More greenwash as major FX dealers foist ethical derivatives onto counterparties

It is very difficult for any business sector not to bring global politics into its consideration these days.

In Europe, including the United Kingdom which is home to the world’s largest and most important financial markets center, it is almost impossible to go about daily business without being apprehended and appalled by some hair-brained, extreme left notion from the collective governments of the regio

In Britain, it matters not which of the three main parties any member of public votes for, the outcome is that all are the same, differentiated only by the color of their suit, and all are inexorably socialist, inflicting constant lockdowns onto the nation which are decimating its economy and curtailing commercial freedom, forcing the majority of the workforce into unemployment which may well become permanent, and then hitting the nation with absurd green policies set to cost a fortune, when really all people want to do is earn a living which they are not allowed to do.

Germany, a notoriously socialist country, is going down the same route, this time with Deutsche Bank leading one of the most bizarre initiatives, that being to place an emphasis on green derivatives.

Users of deal contingent hedges may soon be able to link the derivatives to ethical targets, as banks consider launching trades with an environmental, social and governance (ESG) component.

“We should be doing them,” says Christopher Wall, global head of foreign exchange structuring at Deutsche Bank. “We will do them. When there’s client demand for a solution then banks will step up to the plate, so I’m already firing emails about it.”

Indeed, as are many interbank FX dealers as their management work tirelessly to try to appease the increasingly socialist policy makers in the Western world’s governments, including the US which is now about to embark on the same journey as parts of Western Europe have done with their lockdown obsessed anti-business wreakers of havoc and their illiberal ideologies which are full of obstacles to the free market and littered with irrelevant and expensive pet projects full of greenwash.

“There is no doubt that sustainable finance and environmental, social and governance (ESG) products are becoming increasingly important to policy-makers and financial market participants all around the world” heralded the International Swaps and Derivatives Association last month.

In September, ISDA hosted a virtual conference on ESG and derivatives, which highlighted the very important role the derivatives market has to play in the transition to a sustainable economy. One can only guess that these individuals are a barrel of laughs at a dinner party.

Actually, you would be spared their presence, as dinner parties are too profligate and not ‘sustainable’ enough for these hemp-wearing, bicycle riding, bean-chomping vegetarians with a penchant for facial topiary.

The reality is that the financial markets business, and in particular the fast-moving electronic trading sector at Tier 1 interbank level and at centralized counterparty level (listed derivatives) is not about green agendas and appeasing left wing governments in irrelevant parts of Europe.

It is about free market capitalism, matching the best prices on major currencies whose moves are determined by the activities of business in their host nations. It is about analyzing the news, and capitalizing on corporate decisions in order to gain a higher price on company stock, and looking at the future value of derivatives in commodities, raw materials and predicting the performance of publicly listed corporations globally.

Nit-wits like lockdown-happy Boris Johnson and economic incompetents like Rishi Sunak whose inept government presides over the nation from which the vast majority of the world’s interbank dealing in the FX market takes place – Great Britain – are not the type of people who banks such as Deutsche Bank’s Canary Wharf-based electronic trading and prime brokerage division should be appeasing.

The ISDA says that so called sustainable finance is set to be at the heart of the recovery from the destruction waged on Europe by lockdown obsessed governments with totalitarian aspirations. On September 16, European Commission president Ursula von der Leyen announced that 30% of the €750 billion recovery fund will be raised through green bonds.

The ISDA states that this will equate to a huge amount of new financing in this area, and both issuers and investors will be looking to the derivatives market to hedge their exposures. Product innovation is already developing rapidly to support the hedging needs of participants in this nascent market.

First and foremost, the derivatives market will be the means by which participants are able to hedge their exposure to these green assets, but its role extends further. Derivatives play an important role in facilitating price discovery and fostering greater market transparency. They contribute to the establishment of a market price and thereby enable better assessments of risk.

Alongside the development of ESG derivatives products, work will be needed to promote standardization across jurisdictions and market segments in order to ensure efficiency while reducing risk and cost and also supporting digitization. The ISDA admits that it has always been strong proponents of standardization in documentation, market practices, operational processes, and wherever else it might make economic sense. This is just as important in a relatively new area like ESG as it is in more established markets.

Pandering to a green agenda at a time when many people in Europe are being prohibited from exercising their right to earn even a basic living appears a total folly, however Deutsche Bank perhaps realizes that the governments, along with QANGOs like the ISDA, are hell-bent on these green projects, therefore will need to offer good quality hedging capability against exposure.

Certainly these days in which the past participle of ‘to awaken’ is used ad nauseum in an incorrect context, it does not matter what color you choose on an election day, you get an extreme combination of red and green.

With this in mind, perhaps the Tier 1 banks are simply evolving to ensure they maintain their market as the governments of the ‘woke’ countries ram these follies down our throats.