Structured Products House of the Year – Société Générale

Asia Risk awards 2013 winner: Société Générale – Structured Products House of the Year

Yann Garnier, Société Générale

The past 12 months have seen a number of high-profile exits from the structured product market with banks including RBS and Rabobank shutting down their Asian businesses as a number of others downsize their commitment to the sector. By contrast Société Générale has continued to grow its team in Asia – hiring an additional 15 people for its cross-asset solutions group across trading, financial engineering and sales.

This investment has paid off, seeing the bank once again lead the market with its multi-asset offerings to a wide range of Asian clients including private banks, family offices, insurance companies, banks, asset managers, pension funds, sovereign wealth funds and corporates within the region.

"In terms of risk management, product design and integration of client needs, we have moved from a tailor-made solutions business to a structured product factory which enables us to deliver a product to meet client needs faster. The efficiency of the platform is shown in the numbers where we trade close to $2 billion every month with 20-30 trades on various underlyings," says Yann Garnier, Hong Kong-based head of Asia-Pacific sales, global markets at the bank.

Market factors such as the aggressive quantitative easing from the Bank of Japan and the rise in the Nikkei have also seen new volumes of Nikkei-linked structured products reach $17.5 billion for the year-to-date, compared with $16 billion for the whole of 2012.

"The performance of past products that we have sold has been extremely good and most have been called and reinvested which is why we have flows of structured products in 2013 which are equivalent to two years of normal flows," says Marc Saffon, Hong Kong-based head of financial engineering, Asia-Pacific at SG.

With healthy trading books, the bank was in a position to capitalise on the Japan rally due to its ability to offset positions and hedge out its risk to a wide group of counterparties.

"SG's books were very sound, benefiting from our constant focus on having the best diversification so that we could increase our activity. Our diversified book enabled us to take on more risk than competitors and all our exotic books have a strong positive P&L this year," says Saffon.

During 2013, the bank has adjusted its strategy in Japan, shifting away from the retail vanilla Nikkei-linked products of which the four largest players (JP Morgan, Deutsche Bank, Nomura and UBS) accounted for 50% of the total market. SG was the sixth largest Nikkei knock-in-knock-out (Kiko) provider in 2012/2013 year-to-date.

The bank is now focused on developing products for the Japanese private placement market by offering investors exposure to new underlyings such as a worst-of basket of Japanese stocks and worst-of Nikkei and foreign indexes such as the S&P500. The bank has placed more than $2 billion nominal in 2013 as has become the leading provider of private placement products in Japan.

Similarly, for structured forex products, while SG has been the third-largest provider of AUD knock-in notes since 2012, the bank has focused in 2013 on private placements for investors such as range accrual and superball products denominated in emerging currencies. Total notional traded in these products is close to ¥100 billion ($1 billion) since 2012 with close to 50% of this traded in 2013 year-to-date.

In variable annuities, the bank has the largest book in the region worth $14.7 billion, and is the number one provider of variable annuities to Japanese insurers. In November 2012, the bank signed a deal with Meiji Yasuda to provide the insurer with variable annuity structured products. So far this agreement has assets under management of close to $1 billion.

"For our variable annuity business, we consider that SG's expertise in risk analysis and their consistent pricing capabilities make them the best business partner to meet our needs from both investment and risk management points of view," says Makoto Yasunaka, group manager of product development at Meiji Yasuda in Tokyo.

Hybrid structures have also continued to see strong demand from investors, where the bank claims to have the largest correlation trading book in Asia (worth $5.3 billion), combining asset classes into more than 30 cross-asset pairs and five cross-asset trios. SG hybrids have been popular among distributors and financial institutions in Korea, Taiwan, South-east Asia and Hong Kong. Year-to-date over 111 hybrid notes have been issued by the bank accounting for more than $1.9 billion nominal, and above the total amount raised during 2012.

The bank has also continued to grow its index business with current assets under management at over $5.7 billion in Asia. Over the past 12 months, over $470 million was raised under various multi-asset strategies with the performance of the underlying for the variable annuity products in Japan averaging an annualised return of 6.4% since their launch.

The bank's flagship SG Harmonia Index is a new strategy which diversifies investment and limits market drawdown exposure during bearish periods while maintaining volatility at a predefined level. The index is based both on a risk-budgeting model and a trend-following mechanism, which provides the optimal weighting for each asset within the portfolio. Performance is up 8.5% year-to-date as at the end of July and has most recently been traded with a Chinese retail bank.

In another example, a large Korean institutional client was looking for a yield enhancement strategy linked to interest rates with low volatility and no foreign exchange risk. The bank suggested a strategy capturing value from short-term US dollar interest rates with a hedge on foreign exchange risk (USD/KRW). The product is linked to a proprietary index known as the Monetary Policy Driven strategy (Mod) index which employs a trend-following mechanism that exploits inefficiencies in the interest rate forwards market. A local issuer provided the funding for the product of $35 million, while SG supplied the option.

The bank is also a leader in interest rate-linked products and has seen strong demand from institutional investors in Korea and Taiwan. The bank has sold over $200 million in zero-coupon callable range accrual notes in Korea and is a market leader in Taiwan with over 12% market share.

It has also developed constant maturity swap (CMS)-linked products following discussions with clients on concerns of an impending rise in interest rates. This has led to two transactions with a Korean state-owned institutional investor in January and July this year. In January, with US Treasury yields at a historical low and with portfolio benchmarks higher than long-term bonds in the portfolio, the fund was looking for enhanced yield and invested in a zero callable range accrual note from SG.

After experiencing a drastic sell-off in US Treasuries in May, the fund decided to protect its portfolio amid concern at the US Federal Reserve's tapering and an increase in interest rates. Consequently, in July, the fund invested in an SG callable dual range accrual CMS floating-rate note.

"We invested twice in SG's products in one year – an exceptional case showing our confidence in the bank. SG's products are superior to other products in the market in terms of pricing levels, resilience of the issuer's credit fundamentals, and appropriate structures for the market situation," says the global head of fixed income at the institutional investor.

In another example, SG worked with Taiwan First Bank on a bond repack which yielded the client an additional 30bps pick-up every year for a tenor of up to eight years.

"SG was the first bank to pitch us the idea and its pricing was much cheaper than other counterparties. Every local bank has a lot of counterparties to choose from and I would rank SG amongst the top three. This was the first time we invested in this type of product and we are very happy with the enhanced yield from this product," says the treasurer of the local Taiwanese bank.