01 Jun 2007, Christopher Jeffery, Asia Risk
Investors, for the most part, have enjoyed a buoyant year. Equity values have soared, and relatively benign credit markets and - to a lesser extent - low interest rates and foreign exchange volatility, have made life easy for investors, as well as the dealers that serve them with a dizzying array of derivatives products.
As our eighth annual end-user survey shows, competition among dealers in the region is strong. Many of the top derivatives houses are trying to ramp up their operations to achieve a deeper penetration of clients - ranging from insurers, pension funds and multinational corporations and, increasingly, hedge funds, private banks, small to medium-sized entities (SMEs) and retail distributors.
And, as Loh Boon Chye of Deutsche Bank - which overhauled Citi to take top spot this year, with UBS in third - says in our cover story, dealers are trying to set up teams capable of determining cross-asset class solutions for Asian investors. In this case, Loh was referring to life insurance companies, which, despite the rise in equities having helped alleviate some of their asset-growth concerns, will inevitably have to deal with an ageing population, which will hurt them on the liability side.
Offering large sophisticated entities, such as life insurers, unique derivatives propositions to help them manage longevity risk is fair game, as is increased trading with hedge funds - a relationship that is burgeoning. The Financial Stability Forum Report on Highly Leveraged Institutions, published in May, says just a fifth of all bank revenue from hedge funds now comes from prime broking. But there are rising concerns about the provision of derivatives to SMEs and the retail sectors.
Some parties describe the fast-increasing use of options in Asia as an indication of the sophistication of Asian counterparties. And there is no doubt that options are a valuable tool for risk management. It's also clear than Asian end-users are often sophisticated. But that's been said of others in the past; Ashanti Goldfields, Metallgesellschaft, Proctor & Gamble and Walt Disney spring to mind, not to mention certain local governments and banks.
In part, it's a case of caveat emptor. But where unsophisticated institutions and individuals are concerned, dealers have a responsibility to ensure their products are suitable for their clients. Given that it's getting tougher to recruit talent every year, they need to remain vigilant in maintaining the highest possible compliance standards - or their lack of diligence will come back to bite them.
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