The volatile markets which investors have experienced since the onset of the credit crunch, combined with the low interest rate environment, presents many challenges for Gibraltar’s investment community.

The market conditions have brought the role of the Treasury arms of the major international banks into sharp focus for many professionals who are searching for appropriate solutions to meet the needs of their clients in these testing conditions.

Requests for interest rate outlooks and exchange rate forecasts have increased, a reflection of the increasing concerns that investors have about where to place funds for investment purposes. At RBS International and NatWest, we have been finding that more clients are looking through our research data and economic forecasts, and there is perhaps less reliance on the opinion of credit rating agencies in reaching decisions.

In the low interest rate environment that we have been experiencing, many clients are faced with a dilemma in seeking flexibility to retain access to their funds, perhaps driven by a requirement for regular income, while needing to commit to ever longer terms in order to obtain higher returns.

Treasury teams have been seeking ways to resolve this dilemma by talking to clients more frequently and considering how their expertise can assist in managing the risk inherent in these volatile markets. So in response, for example, there has been a need to provide more innovative, bespoke solutions and more flexible, structured product offerings.

Capital protected products have proved popular, particularly with the most risk averse clients who want an assurance that even when pursuing higher returns, there is a certainty that, in the worst case, the capital will be preserved.

RBS International has devised specific products for the market conditions and further schemes are scheduled.  These have ranged from limited term offers with high coupons to more complex stepped return products where the client has the flexibility to break a term deposit without penalty at quarter dates but should the deposit run full term, enjoy higher returns in the latter stages of the deposit.

The funds industry has been another sector that is appreciating the value of treasury solutions in meeting client demands. While funds may deliver excellent returns on their underlying assets, without appropriate risk management these returns could be eroded by currency movements outside of the funds’ control. For some funds their investors may choose to invest to create exposure to certain currencies and in these cases hedging may not be at all appropriate. For others, failure to hedge may actually contravene commitments made to investors.

Working closely with our clients and with colleagues across The Royal Bank of Scotland Group, we have developed extensive experience in helping funds manage their currency risks whether these derive from multiple currency share classes, a mismatch in currency of income and expenses, foreign currency asset acquisitions and disposals or ongoing asset/investor equity mismatches.

This experience can prove valuable to both funds and fund administrators alike. For an administrator, using hedging to manage exchange rates can greatly simplify making calls on investors, or in paying distributions if the underlying investment is in a different currency to that in which the fund is denominated. Likewise, being able to manage the currency exposure between a funds income and operating expenses can assist greatly in the ongoing cash management of the fund.

Currency market volatility has posed a considerable threat to investors. For example many trust companies form structures on behalf of their clients with exposure to currencies but in the current environment, the risk of losing out due to the exchange rate is heightened.  The Bank’s Treasury team has the experience and insights to provide foreign exchange and interest rate risk management for clients with such exposures.

At this time, it is important that clients review their needs and examine carefully whether they have taken appropriate steps to mitigate risk and achieve sufficient returns from their investment. For clients it should be about ongoing dialogue with their advisers including their banking service provider.

At RBS International and NatWest, we are keen to foster a partnership approach with our intermediary clients, and to deliver bespoke solutions that will meet specific needs. For some clients, preserving capital through existing capital protected products will be appropriate, but for others, a more bespoke solution may be required. The sooner that clients engage with us the earlier we can help in identifying and quantifying potential risks and working together to understand the key drivers in determining an appropriate risk management approach.