Structured products house of the year: Crédit Agricole CIB

Asia Risk Awards 2023

Leon Lam

The past 12 months have been marked by aggressive interest rate hikes in the US and tepid equities markets across the globe. In this environment, many of the structured products traditionally favoured by investors in Asia have suffered.

Crédit Agricole CIB nevertheless saw an opportunity to innovate by marketing new types of structured products with payoffs that were indifferent to the direction in which the markets were heading. With its strong global presence, the bank was able to capture a host of trading opportunities across different markets and deliver them in tailored formats. These products have proved a hit with Asia clients in the risk-off environment the past year.

“We’ve shifted from payoff structures in the past to more non-directional strategies for clients,” says Leon Lam, Crédit Agricole CIB’s head of global markets for Hong Kong and its head of structuring and solutions sales for Asia-Pacific and the Middle East. “We capture the trend, and make sure they can have their yield-enhancement returns and be comfortable with the position they are having on these trades.”

Innovation in EGB markets

Amid Russia’s ongoing aggression against Ukraine and the growing concerns over inflation and recession in European economies, EU market investors have been rushing to buy core European government bonds (EGBs). The change in market dynamics has led to the yields on the bonds dropping below the repurchase rate of the same underlying.

Crédit Agricole CIB has capitalised on this by carrying out hundreds of millions of euros of bond forward trades across Asia to different clients and in various formats, depending on the needs of individual clients.

In a typical bond market, bond yields are usually higher than repo rates. This is because repos have a dual-recourse feature and daily margining, which reduce the risks, while the outright purchase of the bonds is subject to the credit risk of the issuer. To monetise the difference, an investor could buy a bond and sell it under a term repo agreement to capture the positive carry, similar to selling protection via credit default swaps.

When this relationship is inverted and the term repo rate is higher than the bond yield, the investor will need to reverse the repo in a bond to term and earn the repo rate, and then sell the bond forward at the same maturity as the repo. This enables the investor to earn the difference between the bond yield and the repo rate, while the forward sale gives credit risk protection on the bond – a positive carry trade with limited directional risks.

However, some investors face hurdles in assembling bond forward trades, such as access to specific bonds in the EGB repo market.

Crédit Agricole CIB’s strong edge in the EGB cash and repo market enabled it to offer such investors the opportunity to capture the carry through an assortment of product wrappers.

“The idea may sound simple, but capturing and transforming the idea into various trades involved a considerable amount of structuring work,” says Wing Cheung, the bank’s head of structuring, financial institutions, for Asia-Pacific. “We have probably adapted it into five to six variations for different clients.

“Managing these risks requires deep market knowledge in the repo market as well as proximity with clients, especially when some bonds become specials.”

Trading the CCP basis

Another non-directional market opportunity that Crédit Agricole CIB was able to monetise was the price difference between euro swaps cleared at LCH and Eurex, and between yen swaps cleared at LCH and the Japan Securities Clearing Corporation (JSCC).

A widening basis between similar instruments at two central counterparties (CCPs) suggests dealers are seeing a heavy bias towards payers or receivers in a particular tenor and facing higher margin costs as a result of not being able to find a natural offset.

Following the UK’s exit from the EU, the bloc’s regulators started to advise European market participants to trade as much as they could at Eurex instead of LCH, as the latter might no longer be a recognised clearing house – a matter that is still subject to debate. Anticipation of a Brexit-driven shift in euro swaps clearing from LCH to Eurex caused the basis between the two CCPs to widen in early 2023, on account of the bias among EU clients towards pay-fixed instruments.

“We identified the opportunity and, based on this, we traded our first Eurex/LCH basis trades this year,” says Fabien Lanneluc, Crédit Agricole CIB’s co-head of trading for Asia-Pacific and the Middle East, and its head of credit, non-linear, and repo trading for Asia.

For the CCP basis swap to work, Crédit Agricole CIB pays a floating rate at Eurex, such as the three-month Euribor, and receives a fixed rate; at LCH, it receives the floating rate and pays the fixed rate. The bank then passes on the basis to clients in the form of structured swap products.

In the second quarter of 2023, the bank traded a significant volume of the Eurex-LCH basis at a 10-year tenor with Asian securities houses, thereby capturing the widest point in the curve.

It has also traded a significant volume JSCC-LCH basis swaps since 2022, when yen swaps cleared at JSCC started to trade lower than those cleared at LCH.

JSCC now clears more yen interest rate swaps than LCH. Its membership largely comprises Japanese financial institutions and investment companies, and big international banks. Despite an influx of foreign buy-side firms in recent years through the client-clearing channel, many small foreign investment firms still do not have access to it.

Crédit Agricole CIB was able to leverage its access to both CCPs to move swiftly in early 2022 and offer clients JSCC-LCH basis swaps. “We gave access in an OTC format to securities houses and some active trading corporates that were looking for this kind of arbitrage opportunity,” says Lanneluc. “We also traded some structured note versions for banks and distributors whose clients were looking for yield enhancement.”