TCX was founded in 2007 by a group of development finance institutions (DFIs), specialized Microfinance Investment Vehicles (MIVs) and donors to offer a solution to currency risk, a solution which – until then – did not exist. The current investors in TCX are 19 multilateral and bilateral development finance institutions (DFIs) and microfinance investment vehicles (MIVs), as well as the Dutch, German, Swiss, British, and French governments and the European Commission.
TCX focuses on providing currency solutions for its investors. These have accounted for over 90% of the volumes transacted by TCX to date. The remainder is primarily provided through commercial banks to make local currency finance available to their borrowing clients in developing countries.
TCX operates on the basis of the following principles:
- additionality: provide solutions where markets are thin or inexistent;
- risk-reflective pricing: price in accordance with prevailing market rates and methodologies;
- non-speculation: only hedge actual underlying exposure to the real economy.
Original sin: most countries cannot borrow abroad in their own currencies
(Eichengreen, Hausmann, 1999)
TCX acts as a market-maker in currencies and maturities not covered by commercial banks or other providers, notably where there are no offshore hedge markets, no long-term hedging products, or, in extreme cases, no hedge markets at all. In general, this implies that TCX itself cannot hedge the currency risk that it assumes and must bear and manage the open positions that it takes.
Therefore, the fundamental risk management tool that TCX deploys is diversification of its portfolio over a large number of currencies worldwide. Because TCX pools the currency risk related to the lending activities of multiple institutions that are active globally, it can achieve diversification levels that no institution can achieve on its own. This diversification model is backed up by a strong capital base, provided by the investors.
TCX’s activity has gradually increased over the first 10 years of operations and currently spans over 70 currencies in Sub-Saharan Africa, Eastern Europe and Central Asia, the Middle East & North Africa, Asia, and Latin America.