Currency derivatives house of the year: Standard Chartered Bank

Asia Risk Awards 2017

Raghavan Rajagopalan, Standard Chartered

With lower volatility in Asian currency markets over the past 12 months – as most developed and emerging market currencies generally strengthened or remained stable – dealers say clients have been more reluctant to pay a premium to hedge their forex exposure. Hence banks have had to innovate in order to win business.

Standard Chartered wins this year’s currency house of the year award on the back of its ability to offer clients innovative hedging and investment solutions in an ever-changing regulatory environment. The bank is a key market-maker and liquidity provider in Asian forex markets, offering clients access to over 160 emerging market and G10 currencies, supported by on-the-ground teams in more than 40 countries. 

According to Raghavan Rajagopalan, global head of structuring, financial markets at Standard Chartered in Singapore, this year’s success has been predicated on the firm’s ability to offer structuring and advisory solutions across trade corridors and continued leadership in the renminbi market due to a longstanding presence in Greater China.

“Clients were keen on optimising their hedging costs, which led us to come up with new offerings. We saw a lot more demand for spread options where clients are buying and selling options and a lot more cancellable or callable structures. Given uncertainties in cashflows, clients want flexibility, and therefore structures such as cancellable or callable options have been very popular,” he says.

According to Rajagopalan, the bank’s onshore presence and ability to source funds and quote prices at longer tenors has given it the edge, particularly in markets such as Indonesia where the bank offered USD/IDR cancellable call spreads – a fairly new product in the market – to clients. In previous years, clients generally used call spreads to hedge exposure, where the downside was limited to premiums paid to the bank. This year, the bank offered a cancellable option across longer tenors to meet client needs.

In one example, the bank worked with two clients that refinanced their Indonesian operations at cheaper rates by calling previously-issued bonds and issuing new ones. In this way, Standard Chartered was able to extend the tenor from between three and five years out to seven years.

Despite the IDR option market lacking liquidity beyond one year, the bank was able to execute a pair of sizable seven-year USD/IDR options with total notional close to $200 million. Since the clients were in the money when they exited their existing hedges, the bank was able to incorporate the positive mark-to-market of the transaction into the new trade to give an even more attractive hedging rate to the client.

“The cancellable feature has two benefits. It gives more flexibility to the client, since if they call the bond or wish to refinance they can cancel the hedge. From the bank’s perspective, the fact the client can cancel the call spread reduces our capital usage and allows us to improve the pricing on the structure,” says Mathieu Lépinay, head of foreign exchange, rates and credit structuring.

The cancellable option was also relatively cheap for clients, costing an additional 20–30 basis points per year on top of what they would have otherwise paid for a regular call spread.

The tenor of the trades was also noteworthy as few banks have the capability to quote USD/IDR options out to seven years. “The reason we can quote for such a long tenor is due to our deep presence and expertise in emerging markets. Our trading team has a strong track record in managing the large, long-dated option risk,” Lépinay says.

Standard Chartered is also a leader in offering financing and hedging solutions in the Masala bond market – bonds issued outside India but denominated in Indian rupees. Masala bonds are a way for onshore Indian companies to raise rupees by issuing bonds that can be subscribed by offshore investors and are often used by multinational companies to inject financing into subsidiaries, with hedging of the exposure then done at the parent level.

In one example, Standard Chartered worked with a Singapore-based client to inject $500 million into its Indian subsidiary, despite not being part of the initial bond issuance mandate.

“The bond mandate was won by another bank who offered very aggressive pricing. However, the client was keen to tap our market expertise, product innovation and pricing sharpness on the hedging solution. Given the large size, our expertise in execution helped us win a significant portion of the hedge,” says Lépinay.

As the trade had to be executed in two stages, the ability to offer a full-package solution gave the bank the edge; the transaction needed to be hedged in both the spot market onshore and in the offshore non-deliverable forward (NDF) market.

“Given the recent change in Masala bond regulation, we have adapted our cross-border financing solutions to clients, especially for multinational corporations,” Lépinay says.

The bank also worked with a French industrial client to formulate an optimal forex hedge strategy for an Indian asset disposal. The client considered both a direct EUR/INR hedge and split hedges using USD. The systematic approach in dissecting the hedging decision into currency, tenor and instruments meant that Standard Chartered became one of four panel banks for the forex hedge, despite not being part of the disposal panel of banks. Standard Chartered ultimately became the sole hedge bank and helped the client execute $1.2 billion notional worth of EUR/INR two-month forwards.

In China, the bank’s leadership in the renminbi market continues to win praise from clients. Over the past 12 months, China’s regulators have been looking to further liberalise forex markets in order to attract capital inflow into the country. In February 2017, they allowed currency hedging for foreign bond investors through the China interbank bond market direct access scheme. By utilising its onshore presence and licences, Standard Chartered was one of a handful of foreign banks that was able to provide this service to clients.

For example, the bank helped a Hong Kong-based asset management firm specialising in bond investment prepare for China forex market access, in order to buy a number of onshore bonds and enter into associated forex hedges for a total notional of 800 million renminbi ($120 million) over various tenors. “The renminbi hedging rate in the onshore market is higher than that of the offshore CNH market. By successfully gaining access to the onshore market, the client enjoyed a saving of close to 1% in hedging costs,” says Herbert Ng, director of rates structuring.

This cost saving was appreciated by the chief operating officer of the asset manager: “We chose to partner with Standard Chartered for market access as we already had a pre-existing relationship – they are our global custodian – and because of their dedicated onshore China team who helped us to understand the policy requirements and filings. Although other banks such as HSBC and BNP were able to offer this service, we valued Standard Chartered’s timeliness in facilitating entry to the market.”

The bank was also able to offer competitive pricing on large-scale transactions when executing a $1 billion cap forward for a large Hong Kong property company, despite the limited market for CNY-denominated NDF options.

“Although we use a number of banks for our hedging needs – BNP, United Overseas Bank and Deutsche Bank – Standard Chartered provided us with the most competitive pricing and constructive suggestions on the correct timing to execute the trade,” says the head of treasury at the firm.

The bank also executed a $1 billion CNH target redemption forward for another Hong Kong corporate, highlighting its capability in CNH exotic products.

Meanwhile, the regulatory environment in Asia continues to evolve. In July 2016, Taiwan’s central bank introduced tighter scrutiny of forex derivatives products to prevent a future repetition of some of the problems that had been seen with target redemption forwards, which incurred large losses when the renminbi unexpectedly stopped appreciating against the dollar.

While several of the bank’s competitors in Taiwan were impacted by this move – and had to suspend dealing in complex derivatives products – Standard Chartered remained open for business in the country and continued to offer clients structured hedging solutions.

In Malaysia, where the regulator has been pressuring investors to move hedging onshore, the bank says it has doubled its volumes in the ringgit at its onshore entity as it helps global investors adapt to the new hedging rules.

“We continue to win more clients outside Asia, with respect to helping them access restricted currencies in the Asian market,” says Geoff Kot, co-head of cash forex. “We have won several large custody mandates and continue to see very significant increases in third-party forex volumes across Malaysia, Indonesia, Thailand, Korea, to name a few.

“The overall level of activity within forex markets across Asia remains very healthy for us and we continue to increase our market share as some of our international competitors reconsider their position.”

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