Societe Generale has long been known for its intricately structured equity investment solutions. Lately, that reputation has been spreading to other asset classes across the Asia-Pacific region.
Explosive growth has been seen across the French bank’s structured products franchise in the region over the past 12 months, with revenues up 10% year-on-year.
Societe Generale’s credentials as an all-round structured products house are also reflected in client praise for the bank’s cross-asset prowess. “As an institutional investor, you can ask them about anything that’s happening in the market and they can come up with a product to meet your needs,” says a portfolio manager at a Seoul-based insurer.
Impressive revenue performance and effusive client testimony tell only part of the story, however. The expansion of Societe Generale’s structured products franchise has been supported by sophisticated risk recycling and the launch of new digital trading tools for clients, and it is through these endeavours that the bank has truly proved itself a worthy winner.
“Increased issuance of structured products in 2017–18 meant focusing our attentions on managing the sales and trading process intelligently,” says Jerome Niddam, Societe Generale’s head of global markets for Asia-Pacific.
For risk recycling, the bank has sought to implement an originate-to-distribute model for its exotic franchise to hedge transactions immediately following completion with clients.
“Our ability to transfer risk back into the market was one of the key reasons we were able to capitalise on this growth,” says Niddam.
The originate-to-distribute model helped boost risk transfer for equity structured products. With the unremitting growth of the Korean autocall market over recent years, the use of structures such as corridor variance swaps to shift vega and other Greeks to third-party investors has become standard among the biggest banks. Such instruments only partially offset the considerable one-way risk generated by the autocalls business in Korea, however.
This year, Societe Generale became the first bank to develop a solution to recycle its equity-forex quanto risk by offering a carry trade to its pension fund clients. Most equity index autocalls in Korea tend to be denominated in Korean won. That frequently leaves trading desks exposed to unfavourable changes in correlation between the price of an underlying – the Euro Stoxx 50, for example – and the volatility of the exchange rate.
Societe Generale spotted an opportunity. Since trading desks are naturally sellers of correlation, they generally sell this correlation above its realised level. To offload the risk, the bank traded covariance swaps that paid investors the mean realised variance between the two variables, giving them benefits on the carry between implied and realised equity-forex correlation.
“The Korean autocall market is a good example of this: a highly competitive environment, experiencing significant growth. To increase our market share, sales and trading teams worked in tandem to manage risk more efficiently,” says Niddam. “Equity index autocalls are generally denominated in KRW, creating equity-forex quanto risk for issuers. The bank designed a solution allowing fast-money investors to access the carry between implied and realised equity-forex correlation.”
The bank’s risk-transfer innovations have not been limited to equity products. In fixed income, the bank found a solution that allowed it to provide financing to a Chinese corporate in the absence of a liquid credit default swap market. The illiquid loan risk was repackaged into the securitised format of credit-linked notes or a credit-linked loan format before being sold on to institutional investors in Taiwan and Hong Kong. Roughly $50 million has been traded on this format to date, with more trades due to be finalised in the near future, the bank says.
The continued automation of its structured product platform is another major factor contributing to Societe Generale’s recent success in Asia-Pacific. In late 2017, the bank introduced its SG Global Markets Structured Products platform to its clients in the region.
“This is a new push for us in Asia-Pacific,” says Niddam. “We have already onboarded a few clients, and we hope to have more and more in the near future.”
The platform provides pricing and execution capabilities for a host of structured products on thousands of underlying assets and numerous currencies. Customisations were made to the European offering to account for Asia-specific product names and trade documentation.
“The platform covers more than 1,800 underlyings, including equities, ETFs, commodities and credit. It offers a wide range of products, such as autocalls, participation structures and credit-linked notes,” he says.
Niddam adds that the platform, alongside the focus on innovations in risk recycling, is the key reason the bank has been able to grow its business across asset classes.
“We successfully captured the rise in demand for automation and risk recycling,” he says. “We have improved the client experience by continuously optimising the automation of our sales platform and pricing process. We believe this will remain the key driver of growth in the PB [private banking] and distribution business.”