Let’s get physical with wholesale banknotes

Money trade: Banknotes trading involves both retail and wholesale. – Reuters

Money trade: Banknotes trading involves both retail and wholesale. – Reuters

EVER wondered how your neighbourhood Bureau De Exchange source their physical foreign currency?

As much as we are inclined to look at the electronic trading of foreign currencies in an investment banking setup and the factors that drive these currencies, the physical trading of currencies is always ignored. Beyond what is observed from the electronic screens at the Bureau De Exchange, there is a whole different world out there when it comes to the physical part of trading foreign currencies. Wholesale banknote trading is rigorous with a roll up the sleeve approach.

Wholesale banknote is a specialised business due to the need to hold physical commodities and transport them between counterparties. As well as the efficient management of the trading desk, it is important to effectively manage physical inventory of how much is on hand, how much is in transit, what is the foreign exchange exposure at any point in time. There is also the logistical component of shipping valuable cargoes and the associated effect on the profitability of a trade.

For wholesale banknote, dealing spreads are typically wider than in currency deposit exchange markets. Banknotes yield no interest while storage and insurance costs can be substantial. Banknote foreign exchange dealers therefore quote higher spreads than their bank deposit counterparts.

Banknotes trading involves both retail and wholesale. Large deals in convertible and liquid currencies, quoted spreads are reduced while large deals in non-convertible currencies, quoted spreads may increase. While trading in banknotes is usually done via an international supplier of wholesale banknote such as Travelex or MoneyCorp, on the retail front however, banknote retailers would need to source these notes in a physical manner from their local wholesaler of banknotes.

Given the transportation costs and the speed of delivery, retailers of banknotes would usually set a minimum value to the volume of banknotes which they will transact with the wholesaler. The retailer would also set a maximum value depending on market conditions to the volume of inventory which they aim to hold. The retailer does not enjoy the high volume business of the wholesaler, thus the inability to quote competitively a dealing spread that would justify the risk of large inventory holding.

In the case of wholesaler of banknotes who obtain their physical supply from international suppliers, the key would be to obtain these notes at exchange rates that are viable to their storage and insurance costs as well as adhering to strict regulatory and compliance rulings.

The biggest concern for a banknote wholesaler is, an unnecessary built up of inventory, thus managing inventory at an efficient pace and at a competitive rate remains crucial. The difference between a foreign exchange trader in an investment banking setup and a foreign exchange trader in a wholesale banknote setup is the holding period and interest rate factor.

The latter does not enjoy an extended holding period and neither do these banknotes yield interest, thus the higher spreads that are quoted vis a vis their counterparts in an investment banking setup.

Wholesale banknotes trading is a niche area that is usually ignored in the foreign exchange fraternity. Aside from retailers of banknotes and Bureau De Exchange firms, Private Banks are one of the biggest client of wholesale banknotes given the need for hard cash in multiple currencies. High street travel companies on the other hand use the services of wholesale banknotes, as well as Cruise ships  that operate on-board Bureau De Exchange. An area that is gaining significant traction in the wholesale banknotes business is aircraft charter companies whereby these companies regularly use the services of wholesale banknote providers, as they have cash settlements to make for paying for fuel or landing rights.

For the ringgit, ever since it weakened significantly in January this year, the currency has gradually gained ground against the US dollar, thwarting the directional bias of a weak currency. The fact that the currency has reversed its trend, accumulation of foreign currency banknotes in January on expectations of further weakness of the Ringgit perhaps has been misjudged. This indicates when one is in the business of wholesale banknotes, timing is crucial as well as having a razor sharp mind in evaluating the direction of the currency.

A misjudgment could be costly, especially when there is a large inventory holdings of foreign currencies that are depreciating against the local ringgit. The ringgit crosses vs the euro and sterling are the ones that has witnessed significant appreciating trend over the course of this year but when one compares the ringgit against the baht and rupiah, the moves are rather steady, indicating the composition of currencies in the inventory is vital as any other factor in the running of a wholesale banknote business.

A notaphilist is a collector of banknotes, paper money, plastic notes and polymer notes. Suresh Ramanathan can be contacted at skrasta70@hotmail.com

Dr Suresh Ramanathan , currenccy