The story of a currency swap that showed the shockingly high spreads, commissions and omissions by an international bank

The story of a currency swap that showed the shockingly high spreads, commissions and omissions by an international bank
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  • One of India’s top bullion and forex advisors Jamal Mecklai has released a note explaining how a bank has been overcharging in a currency swap deal.
  • The spread on the loan as per what the bank was charging is 45%.
  • It would help if RBI were to at least highlight this kind of malpractice and ask for more disclosures, says Mecklai.
Jamal Mecklai of Mecklai Financial has a suggestion for the Reserve Bank of India, following a complex currency swap transaction it advised a client on.

The CEO of Mecklai Financial, a treasury and foreign currency risk advisor, has written a detailed note on one of its clients that engaged a global investment bank for its currency swap requirements.

A currency swap is nothing but a transaction involving trading principal and interest in one currency for the same in another. A $1.5-bn company engaged Mecklai Financial to help it unwind a currency swap transaction it had entered into with a global bank.

Currency swaps are taken by companies that have exposure in foreign currency payouts and may be receiving payments in some other currency.

Mecklai explains the terms of the transaction and how it perhaps lacked transparency since India does not have a very deep currency derivative market yet.


In this note he says, “We were called in recently to advise a large (about $1.5 bn) company on whether and at what rate to unwind a swap it had taken. The company had a $22 million loan at 3.57% fixed, and significant receipts in EUR and, in 2020 their bank – a large international player – had advised it, appropriately in our view, to enter into a EUR/USD currency swap to where its EUR flows could be paid directly to the bank who, in turn, would pay the company USD to settle its underlying loan.”

Squaring off the swap

As the Euro has fallen since the company entered into this arrangement, the swap was beneficial to the client and the bank asked the company whether it would be interested in squaring it off and pocketing more than $1 million in gains. Since the company also had receipts in USD, which it could use to naturally hedge its loan payments, this sounded like a good idea (to us as well).

Jamal Mecklai writes in his note that he asked for the loan cash flows and the date of the original swap. “We were horrified to discover that back in September 2020, the bank had charged them a swap rate of 3.65% – this meant that the company would have to pay the bank a fixed amount of EUR every six months with interest at 3.65% and the bank would pay the company a fixed amount of USD with interest at 3.57%. The issue was that in 2020 the interest rate differential between EUR and USD was around 0.75-1.0% so the swap rate looked outrageously high,” he explains.

A currency swap works in two stages. In the first stage, the two entities exchange the principal amount at an agreed exchange rate, which is based on spot rates. Alternatively, a forward rate can also be set but it has to be agreed to in advance. This is done to arrive at the principal value. Once this is done then the entities agree on the interest rate, fixed or floating, the client has to pay on this currency swap instrument.

In this case Mecklai Financial found that the interest rates were outrageously high. Currency swaps do come with risks to the bank like credit risk and capital requirements that are different across jurisdictions. Even with these elements priced in, the spread was too high.

The client was unaware of the spread

The client, he says, was unaware of the spread on the loan, was happy to reverse the swap and brought him in for negotiations. The bank offered them $1.9 million to reverse the swap while as per his calculations $2.6 million.

After negotiations, the payout was brought up to $2.3 million – but the bank still made a handsome profit of over $200,000 in addition to the ‘extravagant spread’ and the amount earned at the start of the swap.

“This example simply illustrates the obvious fact that treasury corporate desks are trained to maximize revenue by lying to their customers. But banks overcharging customers is nothing new; Reserve Bank has long been aware of this problem and, about six to eight years ago, had CCIL set up the FX Retail platform for spot FX on which anyone can get close to market rates,” said Mecklai.

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