House of the year, Taiwan: Cathay United Bank

Asia Risk Awards 2018

The Cathay team (L to R): Ami, Sean, Mischa and Francine

Cathay United Bank

Taiwan’s Cathay United Bank has pushed its risk and warehousing capacity to the fore, and in doing so it has shown a strategy for growth that has borne fruit. This achievement has required a very strategic, disciplined approach to investment.

Within the Taiwanese market, client demands are increasingly outstripping the returns promised by plain vanilla instruments, which has pushed providers towards offering more customised products, but developing them is not easy. Sitting between issuers and investors demands a strong operational backbone that can manage complex contracts and the risks they present.

Tougher Basel III capital rules have brought in heavier charges for carrying risk. This makes seizing the opportunity to service clients dependent on the capacity of firms to handle risk very efficiently by managing the associated profitability and cost.

Cathay United Bank has proven itself capable of handling the situation, gaining a market share of 9.71% in forex derivatives (based on notional value outstanding) and a 16.86% share of the interest rate derivatives market. It is now building out its forex product line, following a decision by the Financial Supervisory Commission that banks should have the ability to price every product they trade, even for back-to-back deals, either through an in-house capability or by getting a quote from another local bank.

“We are now vigorously improving our in-house pricing ability, because by doing so we can not only provide our clients [with a] comprehensive product line, but also increase the chance that other banks choose us as their counterparty, effectively expanding our business opportunity,” says Tony Kao, senior vice-president of Cathay United Bank.

The bank has already developed 15 products, including the Discrete Knock Out Forward with cap floor. Over the next six months it plans to make the offering more comprehensive, with about 45 different types.

“So far, we have been able to develop them internally,” says Kao. “We have a very good team handling the quantitative side, handling warehousing and risk management, which, along with IT, makes up about 40–50% of our business.”

The bank has already succeeded in creating a full offering for interest rate hedging, for clients ranging from bond issuers to syndicated loan borrowers. While firms are keen to issue bonds ahead of a rate hike, investors are seeking the highest yields possible. A solution for bond issuers is to issue zero-coupon callable bonds, which provide investors with higher yields.

Sean Ku, deputy manager at Cathay United Bank, says: “The bond issuer wants to enhance their yield using options, and we can help them to hedge their options to enhance their yield by about 140 basis points on the 30-year rate.”

Cathay United Bank

Deputy manager Ami Chang adds: “Through our warehousing function we have a more comprehensive understanding of our counterparties and we are able to assign different capital weightings to different counterparties. Therefore, where trading has seen higher costs of business, based on higher capital requirements, we have been able to match that up, and that creates a more sustainable business going forward.”

Moving risk has been enabled through Investment Platform 2.0; a digital layer that allows the bank to distribute products to investors more easily while increasing transparency.

“Investment Platform 2.0 lets us easily deploy funds from deposits and investment capital in order to generate yield via dealing from our in-house traders,” says Chang. “We have recently enhanced our graphical user interface (GUI) to help clients understand complex products and request quotes more easily. Another feature is that when buying and selling options in the derivatives market we create performance metrics based upon a daily funding rate to enhance the investment yield of the product.”

Cathay United Bank has faced some headwinds in the highly competitive Taiwanese market, so building all of these capabilities has required focus and investment in the right resources. The first operational challenge was on the IT side.

“We have a dedicated Treasury IT team, which makes up around 15% of our employees,” says Kao. “So far, we had a special function team from our IT department just focus on the capital markets department alone. The function team took about 15% of the IT department’s staff, and covered the Singapore, Hong Kong and Taipei treasuries. The IT team will focus on building systems to our exact requirements.”

The second operational challenge was to build out support for risk management with a market risk team, which, along with the IT team (for developing internal market risk systems) and the warehousing team (spanning Hong Kong, Singapore and Taipei), makes up about 10% of the bank’s Treasury staff in total.

However, by setting down solid foundations, Kao perceives his firm will be able to ride out the potentially volatile trade climate, which can be seen on the horizon.

“The biggest challenge is likely to be as a result of political issues that may arise between the US and China, which will impact market dynamics and require us to be very careful about hedging positions,” Kao says. “It will be a challenge and there is also a very good opportunity, as we can create equity based products or index-linked products to sell to our customers.”

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