CIMB masters interest rate challenge in Malaysia

Clients seeking to embed forex or interest rate optionality

Jennifer Yong, CIMB

Malaysia remains the central hub of CIMB's regional operations where product innovation and cross-border solutions are developed and rolled out to the regional bank's network. The bank has retained the award for Malaysia house of the year for the tenth year running, maintaining its position as the leading derivatives issuer and distributor in Malaysia. CIMB traded over 138 billion ringgit ($42 billion) of derivatives from July 2013 to June 2014, an 11.2% increase year-on-year.

This year, with uncertainty in the timing of the rise in US interest rates and local Malaysian interest rate volatility, the bank has seen strong interest from clients to embed foreign exchange or interest rate optionality as a cost-reducing funding solution. Multinational clients continue to show interest for forex option embedded solutions as these clients have receivables in various currencies other than their home currencies.

"Clients have shown a lot of interest for this structure due to the interest rate reduction for in-arrears fixing. Volumes for embedded derivative loan structures are approximately $100 million up to June 2014 in Malaysia," says Jennifer Yong, managing director for rates, funding and structuring at CIMB in Kuala Lumpur.

For borrowers with floating rate liabilities, the conventional hedging tool would be to enter into a fixed to float interest rate swap where the borrower receives a floating rate of interest (offsetting the floating rate obligations on the underlying liability) and pays a fixed rate of interest. However, the opportunity cost of entering into an interest rate swap is the initial "negative carry" incurred by the fixed rate payer. CIMB has also offered the client several alternatives such as the fixed rate swap with knock-out, liability-side range accrual and payer swaptions to help mitigate this negative carry.

"We also offer interest rate swap hedging ideas to corporate clients who have a view that interest rates will remain low for an extended period of time. The client would get to enjoy the low floating rates as long as the reference rate remains below the target rate. If the reference rate goes above the target level, the client would be paying at maximum the target rate only," says Yong.

CIMB's Malaysian interest rate market-making desk is recognised by market participants as being the dominant player in the ringgit-denominated market. During the past year the desk executed around 4.5 billion ringgit in ringgit interest rate swaps, 1.5 billion ringgit in foreign currency interest rate swaps and 4 billion ringgit in cross-currency swaps.

In credit, CIMB executed a landmark quanto first-to-default basket credit-linked note for a local asset manager for 350 million ringgit. The basket of 10 global and Asian underlyings provided a coupon of 6% per annum and as long as none of the tracked companies default.

"The quanto first-to-default basket provides a decent pick-up to local asset managers," says Yong.

The bank has also expanded its hedging suite of commodity underlyings to corporate customers who wish to manage their commodity risks. In the past year the bank has executed hedges for an Indonesian gold miner for $292 million, provided fuel oil hedges to a Singaporean power plant for $89 million, hedged energy production for a local oil refiner for $294 million and hedged jet kerosene and Brent crude oil prices for regional based airlines for $177 million.

CIMB also took the lead in offering the first of its kind equity autocallable structures in the Malaysian market. The knock-in, knock-out structure references local stocks and delivers the underlying shares to investors in the event that a trigger or conversion event occurs at maturity.

"This allows investors to decide when they would prefer to dispose of the stock at their convenience rather than immediately crystallising the loss when the reference stocks plunge beyond the trigger level. This product has been hugely successful as we sold over 1 billion ringgit of this structure where we provided clients with choices of more than 20 local and foreign names," says Yong.