Deutsche Bank Deutsche Bank has emerged as a market leader in the trading and structuring of credit derivatives transactions in the Asia-Pacific region. Market participants say the bank has dusted itself off after some problems in 2008 to emerge as the dominant player in the region, especially for best execution. The bank’s volumes in credit default swaps (CDSs) on Asian names and indexes is more than double that of last year, according to Chetankumar Shah, head of global credit trading at Deutsche Bank in Singapore. He estimates that Deutsche Bank captures around 20% of the daily market volumes on the iTraxx Asia ex-Japan investment grade index. Execution and service are key criteria for Daniel Yu, head of credit trading, global treasury, at OCBC Bank in Singapore. He feels Deutsche Bank excels in both. “Deutsche does a good job of reflecting an axe either way,” he says. Yu trades Asia ex-Japan index, sovereigns and underlying single names. “They definitely reflect their market view and this is as an opportune way of driving traffic, which leads to an overall increase in trading volume.” Yu believes Deutsche Bank is one of only a handful of banks in the region capable of providing liquidity in this form and able to offer competitive pricing consistently on a comprehensive range of CDS trades. Other notable banks include UBS, Credit Suisse and JP Morgan. Yu also commends the German bank on its sales force, which he says offers strong client service and support, especially requests for information and initiating dialogues with traders and analysts that can provide valuable colour on the market. Previously head of Asia high-yield trading at JP Morgan, Yu believes this is one area that banks need to keep in mind especially due to the increasingly competitive nature of the business with new entrants, such as financial institutions from Japan and Australia, expanding into the region. “For banks to succeed they not only have to show aggressive pricing but also be more competitive in other areas of the sales function,” he says. “We have a good relationship with the salespeople at several banks and it is important we receive not just liquidity and pricing, but access to investor conferences and analysts globally.” For Romain Michalon, credit arbitrage prop trader at Credit Industriel et Commercial (CIC) in Singapore, Deutsche Bank has been the best trading counterparty for providing consistent prices. Size has never been an issue, he adds, nor achieving favourable spread levels for Australia and Asia ex-Japan index transactions investing in the investment-grade and five-year CDS markets. “Deutsche Bank is a good provider of liquidity because it is one of the most active banks in the market,” he says. “I am price-sensitive and Deutsche quotes pretty decent prices on single names and curve trades that are never off the mark.” A credit trader at a hedge fund in Singapore concurs that Deutsche Bank is by far the best counterparty for competitive and a broader range of pricing on the Markit iTraxx Australia and iTraxx Japan indexes and single-name transactions. “We have received low execution in terms of pricing for the volumes we trade, depending on market conditions,” he says. “Deutsche can give us a wider choice of names and with tighter bid/offer spreads. The bank is particularly strong in Australia and also has good capabilities in Japanese CDS.” Maintaining good client relationships is important and resulted in the sales team at Deutsche Bank generating a number of trading strategies for the hedge fund, the trader adds. “Sales and traders know what interests us and meets our requirements,” he says. “Discussions with them have led us to carry through some interesting ideas. Our trading volume fluctuates, but our dealings with Deutsche has remained consistent over the last trading year.” He believes banks in general need to be more proactive in generating trading strategies for the client base. “We do not see banks leading with ideas as often as they do in the equity markets,” he adds. “Getting good execution depends on trading an axe in the market and that is the added value that banks need to provide investors.” Deutsche Bank has also enhanced the way it provides liquidity through offering skew trades, which exploit the difference between the pricing of indexes and of companies in those indexes, says Michalon at CIC. “Other banks only quote the skew from time to time, but we have been able to trade with Deutsche on several occasions in the last year. The skew is the one of the hardest transactions to execute and allows us to implement another different strategy by trading single-name CDS against the index.” One course of action that could improve the composition of the iTraxx Asia ex-Japan indexes, he suggests, is to remove the more illiquid components and substitute more liquid entities, though he doubts market-makers will take this up. “Shrinking the number of constituents to 45 names would enhance liquidity in the index and single names,” he says. Jon Ormond, global co-head of credit structuring at Deutsche Bank in