China house of the year: UBS

Structured Products Asia Awards 2017: Wise application of risk management, clear awareness of regulation and a sustainable spirit of innovation have allowed the bank to support investors and market growth

Mingxi Fan, UBS

UBS has an unrivalled presence across the People’s Republic of China, with six entities: UBS China (banking), UBS Securities, UBS Futures, UBS Asset Management China, UBS Fund Management and UBS Corporate Management. Geographically, it reaches across four locations: Beijing, Shanghai, Guangzhou and Shenzen.

Although it is dwarfed in capital and presence by domestic institutions such as Citic and ICBC, UBS is uniquely positioned to offer offshore investment in structured products to local investors, and local investment to offshore Chinese buyers. In Shanghai, it has, for example, a 66-person structuring and quants team.

The firm owns 25% of a joint venture with state agencies, called UBS Securities – one of only two firms to have been given a proprietary trading licence. “Through this local securities house, we are able to offer local derivatives products,” says Mingxi Fan, head of structured solutions in China. “We are the only non-Chinese securities firm to offer local derivatives in China.”

But UBS’s significant footprint in the Chinese onshore market is only half of the story. It has also demonstrated considerable nimbleness and capacity for innovation to meet the needs of onshore clients, which are mainly local banks and asset managers.

For example, some clients with limited Qualified Domestic Institutional Investor (QDII) quotas, are seeking to increase their exposure to the US dollar bond market through leverage. The QDII scheme was introduced in 2006 to allow investment in foreign securities, but the amount is capped. To meet the desire to gain extra exposure, UBS has developed a special-purpose vehicle (SPV)-issued leveraged note linked to an externally managed account.

The note delivers the return required by the buyer, but the use of an SPV ensures the impact upon the UBS balance sheet is minimal. The client also acts as the portfolio adviser for the managed account, giving it considerable flexibility in its use of brokers and hedging.

By the middle of the year, UBS had transacted several hundred million dollars through this structure, and reports it has a healthy pipeline of clients as well.

The SPV structure attracted the praise of the judges in this category. One noted that the “strategic investments onshore and ability to offer unique cross-border products, such as the Adjusted Present Value (APV) leveraged notes, make UBS the clear winner in this category”.

The QDII quota and the wish for increased overseas risk have also led onshore clients to gain exposure to offshore mutual funds through the use of options. As option premiums are relatively low, buyers use up only a small amount of their quota to gain full exposure to the fund. UBS has been prominent in this market and, during 2016–17, completed a healthy amount of option sales linked to offshore funds.

UBS Securities has also been at the forefront of sales of structured products linked to A-shares, trading a variety of structures such as calls, call spreads, puts, reverse convertibles, bearish autocallables and digital options. It is also working to exploit the recent enthusiasm for A-share single stock options, and has provided onshore clients with exposure to offshore commodity indexes, the Hong Kong Index and Hong Kong single stocks.

The uncertain picture surrounding the currency exchange rate has been the most difficult issue with which UBS has had to contend in the past year. After years of steady depreciation, the renminbi has climbed steadily against the US dollar. At the end of last year, the exchange rate was close to seven yuan against the dollar, but by the end of August it had sunk to around 6.62 yuan to the dollar.

This has put the cat among the pigeons and, more or less overnight, changed the investment stance of local clients. Locals now want overseas exposure.

“When the renminbi appreciates, clients want local investment in China but, vice versa, when it depreciates they look for overseas investment. That’s one of the reasons we have to have a local business, otherwise you couldn’t sustain service for all environments,” Fan says.

In fact, the UBS structured products business in China has to be light on its feet and prepared to dance in any number of different ways, sometimes at the same time. It has to be prepared to service onshore clients who want exposure to structures based on onshore underlying; offshore Chinese clients who want exposure to offshore underlying; offshore Chinese clients who want exposure to onshore underlying; and onshore clients who want exposure to offshore underlying.

“These are the four directions of client demand for derivatives product. Among the foreign houses, we are probably the only one that can facilitate all four of them,” says Fan.

In common with many regimes, the Chinese regulators are also imposing a layer of new regulation upon market participants. But the pressure in China is, if anything more intense. This weighs on UBS, which, given its prominent role in the Chinese market, is obliged to be faithful to both the letter and the spirit of the new laws.

“We must follow the regulation changes very closely, have a deep understanding of the regulatory spirit and also be innovative,” Fan says.