Structured Products Asia Awards 2016
Societe Generale Corporate and Investment Banking's (SG CIB) success in Taiwan has been a result of the bank's commitment to being on the ground in the country. The bank acquired a financial advisory licence in 2015 and began a localisation process with the sales force from the beginning of that year.
"We benefited from localisation as it makes the marketing more efficient by knowing our clients better," says William Huang, head of Greater China sales, global markets at Societe Generale Corporate and Investment Banking in Hong Kong.
Regulatory developments have meant that the structured products market in Taiwan has been something of a moving feast, particularly with regard to investor access. In 2015, Taiwan's Financial Supervisory Commission (FSC) opened the market for Formosa bonds - foreign currency bonds sold in Taiwan - to retail investors, creating an opportunity for these securities to reach a new audience. SG CIB led the way with these products, taking advantage of their new classification as onshore investments for insurers and the removal of the existing 45% cap on foreign investment that had previously applied.
Having started the ball rolling, the bank issued a second retail Formosa bond via the insurance structure and is engaging with more insurance firms as investors. Depending on market conditions, a third issuance is possible by the end of 2016, says Huang.
The notes are plain vanilla cash bonds, and so the yield depends on the interest and swap rate. The first issuance was for $150 million; the second was for NZ$58 million ($42.5 million). The third, subject to getting a lower interest rate and based on market feedback, is expected to be of a smaller amount.
On the foreign exchange side, target redemption forward (Tarf) investment products have seen less interest following losses for banks and corporates since the renminbi appreciation began in 2014. Corporates use these products to hedge, typically selling a set amount of US dollars for renminbi at a fixed level for the life of the trade - generally two years. The target redemption feature means the product knocks out as soon as a certain level of profit has been earned. If spot falls below a downside barrier, however, the corporate has to buy US dollars at an unfavourable rate - creating losses for investors and risk management headaches for banks.
The FSC has clamped down on sales of Tarfs over the past year, with the latest rules requiring banks to seek regulatory approval before selling to certain clients. This came after moves by the FSC late last year to double the threshold for a "professional legal entity" - a category of investor that is allowed to buy Tarfs; limit the maximum duration of Tarfs to 12 months; and require investors to post initial and variation margin.
"In the next few years, I expect to see more products and more licences for banks being granted for institutional clients, but it will take more time to see some deregulation for retail markets," Huang says.
Reverse convertible notes referencing US constant maturity swap (CMS) rates have proven popular across the region, in South Korea and Singapore as well as Taiwan. The notes have a quarterly fixed coupon, and at maturity the payoff is based on where the US dollar 10-year CMS rate is. If the rate is at or above the strike, investors get their full investment principal back; if it is below, their principal is reduced.
Taiwanese investors prefer a tenor of one year, whereas those in other countries tend towards shorter tenors lasting between three and six months. For a one-year reverse convertible note with a strike at 80% of the initial fixing, the coupon could achieve around 6% compared with 4-4.5% for a three-month tenor.
"By extending the tenor, the yield will be higher and it also could make strike lower, so it is a relatively safer product compared with those in other countries," says Huang.
The bank's relationship with the major distributors from banks, securities houses, and asset management and insurance companies in Taiwan has also been sustained. With a lot of distributors having withdrawn from the business almost completely after the 2008 crisis, SG CIB kept a dialogue open and kept its partners abreast of the latest market intelligence in order to facilitate their subsequent re-entry into the market.