LONDON, July 1 The almost-$9 billion fine slapped on BNP Paribas this week has got foreign exchange markets buzzing about how and when the French bank will process the payment and whether it will lead to sharp price swings.
So far, little direct impact has been felt, especially in the most liquid euro/dollar exchange rate. But traders and analysts are poring over the details of case as closely as they analyse one-off flows related to cross-border mergers.
Steady accumulation of dollars from a European bank could depress the euro/dollar exchange rate, at least briefly, traders said.
Just over a month ago, penalties worth $2.5 billion imposed on Credit Suisse by U.S. authorities drove the dollar to a three-month high against the franc, several traders said. The payments went through the noon "fix" during London trading.
Central to the speculation about the BNP fine and how it may affect the exchange rate is when the amount needs to be paid, whether the bank raises the money through U.S. dollar bonds and if any of the amount set aside for the fine has been hedged.
Traders said with details on the fine becoming clear over the past week, it was unlikely the bulk of the fine would be hedged. And bankers said there was no indication so far that BNP Paribas was sounding out investors for a dollar bond issue. Such a bond would have minimal impact on exchange rates.
Some traders reckon that the lack of price action so far suggests the bank, which is among the top 10 banks in the foreign exchange business, according to Euromoney, may have worked off quietly.
But most admit that it is not clear enough yet to say the coast is clear and the fine payment will have little impact.
Analysts at Investec reckoned the market may trade around the speculation, at least for a while.
"The significance of this for FX markets is that although the bank may have pre-bought a certain amount of dollar from their euro holdings, the assumption is that there is likely to be more euro sold and dollar purchases now that final figure is confirmed," Investec told clients in a note Tuesday.
The plea agreement signed by BNP provides for it to pay the fine within 30 days.
BNP refused to comment on how the bank plans to make the payment. It said in May it had already made provisions of 1.1 billion euros ($1.5 bln) towards the fine.
The bank is expected to sell bonds or some assets to help pay for the fine. It has a large liquidity buffer of about 100 billion euros at the end of the first quarter - with half of that in dollars - figures that have remained about the same at the end of the second quarter, senior officials have said.
Some senior dealers contacted by Reuters said it was impossible to detect any real impact in daily flows to date and it's likely these would be well disguised by a bank with global treasury operations anyhow.
"We have not seen any price action to indicate it, but my inclination would be to expect that they had hedged a lot of this already," said the head of spot G10 currency trading with one bank in London.
"BNP are a pretty sophisticated operation in general and it would be a real surprise if they had not been planning for this for some time. They also run a pretty hefty U.S. dollar balance sheet and I would think they would be making use of that."
But big one-off flows unnerve spot dealers, who constantly need to be wary of outsize orders buffeting rates unexpectedly
Earlier this year, the repatriation of funds from Vodafone's $130 billion sale of its stake in the wireless unit of Verizon in the United States drove the British pound higher against the dollar.
And, as with the Credit Suisse fine fallout, much of the focus will be on activity around the "fix".
The "fix" is a benchmark service in the foreign exchange market provided by banks. It is useful for buy-side investors like large funds to value and benchmark their portfolios, since a majority of main stock and bond index compliers use the rates for their calculations.
"One would assume if the payments have to made - converting euros to dollars - they would be through the fix as shareholders demand a certain degree of transparency," said a London-based currency trader. (Additional reporting by Jemima Kelly; Editing by Larry King)