareholders abroad with a fixed date, and proceeds of commodity and service exports received by the bank’s customers, provided that the bank obtains a proof that the transaction is commercial taking into account that customers are not allowed to carry out such operations for speculative purposes.
The CBE also decided to allow banks to carry out FX Swaps operations with local banks for non-speculative purposes, provided that their purpose is to protect customers from unexpected or adverse movements in the currencies’ future spot rates, resulting from the aforementioned commercial operations, which are carried out through the same bank, emphasizing the possibility of carrying out the same operations with local banks only.
A source told Daily News Egypt that the Central Bank asked banks operating in Egypt to provide their plans to deal with these tools, and some banks have already submitted their plans, while others are still in the preparation stage, stressing that the new tools have not yet been launched.
Tarek Metwally, the former vice president of BLOM Bank Egypt, applauded the new steps adopted by the CBE, foremost of which is the liberalisation of the exchange rate and phasing out documentary credits.
He explained that it is common knowledge that in trade, either payment is made immediately, which represents a very small percentage of transactions, or deferred payment, which represents the majority of the volume of international trade, and accordingly it was very important to have mechanisms that allow the future dealing of the currency and determining its future price from now on, which provides a lot of not putting pressure on the resources of the free market with future obligations that can be postponed at the due date and without burdening the customer with currency risks, whether he is an investor, importer or manufacturer. It also works on stabilizing markets and pricing products in a better way that benefits everyone and the consumer in particular.