The sustained growth in fund-linked products in Singapore has meant that banks dealing in them are accumulating risk. Societe Generale tackled this not just as a risk build-up; it came up with a product that clients desired – and by doing so managed to balance the exposure.
The notable trading volumes in mutual fund-linked products saw dealers such as Societe Generale accumulating significant amounts of one-way risk: a large short-volatility position, which needed to be recycled into the market. The French bank devised a trade linked to equity and multi-asset funds, and relied on its market penetration to unload the risk.
Financial engineers at the bank designed a new type of variance/volatility swap, in which clients were able to take a short position on mutual fund volatility that has historically been low and stable, according to Edward Lee, head of global market sales for South-east Asia and India at Societe Generale.
“Historically, this trade has performed very well for investors,” says Lee. “It consistently provides a positive carry. In addition, realised volatility is capped.”
The product opened up a new business for Societe Generale in Singapore and played to demand from clients seeking products that boost yields. By recycling the risk, the bank also squares up the one-way risk, which also allows the bank to offer tight spreads on the fund-linked products.
The product is designed in such a way that the strike level has generally been set well above the historic volatility or variance levels, with clients receiving the difference between the strike and the fund’s realised volatility. Clients typically prefer the one- to two-year tenor as this has consistently provided a positive carry. By capping realised volatility, potential losses from a sudden spike in volatility that takes the variance well above the strike level are also controlled, says Lee.
Societe Generale’s ability to recycle the risk to sophisticated clients boosted the bank’s move to diversify away from fixed income alone in Singapore. It moved towards multi-asset and alternative strategies, in line with the mushrooming of private banks, sovereign wealth funds and hedge funds in the city state.
“In the past 10 years, equity clients [have been] increasingly based out of Singapore,” says Lee. “These include distributors and hedge funds. There has been bigger product success in Singapore for mutual fund derivatives, and we have positioned teams and products to benefit from that.”
Over the past year, the bank saw rising demand for equity and fund-linked products, trading almost $1 billion of mutual fund-linked structures and $6 billion of equity-linked structures. Autocallable structures also remain popular with private banks, which favoured European financial and technology stock underlyings.
Societe Generale was the first to launch daily leverage certificates (DLCs) in Singapore with the introduction last year of three-times and five-times leverage offerings. In January 2018, it bolstered its DLC baskets with seven-times leverage on the Hang Seng China Enterprises index, Hang Seng index and Singapore Free index. Inflows have been strong, with the number of trades up by 66% since the launch of the seven-times DLCs, as of end-June.
DLCs are similar to leveraged inverse exchange-traded funds (ETFs) that give two times a fixed daily leverage on the underlying return, but with greater degree of leverage. “This is a simpler product than leveraged ETFs, with investors taking their own view: long or short, and then they can pick their leverage,” says Lee. “We provide ample liquidity and tight spreads. Added to that, it tracks the small moves in the index very closely.”
The bank is also looking at opportunities to launch single-stock DLCs in order to further strengthen the offerings, he says.
Continuing with the equity and multi-asset theme, Societe Generale has evolved to become a key player by widening its execution and clearing broker services for listed derivatives in Singapore. Having had a presence there since 1979, the bank services a multitude of clients. Its product offerings cater to asset managers, banks and central banks, corporates, insurance companies, private banks, sovereign wealth funds and hedge funds.
An example of the bank’s ability to adapt to market conditions can be seen in its tailor-made structures designed to play the commodities market last year.
Surging oil prices and monetary policy normalisation across the globe led to increased interest in energy and precious metals, and with Singapore being the Asia-Pacific hub for commodities, investor interest was palpable.
One of the most popular structures for private banks in the commodities world has been the Twin Win on Oil, which allows investors to benefit from a moderately bearish and bullish oil scenario. To support the success of the payout, automation has been key and the bank has managed to be agile by automating flows. On over-the-counter precious metals, it has developed a price-discovery bot. In around 30 seconds, the bot can provide pricing on live spot or spot reference on different types of payout.
“We have taken a holistic approach in South-east Asia,” says Lee. “It is all about tapping the synergies that exist between the various investor types in the region, be they private banks, hedge funds or institutional investors. The variance swap that recycles the one-way risk of the fund-linked derivatives is a clear example of our approach.”
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