Background
A prominent Saudi-based company recently engaged in a complex derivative transaction with the intention of hedging interest rate risk and reducing potential financing costs.
However, as the interest rates market experienced significant fluctuations, the company became aware of the substantial risks associated with the transaction, including implicit financial leverage.
In response, the company’s management and board sought to comprehend the existing trade’s risk profile and evaluate the potential for derivative misselling. Consequently, the company decided to appoint a legal advisor to dispute the transaction on the grounds of unsuitability.
Ehata was entrusted with providing an expert perspective and assessment of the suitability process.
Our approach
Drawing on our extensive experience as a specialized market risk and derivative advisor, Ehata undertook a comprehensive assessment to deliver a detailed report on the actual risks faced by the company.
We reviewed all relevant marketing materials leading up to the trade execution to identify gaps in the suitability process.
Our analysis focused on areas where the financial institution failed to meet compliance requirements.
Moreover, we made a clear distinction between a conventional hedge transaction and a speculative derivative trade.
Collaborating closely with the company’s management and legal advisor, we provided technical support and guidance to navigate the complexities inherent in the transaction.
We assumed the responsibility of addressing various legal memos from a technical and commercial standpoint. Through the application of stress-testing tools, we enabled the client to make informed decisions by visualizing the risks and potential exposures involved.
Outcome
Through our comprehensive advisory services, Ehata successfully presented a holistic view of the derivative suitability aspects to the company.
The company’s legal advisor gained valuable insights that aided in building a compelling case and addressing all technical gaps.
Additionally, the company acquired a clearer understanding of alternative restructuring options and risk mitigation strategies while contesting the original transaction.
