Overview
• Launched in 2009
• A group of Microfinance Lenders joined hands to form MFX as an
intermediary to facilitate currency hedging
• Have hedged $1bn+ in forex exposure to date and currently carry
an active book of $450m+.
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How does MFX operate
Client
•
•
Back to back counterparty
Require external credit
rating.
Client credit risk fully
guaranteed by OPIC and
FMO (AAA)
•
•
ISDA
MFX
ISDA
Minimum BBB+ rated bank
or TCX
Currently transact with:
•
•
•
•
•
Standard Chartered (A+)
Deutsche Bank (BBB+)
Scotia Bank (A+)
TCX (A-)
ANZ Bank (A)
• MFX does not carry any market risk as it back-to-backs all its
transactions with banks and TCX.
• 50% of our active portfolio (& all of our HTG portfolio) is
currently backed to TCX who carries the ultimate market /
currency risk
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• To shield the ultimate borrower from the impact of currency risk (reduce
dollar/euro linked loans made by MFI’s)
• High cost of capital associated with putting up cash collateral (where
products were available from Banks)
• Banks and other entities were averse to taking the credit risk on the
microfinance sector.
• OPIC and FMO stepped in to cover the credit risk of MFI’s
• Individual entity volumes were small and a consolidator was needed to
facilitate larger volumes.
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• Approx 5% of Microfinance Lenders (MIV’s) Assets under Management are
currently hedged with MFX. (Another 5% directly with TCX)
• USD and Euro denominate loans are still the norm.
• Institutions are finding local options via the back-to-back loan mechanism.
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• Current Active portfolio in Haiti is USD 4.7m
• Clients have benefited to the tune of USD 1.4m (as at March 31)
as result of hedging their USD exposure
• Cost of hedging (i.e. Interest rate differential) has historically
been 7-9% p.a.
• Current spread closer to 12%
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What is a Cross Currency Swap?
 An agreement between two parties to exchange
interest payments and principals denominated in two
different currencies.
 Full exposure to foreign currency is hedged (based on
spot fx rate at date of execution).
 Cost of hedging is reflected in the higher local
currency interest rate paid.
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Start
During
the
term
MFX
MFI enters into a CCS with
MFX to swap the $1m loan
into a HTG loan using the
spot FX rate (62:1) on date
of swap
Lender
USD Interest paid @ 6%
MFX
MFI
USD Interest paid
Lender
HTG Interest paid @ 14%
USD 1m paid
Maturity
MFI
USD 1m
Loan at 6%
MFX
MFI
USD 1m loan repaid
Lender
HTG 62m paid
The MFI has converted a USD 1m liability @ 6% into a HTG 62m liability at 14%
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Determine need to hedge currency risk.
 What is your exposure to USD/EUR and at what level of FX depreciation
would the MFI face capital adequacy issues and be unable to operate
comfortably.
 No-one can predict FX markets. As such entities need to develop a policy
and follow it. (Hedging (or not) is typically not a decision left to the
CEO/CFO but should be a Board mandated risk management tool with
defined requirements)
Independent Credit Review
 MFX requires all our counterparties to undergo a credit review.
Legal Agreements
 ISDA agreement (including a Credit Support Annexe.)
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Guarantors
OPIC / FMO
Guarantee Amounts
are “Allocated” or
assigned to PA’s via a
“Allocation
Certificate”.
PA makes a claim from OPIC/FMO and gets
paid directly by the Guarantors
Client Default
Client
Hedge
Transactions
MFX Default
MFX Solutions Inc.
In the event of a client default,
MFX will in the first instance
likely meet its obligations to the
PA from internal resources.
Hedge
Transactions
Permitted Assignee
Permitted Assignees are defined
as banks and TCX that MFX
Collateral
offloads its market risk to.
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MFX Corporate Structure
Investors
Investment
MFX Solutions LLC (Delaware LLC.)
Most clients of MFX
have a shareholding
in MFX Solutions LLC
and approx. 90% of
our transactions are
with related parties
100% Ownership
Investment $5m
MFX Solutions Inc.
(Delaware Corp.)
Investment $7.5m
(<2%)
TCX is also a
hedging
counterparty to
MFX
TCX Fund
Hedge Transactions
Collateral
MIVs/SME Lenders/MFIs
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MFX Governance and Regulatory Environment
MFX Board Level Governance
•
The Board of MFX manages the
MFX operations and risk through
3 key committees:
•
Audit
•
Operations and Credit
•
Pricing and Regulatory
External Audit and Reviews
•
•
Guarantor (OPIC/FMO) Level
Governance
An annual external audit is
conducted by Ernst & Young
At the discretion of the Board
external operational risk reviews
are conducted
•
MFX
Regulatory Governance
•
Legal Counsel
•
•
Corporate Counsel – General :
Strasburger & Price
Corporate Counsel – Regulatory :
Katten Muchin Rosenman
Guarantors manage MFX via
covenants in the guarantees. These
cover:
•
Type of client (i.e. Impact
space only)
•
Type of transactions
•
Currency and client
exposure limits
•
KYC and AML monitoring
requirements and policies
•
Operational sustainability
(via. Cost/income ratio
covenants)
•
No debt allowed covenants.
•
MFX is a Delaware incorporated
LLC (pass through organization for
tax purposes) with limited liability
on its partners.
Determined as a Non Swap Dealer
by the CFTC but required to comply
with the following requirements:
•
Reporting (DTCC) &
reconciliation
•
Margin and clearing
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Risk limits
Guarantee leverage limits
Permitted assignee limits
Restricted to having active client
positions of 10x the amount of
Guarantee available.
Any downgrade of any Permitted
Assignee by an international rating
agency. A downgrade below minimum
levels would result in:
•
Existing
transactions
with
permitted assignees are covered to
maturity.
•
No new transactions allowed with
such permitted assignee unless
guarantee terms amended or
waived.
Current Max Client positions =
$400m (based on $40m guarantee)
Client concentration limits
Tier 1 : max 25% of portfolio
Tier 2 : max 20% of portfolio
Tier 3 : max 10% of portfolio
Currency concentration limit
Notional Amount of all Eligible Hedge
Transactions denominated in any
single currency (other than US
Dollars or Euros) shall
constitute no more than 25% of the
Aggregate Portfolio
MFX
Clients restricted to
•
•
•
MIV
MFI
SME Fund
Transactions restricted to
•
•
•
Cross Currency Interest Rate Swaps
Foreign Exchange Forwards
FX Options
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