Derivatives dealers don't always understand their clients' risks and may be selling them products that are poorly suited to their needs, a new survey suggests.
While nearly 85% of responding financial executives said they put the onus on dealers to determine whether a derivatives proposal is suitable for their companies, only 38.1% said they agreed with the way their risks have been categorized by dealers.
"What that might suggest is that dealers in particular instruments should perhaps be more informed about their potential clients' risks and risk management style," said Aaron Phillips, director of research for Treasury Management Association, Bethesda, Md., which conducted the survey last spring.
Of the 657 association members who responded to the survey, 415 said their institutions have engaged in some type of derivatives transaction. Respondents included privately owned and publicly held corporations, governmental units, and educational institutions.
Despite the misgivings about suitability, 57.1% of the executives said they sought risk management counsel from a banker with whom they engaged in derivatives transactions. AT the same time, 57.8% said they have used in- house personnel, and 45.5% said they have used investment bankers.
The executives said they believe the products are useful for risk management. More than 90% said they face interest rate risks, 75.4% said they are concerned about foreign exchange risk, and 36.6% pointed to commodity price risk.
Of the derivatives products available, a nearly equal number said they used interest rate or foreign exchange swaps. Of the 154 who said they used interest rate swaps, 90 used them to swap from floating rates into fixed rates.
Over-the-counter forwards were used by 72% of the organizations represented in the survey. Traditional securities with imbedded options like calls or puts were used by 42%, while OTC options and asset-backed securities were used by with 37% and 36%, respectively. Exchange-traded derivatives and structured securities were used by less than 20% of the respondents.
