South African individuals, business and trusts often need help to manage their exposure and protect their financial assets against a volatile rand when operating globally.
One financial instrument that is useful for addressing such issues is an “asset swap”. Bianca Botes, Director at Citadel Global, is answering five frequently asked questions about asset swaps to better communicate how they work and what benefits can be derived from them for businesses and individuals seeking solutions.
5 FREQUENTLY ASKED QUESTIONS EXPLAINING ASSET SWAPS:
- What is an asset swap?
An asset swap allows an investor to buy foreign currency with rands as a long-term investment or as a short-term hedge. The mechanism by which a financial institution’s capacity to invest offshore can be utilised by other South African residents is known as an asset swap. It is an agreement between an investor and a financial institution with asset swap capacity, whereby the institution holds an offshore asset on behalf of the investor. Although the underlying assets are in an offshore jurisdiction; it is a rand-denominated investment. There is no fixed term to an asset swap. When the investor wants to liquidate their investment, the fund value is converted to rands at the applicable exchange rate and repatriated to South Africa.
- Who needs asset swaps?
Assets swaps are ideal tools for companies, individuals or trusts that need to protect against currency volatility risk when operating in the global market space. Asset swaps are also ideal for companies and trusts that are prohibited, by exchange control regulations, to passively invest offshore. Investors who do not want to physically move their funds offshore but would still like to profit from investing in overseas markets, can also benefit. Lastly, individuals wanting to mitigate exchange rate risks while awaiting South African Reserve Bank (SARB) tax clearances, and companies and individuals wanting to mitigate exchange rate risks while awaiting SARB approvals, can benefit from asset swaps.
- What is attractive about asset swaps?
Citadel Global’s asset swap is one of many efficient hedging instruments utilised on behalf of businesses and investors. Making it more attractive is the fact that it can be put in place without waiting for approval from the SARB and/or using the investors foreign investment allowances which shortens the time frame of a transaction. This enables investors to make use of favourable market conditions to secure their currency exposure.
- How do you unwind an asset swap?
The rate secured with an asset swap will be very close to the ultimate rate used when an asset swap is un-winded, and funds are sent directly offshore in terms of a SARB approval or utilising a foreign exchange allowance. This is achieved by performing a series of transparent back-to-back transactions at very favourable cost structures.
- Are asset swaps expensive?
Asset swaps are a cost-effective tool when it comes to protecting against rand volatility. To provide an example, Citadel Global’s fees typically amount to 1% of the transaction value, depending on size and duration of the swap.