Deutsche Bank


Volatility, or large jumps in it, has characterised the Asian equities markets in the past year - alongside plunging market prices. This has presented a raft of problems, as well as opportunities, for corporates, real money funds, hedge funds, government-sponsored entities and individuals alike. Institutions able to conduct sizeable transactions to help with crash protection, restructure derivatives investment products suffering mark-to-market losses and support business expansion using non-traditional means all drew high marks from clients.

Catering to that need in turbulent markets is not trivial. It requires a strong footprint around the region and a capability to take on risk and redistribute it on a continuous basis. Deutsche Bank, traditionally known as a fixed-income house, has built up a significant equity derivatives platform that has enabled it to meet the challenges of many of its clients during the awards period. Indeed, this was borne out in the Asia Risk end-user survey 2008 in the June issue, where the German dealer won 21 out of 22 equity derivatives categories.

While the bank is particularly strong in debt/equity financing for companies likely to list in the future (see page 24), Deutsche Bank has grown increasingly confident as a large counterparty for corporate and institutional clients engaging in pure equity derivatives transactions, and its focus is much more than just on retail structured products - the instruments of choice for many other major financial institutions covering the region.

"We have invested heavily in our regional flow platform to ensure our clients have stable and consistent access to liquidity and pricing in Asian markets," says Denis MacCarthy, head of equity derivatives sales for Asia ex-Japan in Hong Kong. "We have gained market share in what has been an unprecedented year for equity markets in terms of volatility and trading volumes."

Deutsche Bank's equity trading team includes 45 front-office traders, offering cash equities, synthetic equity, programme trading and direct market access - which was partially rolled out this year. And it has notably improved its hedge funds coverage in the past couple of years. This has helped the bank shed its 'book axe' positions built up by offering structured products that result in banks being short vega and gamma. It also includes a commitment to a two-way market in vanilla options and baskets of options.

A Hong Kong-based trader at one of the world's largest hedge funds, which trades volatility products - with the most exotic instruments it trades being structured basket options and outperformance options - says Deutsche Bank stands out in offering large-ticket transactions. "It's a combination of size, pricing and research," he says. "Deutsche Bank has been consistent and stood up to some pricing, whereas others haven't."

On the sales side, the bank now has Asian equity staff based in London and New York, in addition to its onshore staff in China, Hong Kong, India, Singapore and Taiwan - the bank has 50 sales staff across Asia ex-Japan. These employees cover flow equity derivatives (listed futures and options, over-the-counter options along with volatility and correlation products), synthetic equity (delta-one products to index and sector swaps), private and illiquid equity, fund derivatives, structured equity and retail products. And its institutional equity team is pushing into South Korea and the Middle East as well as targeting traditional private equity account bases.

Deutsche Bank also helped a number of major funds put on crash put protection against their equity exposures late last year and early this year. For example, the German dealer has also done about $9 billion of Hang Seng China Enterprise Index deep out-of-the money put hedges, in the range of 50-60% puts due to its axe positions in downside skew from its structured products business and its volatility trading activities.

MacCarthy says Deutsche Bank could offer volatility at three to four points cheaper than the market. And a senior trader at the emerging markets fund of a large US hedge fund says the bank did several hundred millions of US dollars of index crash protection trades at relatively cheap prices with his firm at the start of the year. These have worked out well from his fund's perspective, as Chinese stocks are down over 60% since the start of 2008.

While institutional needs were paramount, Deutsche Bank continued to meet the needs of many private banking clients - often with underwater positions - despite the departure of Frank Copplestone, the bank's head of quantitative products for Asia ex-Japan. Copplestone was replaced by Chrif Youssfi, who had already relocated from New York and now has a wider remit in equity product structuring for Asia excluding Japan.

A Hong Kong-based official at one of Asia's largest private bank clients in Hong Kong says Deutsche Bank made quick and fair secondary prices on structured products he had wanted to exit as markets turned south. And Deutsche Bank has also offered standard decumulator structures to high-net-worth clients and done about $600 million in the first half of 2008.

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