The specificities of corporate market activities

Today’s most high-profile financial market players are investment banks, hedge funds, pension funds, brokers, asset managers and others.
We can group these types of stakeholders into the “institutional” category.
The other so-called “professional” speakers come from the world of corporates or corpo in financial jargon. Corporates refer to any type of company whose capital market finance is not the activity behind the business plan. Their presence on the financial markets is primarily used for their own financing and for the coverage they encounter when carrying out their main activities. In theory, corporates are never supposed to speculate on the financial markets, as this would be contrary to their hedging and risk reduction policy.
The different types of risks encountered naturally depend on the type of activities carried out and the different geographical areas in which the company will be exposed.
These risks can be classified into the following categories:

  • Exchange risks

  • Rate risks

  • Risks of exposure to raw material price variations.

  • Funding risks

  • Equity market risks

  • Counterparty risks

It is possible to distinguish two types of corporates on financial markets.
1) Small and medium-sized companies that operate on financial markets on an ad hoc basis through their CFO or treasurer. These companies often go through intermediaries and are therefore more likely to obtain lower prices and therefore to be sold.
2) Large or multinational companies with a larger financial staff often with real trading rooms, like most CAC 40 companies.

In this second type, the functions of employees are very similar to those of investment bank trading teams. However, these corporate people are often cross asset (Fx and commodities for example). On the other hand, these corporates will not have all the positions of a traditional trading room such as salesmen, structurers, or market makers.
Treasurers will have the same roles as traders on their own account are that these treasurers will not seek gain by taking risks but on the contrary risk coverage.
However, some treasurers take more risks than they should and are nicknamed “spieler”. These choices are ultimately questionable because they are totally in opposition to their management and these treasurers will not receive bonuses proportional to their performance.

A large majority of the operations carried out by these companies cannot be considered as such. Each operation is actually part of an overall strategy. From the sell-side point of view of a traditional investment bank, some transactions will seem strange because the other hedging transactions could be carried out by other competing institutions offering better prices. Historically, regarding options negotiations, corporates are much more present at the purchase than at the sale on all types of markets in order to search for certain levels of markets, or 0 costs at best. It is much rarer than to see corporates selling more than buying options with the sole purpose of collecting option premiums.
As for other products, the most traded are currency swaps, interest rate swaps, cross currency swaps, swaptions, forwards, spot transactions and options of course.

Another problem concerning so-called corporate trading rooms comes from a possible lack of objectivity because the results must be optimized according to the parent company and the headquarters, to the detriment of the subsidiaries.

The job market in the corporate markets room is quite specific. Some treasurers are former employees of investment banks. The job market is often more dynamic than in banks as well. The relatively small teams dedicated to market activities allow the staff to accumulate more responsibilities, which may appeal to certain candidate profiles. The counterpart being that the players in corporate trading rooms have the “corporate” label associated with their names and it is therefore thought that it would be more difficult for them to obtain a place in corporate and investment banking. The working conditions between corporates and investment banks for trading room businesses are relatively different, and will be best suited to employees depending on their characteristics and ambitions.

http://greenwichtreasury.com/download/GTA_Modern_Corporate_FX_Risk_Management.pdf

 

Baptiste LIRZIN

Baptiste LIRZIN


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