Derivatives house of the year, Taiwan: CTBC Bank

Asia Risk Awards 2023

Jack Wang, CTBC
Jack Wang, CTBC Bank’s head of treasury sales

Successive US interest rate rises over the past 18 months have afforded CTBC Bank the opportunity to demonstrate its capabilities as a Taiwanese structuring powerhouse, with a reach that extends far beyond the borders of its home market. The bank has also benefited from a reluctance of foreign players to become too deeply involved in Taiwan, amid heightened geopolitical tensions.

“In the past 40 years we have never seen this kind of aggressive Federal Reserve tightening,” says Jack Wang, CTBC Bank’s head of treasury sales division. “This has changed the risk management requirements of our clients, who are looking for new ways of hedging their liability exposure while at the same time managing their upside risk. It has also created new opportunities for our clients to take advantage of.”

One Asian market where such opportunities have been particularly obvious is in Japan. While the US Fed has been aggressively raising interest rates, the Bank of Japan has remained stubbornly wedded to negative interest rates. Japan’s short-term lending rate currently stands at -0.1%.

These divergent monetary policy stances contributed to significant price differentials between the two countries’ respective currencies. Throughout much of 2022, the Japanese yen weakened from 115.59 against the US dollar to a low 148.70 on October 14, before recovering some of its lost ground.

“We used this opportunity to do more deals in Japan with Japanese importers. This also helped to sharpen our risk management and warehousing capabilities,” Wang says.

For example, CTBC Bank, which serves Japanese clients through its subsidiary Tokyo Star Bank, was able to price long-tenor target redemption forwards (TARFs) on the market up to 10 years. This was something it had not previously done. As of April 23, CTBC Bank had executed 12 of these deals, to the tune of $100 million. This has allowed the Taiwanese house to offer Japanese clients hedging solutions at a much lower strike level than they were able to get before.

Having spotted this opportunity in Japan, CTBC has been allocating a lot of resources to go after clients in the country. Since many of the larger importers are already well-served by the country’s three megabanks, the Taiwanese player has largely been targeting the mid-tier segment of the market.

“These kinds of importers are most vulnerable to the USD/JPY differentials, and it is getting more expensive for them to do business as the yen weakens,” says Wang. “We were able to spot this opportunity in the market and book the trades on our platform, warehousing the risk rather than passing it on to the market.”

Managing risk precisely

Offering more complex products to its clients has been made possible, in part, by the development of an in-house treasury management system.

This platform allows pricing curves to be tailored to specific products and client needs, supporting different benchmark rate curves for the same currency and same product. For example, the system can accommodate compound SOFR, term SOFR, USD Libor curve and USD Libor fallback rate curves.

To reduce implementation risk, CTBC bank chose to introduce this treasury management system into its regional offices first. But, in August 2023, the system was rolled out to the bank’s Taipei headquarters – and that makes the bank’s pricing and booking model much more powerful.

“Getting the headquarters to manage this process allows us to deal with more complex trades. Our multi-dimensional pricing curve can really help us manage the risks in a more precise way rather than just playing a guessing game,” says Wang.

Seeking capital efficiencies

Something else that CTBC Bank has been working hard on this year is to reduce Basel capital charges for commodity products. Regulation, particularly capital charges, has made it increasingly expensive for banks to operate in commodities markets in recent years. But the regulatory cost burden was further exacerbated by the conflict between Russia and Ukraine, which sharply raised the volatility in commodity markets.

“The Ukraine war has made energy prices much more volatile and, as a result, we have seen much higher capital charges being recorded in our books,” says Wang.

To help control surging regulatory capital costs, CTBC Bank undertook a review of product correlations, and sought approval from its risk management department for the introduction of new correlation parameters. One example was switching to calculating various risk parameters, such as delta and gamma, rather than simply duplicating capital add-ons for both long and short underlyings. Correlation parameters were also adjusted to better match prevailing market conditions.

“In the past we may have used a correlation that was too conservative, or we did not distinguish between different correlations,” says Wang. “By adjusting our product correlations, we have been able to significantly improve our capital efficiencies.

One of CTBC Bank’s clients in south-east Asia is a leading oil refining company, which frequently trades the price difference between crude and refined oil, known as the crack spread.

Previously, CTBC Bank used a one-day correlation as the model parameter, but after some investigation decided to switch over to a 20-day correlation. This matched the client’s other exposure in Asia’s oil swap market, where the fixing depends on the average price of the underlying asset over a period of time.

CTBC Bank claims this correlation tweak allowed its client to reduce its limit utilisation from 81% to 62%, thus helping the firm to put on more trades. The client has concluded 44 deals, with a notional amount of around $200 million, since the enhancement was made.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact or view our subscription options here:

You are currently unable to copy this content. Please contact to find out more.

Anti-fraud product of the year: Moody’s Analytics

In a competitive landscape that demands robust risk management and compliance solutions, Moody’s Analytics has emerged as a standout vendor, securing the Anti-fraud product of the year award at the Risk Technology Awards 2023

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here