24th, a peaceful march by students in Hong Kong, protesting China’s
decision to vet candidates for its 2017 election, sparked a
pro-democracy demonstration which sent Asian markets into a tailspin.
The repercussions of this event redirected market participants’ focus
onto risk mitigation and the potential cultural change within the SME
exchange derivatives market.
Albeit its peaceful nature, investor wariness over the protests caused
broad sell offs across the region. Hong Kong’s Hang Seng Index dropped
nearly one percent overnight, as tens of thousands of protestors
bourgeoned into a vigil, barricading central parts of the city.
The Hong Kong dollar (HKD) immediately followed suit, tumbling to a
six-month low against the US dollar by the sixth day of the protest.
Similarly, currency slumps were felt across Asia.
Investors and speculators recoiled to the safe haven of the greenback,
causing the Malaysian Ringgit and Japanese Yen to reach their lowest
levels since April 2014 and August 2008, respectively.
Amid the mounting political risks and escalating currency
volatilities, underlying dangers of currency exposure have caused
market participants to revisit foreign exchange hedging options.
Since the Asian Financial Crisis, companies in the region have started
to embrace the significance of hedging and responded positively to its
utilisation. However, certain segments have gained more traction than
In East’s latest Asia Business Foreign Exchange Report, figures showed
that engagement with FX Forwards and FX Options only corresponded to
26.8 percent and 23.9 percent of SMEs respectively.
Such disparity polarised to that of upper corporate and institutional
enterprises; which begs the question – why are SMEs less inclined to
invest in foreign exchange strategies?
Historically, the majority of SMEs have solely been reactive to
foreign exchange movements.
evidence indicates that most business owners have adopted the
mentality of “hoping for the best” when it came to currency risk
mitigation. They merely adjusted their strategies post impact in
accordance to the degree of variance the volatility has caused.
Furthermore, SMEs have not been able to grasp FX hedging’s effect on
the maintenance of a sustainable operational profitability. Due to the
almost ancillary impact of currency risk on daily transactions, they
do not classify it as on par with receivables and notes – a business
risk that should be managed in order to achieve healthy margins and
stable cash flows.
It is also not plausible for SMEs to attain the same magnitude of
financial sophistication as their larger counterparts. The lack of an
entrenched derivatives culture in the SME segment can be drawn from
their ambivalence towards products on offer, a consensus outcome that
appears throughout several East research programs.
Consequently, such scenarios also represent a strategy evaluation
opportunity for FX solution providers.
The establishment of a symbiotic relationship where customers consider
their bankers as a source of knowledge and advice should be at the
forefront of all strategic objectives. The result will often lead to
higher customer satisfaction rates, which in turn will increase the
banks’ wallet share.
For example, Singapore has the most sophisticated SME cohort in terms
of FX strategies. The derivatives penetration rate in Singapore is
31.5 percent for FX Options and 33.2 percent for FX Forwards.
This is almost double that of the Philippines. Unsurprisingly,
Singapore also enjoys the best customer satisfaction rating, scoring
the highest in the region at 1.25 and eclipsing the Philippines’
rating of 1.53.
Despite the turmoil, Hong Kong’s ongoing protests may have
inadvertently provided a much needed wake up call for banks seeking to
penetrate the elusive SME exchange derivatives market.