Singapore, estimates that close to $500 million in skew trades on indexes were completed in May and June alone this year for large European participants, taking advantage of arbitrage opportunities between the indexes and their individual components. “They are among the main players to have used the market discrepancy in the short term to monetise the positive basis and had traded around the skew or single names separately in previous times of market dislocation,” he says. A director at a German private bank in Singapore, adds that Deutsche Bank’s strong Asian franchise has enabled it to be a leader in providing novel solutions. He says Deutsche Bank has been a leading counterparty for credit access products on a range of different underlying Asian markets. “Deutsche Bank has generally been the first to offer innovative products packaged in a different fashion,” he says. “Last year, the bank was offering structured notes linked to Korea and India credit risk and we are now seeing other banks follow its lead with similar innovative structures this year.” The private banker adds that more banks are combining a trading axe and a product in a fashion that has proven attractive for clients to invest in. “There are a number of innovative transactions in the market that offer quasi-sovereign risk with an enhanced yield,” he says. One trader at a Japanese regional bank is impressed by the service and the range of customised products Deutsche Bank has offered him in the past 12 months. “The price is generally competitive and the bank is good from an information service perspective and following up requests,” he adds. Deutsche Bank’s exponential growth in its credit derivatives business is symptomatic of the further strengthening and build-out of the bank’s platform during the past year. Deutsche Bank has committed more resources to credit trading and enlarged its capabilities on a product and geographic basis. The bank has opened local currency offices in India, China, Taiwan and Korea, and plans also plans to set up in Malaysia soon. The team now totals 60 professionals after an expansion in local currency credit trading and loans in the last 12 months. Hires include a loan syndication and trading banker, a new head of research and several salespeople across Asia. The team has continued to grow the range of liabilities across Asia, completing 18 new bilateral loan financings this year, focused on China, India and Indonesia, adds Ormond. Shah says that Deutsche Bank’s strength in credit trading lies in having a fully integrated and comprehensive business structure across all credit products. “The ability to offer structured credit solutions and undertake hedges stems from the bank’s active presence with flow trading investors and is supported by a strong distribution network,” he says. Close integration of trading, sales and structuring has been vital in providing volume and liquidity in an array of products from the simple to the complex. Ormond says the bank is seeing good traction for trading strategies linked to the Astra and Cassie proprietary indexes, which were launched this year and is an area that will see continued development in the next 12 months. Astra purports to offer a low return, low-risk strategy that tracks the Markit iTraxx SovX Asia-Pacific index. Cassie is based on the European iTraxx corporate and high-yield indexes, and has been popular among Asian accounts, with particular success in Korea. Strategies on the indexes have a stop-loss feature that acts as a volatility dampener to provide clients comfort in periods of extreme crisis and an enhanced return on a carry basis. “The index trackers we have created smooth the performance by knocking out periods of extreme volatility spikes so clients do not suffer the losses,” Ormond says. “The indexes are also an easy way for investors to hedge and to get diversification.” Risk management remains a key objective for the bank as well as for its investors, and this has compelled it to devise innovative hedging and risk management solutions. “It has been a strong year in hedging risk for clients, either for those wanting to get out of positions or achieve a particularly bespoke result,” says Ormond. Deutsche Bank also helped the European Investment Bank hedge the risk of State Bank of India, Bank of India and Bank of Baroda on a £340 million ($542 million) loan issued to Jaguar Land Rover. The bank provided a counter guarantee to the largest tranche, representing a large portion of the loan and also guaranteed by the State Bank of India. “We were able to help a European account manage its Asian risk with a very bespoke and not that liquid transaction in a very large size,” says Ormond. Meanwhile, a $40 million repackaging of a Kexim bond provided one client with higher yields due to callability and substitutions rights being included. It may be a sign of things to come. “We are starting to see mild complexity returning to the market and greater interest in lightly structured transactions,” says Ormond....
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