FICC house of the year: Societe Generale

Structured Products Europe Awards 2017

Thomas-Decouvelaere
Thomas Decouvelaere, Societe Generale

A series of factors have rendered fixed income, credit and commodity structured products less attractive to clients compared to equities, which have been on an upwards tear for much of the past 12 months. Societe Generale met these challenges head-on through product innovation and a concerted effort to educate clients on the undervalued opportunities available in the space. 

“Fixed income is currently a tough market because the incentives for entering it are not there,” says Thomas Decouvelaere, head of pricing, fixed income at SG. “Credit is tight, rates are low, and it makes sense to rotate to equity. To compete, we’ve had to convince clients of our strong market convictions.”

Pitching clients exotic trades based on in-house beliefs is outside the French bank’s traditional playbook. SG generally prefers to tailor solutions to client needs rather than pushing its own ideas. However, Decouvelaere argues that unique market dynamics, in the rates space in particular, have given the bank the confidence to promote a select number of “win-win” trades.    

“Instead of going to clients and providing them with a whole list of products as we have done in the past, we have instead produced much shorter presentations with a much more limited number of products that our clients have found to be very relevant,” he says.

One such product was a rates volatility strategy wrapped in a collateralised note. SG is well attuned to the factors contributing to suppressed European and US rates volatility. As an established structured products house, the bank has had a front-row view into how the massive issuance of callable bonds worldwide has flooded the market with long-term rates volatility. This has worked to invert the volatility term structure of rates.

SG packaged the value opportunity available through this inversion in a strategy in which the client is axed differently on long-term swaptions, thereby gaining an exposure to the underpriced volatility. The trade accrues value over time as its discounted long-term volatilities are pulled to higher values of short-term volatilities. SG sold this to a range of clients, including major asset managers, reflecting an underlying swaption notional exposure of roughly $3 billion. 

As attractive as it was to clients, it also complemented SG’s own rates risk-recycling programme. “Because we are a big player in the structured business in general, we have built up a long-term volatility exposure, so we were happy to offload that risk through this long vol trade, as well as through other flows with hedge fund and asset manager clients,” says Decouvelaere.

In credit, SG has been fighting buyers’ apathy towards the asset class with innovative double repacks. The bank already has a well-earned reputation as a master of the bond asset swap, where clients can access enhanced coupons while retaining exposure to high-quality credits. Yet while the buy side still favours sovereign bonds as underlyings, institutions’ thirst for yield has driven demand for payouts beyond the usual constant maturity swap-based variety. This led SG to promote a sovereign repack with a coupon indexed to a second credit component, typically an exposure to a credit default swap (CDS) index.

“It’s as if a sovereign were to issue a credit-linked note,” explains Decouvelaere. “Principal-at-risk is still sovereign credit, but the client gets a yield indexed to a separate credit component.”

Being able to offer a simple CDS in a securities format has made a big difference to our capacity to deliver credit protection to more clients
Thomas Decouvelaere, SG

One landmark deal saw SG sell an asset manager a repack of an eastern European government bond with a yield enhanced by exposure to US corporate CDSs and European rates. The French bank enhanced its roster of credit products further with the launch of fixed-income fund derivatives. 

Wary of investors’ indifference towards traditional bond fields with anaemic returns, SG sought to draw in clients with the promise of leveraged participation in the upside of certain blockbuster mutual funds – without putting their capital at risk.

Offering exposure to the euro-denominated returns on these funds but paying out to clients in dollars allowed SG to leverage the differential between the dollar and euro curves. Clients gained access to the fund options for a lower price, as expressed in dollars, than they would if the options were purchased on the dollar-denominated returns. The products have consequently attracted $2 billion in investment across Europe and Asia since their launch in 2016.

SG has also sought new ways to offer less-sophisticated clients access to credit protection. CDSs and related derivatives can prove useful and cost-efficient macro hedges to the fixed-income portfolios of high-net-worth individuals (HNWI) and smaller asset managers. However, these are generally only accessible over the counter, which loads on operational and technical burdens to such an extent that those clients are either unwilling or unable to take them on.

Aware of this gap in the market, SG laboured to provide CDS-style protection in the form of warrants on a variety of credit indexes, rates, and foreign exchange underlyings. The product line was a hit – the bank says it has shifted €250 million ($296 million) of credit warrants alone with private banks in the UK and Switzerland since 2016.

“Being able to offer a simple CDS in a securities format has made a big difference to our capacity to deliver credit protection to more clients. This way HNWIs and smaller asset managers don’t need to sign an Isda [International Swaps and Derivatives Association master agreement], set up credit support annexes or deal with margin,” says Decouvelaere. 

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