Structured Products House of the Year: SG CIB

Technology has been instrumental to the development of the structured products franchise at Société Générale Corporate and Investment Banking (SG CIB) during the past 18 months. “An important subject for us in 2012 and 2013 has been automation,” says Alexandre Cosquer, the bank’s Paris-based head of commodity investment solutions. The bank has built a tool to execute trades on live indexes and a platform on which structured products can be designed, priced, traded, booked and confirmed automatically – “like booking a flight online”, Cosquer says.

The bank believes this kind of automation should prove attractive to clients such as private banks, which often trade the same type of products on a regular basis. The platform also provides an easy and transparent way for clients to trade index products during the day, rather than waiting for the market close.

Credit risk has been another area of focus. In 2012, SG CIB launched SG Issuer – a product aimed at investors concerned about credit risk. The initiative allows any type of note to be collateralised with any type of asset, as long as it is capable of being cleared. In November 2012, SG CIB used the platform to issue a commodity-linked note for a German asset manager that wanted exposure to commodities, but also wanted to mitigate the risk of an issuer default. “On a day-to-day basis, we most often deal with clients that are comfortable with our creditworthiness. For those that are not, [SG Issuer] offers additional protection,” says Cosquer.

SG Issuer ensures clients are protected through full segregation of collateral assets, while custodian BNY Mellon acts as an independent monitor and handles responsibility for liquidating the collateral portfolio if SG CIB defaults.

Not all commodity investors are put off by the idea of taking credit risk. For clients that are more enthusiastic about it, SG CIB has created hybrid products that seek to take advantage of credit yields by mixing commodity and credit risk. Typically, these hybrid products are standard commodity market offerings combined with issuer credit risk exposure. Examples include a commodity structured product created for a large Italian private bank, which was coupled with credit risk from an Italian corporate. While hybrid products with exposure to credit and interest rates have traditionally been more popular than those with exposure to credit and commodities, Cosquer says interest in such products has soared. “The market is growing and sales on commodity hybrid products have increased 300% since last year.”

Since 2008, the factors that impact commodities have completely changed

The existence of partnerships across the bank has been critical to developing its hybrid structured products offering, he says. “[It] was very much about understanding, assessing and using credit risk as much as possible... That’s something we couldn’t do if we didn’t have the ability to work with other teams at SG CIB to develop products across different asset classes.”

Similarly, SG CIB has been making a big effort to bolster co-operation between its commodity analysts and members of its structured products team. This closer working relationship appears to have paid off in several areas – one of which is the bank’s research on the impact of non-fundamental factors on commodity markets.

“Since 2008, the factors that impact commodities have completely changed,” says Michael Haigh, the bank’s New York-based global head of commodities research. Using principal-component analysis, Haigh and his team have isolated 27 non-fundamental variables that affect individual commodities, which they group into three broad categories. These include macro factors, factors that are related to the value of the dollar and factors related to liquidity. One of their major findings is that, since 2001, the influence of macro factors has become much more pronounced for commodities such as crude oil.

Such a conclusion has a potentially valuable practical use – SG CIB hopes to use it to enhance its index products, using the results of the research to go underweight or overweight depending on the influence of different groups of factors.