It has been a year of two halves in the equity derivatives market, says Stephane Mattatia, global head of the macro group at Societe Generale (SG) in London. The first half was relatively quiet, characterised by low interest rates and a hunt for yield. Since mid-year, however, volatility has picked up again, generating increased opportunities for innovative structuring.
"Since August, there has been much more volatility and very different flows following the news out of China. We prefer these conditions from a franchise perspective because in quiet markets there are always competitors keen on buying market share, whereas in shaky markets these competitors pull out," says Mattatia.
SG's equity derivatives business has long been the envy of its peers, and it has continued to thrive in 2015, with business growth up 61% year-on-year in the second quarter. The bank's success rests on two planks: first, the ability to price and execute in even the most turbulent market conditions; and second, a knack for structuring bespoke trades that exploit temporary market dislocations in the blink of an eye.
Clients testify to SG's resilience during unpredictable market conditions. Turcan Connell, a UK asset management firm, partnered with the French bank in August to structure a US BuyWrite note, combining long exposure to the S&P 500 with a call-selling strategy to generate an upfront premium.
"With covered call strategies like this, the sensitivity is around how often you are able to roll a section of the portfolio. This structure allows us to transact out-of-the-money call options at 2% on 10% of the portfolio every day for two weeks. A lot of other investment banks couldn't do that as effectively on the structuring side, which is a testament to the size and skill of SG in that area," says Gavin Maxwell, investment manager at Turcan Connell in Edinburgh.
Since August, there has been more volatility and very different flows following the news out of China. We prefer these conditions from a franchise perspective
The bank also continues to differentiate itself on pricing. "SG's pricing is extremely good and that is down to the collateralisation programme it has in place. Other banks have similar programmes, but they are not as sophisticated," says a research analyst at a UK-based private bank.
Maxwell adds: "We find SG is cost competitive for the size, scale, and bespoke nature of what we do. We find it easy to get new structures created with a standardised collateral base, which makes things very simple for us."
As well as outperforming competitors on retail flows and exchange-traded products (see the Europe house of the year award), Societe Generale has added value with a series of complex tactical plays for more sophisticated clients. One was the lightning-quick development of a trade that exploited a dislocation in correlation between the S&P 500 and the Euro Stoxx 50.
In late October 2014, as the European Central Bank began to moot the possibility of quantitative easing, one-year correlation sold off as financial institutions hedged the divergence between central bank policy in the US and Europe. But while the short end of the curve dived, December 2016 correlation remained at high levels.
Within 24 hours of the move, SG had put together a forward-starting call-versus-call trade that would monetise the dislocation, locking in the low entry levels implied by the depressed December 2015 bid/offer. The trade raised €250 million ($274 million) in notional.
Another success story was a hedge against Greece leaving the eurozone, which gained traction during the fraught bailout negotiations earlier this year. By the end of June 2015, the bank had traded roughly €1 million in vega notional in the product.
"What we designed was a covariance swap with three legs," says Mattatia. "One leg where the client is long variance on the Euro Stoxx as expressed in dollars; another where they are short variance on the Euro Stoxx and a third where they are short variance on euro/dollar. Synthetically the client is long covariance between euro/dollar and the Euro Stoxx. The three legs give the client the flexibility to alter the risk profile. Each time Greece came on the news, this swap did well."
Finally, risk premia indexes have also been successful. In September 2014, the bank launched the SGI Risk Premia Index, a cross-asset basket of smart beta plays with a volatility control overlay targeted at institutional investors seeking absolute returns without the expense of an active manager.
"We ranked all the strategies presented during our tendering process, evaluating the consistency of performance. SG scored highest and negotiated tighter pricing compared with competitors. The bank is also very flexible in meeting our needs in terms of legal documentation," says an Italian asset manager that transacted on the index.
The week on Risk.net, September 8-14, 2018Receive this by email