Interest rate derivatives house of the year: Societe Generale

Asia Risk Awards 2019

Guillaume Miquel, Societe Generale

It has been a testing 12 months for rate houses globally with the flattening curve initially and rate inversion more recently causing quite a stir.

In such an environment, Societe Generale has demonstrated its ability to adapt to a fast-changing rates outlook and offer timely, well-researched advice to clients across Asia. For instance, the bank’s financial engineering team spotted signs of inversion in the US dollar rate curve towards the end of 2018 and quickly acted by offering solutions that have benefitted clients.

This year, Societe Generale’s rates structuring capabilities are exemplified by products that include Libor range accrual product, swap financing solutions and China access products. These were all protected by thorough risk management, which allowed the bank to set conservative barriers and payoffs.

A cross-asset focus also helped, with the bank importing ideas from desks such as equities to combat challenges. The structuring team was not deterred by difficulties in timing the market and most recently shifted focus to offer more short-term products, says Hong Kong-based Guillaume Miquel, the head of fixed income and currencies for Asia-Pacific.

The bank came up with hedging and investment instruments that have offered attractive, alternate sources of returns even as the fixed income derivatives markets were obstructed by a plethora of challenges, he says.

“With fixed income, it usually requires longer tenor for the level of value added and appropriate risk,” Miquel says. “It’s typically been an issue with Asian markets because the distribution model and the client appetite usually favors shorter-term products. Here in Asia, fixed income products need to be structured in a short tenor and with a rollover mechanism like in equities to see a successful launch.”

The bank offset that by borrowing some innovative tweaks from its equities business and deployed that to the fixed income product to ensure the payoff can be safe and secure. This is also helped the bank be conservative in setting the strike and barriers, which eventually helped in current market conditions as most of structured were redeemed early and before the rate curve inverted.

“Clients were suggested less aggressive levels of put strikes, in case of rate market depreciation,” says Miquel referring to the rate steepener products that were sold. “This was proved to have effectively protected them. While it has not steepened and instead inverted, due to the low level of strikes, most of these products have already been early redeemed with full principal redemption and fixed coupon.”

Rate curve inversion

The bank was also among the first to spot the rate curve inversion and was quick with products to attract clients.

An example of the bank’s solution is a tactical bet offered to several financial institutions based in Taiwan. Supported by the bank’s internal cross-asset research, the product was designed to capture the inversion between USD five-year/two-year while under full principal protection.

The product was offered into a swap or a notes with principal protection and range accrual coupons linked to the inversion. In addition, the bank promoted a 75% protection feature on the coupons, if the spread was below 0% for at least 75% of the time. If that clause were to be met, clients would receive the full coupon.

This product has been a hit with investors and has attracted $400 million in assets in Taiwan and returned investors an attractive mark-to-market gain year to date.

“Although this is a trend that occurs roughly every 10 years, it represented a true challenge to the market,” says Miquel.

It is important to note that we are the first bank to promote this inversion trade idea in Asia, not just in Taiwan
Guillaume Miquel, Societe Generale

The product has piqued the interest of more clients in Taiwan and Societe Generale is promoting it to its Singapore clients.

Miquel emphasises this is merely one of multiple examples that underscores the bank’s long-established strength, constant innovation effort and long-term commitment to clients.

“It is important to note that we are the first bank to promote this inversion trade idea in Asia, not just in Taiwan,” he says. 

Societe Generale has offered more solutions to Taiwanese investors. Another example was the launch of the first-ever three-month Libor range accrual product in Taiwanese dollars.

Traditionally, institutional investors in Taiwan have shown a tendency to look at investment solutions denominated in domestic currency. However, a weak local currency trend was among factors that eroded part of the returns, resulting in a failure to meet annual yield targets.

The Taiwanese dollar fell 2.83% against the greenback in 2018 and has weakened another 2.1% so far this year.

To help the clients accommodate the return requirement, the French bank structured range accruals for the onshore Taiwanese market: a 10-year callable Libor.  It has already gathered a notional of $65 million.

The product was built to give out an additional yield of around 2% per annum, in the event of the Libor range remaining below 1.15% over the investment period. The trade was made possible due to collaboration between Societe Generale’s risk, trading, sales and structuring teams, says Miquel.

Financing footprint

Apart from its exposure in rates products for financial institutions and high-net-worth clients, Societe Generale expanded its footprint in the financing market as well.

Take for example, a project finance solution in for a large liquefied natural gas power project in Java, Indonesia. The bank acted as the sole contingent hedge provider and hedge provider for the project finance and offered an interest rate swap solution.

Societe Generale’s solution allowed the project company to pre-hedge its interest rate risk, three months before the project swaps had to be entered. The pre-hedging solution allowed a smooth novation of the companies pro-rata share of swaps to other hedging banks prior to the first debt draw down without additional credit charge or funding cost.

The bank’s structuring team worked closely with the trading and the corporate sales teams to identify and manage the risk involved in this pre-hedge in order to secure cost savings.

China access

In the past year, Societe Generale has also sought to expand to newer markets and one example is its increased focus on China.

As the second-largest economy opens up and its bonds and equities are included in global indexes, Societe Generale is adopting a two-pronged approach: expanding cross-border solutions and, at the same time, enhancing its onshore presence.

Miquel says while the bank primarily focuses on growing its onshore business in mainland China, the market also continues to be a cross-border play for Societe Generale, despite the removal of several major barriers.

He believes the growth is supported by a greater representation of Chinese assets on a global scale provided that foreign asset owners generally underinvest in China historically.

“The further opening up of the markets on the mainland would not change our positioning as a cross-border facilitator, in either direction. The opportunities linking up onshore and overseas players still largely exist because the ‘opening of the door’ happens in a gradual fashion,” he says.

Hedging products offered to foreign investors entering the onshore space is limited and this mismatch opens up opportunities for banks.

“We want our products to serve as a value-added proposition to clients hoping to gain exposure to onshore assets, for example via CIBM, on the back of inclusion of renminbi-denominated fixed income securities into several globally tracked bond indexes,” says Miquel.

He says a number of large-scale hedge funds are looking for opportunities to enter the onshore credit market as the nation’s debt is included in global indexes.

Bloomberg Barclays Global Aggregate Index on April 1 began adding Chinese government and policy bank bonds. The inclusion will eventually take China’s weight in the index to 6%, Bloomberg said in January. Chinese government bonds are also on a watchlist of bonds to join FTSE Russell’s World Government Bond Index (WGBI).

The Global Aggregate Index is tracked by $2.5 trillion of portfolio assets under management and a 6% weighting would bring $150 billion to Chinese fixed income. A 5% inclusion in WGBI will add another $125 billion of inflows.

The global index inclusion has bolstered fixed income flow in China in 2018 and Societe Generale has brought on board more than 20 new clients to the China Interbank Bond Market Direct platform. The resultant bond trading volume has climbed five times in the past year.

“The track record illustrated the efficient know-your-customer process and simplified onboarding procedures will bring more flows in 2019,” Miquel says.

The bank is also in discussions with the mainland regulator to facilitate the onshore development of the interest rate swap and bond futures markets.

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