The financial derivatives crisis in the Netherlands

Posted by Fairmat Srl on 17 September 2012 | 1 Comments

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We recently conducted research on the financial derivatives crisis in the Netherlands. We believe our findings are  very informative and so wanted to share them.  Please note that many of the linked resources are in Dutch. The crisis started at the beginning of 2012, when the largest Dutch social housing corporation Vestia in Rotterdam experienced the meaning of lack of risk control in the management of interest rate derivatives.

In the following two resources you can find the story background: 

http://www.cfv.nl/media_dirs/8446/media_files_data/rapport_derivatenonderzoek_2012.pdf 

http://blogs.minyanville.com/ernst-labruyere/2012/02/03/building-cooperative-vestia-based-in-rotterdam-the-netherlands-plays-‘hedgefund’-with-the-banks-and-might-lose-e2-5-bln-who-is-to-blame-the-banks-or-the-cooperative-itself/

In the following months the Public Prosecutor who was interested in the case found out that Vestia paid about ten times as much in commission fees as in normal transactions, highlighting the issue of the verification of the prices charged by Banks to the signing of financial contract, the so called mispricing. Another relevant case similar to Vestia concerned the largest sludge treatment processing firm in Europe, Slibverwerkingsbedrijf Noord Brabant (see http://www.nrc.nl/nieuws/2012/07/12/financiele-problemen-bij-nutsbedrijf-door-derivaten/ and http://www.rtl.nl/components/financien/rtlz/nieuws/2012/28/nutsbedrijf-neemt-stappen-tegen-volkskrant.xml).

Many big companies, as well medium business and even some educational institutions, have experienced the same problems. Therefore, the correct understanding and selection of derivative instruments, the financial risk monitoring and managing, and the verification of the implicit costs that are charged by banks, is not a luxury.

The, laws which regulate this area are also changing, affecting Social housing corporations. Here, in the annual report, are  the actual rules concerned.  On 1 October 2012, the policy for using financial derivatives by authorized housing corporations is set to be tightened. A significant constriction concerns the organizational requirements. This includes:

  • control structures around the risks of financial derivatives, aimed at market value, the size and composition of the derivatives portfolio and the monitoring of the market and the liquidity buffer in relation to liquidity risk.
  • ensuring adequate internal professionalism on financial derivatives.

With the actual rules concerning  derivative products and annual reporting for Educational Intitutions  schools are allowed to keep standard swaps outside the annual report.  According to the financial reporting rules, the paper market value of ineffective swaps should be in the books as an actual value loss. "Open positions" according to the Education Inspection are not allowed in the Regeling beleggen en belenen door instellingen voor onderwijs en onderzoek 2010. That is not literally in the scheme itself, but in the explanatory manual, even when such a situation is temporary.

There are still no changes in the rules for the accounting reports of companies. For processing, valuation, calculation of results, presentation and disclosure of financial derivatives in the financial statements you have to apply Title 9 of Book 2 of the civil code (Burgelijk Wetboek) and 290 Financial Instruments Directive (modified 2011) of the Council for the annual reporting. Valuation of derivatives in financial statements can be at cost or market value. But if the hedged item is valued at market value, the entity changes the value of the derivative at fair value, and applies fair value or cash flow hedge accounting. Even in this law framework and valuation of derivatives is a key and essential skill.

Hence there is a lot going on with derivatives in organizations. Whether you are a corporation, an educational institution or a social housing corporation,  Fairmat Professional lets you manage your derivative risks, helps to meet hedge accounting requirements (i.e the IAS-39 hedge accounting),  prevents the organization from mispricing and keeps you in control. It is an indispensable tool that will help the organization meet the stringent policies and prevents any nasty unexpected surprises.

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  • Also the following news may be relevant: even though either the Dutch labor party, which is proposing that some of the financial transactions will be taxed, and the socialist party is proposing to increase taxes on banks, the trend is a toughening of the rules on banks (http://www.businessweek.com/news/2012-09-10/feuding-dutch-politicians-agree-on-toughening-rules-for-banks), and it seems very probable that we will assist also to a strengthening of the financial supervision: in fact a report by the AFM (The Authority for the Financial Markets) observes that there is a need of using complex financial products but it still not clear if these non-retail customers are able to assess involved risks. The recent history triggered them to test the professionalism assumption among companies who have purchased derivatives (http://www.afm.nl/professionals/afm-actueel/nieuws/2012/sep/onderzoek-dienstverlening-niet-retailklanten.aspx).

    AFM is also wise to extend the investigation (http://fd.nl/economie-politiek/971264-1209/derivaten-bij-mkb) to almost the whole system in order to understand which are the responsibility of the banks with the aim of protecting small business given that they must be treated as private customer and have the highest duty protection. How new regulations will treat medium companies is still unclear: according to European rules, when an organization satisfies two of the three following criteria: balance sheet total of at least € 20 million, a turnover of at least € 40 million and an equity capital of at least € 2 million is considered as a professional party in the transactions.

    Posted by matteot, 27/09/2012 4:12pm (6 years ago)

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