The world's leading currency management fund is to branch out into the corporate sector by offering a product that will allow companies to borrow money in different currencies in order to find the cheapest lending rates, writes David Oakley.
This strategy - which involves using the so-called carry trade - should allow companies to reduce their liabilities in a climate of rising debt and potential peaks in asset prices, the group argues.
Charles Romilly, head of corporate liability management at ECU, which has $1.4bn under management, said: "Now is the time for us to expand into the corporate sector as some asset prices may be at their highs. Companies will want to look at how they can reduce their debt in such a climate."
The move may trigger unease among some observers, since it could expose a new range of investors to currency risk if markets move in unexpected ways this year.
ECU argues that it has a strong record of predicting currency patterns, which should lessen the risk for clients.
Until now it has built its business on offering its services to wealthy individuals. However, it plans to target some of Europe's biggest property companies with sterling-denominated debt by advising on ways to reduce borrowing costs.
It will do this by predicting medium-term currency direction and relativecurrency strength through economic and market analysis. Loan reduction is achieved by placing debt in currencies that fall against sterling.
It also aims to reduce debt through, as Mr Romilly describes it, the "classic carry trade", where savings are made by putting debt in currencies such as the yen and the euro that have lower interest rates than sterling.
Foreign exchange movements can be sudden and substantial. At no stage should you expose yourself to the high risks of foreign currency exposures if you are not able to afford the potential losses that could result from sizeable adverse currency movements and the higher interest rate servicing costs that would be required of you in the event of your having a larger debt.
Denominating debt in foreign currencies may not be suitable for you. Changes in the exchange rate may increase the sterling equivalent of your debt. Your lender will not tolerate too great an increase in the sterling equivalent of your debt as a result of currency losses and may opt to convert your debt back into sterling at a predetermined level. This may result in a permanent increase in the sterling equivalent of your debt which is not fully compensated for by any other benefits derived during the course of The ECU Group plc's discretionary currency debt management services. In this event, you could be left paying UK interest rates on a larger amount of sterling debt than that you originally borrowed. Your home may be repossessed if you do not keep up repayments on your mortgage.
Your lending bank sets a 'Conversion Limit' at which level they have the right to convert your managed multi-currency mortgage back into sterling to prevent further currency losses. It is important to understand that this is a right of your lending bank and not an obligation and that if they do not act promptly to convert your loan back into sterling when your Conversion Limit is reached, your loan could increase by more than that specified by your Conversion Limit.
ECU may from time to time transfer your loan into foreign currencies with higher interest rates than sterling with the objective of achieving a debt reduction in that currency.
Sterling interest rates are subject to change and the differential between sterling interest rates and the interest rates of other foreign currencies will fluctuate.
Suitability
The markets or financial instruments discussed herein may not be suitable for all investors and investors must make their own investment or participation decisions using their own independent advisors as they believe necessary and based upon their specific financial situation and investment objectives. Past performance is not a reliable indicator of future performance, and should not therefore form the basis of a decision whether or not to buy or sell any investments or financial instruments or to participate in any particular trading strategy mentioned herein.
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In respect of managing physical liabilities in foreign currencies, ECU trades the foreign exchange markets on a spot basis and issues switch instructions to lending banks on a spot basis. Neither of these activities is currently regulated by the Financial Services & Markets Act 2000 as they meet the "Commercial Purposes" test. Therefore you will not benefit from the protection of the Financial Services and Markets Act 2000.
However, if ECU instructs the Lender, or any prime broker or counterparty with whom ECU effects foreign exchange transactions, to conduct a switch by way of effecting an “option” or “futures” transaction for the Client’s account, such transactions may be considered to be an “investment of a specified kind” under the Financial Services and Markets Act 2000. Consequently, both the execution process provided by the Lender, or any prime broker or counterparty with whom ECU effects foreign exchange transactions, and the currency management services provided by ECU, as envisaged under this Agreement, may be considered to be regulated activities. In such instances, the Client may be required to sign additional risk warnings and the rules for the protection of investors under the Financial Services and Markets Act 2000 will apply.
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The world's leading currency management fund is to branch out into the corporate sector by offering a product that will allow companies to borrow money in different currencies in order to find the cheapest lending rates, writes David Oakley. 
