01 May 2005, Risk magazine, Risk magazine
Forex growth driven by volatility and fund managers
A report from consulting firm Greenwich Associates attributes the massive increase in forex trading volumes seen over the past 12 months to cyclical factors such as the Iraq war, terrorism, fluctuations in the value of the US dollar and rapidly rising commodities prices. Active trading strategies employed by hedge funds and asset managers looking to capitalise on these high volatility levels also contributed to growth.
“Financial institutions and non-traditional forex users are accounting for a growing proportion of trading volume,” says Greenwich Associates consultant Woody Canaday.
While the relatively lacklustre performance of traditional investment markets such as stocks and bonds has encouraged an increasing number of real-money asset managers and retail players to trade foreign exchange as an independent asset class, the most prominent members of this new breed of professional forex investors are hedge funds, says Greenwich. “When you combine last year’s dollar volatility with the drastic ups and downs in pricing for commodities – which are priced in dollars – you produce nothing short of a currency volatility bonanza for hedge funds,” says Greenwich Associates consultant Frank Feenstra.
Europe accounted for the majority of global forex volume, or roughly 60% in 2004. The highest rate of year-to-year growth in average foreign exchange trading volumes was found in the UK, due to the high number of hedge funds domiciled there. On a matched sample basis, average volume in the UK rose from $38.9 billion in 2004 to $55.4 billion in 2005, an increase of 42%. Trade volumes in the US followed a similar trajectory, with average volumes rising 39%, from $39.2 billion to $54.5 billion.
Volume growth in other regions, while falling short of that of the UK and the US, was nevertheless robust. Average continental European trading volumes rose from $35.4 billion to $41.7 billion, or 18%. In Latin America, volumes grew from $15.1 billion to $16.2 billion, or 7%. In Canada, average trading volume increased 4.6%, from $18.6 billion to $19.5 billion, and average trading volumes in Asia ex-Japan rose from $20.9 billion to $21.4 billion, or slightly more than 2%. The only year-to-year decrease occurred in Japan, where average trading volumes declined by more than 6%.
UK hints at 50-year linkers
The UK’s Debt Management Office (DMO), the body which borrows money on behalf of the government, has hinted that it will issue 50-year index-linked gilts for the first time later this year.
A sterling-denominated 50-year index- linked bond could be issued in June, July or September, the DMO said. The UK government has already scheduled a 50-year fixed-rate bond auction for May 26.
London grows as hedge fund hub
London is racing ahead of its rivals to become Europe’s premier hub for hedge fund management. A recently released report shows that 74% of European hedge fund assets are now managed out of the City.
The City’s share of the European hedge fund industry was up 4 percentage points from the 70% recorded in 2003, according to the report by International Financial Services London, a private-sector organisation aimed at promoting the UK-based financial services industry. However, if figures for funds of funds and US hedge funds with a trading desk in London are taken into account, the figure rises to more than 90% of Europe’s hedge fund assets. The notional value of hedge fund assets managed out of London grew by 60% in 2004 to reach $190 billion.
Meanwhile, London’s share of global hedge fund assets grew from 15% to 20%, beating the growth rate in the US, the company said.
SG CIB completes BoA acquisition
Société Générale Corporate and Investment Bank (SG CIB) has completed its takeover of Bank of America’s (BoA) structured investments business. The acquisition price was not disclosed, but sources estimate that SG CIB is likely to have paid around $50 million for the business, which has around $6 billion under management.
The deal will see 19 BoA sales, marketing and support staff join the existing 81 staff at the front office of SG CIB’s New York equity derivatives operation, headed by Francois Barthelemy.
The New York sales team, which will be headed by Jason Griffith, will focus on selling leveraged and principal-protected hedge fund products to funds of funds, high-net-worth investors and family offices and other institutional investors.
The purchase comes just 18 months after SG CIB bought Constellation Financial Management, another US structured products firm, and two years after derivatives rival BNP Paribas bought the fund platform Zurich Capital Markets in a bidding contest SG CIB was also said to have participated in.
BoA’s exit from the structured alternatives business leaves SG CIB, BNP and Royal Bank of Canada (RBC) as the front-runners in the US. RBC has announced that it is also looking to expand its structured products business.
BNP launches structured products platform
BNP Paribas has launched an electronic trading platform for structured products, aimed at increasing liquidity in the secondary markets across different asset classes.
The platform provides real-time bid/offer prices from BNP’s trading desks for 1,500 structured products, including interest rate, credit, equity, commodity, inflation, foreign exchange and hybrid structured notes, with average bid/offer spreads of 1%.
The platform is being marketed globally to private banking and retail distributors, who are now able to buy and sell structured products 24 hours a day through the bank’s website.
