By Juliette Fairley
After the Polish Futures Market began listing futures and options in the World Currency Unit (WOCU) last year, the London-based WDX Organisation stepped up its efforts to recruit other foreign exchanges to list the new currency as well.
Owned and distributed by the WDX Organisation, the WOCU is made up of a basket of the currencies of the world's strongest 20 economies as determined by IMF measures of GDP. Countries include U.S., China, India, Russia, Mexico, Japan, South Korea, Canada, Australia, Poland, Great Britain, Switzerland, Brazil, Germany, France, Italy, Spain and the Netherlands.
"WDX spent the last two years building infrastructure, getting technology in place and protecting the intellectual property of the WOCU. We have registered and trade marked the name WOCU and have also applied for patents in the U.S. and Europe," said Ian Hillier-Brook whom WDX appointed as managing director to replace founder Michael King.
The use of the WOCU is intended to reduce currency fluctuations compared to pricing in U.S. dollars. "The WOCU is complex because it is diversified. It will be a challenge to get this embraced on a larger scale," says Axel Merk, chief investment officer and president of Merk Investments, who manages a hard currency fund that protects against the depreciation of the U.S. dollar by investing in other currencies, such as gold, the Swedish Krona, the Euro, the Japanese Yen and the Australian dollar. As of September 20, 2011, the fund's 1-year return was 9.10% compared to 5.58% for the U.S. Dollar Index and 7.32% for the S&P 500, according to Bloomberg.
As of September 20, the WOCU was trading at at 1.74 to the U.S. dollar, 1.27 against the Euro and 132.96 to the Japanese yen while the WDX Organisation charges a license fee for the use of WOCU calculation methodology and a transaction fee depending on the case, according to Hillier-Brook. "What's unfortunate is that the WDX has included non-deliverable currencies and the cost of trading this derivative is going to be higher than it would be for any one corporation to get exposure to these currencies," says Merk. "It's more cost effective for treasury departments to look at limited baskets."
Created by the International Monetary Fund (IMF) in 1969, the Special Drawing Right (SDR) is a limited basket of currencies made up of four rather than 20 currencies that include the U.K. pound sterling, Japanese yen, U.S. dollar and the euro. The IMF still uses SDRs as their basic accounting unit even though the stock of SDRs has not increased since 1972. The stock was to be doubled with an additional 21.7 billion but this expansion had not occurred by the end of 2008 as the U.S. vetoed the proposal.
For much of 2009, China's central bank chief advocated for the eventual replacement of the dollar with the SDR as the reserve currency. "The mechanics as well as market-making processes required for the SDR to replace the U.S. dollar are difficult and complicated and the confluence of enabling factors are even more remote for the WOCU," says Dev Kar, lead economist with Global Financial Integrity in Washington, DC. "The IMF would need to operate like an international version of the Federal Reserve Bank if the SDR was to ever become the world's preeminent reserve currency. The same is true of the issuer of the WOCU."
Developing economies, such as China and Brazil, may be unhappy with the use of the U.S. dollar as the global reserve currency, however, they are loath to replace it with another sovereign currency or even the Euro. The WDX was founded after the 2008 market collapse and has raised money to commercialize the WOCU.
Hillier-Brook is pushing the currency among the heads of global banks in Hong Kong, attending conferences and writing articles for the Association of Corporate Treasurers in the U.K. "Corporate treasurers are saying they will happily use the WOCU if their banks are offering WOCU rates and prices," said Hillier-Brook. Despite Hillier-Brook's effort, critics say the WOCU will not be replacing the dollar anytime soon. "The opinion of the U.S. dollar is high among foreign traders. The dollar has the dominant position today in the invoicing of imports and exports because it's used as a third party currency between countries, such as India and China. To supplant the dollar from its current position is a difficult task," says Kar.
Although the WOCU is new, major currencies, such as the U.S. dollar, have better liquidity. "The liquidity may not be there for the WOCU to trade actively because it has non-deliverable currencies in its basket. Instead, you have to come up with a deliverable currency. The drawback is that with emerging market currencies there is often no full convertibility there," says Merk.