Two foreign exchange firms have been accused of turning the screw on struggling retailers by abruptly changing the terms of currency cover after dramatic fluctuations in sterling.
The Original Factory Shop, a discount chain with 168 stores and 2,450 employees, is complaining to the Financial Conduct Authority after Ebury Partners and Global Reach Group altered the terms of their currency hedging contracts.
The retailer, which sells toys, small electrical appliances and garden equipment, imports a significant amount of stock and had two forward currency contracts worth about $16.5 million with the two forex firms.
Such contracts are supposed to give businesses protection from currency movements, which can erode profit margins. The retailer said that its contracts, which were taken when sterling was worth $1.30, have been changed leaving it exposed to further sterling falls.
It is understood that in the middle of March, as sterling fell to $1.16, Global Reach demanded additional payments and threatened to cancel all forward contracts. Ebury sent a “blanket email” to terminate its currency contract.
How have those contracts changed? Assuming that the FX contracts were to protect them against a fall in sterling – and they’d not have been doing otherwise, would they? – then they’d be wildly in the money and therefore no further margin would be necessary.
And it boggles the mind to think that an FX firm is going to try to renege.
The only other thing I can think of is that the price to roll over into a future time period that protection has risen. Which seems fairly logical, as the position is now well in the money. Also, a pretty weird thing to complain about. Even, if they’re trying to protect at the current level the price will still have risen because volatility has.
That is, it’s very difficult to understand what is being complained about. Reneging seems so unlikely……