A stable currency for treasurers?
ISSUE 19.3, Nov 09
Ian Hillier-Brook,
WDX Organisation
January 1st 2010 will see the formal launch of the newest commercially available global currency unit, the World Currency Unit, otherwise known as the Wocu.
The pricing of the Wocu is derived by a software algorithm created by WDX Organisation and uses a basket of currencies drawn from the sovereign currencies of the top 20 countries rated by GDP, according to the IMF.
Following the first ever execution and settlement of a trade conducted in the Wocu on September 10th this year, the new currency unit is set to allow corporations, financial institutions, governments and even individuals to trade across national boundaries and hold foreign assets with minimal risk of losses caused by exchange rate fluctuations.
In practice, investment banks will act as liquidity providers in FX, forwards, swaps and fixed income business – all denominated in Wocu. Commercial banks will facilitate settlement, clearing and day-to-day personal and corporate transactions. Trade settlement will be made through the normal banking process with brokers and clearing houses.
The concept of a basket of currencies is not without precedent. The ERM and the Ecu both tried to minimise currency fluctuations in the EU. More closely related is the IMF’s SDR (special drawing rights). This is an international reserve asset, created in 1969 to supplement its member countries’ official reserves.
SDR’s value is also based on a basket of key currencies, but the Wocu differs in that the SDR uses only four fixed currencies and is re-weighted only every five years whereas the Wocu is based on 14 variable currencies of 20 countries (there are several euro-based countries in the basket by virtue of their GDP) and is re-weighted every six months when the IMF releases its GDP figures.
The SDR is also subject to ‘a lot of political influence’, says Ian Hillier-Brook, director of WDX Organisation, the company that has brought the Wocu to life. The UK, he notes as an example, has around 24 per cent in terms of voting rights at the IMF. Sterling is eleven per cent of the SDR but only contributes 5.5 per cent of total GDP in the Wocu.
Although the project is currently financed by NYSE-listed investment house, Flex Fuels Energy Inc, credibility is given to the Wocu’s pricing and management via support from a fully independent body: the WDX Institute. This will comprise a panel of senior academics, economists, business practitioners and treasury advisors from around the globe. It was preceded by a pathfinder institute which assisted in the initial setting up of the Wocu.
The concept around the Wocu right from its early days – it has been in the pipeline for about ten years – has been to create a ‘demonstrably less volatile and totally apolitical currency unit’, says Hillier-Brook. Trade in US dollars or euros can see sharp changes in exchange rates. Corporates trading in billions can see huge differentials, vastly complicating risk management and forward planning, he explains.
With the emergence of the BRIC countries into the world market, WDX felt that a resolution was needed sooner rather than later. ‘The idea of another sovereign currency taking over [from the US dollar] doesn’t make a lot of sense, because there will be huge political arguments,’ he comments. ‘If it even happens, it will take forever because they’ll all be fighting each other. I just don’t see it happening.’
As a derivative of global currencies, the Wocu is clearly not intended to replace them, but the beauty of setting its value based on the currencies of the top 20 countries by GDP, says Hillier-Brook, is that this list is not fixed. If any sovereign currency underperforms, it will be replaced by one which is performing; as the global economic environment changes, the value line of the Wocu should therefore remain fairly smooth. ‘Even if you only reduce volatility by two or three per cent, that’s an awful lot of money you have saved if you’re a billion dollar corporation.’ There is also the ‘comfort factor’ for reducing hedging costs,’ he says. ‘The current downturn has focused peoples’ minds on risk, hedging costs and currency volatilities. It seems the time is now right for the Wocu.’
As a new currency reference, the Wocu is aimed at being a useful tool for major buyers and sellers of world commodities, including corporate treasurers. But its primary purpose, says Hillier-Brook, is to facilitate trade.
He says WDX has been talking to ‘major banks’ about trading and settling international transactions on behalf of their corporate clients using the Wocu. He adds that both banks and inter-dealer brokers are ultimately expected to trade Wocu derivatives for clients, ‘just to make money from it’.
For WDX, much of its revenue is expected to come from licensing the pricing algorithm. ‘We will license the algorithm to the banks and exchanges, so they can offer their own Wocu rate, giving them control over their own destiny. We are also in negotiation with a number of well-known market data vendors about them delivering the data, and we are currently delivering the data directly via the internet.’
‘The FX trading technology vendors and some TMS vendors have also shown interest,’ he says. The FX system suppliers have told him that if the banks are interested in the Wocu, they will add it to their pricing engines. ‘To add another currency, and to apply our algorithm if they want it in-house, is a fairly straightforward technical issue.’ Market data vendors may soon have the option of white-labelling the solution.
For the end-user – the corporate – recent advancements in WDX’s technology have facilitated interest rate calculations based on the Wocu basket. Generation of forward curves and yield curves are therefore now possible.
Michael King, inventor of the Wocu, comments that this currency unit can offer organisations, governments and, through them, individuals, ‘a new instrument of great elegance and power’. ‘Some even see it as the answer to the reserve currency issue.’
In terms of commercial take-up so far, Hillier-Brook states that ‘we have some very serious interest from some very big players, mostly European, some Far Eastern’. All such interest is under NDA.
