House of the year - equity derivatives; Innovation of the year - SG Corporate and Investment Banking

Structured Products European Awards 2006


SG CIB owns equity derivatives; well, it owns the website at any rate. In all seriousness, however, this statement isn't far off the mark. When market participants want equity derivatives expertise they tend to make a beeline for SG. Its equity derivatives franchise is easily the largest in the world and still growing. And its commitment to innovation is second to none.

We honour the structured products powerhouse in two categories. Once again, the French bank wins our award for house of the year, equity derivatives; and we also recognise SG with our innovation of the year award for its groundbreaking new products linked to the Sharpe ratio.

SG's equity derivatives business has experienced exceptional growth, with a 45% increase in revenues in the first half of this year compared to 2005. "This results not from individual success in any individual activity, but from the huge development of all contributors to growth with all types of clients," says Laurent Seyer, Paris-based chief executive of Lyxor, the SG CIB fund platform subsidiary. "Never has SG CIB seen such consistency in its revenue sources. In fact, JP Morgan estimates our revenues to be more than 48% above any competitor." Considering that SG began the year with the highest market share, these rises are even more impressive.

Various analyst estimates put SG's global equity derivatives revenues at EUR2.835 billion. And analysts have also heaped praise on the bank's equity derivatives business. Merrill Lynch research published on September 6, for example, states: "Talent was required (for SG) to build what had become over the years simply the biggest equity derivatives franchise in the whole world ... But more importantly, it won the biggest prize of them all: the respect of its best and brightest peers."

When we researched this award we were impressed by the fact that SG has not simply rested on its laurels, happy to draw in business after business. Instead, it has strived for innovation at every turn, and its clients have certainly appreciated its efforts. In addition, most of the private banks we spoke to prefer to use SG's manufacturing prowess rather than the services of their parent company's investment banking division.

"Be it a tailor-made offering for the French retail market, a leveraged institutional note distributed worldwide or a tax-efficient offering for the largest IFA network in the UK, SG always delivers," says one such London-based banker, who wished to remain anonymous. "I have experienced many structuring housees in my professional career but I can't see any other bank matching SG CIB's flexibility and long-term approach."

A look at SG's large retail European deals shows how it is expanding its franchise across Europe. The bank has enjoyed considerable success in Greece, for example, providing structuring services for EFG MFMC - one of the largest, most innovative mutual fund management companies in Greece, with EUR7.5 billion under management.

EFG's Eurobank All Weather Foreign Equity Fund, which garnered EUR200 million via the EFG Eurobank-Ergasias network, invests at least 65% of its net assets in equity securities issued by companies domiciled outside Greece and traded in foreign regulated markets and in equity derivatives. The fund also invests in fixed-income securities and/or money market instruments.

On July 21, 2006, the fund entered into an equity-linked swap with SG, maturing in nine and a half years, to hedge the equities included in the fund portfolio. The payout is based on a performance valuation mechanism of a reference basket consisting of 20 equally weighted equity securities and calculated according to nine reference periods. The payoff is 60% of the highest positive observed performance, plus 40% of the highest (in absolute terms) of the negative observed performance, allowing investors to benefit from both rises and falls in the basket's value.

It's impossible to list all of SG's blockbuster deals here. And just as impressive is the fact that the bank has constantly explored new ideas, whether related to trading or access to new investment opportunities.

For example, SG has forged partnerships with index provider Dow Jones Indexes and Sustainable Asset Management to issue new indexes that allow investors to profit from renewable sources of energy. Its solar, water and bioenergy-linked products have been particularly successful. "SG continuously provides bid-and-offer prices for the certificates in daily trading with a market listing on several stock exchanges," Seyer says. "Our Open End Index Certificates for these indexes mirror the index performance almost one to one. And as of the end of September they already have inflows of more than EUR62 million."

SG CIB has also just launched Privex, again in partnership with Dow Jones, to offer structured products linked to the performance of 25 listed private equity companies. Additionally, the bank says its regional products, ranging from the India 15 Certificates to the Lyxor/Dow Jones Arabia Titans Fund, have all had considerable uptake by European investors.

The bank has also used its equity derivatives expertise to adapt the technology for commodity-linked products. Its Commodity Accelerator, for example, has been designed for investors who are bullish about commodities. "Commodities are highly volatile and potential returns might vary significantly, so we designed the Commodity Accelerator to efficiently address this issue," Seyer says.

Two versions of the Accelerator are available: one denominated in euros with a six-year investment horizon and one in US dollars with a 4.25-year maturity. The performance is based on a basket containing five equally weighted commodities (aluminium, oil, copper, nickel and zinc). If, at maturity, the performance average of the basket is positive and above 45%, investors redeem their initial capital plus the full upside performance. If the performance of the basket is positive but less than 45%, investors redeem 145% of the capital initially invested. If the performance of the basket is negative, investors still benefit from the capital guarantee.

Innovative insights

All in all, SG CIB can perhaps be best characterised as a bank that consistently identifies growth topics for new investment products. And nowhere is this better demonstrated than in relation to its new product range linked to the Sharpe ratio.

The Sharpe ratio (named after Nobel prize winner William Sharpe) is a direct measure of risk-adjusted performance, showing the outperformance over the risk-free rate of an asset divided by the asset's risk. "Until now, structured products' returns were largely linked to the performance of their underlying," Seyer explains. "In focusing on the Sharpe ratio, we do not invest in the manager's capacity to outperform the market. Rather, we invest in his capacity to deliver a better risk/return ratio."

For investors, the Sharpe range, known as Altitude, marks a new opportunity, providing the ability to profit from the good historical risk-return ratio of certain hedge funds, Seyer adds. "Effectively, it's an adapted alternative to traditional bond investments and we are already seeing other banks trying to replicate our ideas."

Altitude is a 100% capital-protected note, or bond, with maturities of between five and 15 years. The note distributes an annual coupon indexed to the realised value of the Sharpe ratio of a given fund of hedge funds. The coupon pays four times the annual Sharpe ratio of a selection of the best alternative funds, floored at 0%. "Altitude's annual reset feature allows investors to lock in performance throughout the life of the product," Seyer says. "For example, with FRM Absolute Alpha, which had an annual Sharpe ratio of 3.0 in April 2006, investors receive a 12% coupon, while the euro long-term rate is at 4%." The product indexes its annual coupons to the realised value of the Sharpe ratio of the underlying fund year after year.

Although the performance of many alternative investment strategies has fallen over the past few years, their associated risk - as measured by their volatility - has also decreased. As a result, it's the best asset class for the creation of options on the Sharpe ratio, Seyer says.

SG's clients have certainly appreciated the innovation. "Using the Sharpe ratio as an underlying for a structured product is an excellent and original concept," says Christian Desbois, chief executive of UFG Group in Paris. "Moreover, linking this ratio to alternative investments that show higher Sharpe ratios than other asset classes creates a doubly attractive product."

Since its launch six months ago, SG has already transacted around EUR1 billion in Sharpe ratio options. Observers say that the next step would be to take a simplified version of the concept down to the retail level, as well as further developing the high-net-worth and institutional offerings. "The concept has proven attractive to investors seeking high, stable annual interest payments, similar to high-yield bond coupons, but without any credit risk," Seyer says.


SG's equity derivatives franchise is the envy of its competitors and is still growing. It would be easy for the bank to sit back and enjoy the fruits of its labours, but SG is never content with just being number one, it seems. Constant innovation and client commitment elevate the bank into a class of its own.

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