Soaring bank fees prompt new exchange allowing landlords to trade ‘swaps’
Associations to work together to avoid fees
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Housing associations are set to start trading complex financial instruments with each other to sidestep spiralling bank fees.
The prices banks are charging associations for interest rate ‘swaps’ have increased by up to 10 times since the financial crisis began, according to risk management firm Traderisks.
Associations use these financial contracts to ‘fix’ the variable interest rates on huge loans they take out to build and improve homes.
According to Traderisks chief executive Alex Pilato, the cost of ‘fixing’ with the banks has spiralled ‘to the point where in many instances we have advised our [association] clients not to do it’.
In response, the firm is poised to open an exchange for social landlords to trade swaps among themselves.
The market would allow associations that feel they have too much fixed debt to sell fixes to others.
Associations buy fixes to protect their business plans against interest rate hikes.
Traderisks, which will charge a fee for administering these contracts, said this could ‘drastically reduce costs’ compared with dealing with the banks. Mr Pilato added that it would also help protect associations from a repeat of the swaps crisis that hit the sector in November. That saw associations stunned by short-notice calls for tens of millions of pounds as security on their swaps contracts.
Mr Pilato said: ‘In the event of calls for security [associations] will be much more friendly to each other [than the banks] in discussions on this matter, and won’t do so under the threat of repricing [loan facilities] as is being done at the moment.’
Clare Miller, executive director of governance and viability at the Tenant Services Authority, said: ‘I think this idea is entirely consistent with our view that the sector in these current, challenging times should be seeking to help itself.’
Traderisks’ scheme, the TRL exchange, is due to be launched next week.
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Readers' comments (5)
Jim Parsons | 13/02/2009 12:50 pm
As with most things this seems to be a way forward to save costs and 'protect from short notice cash calls, but has anyone considered the risks should HA's and RSL's go unregulated and merrily trade to their heart's content? Just look at the mess our banks have gotten into that started this whole debacle! Who will be the overseer, the FSA? I for one would like to see some detail, are there any one can log into?
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Howard Webb | 13/02/2009 3:30 pm
I wonder who these housing associaitons with too much fixed rate debt are?
Maybe some of Mr Pilato's clients perhaps?
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Graham Duncan | 14/02/2009 8:55 pm
This will not "help protect associations from a repeat of the swaps crisis that hit the sector in November". Associations have a legal duty to act prudently and that includes taking appropriate security to cover exposure to other associations under swap contracts. Just because the counterparty is another association does not lessen that requirement. Derivatives trading and risk management schemes are extremely complex and difficult to structure properly. Those of us who have set such mechanisms up can attest to the fact that the devil lurks in every detail, so beware the smooth sales talk.
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Crispin Dowler | 26/02/2009 3:40 pm
Jim, You can see more details about the exchange at: http://www.trl-exchange.com/ The exchange hadn't opened when I filed this story, or we would have included the weblink with the original piece.
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Peter Rutherford | 04/03/2009 10:19 am
If these RSLs are stupid enough to swap and exchange and mix 'n' match valueless or near valueless derivatives, then the TSA's Peter Marsh must state publicly now that these MUST NEVER appear on the Balance Sheet as an asset.
The trouble with so many so-called experts these days is that they do not seem to have a clear understanding of the difference between an asset and a liability.
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