The past year has seen a flurry of unprecedented market events that have jolted currency and interest rate markets. The fallout from the UK’s vote to leave the EU, Donald Trump’s victory in the US presidential elections and China’s strict capital controls – all of these market disruptions have focused attention not just on the ability to implement bespoke solutions, but also on the ability to execute them in a timely and efficient way.
Against this backdrop, OCBC has been at the forefront of creative thinking that has helped its clients navigate these choppy waters.
“The bulk of our structured solutions are targeted at customers who need to hedge their forex exposure, but we also do a lot of interest rate hedging,” says Gerard Tan, team head of foreign exchange and structured products at the Singaporean bank. “Forex hedging, interest rate hedging, cross-currency swaps, cross-border funding solutions – we offer the full suite.”
This year, OCBC has focused on strengthening its credit-linked investment business in order to provide value to clients that have operations in places where it is expensive to raise onshore funding.
In one structured solution offered this year, a Singapore-based client was looking for a funding solution for its Indonesian operations.
Given that Indonesia’s benchmark interest rate is 4.5%, borrowing costs are significantly higher than in the client’s home country of Singapore, where they are linked to the exchange rate with the US dollar.
Furthermore, taking out a loan in Singapore would have required the client to use its onshore assets as collateral – something it was not eager to do, since most of its cash sits with the headquarters.
A credit-linked note (CLN) issued from OCBC’s head office in Singapore was the perfect solution and the client’s financing requirements could be met.
“By doing this, we were able to offer a more competitive solution. In addition, we were able to reduce the customer’s FX exposure by incorporating an FX hedging component/structure as well. The offshore structure provided a safety net for the bank,” says Wee Wei Min, OCBC’s global head of treasury advisory.
“Another illustration of the effectiveness of the solution is intended for multinational corporate clients,” adds Tan. “One client had cash pooling in Singapore, where the regional business funds are put on a regular basis, and faced issues with its cashflows. We managed to use our cross-border funding solution to create a synthetic cash-pooling structure to overcome these cashflow problems.”
Cash pooling is typically done on a quarterly basis by companies that want to improve liquidity management and optimise interest rate payments.
The bank’s treasury department has also been active with managing event risks. In one case, ahead of the Brexit vote last year, the bank began engaging a client on the risk of the sudden depreciation of sterling, which would have impacted its receivables.
“The client started to move away from spot transactions and to use more options, in this case the cancellable forwards, to hedge their British pound and US dollar exposure. Over that period of time, we helped the client beat the market rates,” says Tan.
This structure was so successful that the client channelled all of its hedging requirements to OCBC, amounting to approximately £140 million ($188 million) a year, says Tan.
The bank remains a forex powerhouse in Singapore and is an active participant in G7 and major currency crosses. It is also a key market-maker in many of Asia’s main currencies as well as non-deliverable forwards, and remains the main liquidity provider for forex derivatives involving Singapore dollar crosses, with more than $600 million achieved over the past one year.