RMB House of the Year – HSBC

Asia Risk Awards 2012 winner: HSBC – RMB House of the Year

Justin Chan, HSBC

With its roots in Hong Kong and China, HSBC has been at the forefront of developing the renminbi market both onshore and offshore, offering the first renminbi non-deliverable forwards (NDFs) in Hong Kong in 2006 and playing a pivotal role in the offshore market's subsequent expansion.

This has helped make HSBC the leading market-maker for options in offshore renminbi, providing over $10 billion in hedging solutions to corporate clients and a similar amount to its institutional clients, according to the bank.

Justin Chan, HSBC's deputy head of global markets for Asia-Pacific and head of Hong Kong trading, says the bank is one of the few market-makers in long-dated forwards in offshore renminbi, a product that sees much lower liquidity than other products.

"Our leading position in the dim sum bond market has put us at the crossroads of derivative deals with issuers and investors, as well as bringing us into dialogue with institutions that are looking for value in trading yield curves. By connecting these different interests, HSBC can help clients by providing liquidity in areas where other banks might not be able to do so," he says.

Chan's view was backed by a portfolio manager at a Singapore-based investment management firm, who says HSBC's scale is crucial in the nascent RMB market. "HSBC sees the lion's share of the flows given that they have the origination side of the business. They have a broad exposure to both European and onshore Chinese flows. Their franchise is very useful to tap into."

The low volatility on a pegged currency such as RMB relative to its free-floating peers requires a different approach to risk management.

Andrew Sharkey, head of forex and precious metals options at HSBC, says as a result of HSBC's quantitative investment in analysing its risk exposure it was able to continue providing liquidity in the market when risk appetite for renminbi suddenly dropped earlier this year. This was due to a trade deterioration in China and changing sentiments on renminbi appreciation leading to a sharp increase in volatility. According to Sharkey, the bank's model continued to provide consistent and accurate valuations to clients.

"We were confident about the correct prices for all strikes on the volatility surface whereas other banks might have been more hesitant. This enabled stable valuation and risk management of primary and secondary greeks, which other banks would have been unable to do as the volatility surface was broken," he says.

The early part of 2012 was not the only time the RMB markets have performed erratically in the last 12 months - in September and October last year there was a reversal in the onshore and offshore curves, which caught the market by surprise and led to significant losses for investors.

Chan says HSBC also helped clients weather the dislocation without incurring a loss on their previous hedges on the offshore renminbi. On the bank's advice, a Hong Kong garment manufacturer reversed its hedging strategy from the NDF market to take advantage of the opportunity presented by the 2% discount of the offshore renminbi market over the onshore and NDF markets.

"We encouraged the client to switch its hedging strategy from NDF to the offshore renminbi market - including spot, forward and structured options - in order to take advantage of this market opportunity and enjoy lower hedging costs for its regular renminbi payables. The client subsequently booked a series of offshore renminbi deliverable forward contracts in Hong Kong for its ongoing renminbi requirements in China," he says.

A senior figure from the garment manufacturer confirmed that due to HSBC's advice his firm had saved a significant amount of money during this period of volatility.

Additionally a senior executive at another Singapore-based asset manager says HSBC provided constant information and liquidity during the disruption which prevented a difficult situation worsening.

"The curve reversal was a big issue for everybody involved in that market. HSBC was one of the banks providing very good information on the flows and some good analysis on some of the changing regulation as well. They were up there with the best during that period," says the asset manager.