Product insights

The technical implications of Grexit, how can SimCorp clients prepare

With the Greek sovereign debt crisis unravelling around us, there is concern and uncertainty as to its effect on Europe and the investment management industry. With many rating agencies now rating the probability of Greece exiting the Eurozone at 50%, it feels as if we may be reaching a tipping point. But what are the technical implications of such an event on investment management firms? And how should SimCorp clients prepare?

The political and economic consequences of Greece’s exit from the 19 nation currency block cannot be underestimated. It takes us into uncharted territory, and will likely hurt market sentiment and lead to a bout of risk aversion.

SimCorp has been analyzing the technical consequences of a possible euro exit since December 2011, so that we are prepared to advise clients on necessary action plans.

Isn’t a euro exit just a reverse euro conversion?

A euro exit is not the same as a reverse euro entry conversion. During a euro entry, a sovereign government terminates its own legacy currency, making all contracts in this currency void if they do not adapt. In case of a euro exit, the euro continues to exist, so unless other actions come into play, all contracts in euro remain contracts in euro.

The technical impact of Greece exiting the euro depends on whether your firm:

Is merely an investor?

Is servicing clients in Greece?

Has subsidiaries in Greece?

The view from the investor

Bonds are legal contracts, so unless the issuer breaks the contract either by defaulting or by forcing an exchange of old bonds to new, a euro bond will remain a euro bond. In most likelihood you don’t have to do anything, and in the worst case you need to apply your usual impairment, default or exchange processes. The fact that the cause may be a Greek exit doesn’t change the technical processes.

Similarly, if the government opts to default or offer an exchange of government bonds, then there is very little you can do about it.

For listed equities, shares may begin to be quoted in a new currency, but the equity itself stays unchanged. Because SimCorp Dimension® supports multiple currencies on equity; your firm simply needs to add an additional currency if, for example, your Greek shares go from being quoted in euro to drachma.

Derivatives are legal contracts as well and will continue as such unless a breach of contract takes place. In SimCorp Dimension®, such a breach of contract involves closing the old contracts and (potentially) opening new ones. A data extract of the old contracts could be edited and re-imported to facilitate the opening of new contracts.

The view from the asset manager

As well as the issues listed above, if you perform asset management for a client in Greece, the consequences can vary depending on whether you:

Deliver actual accounting figures?

Deliver trade data and valuations?

Deliver performance or risk calculations?

If your client needs to have accounting figures in Greece’s new currency, you will have to convert the portfolio currency of that client’s portfolio.

Important aspects to keep in mind in terms of your accounting figures and portfolio currency conversion.

Auditors insist that the past must be documented true and fair. Therefore simply changing the portfolio currency on the existing portfolios is not an option. Instead you must duplicate your whole portfolio structure in the new currency and move your open positions from old to new, converting their portfolio currencies in the process.

You must consider your bank accounts, cash buckets and general ledger. Where fixed amounts are a part of your cost/tax setup, they must be addressed. Both your own and your counterparties’ settlement defaults may change.

SimCorp Dimension’s® Euro Portfolio module can duplicate portfolios and portfolio groups applying a naming standard of your choice and put a blocking definition on the old portfolios as of a selected date.

The Euro Portfolio module can also create conversion (reallocation) transactions for equities (and equity-like), bonds (and bond-like) and different kinds of interest-based swaps (leg by leg) from a euro entry currency into EUR, based on the conversion factor(s).

Should the need arise, SimCorp will deliver at short notice a similar conversion from EUR to another currency, dedicated to the task at hand.

Derivatives and other instruments not mentioned above must be (manually) closed in the old portfolios and re-opened in the new. Data extracts and imports using existing standard tools will support this process, making it much less manual as it initially sounds.

Whatever your euro-related scenario, SimCorp stands ready to assist and support your needs by continually developing and updating SimCorp Dimension® to meet your requirements. With things changing on a daily basis, SimCorp monitors the situation closely. From a technical standpoint however, SimCorp clients should not be concerned. Your system can support you adapt to the changing landscape, whether Greece leaves the euro or not.

Disclaimer: Being a solution provider, SimCorp does not analyze or advise on likelihoods of political events or on the economic consequences of them. It sticks to the technical aspects.

This post was originally published as a LinkedIn Pulse article.