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Hedging Risks Through Multi-asset Trading at BFX

BFX director Arshad Khan, who is also director of business development for the Middle East and North Africa operations of the Financial Technologies Group, plays a key role in promoting the exchange as an alternative investment platform in the region.

Khan spoke to Khaleej Times on the changing investment environment and how the BFX is perfect for investors looking for a way to prosper amid these challenging times in the financial markets. Excerpts from the interview:

Many are quite skeptical about the timing of the BFX launch, coming as it is at a time when structured debt has collapsed and pummeled financial markets. Quite a number are wary of derivatives for instance.

What we will be offering is not just derivatives but a mix of various instruments, we are offering trading in both cash and derivatives products on multiple asset classes along with Islamic finance instruments. BFX is a more versatile platform where the diversified products will allow investors to hedge the risk by investing in multiple asset classes.

Unlike in a OTC market transaction for example between banks and between traders, they do not have a third party to monitor their transactions and act as counter guarantee to the two sides of the transactions. So if either one of them collapses, there is a problem. But in an exchange like BFX, the risk is minimised because first, you have to be a member of the exchange to be able to trade.

We have stringent criteria for membership, we conduct due diligence, we look at track records, financial strength. Members have to give margins and keep security deposit and these deposits cumulatively serve as a guarantee for transactions. We have a strong risk management in place. The structure of any product traded on an exchange is known to all participants, including inherent risks and benefits. Trade statistics are distributed for the public to have a much better price discovery mechanism in place. BFX will be an electronic exchange, bringing more transparency and accurateness in trading practices.

These mechanisms make trading in the exchange more sustainable to a large extent — it frees the market from various issues which otherwise exist in other forms of trading.

I believe this is a very constructive step to bring back waning confidence in the financial markets. We are bringing more maturity, transparency and adaptability to the financial markets. And that’s what the investors need to come back to the market.

Why are you doing it now — at a time when investors are shying away from risky instruments?

We believe it is the right time to launch and it is a positive step to bring back investor confidence. While many investors have been hurt, but still people need investment avenues to park their surplus funds and are looking at right options . BFX is offering is that ‘right option’ for investing in diversified products like equities, bonds, currencies and commodities that would enable the investors to spread and reduce their risks. By using a single exchange and yet able to diversify their investment portfolio, they are much better protected and their potential returns are much better than in investing in a single asset class.

When exactly do you intend to begin trading?

We hope to be up and running in the first quarter of 2010. Our expectations are that by that time, economic conditions are better and investors are raring to go back to the market.

This year presumably, will be spent convincing investors to join the exchange. How do you intend to promote this kind of trading when most people would at this stage – just actually want to stay in cash?

Yes, we do have our hands full preparing for the first day of trading. We are now talking to all potential users of the BFX – banks, hedge funds, brokering community. We are keen on knowing what products do they really want from us on day one and how will this be expanded as we move forward. We are working on a product development roadmap that will take investors where and how they want their money to invest.

How well-equipped is BFX in dealing with individual investors and institutions going into this kind of trading for the first time?

BFX has also set-up an investor training academy which will help the investors to understand these products in much more detail. Its important to impart a practical knowledge of how to trade and use the products listed on an exchange and no one can do it better other then the exchange itself. This will also be a factor for people to come back to market with more skills and expertise. This will also help to create an even wider spectrum of trading community.

What responses are you getting so far?

What we are noticing is the enthusiasm of investors who view the BFX as a platform for multi-asset trading. People are interested in discussing Islamic finance products because the global financial crisis has convinced them that Islamic finance may be a better way of protecting investments.

We are happy that we didn’t receive any negative feedback about this announcement. Some people had few concerns but they also turned very optimistic and positive when we discussed our plans in more detail with them.

What is emerging as their primary interest or concern?

One of the interesting things we are finding out is that existing products like over-the-counter and bank-to-bank deals are something that people want to get onto the exchange environment. So we are putting a lot of effort to introduce innovative products which can take care of this demand. These innovations are challenging but BFX has strong management team and advisers to help us scale those challenges.

What are the advantages that Bahrain has over other similar exchanges in the region? How different would it be from other exchanges?

Most exchanges in the region and internationally offer only one or two products. It could be a stock exchange, it could be derivatives, debt or bonds, currencies or commodities. We can trade all these on a single international exchange, there are few examples of that that I could think of.

Clearly, what we have is something unique, investors can trade in all different products, depending on what they want to go into. Many sectors want to work with us in developing this market further, especially Islamic finance.

rocel@khaleejtimes.com