Become a Client
Broadly speaking, in order to get started as an MFX client, MIVs and MFIs need to complete two steps.
- Credit Evaluation
- ISDA Negotiation and Signing Process
Credit Evaluation
As a consequence of not requiring our clients to provide collateral, all MFX clients must undergo a credit evaluation. For MIV counterparties, MFX relies on a rating methodology developed by MicroRate specifically to address the financial and business characteristics unique to MIVs. For MFI counterparties, MFX works with Microrate and Microfinanza to develop a credit score. If the MFI has a rating from one of these rating services, then that can be used by MFX. If the MFI has a rating from another major rating service, it could be converted. Alternatively, if an MFI has not been rated previously, either Microrate or Microfinanza would need to complete one. The rating provided to MFX is confidential in nature and is not available for circulation by either MFX, or our counterparties.
For MIVs, the rating methodology categorizes counterparties into Tier 1 through 4, Tier 1 being “High creditworthiness” and Tier 4 being “Not creditworthy”. The Investment Quality score is based on an evaluation of portfolio quality, performance, capital structure and liquidity and treasury management. MicroRate’s Basic MIV Requirements.
For MFIs, MFX uses a financial strength rating derived from our partners’ standard rating methodology. Microfinanza’s Basic MFI Requirements
ISDA Negotiation and Signing Process
Before an MIV can engage in a hedging transaction with MFX (or anyone else), both parties must enter into anagreement which defines the relationship and commits both parties to derivative transactions undertaken between them. The agreement also contains the procedures and rules regarding payment terms and settlements. The agreement governing foreign exchange or currency swaps is known as the “ISDA”, which is a standardized contract named for the organization that established global financial derivatives standards more than 20 years ago – the International Swap Dealers Association. The most recent version is the 2002 ISDA. The agreement comes in three parts: the ISDA Master Agreement, the ISDA schedule, and the Credit Support Agreement (CSA).
The ISDA Master Agreement contains standardized terms that hold for all derivative contracts and thus does not need to be negotiated. MFX can help to familiarize you with these standard terms.
The ISDA schedule sets the terms and information that are unique to the contract such as specific conditions for unwinding trades, particular covenants, notification, information disclosure, etc. MFX can provide standard terms in most areas to help simplify the process for agreeing to an ISDA schedule.
The CSA primarily covers collateral arrangements. This normally requires the greatest amount of negotiating time. However, since MFX generally does not require collateral of its clients the CSA is not required.
For more information, or to begin the process of becoming a client please contact us.