• One of India’s Best Bullion and Currency Advisors Jamal Mecklai released a memo explaining how a bank overcharged in a currency exchange OK.
  • The spread on the loan based on what the bank was charging is 45%.
  • It would help if RBI at least highlighted this type of malpractice and asked for more disclosures, Mecklai says.

Jamal Mecklai from Mecklai Financial has a suggestion for Reserve Bank of Indiafollowing a complex currency exchange transaction for which she advised a client.

The CEO of Mecklai Financial, a treasury and currency risk adviser, wrote a detailed note about one of his clients who engaged a global investment bank for his currency swap needs.

A currency swap is nothing but a transaction involving the exchange of principal and interest in one currency for the same in another. A $1.5 billion firm hired Mecklai Financial to help unwind a currency swap deal it had made with a global bank.

Currency swaps are entered into by companies which are exposed to payments in foreign currencies and which may receive payments in another currency.

Mecklai explains the terms of the transaction and how it may have lacked transparency since India does not yet have a very deep currency derivatives market.

In the memo, he says, “We were called in recently to advise a large company (approximately $1.5 billion) on the desirability and rate of unwinding of a swap they had taken. The company had a loan of $22 million at 3.57% fixed and significant receipts in EUR and, in 2020, their bank – a major international player – had advised it, correctly in our opinion, to enter into a swap of EUR/USD currencies where its EUR flows could be paid directly to the bank which, in turn, would pay the business in USD to settle its underlying loan.

Balance the exchange

As the Euro has fallen since the company entered into this agreement, the swap has been beneficial for the client and the bank has asked the company if they would be interested in balancing it and pocketing over a million dollars worth of earnings. Since the business also had revenue in USD, which it could use to naturally cover its loan repayments, this seemed like a good idea (to us as well).

Jamal Mecklai writes in his note that he asked for the cash flow of the loan and the date of the initial exchange. “We were horrified to discover that in September 2020 the bank had charged them a swap rate of 3.65% – this meant that the company would have to pay the bank a fixed amount of EUR every six months with interest of 3.65% and the bank would pay the company a fixed amount in USD with interest of 3.57% The problem was that in 2020 the interest rate differential between the EUR and the ‘USD was around 0.75-1.0%, so the swap rate looked outrageously high,’ he explains.

A currency swap works in two stages. In the first stage, the two entities exchange the principal amount at an agreed exchange rate, which is based on spot rates. Alternatively, a forward rate can also be fixed, but must be agreed in advance. This is done to arrive at the main value. Once this is done, the entities agree on the interest rate, fixed or floating, that the customer must pay on this currency swap instrument.

In this case, Mecklai Financial found interest rates to be shockingly high. Currency swaps involve risks for the bank, such as credit risk and capital requirements, which differ from jurisdiction to jurisdiction. Even with these factors taken into account, the gap was too high.

The client was unaware of the spread


The client, he says, was unaware of the margin on the loan, was happy to cancel the trade, and brought him in for negotiations. The bank offered them $1.9 million to cancel the swap when, according to its calculations, $2.6 million.

After negotiations, the payment was increased to $2.3 million – but the bank still made a handsome profit of over $200,000 on top of the “extravagant spread” and the amount earned at the start of the exchange.

“This example simply illustrates the obvious fact that corporate treasury offices are trained to maximize revenue by lying to their customers. But banks overcharging customers is nothing new; The Reserve Bank has been aware of this problem for a long time and about six to eight years ago the CCIL created the Retail business spot exchange platform where anyone can get close to market rates,” Mecklai said.

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