Beware of emerging markets (and other things) that go bump in the night

June 26, 2013 01:11 PM
Counterparty risk takes on a new meaning in emerging markets.

During The Trading Show in Chicago on Tuesday, a panel moderated by James Koutoulas, CEO of Typhon Capital, discussed how to improve counterparty risk management and optimize risk exposure hedging options (the show was focused on quant and high frequency trading). Some of the precautions were expected, such as a firm needs controls in place and to beware of the broker that also is a prop trader (a bit ironic considering the audience). But one (sometimes humorous) discussion was looking at the dangers of trading in emerging markets. All panelists urged that due diligence was the key to trading these markets, and risk should be spread across many areas and counterparties.

One panelist noted that due diligence in emerging markets “is a job.” He said that his firm looked at trading in Romania, but found there were only a few broker/dealers and funds and many people considered it “the wild west.” So his firm decided to go to Russia, which he noted “a lot of people think still is the wild west as well.”

Another panelist told of checking out trading in a Middle East market but found, unlike in the United States that has separate clearing houses, in this country the brokers were the custodians. He said that was way too much risk and they walked away.

One trader noted that his firm saw the wide spreads and low hanging fruit in Brazil and decided to venture in but once they tried to close a trade, they were hit with high commissions, taxes, and a government haircut when taking their money out of the country. “We barely got out of there with our lives,” he chuckled.

He also urged everyone to read the fine print, especially in emerging markets. Once he reviewed what looked to be a standard brokerage document until the end, when it said that any failure to fulfill the agreement could have a penalty of death. "Make sure you read to the end!" he said.

The main lesson was to pay attention to details, to the players, to the rules and regulations and especially to current events. One manager noted two “great stories” that changed overnight from an investment paradise to an investment nightmare: Egypt and Turkey. “The last thing you want is your assets stuck in an affiliate overseas,” he said.

About the Author

In her many years covering the futures industry Ginger has interviewed some of today's best global hedge fund and commodity trading advisors. Ginger received a master's degree in journalism at Northwestern University's Medill School of Journalism and a bachelor’s in communication arts from the University of Wisconsin – Madison