The clock maker

BMO Financial Group gets its timing right


In foreign exchange markets, timing may not exactly be everything but it’s certainly important, as the FX unit of Canada’s BMO Financial Group has learned to its benefit.

When the unit, one of the stand-out divisions of the group, opened its London office in late 2007, the financial crisis was brewing and there was a virtual waiting list of high-calibre customers looking for counterparties who had a reputation for capital integrity and other old-fashioned, suddenly highly-prized virtues.

For many in the City, that was BMO Financial Group. One of the ten largest financial institutions in North America, it has a risk-averse reputation. This was not only because the Bank of Canada has long demanded high standards across the financial sector for loan books, capital levels and other crucial elements in banking robustness, but also because the group itself had just undertaken a risk review process of its own following a sudden loss.

Call it luck or good management. When the crisis hit, the group was well into making changes to its risk processes and the FX unit imported that confidence into London. The results speak for themselves.

“When we opened our London FX office, we thought the lion’s share of the business would be Canadian-dollar transactions,” remembers Firas Askari (pictured right), head of foreign exchange trading at Toronto-based BMO Capital Markets. “Two years later, only 40 percent of our business in the London office is in the Canadian dollar, and we are executing for all major currency pairs.”

However the FX team’s expertise in its domestic currency, sometimes called the loonie [after the etching of a Canadian loon embossed on the front of the country’s one-dollar coin], hardly hurts. Like the Australian and Kiwi dollars and the Norwegian krone, the loonie has its own challenging characteristics. It’s largely commodity-based, like the other three, but it’s also historically tied to the US dollar. “Some days it will parallel the US dollar, other days it is off on its own,” observes Askari. “It demands its own level of knowledge and finesse.”

The loonie’s certainly gone on some wild rides since the crisis. Last October it bought over US94c and currency analysts were talking excitedly of greenback/loonie parity. But in March the loonie fell to US76c and parity became a dirty word. So in the wrong hands, the loonie’s adventuresome characteristics can hurt and recently, market insiders say, Canada has seen some bungled FX flows that cost clients dearly.

BMO’s FX unit arrived in the City with an international reputation for the structuring of Canadian-dollar products and derivatives, customised accounting solutions such as highly effective hedge-accounting treatments among other home-grown expertise. (BMO is hardly a newcomer to London; it first opened an office there in 1870.) As a member of the unit says, “our [FX] sales staff know exactly what is eligible [in accounting treatment] and what is not.” Surely, comforting knowledge for a client in today’s accounting-driven environment.

But deep expertise in one currency can translate seamlessly into matching proficiency in others. “There is always strong interest in major pairs, such as Canadian dollar with the US dollar, the yen and the Euro,” adds Askari. “But we have also formed relationships with other banks in their niche currencies, which gives us another useful capability for our clients.” Those clients run the gamut – corporates, investors and government agencies.

Summarises Askari about the unit’s London debut: “A reputation as one of the top market makers in the Canadian dollar certainly opened doors.” Nor did it hurt that last year the FX team was voted best FX market-maker in a survey by the China Foreign Exchange Trade System and the Interbank Funding Centre.

Surprisingly, the unit’s international standing is not so much based on whizz-bang technology and quant-like complexity as on a principles-based modus operandi. “Our team doesn’t focus on making breakthrough products for our clients,” Askari unapologetically explains. “We concentrate on working with clients and earning their trust with knowledgeable service. If that sounds conservative, that’s because it is. To us, it’s more important to have all the tools and a reputation for knowing how to use them, than to be known as innovative. “Frankly, this conservative approach – and Canadian regulatory oversight – have helped us in Europe recently.”

In a business famous – or infamous – for burn-out, this strategy has ended up giving the unit unusually long-serving staff with matching experience. Some in the FX team, who cut their teeth with other global banks, hedge funds and asset managers have been trading for nearly 40 years. “We look for perspective,” explains Askari. “These people have seen it all before.”

That sense of history turned out to be a useful qualification in the crisis. When the markets froze, the FX unit’s long-standing relationships paid off. It was able to tap liquidity when many other trading teams could not.

The robustness of the parent has to be seen as one of the FX unit’s secret weapons. Despite the general mayhem, the group has reported positive net income in each of the last eight quarters with a cash return on equity of 13.3 percent for the fiscal year ended October 2008. At the end of the second quarter of 2009, tier 1 capital ratio was 10.7 percent. As CEO Bill Downe observes: “In a challenging year, to say the least, when a number of global financial institutions reported staggering losses or simply disappeared, BMO’s financial results in fiscal 2008 are a testament to our strength and stability.”

And it’s hard to argue with that.

The institution’s long heritage can be counted a factor too. Way back in 1818, the bank undertook its first FX transaction in a trade deal with China. As Askari says: “We’ve learned a lot over the past 190 years, most notably that no two clients are alike in their FX needs.”