To give the concept legs, the treasury community will need to push their banks towards the Wocu. ‘They will be hugely influential in its success,’ he says. ‘The technology is in place, we have it up and running.’
http://www.ibspublishing.com/index.cfm?section=news&action=view&id=13520
ISSUE 19.3, Nov 09
Ian Hillier-Brook,
WDX Organisation
January 1st 2010 will see the formal launch of the newest commercially available global currency unit, the World Currency Unit, otherwise known as the Wocu.
The pricing of the Wocu is derived by a software algorithm created by WDX Organisation and uses a basket of currencies drawn from the sovereign currencies of the top 20 countries rated by GDP, according to the IMF.
Following the first ever execution and settlement of a trade conducted in the Wocu on September 10th this year, the new currency unit is set to allow corporations, financial institutions, governments and even individuals to trade across national boundaries and hold foreign assets with minimal risk of losses caused by exchange rate fluctuations.
In practice, investment banks will act as liquidity providers in FX, forwards, swaps and fixed income business – all denominated in Wocu. Commercial banks will facilitate settlement, clearing and day-to-day personal and corporate transactions. Trade settlement will be made through the normal banking process with brokers and clearing houses.
The concept of a basket of currencies is not without precedent. The ERM and the Ecu both tried to minimise currency fluctuations in the EU. More closely related is the IMF’s SDR (special drawing rights). This is an international reserve asset, created in 1969 to supplement its member countries’ official reserves.
SDR’s value is also based on a basket of key currencies, but the Wocu differs in that the SDR uses only four fixed currencies and is re-weighted only every five years whereas the Wocu is based on 14 variable currencies of 20 countries (there are several euro-based countries in the basket by virtue of their GDP) and is re-weighted every six months when the IMF releases its GDP figures.
The SDR is also subject to ‘a lot of political influence’, says Ian Hillier-Brook, director of WDX Organisation, the company that has brought the Wocu to life. The UK, he notes as an example, has around 24 per cent in terms of voting rights at the IMF. Sterling is eleven per cent of the SDR but only contributes 5.5 per cent of total GDP in the Wocu.
Although the project is currently financed by NYSE-listed investment house, Flex Fuels Energy Inc, credibility is given to the Wocu’s pricing and management via support from a fully independent body: the WDX Institute. This will comprise a panel of senior academics, economists, business practitioners and treasury advisors from around the globe. It was preceded by a pathfinder institute which assisted in the initial setting up of the Wocu.
The concept around the Wocu right from its early days – it has been in the pipeline for about ten years – has been to create a ‘demonstrably less volatile and totally apolitical currency unit’, says Hillier-Brook. Trade in US dollars or euros can see sharp changes in exchange rates. Corporates trading in billions can see huge differentials, vastly complicating risk management and forward planning, he explains.
With the emergence of the BRIC countries into the world market, WDX felt that a resolution was needed sooner rather than later. ‘The idea of another sovereign currency taking over [from the US dollar] doesn’t make a lot of sense, because there will be huge political arguments,’ he comments. ‘If it even happens, it will take forever because they’ll all be fighting each other. I just don’t see it happening.’
As a derivative of global currencies, the Wocu is clearly not intended to replace them, but the beauty of setting its value based on the currencies of the top 20 countries by GDP, says Hillier-Brook, is that this list is not fixed. If any sovereign currency underperforms, it will be replaced by one which is performing; as the global economic environment changes, the value line of the Wocu should therefore remain fairly smooth. ‘Even if you only reduce volatility by two or three per cent, that’s an awful lot of money you have saved if you’re a billion dollar corporation.’ There is also the ‘comfort factor’ for reducing hedging costs,’ he says. ‘The current downturn has focused peoples’ minds on risk, hedging costs and currency volatilities. It seems the time is now right for the Wocu.’
As a new currency reference, the Wocu is aimed at being a useful tool for major buyers and sellers of world commodities, including corporate treasurers. But its primary purpose, says Hillier-Brook, is to facilitate trade.
He says WDX has been talking to ‘major banks’ about trading and settling international transactions on behalf of their corporate clients using the Wocu. He adds that both banks and inter-dealer brokers are ultimately expected to trade Wocu derivatives for clients, ‘just to make money from it’.
For WDX, much of its revenue is expected to come from licensing the pricing algorithm. ‘We will license the algorithm to the banks and exchanges, so they can offer their own Wocu rate, giving them control over their own destiny. We are also in negotiation with a number of well-known market data vendors about them delivering the data, and we are currently delivering the data directly via the internet.’
‘The FX trading technology vendors and some TMS vendors have also shown interest,’ he says. The FX system suppliers have told him that if the banks are interested in the Wocu, they will add it to their pricing engines. ‘To add another currency, and to apply our algorithm if they want it in-house, is a fairly straightforward technical issue.’ Market data vendors may soon have the option of white-labelling the solution.
For the end-user – the corporate – recent advancements in WDX’s technology have facilitated interest rate calculations based on the Wocu basket. Generation of forward curves and yield curves are therefore now possible.
Michael King, inventor of the Wocu, comments that this currency unit can offer organisations, governments and, through them, individuals, ‘a new instrument of great elegance and power’. ‘Some even see it as the answer to the reserve currency issue.’
In terms of commercial take-up so far, Hillier-Brook states that ‘we have some very serious interest from some very big players, mostly European, some Far Eastern’. All such interest is under NDA.
To give the concept legs, the treasury community will need to push their banks towards the Wocu. ‘They will be hugely influential in its success,’ he says. ‘The technology is in place, we have it up and running.’
http://www.ibspublishing.com/index.cfm?section=news&action=view&id=13520