Cedric Jeanson, London-based head of the retail platform at BNP Paribas, says the bank has made a strategic push into the structured retail market because “the service that private banks and retail distributors want is a top quality secondary market”.
Jeanson adds that he expects the platform to be particularly successful in the Asian markets: “Looking at the client base, we think Asia will be the biggest market because there is a trading mentality in Asia and this is where the strongest demand is [for this platform].”
Prices are also published on Bloomberg and Reuters, and the bank aims to provide quotations directly to exchanges in 2005, starting with the Swiss, German and Euronext stock exchanges.
Markit provides new NAV calculation
Investors now have an alternative way of calculating the net asset value of their credit derivatives portfolios, following the launch of a pricing tool from UK-based market data platform Markit.
The Present Value Service system provides a fully automated pricing service and is targeted at hedge funds, traditional asset managers and fund administrators. Users will only have to enter their trade data via a spreadsheet or XML, instead of relying on additional software. The trades will then be priced using Markit’s average mark-to-market prices from main dealers in the credit default swap market, providing users with an independent valuation.
The system is able to value a wide range of credit derivatives products, ranging from credit default swaps to index trades. Collateralised debt obligations baskets and tranched index trades are scheduled for inclusion by the end of 2005.
So far, users are enthusiastic about the new tool. David Hampson, controller at Anchorage Capital, says the service helps him by “saving time and eliminating manual spreadsheet calculations, which often lead to pricing errors”.
HKEx launches Xinhua futures
The Hong Kong Stock Exchange (HKEx) has signed an agreement with index provider FTSE Xinhua Index (FXI) to list futures and options linked to the FXI China 25. Trading in the instruments is expected to begin on May 23.
The FXI China 25 is a tradable index that was launched in 2000 by FXI, a joint venture between FTSE and Hong Kong-based news and rating agency Xinhua Financial Network. It tracks the performance of the 25 largest and most liquid mainland Chinese company shares listed in Hong Kong (H shares).
The new contracts will sit alongside existing futures and options already available on the exchange. These include futures and options on the H-shares index as well as those on individual H-share and red-chip companies.
“These products are an important contribution to investors in the China markets because they allow them to hedge investments in the cash markets in a way that was not possible before,” says Fredy Bush, chief executive officer of Xinhua Finance, the parent company of the Xinhua Financial Network.
|DrKW combines derivatives trading and structuring teams|
Dresdner Kleinwort Wasserstein (DrKW) has opted to combine its derivatives trading and structuring capabilities across multiple asset classes, creating a single global derivatives group within its capital markets business.
The new group will span interest rate, foreign exchange, credit and equity, and will be headed by the bank’s head of credit derivatives, Matteo Mazzocchi, who now becomes head of global derivatives.
“The aim of our new group is not only to realise efficiencies but also the other benefits that will arise from shared resources, models, product development, technology and risk management across all derivatives classes,” says Mazzocchi. “It will bring a more consistent approach to our existing derivatives product suite and delivery, and allows us to develop new ideas such as hybrid products for clients.”
DrKW joins a small group of banks that have made a similar jump. JP Morgan last year merged its equity derivatives and credit and rates structuring teams in Asia, and established a third-party group to structure, market and distribute cross-asset investment products to private banking and retail investors. Meanwhile, Deutsche Bank announced at the end of last year that it will merge its global equity derivatives, fixed-income and credit units under a single global markets group.
Other banks are also thought to be weighing up the benefits of adopting a cross-asset structure, amid increasing demand from certain clients – and particularly hedge funds – for a single, one-stop shop for derivatives and investment products.
|CAO to improve debt restructuring|
China Aviation Oil (CAO) has declared that it will improve the terms of a debt restructuring by mid-May, in an attempt to stave off threats by some creditors to put the company under new, independent management.
Singapore-listed CAO, which revealed that it had racked up $550 million in oil derivatives losses at the end of last year, had initially proposed that its 98 outside creditors, which together are owed around $530 million, would receive an upfront cash payment of $100 million, with a further $120 million to be paid over eight years, representing a repayment ratio of 41.5%.
The offer of an improved scheme of arrangement follows the filing of a judicial management petition by South Korea’s SK Energy Asia in March. At a court hearing in early April, CAO announced that it has been working on an improved restructuring deal, which it will present to creditors sometime between the end of April and mid-May. The High Court of Singapore adjourned the judicial management petition until after May 20.
CAO’s parent, Chinese state-owned company China Aviation Oil Holdings Corporation, has previously made it clear that it will only proceed with a $100 million cash injection – an integral part of the restructuring – if all creditors accept the scheme of arrangement. Investors are due to vote on whether to accept the restructuring on June 10. However, the firm is still some way short of the winning support from the required majority of the creditors, representing 75% of the total debt. As of April 8, the company said it had achieved support for a consensual restructuring from 66% of all creditors.
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