Best in South Korea

Harold Moon, Nomura

Nomura

Nomura remains at the forefront of structured products innovation in South Korea. Drawing its strength from the close co-operation between its fixed-income and equity derivatives team, the bank was able to tap into the rising demand for exotic and hybrid products.

"The main driver in Korea has been the growth of structured Korean exotics and hybrids among institutional investors as a means of dealing with global low rates," says John Goff, head of fixed-income structuring for Asia ex-Japan in Hong Kong. "Nomura has been well positioned to take advantage of that trend of having a regional and Asia-based exotic trading team able to offer products to the Korean market."

While the volume of Korean fixed income may not be as high as it was was prior to the financial crisis, the bank has been focusing on product developments in new payoffs and the exotic space. It has issued close to $600 million worth of hybrid notes and swaps in US dollar and South Korean won-denominated rates, credit, currency and equity hybrid structures aimed at institutional investors.

Nomura, whose biggest market outside Japan is Korea, continued to introduce innovative payouts, and its ability to develop and adapt structured reverse repo products in line with more stringent financing regulations has made it a leader, with around $400 million of financing ranging from three to 6.25 years in tenor in both US dollar and yen provided to local banks with large pools of domestic currency collateral.

"One of the features of the Korean market is that the government requires Korean banks to own a very large pool of Korean Treasury bond securities, which they must keep on their balance sheet," says Goff. "At the same time, there is another requirement that stipulates that if Korean banks want to make foreign currency loans, they must also have a foreign currency borrowing on the other side. That requirement was about 80% pre-crisis, but after 2009 it went up to 120%, so for every dollar a Korean bank will lend out in foreign currency, it needs to have $1.20 on the other side in foreign currency borrowing."

Taking into account the tougher credit market conditions over the past year that caused a significant widening of dollar spreads for Korean banks and their need for dollar financing, which had become more expensive as a result, Nomura structured a transaction in which it could provide long-dated Korean Treasury bond repos in a cross-currency format. The innovative aspect was to devise a way to use a combination of cross-currency interest rate swaps and credit default swaps to manage the risks under the transaction to provide that type of financing.

"Under the repo, we acted as the purchaser of their Korean Treasury bond portfolio and offered US dollar financing against it. This led to a number of risks on the balance sheet, such as foreign exchange and credit risks," says Goff. "In order to handle these transactions you need strong risk appetite and the ability to manage the currency and interest rate risks that arise in the transaction."

A leading provider of first-to-default baskets and single-name credit-linked notes on the Korean market, the bank's total notional executed on a variety of corporate and institutional names hovers around $350 million. One of its most popular products was a 10-year structured note linked to a dual range on both Korea's Kospi index and US dollar Libor.

"By combining both you have a view that is high-yielding with coupons in the region of 7%, which is a significant form of yield enhancement compared to what's available in other types of product in Korean," says Goff.

In equity, the challenge was to come up with innovative structures in a saturated equity-linked securities market dominated by autocallables. Nomura distinguished itself by issuing new products.

One client at a Seoul-based securities firm highlights how Nomura, in addition to its capacity to come up with innovative ideas, is also able to follow up with good after-sales services. "They can provide us most kinds of products, which others have difficulty providing," says another client, senior portfolio manager at Korea Post in Seoul, Jiwook Kim.

Revenue from new products amounted to 15% of total revenue in the past 12 months and the bank plans to increase this to 20%. "Last year, the market began to change and banks tried to diversify away from plain autocall structures towards others, such as principal guaranteed," says Harold Moon, head of equity derivatives at Nomura in Seoul. "So we added variations to the autocall, adding one new feature at a time."

Nomura's Two Underlying barrier option was the answer to high index levels that had made retail investors uncomfortable in terms of risk, offering them a capital-protected structure. With sales amounting to $191 million, it has a one-and-a-half year maturity and adopts a ‘worst of two indexes' feature on the upside performance of the call option.

One recent product that has also been well received offers retail periodic coupons through a capital-protected autocallable structure paying quarterly and a semi-annual coupon if no knock-in occurs.