Currency derivatives house of the year: UBS

Risk Awards 2025: Access to wealth management client base helped Swiss bank to recycle volatility and provide accurate pricing for a range of FX structures

Left to right: Mathieu Reaud, Adrian Boehler, Adrian Bracher and Natali Blondeau

Photo: UBS

The job of a liquidity provider – to take and recycle risk – is largely dependent on having a diverse client base with opposite interests that can be matched off. This often entails pairing interest from a hedge fund with that of a corporate.

This year, though, foreign exchange options markets were directional across a range of currency pairs, meaning many liquidity providers struggled to find opposite interest.

Many, but not all.

UBS’s access to wealth management clients, buoyed by the integration with Credit Suisse, provided the ideal avenue for the bank to internalise risk and monetise flows in a challenging year.

“This year, focusing on the wealth franchise, I think it’s been important as it defines ourselves, and has become a sizeable part of our inventory of risk that we then recycle with the rest of the franchise,” says Mathieu Reaud, global head of FX derivatives trading at UBS.

This capability was demonstrated during the first half of this year when activity in the Swiss franc jumped. The Swiss National Bank was the first of the major economy (G10) central banks to cut interest rates, resulting in big swings in currency volatility. It has also led to significant demand in FX options on US dollar/Swiss franc from hedge funds through vanilla structures and simpler exotics like call spreads and digitals.

UBS was able to service this demand by tapping into the ready supply of volatility from its wealth management and private bank clients. This meant the bank could source liquidity and price more consistently at a time when the cost of hedging overnight volatility was surging.

With that steady supply from wealth, which we can then recycle through the natural demand there is from institutional, it means we can be a much more competitive seller of vol

Mathieu Reaud, UBS

“Having access to this source of Swiss franc volatility from the wealth franchise was key to providing liquidity to institutional firms,” says Reaud.

Wealth management clients buy zero-cost structured products like FX accumulators, where the holder is exposed to a currency pair with a series of staggered settlement dates. A related product is the target redemption forward, or Tarf, which gives the holder exposure to a currency at an enhanced exchange rate.

These products offer wealth clients better yields on their underlying holdings. They also mean the clients are selling volatility to the dealer. An example of how this works is in US dollar/yen Tarfs, which have been a popular trade with wealth managers, UBS says.

In this scenario, the clients sell yen at a strike that is more favourable than the forward rate. This enhanced rate comes with selling downside volatility as the client is exposed to adverse exchange rate fluctuations. Once the strike is hit, the product knocks out and the client has the choice to restructure.

Before the Bank of Japan meeting at the end of July, which sparked a mass unwind of the carry trade, wealth managers had been adding to their Tarf positions, supplying UBS with volatility they could sell to hedge funds and asset managers.

“We had a lot of supply coming in opportunistically from the wealth franchise,” says Reaud. “[From this] we traded some sizeable downside options with real money accounts who were hedging their underlying positions.”

“With that steady supply from wealth, which we can then recycle through the natural demand there is from institutional, it means we can be a much more competitive seller of vol,” he adds.

Trades with wealth management clients are not the only source of volatility for the bank. Corporate client advisers have also been trading flexible forwards, a type of option contract that allows them to exchange currency at a set rate at any time during the life of the trade.

UBS says volumes of accumulator trades with global wealth management clients grew 30% year-on-year, while the total number of wealth management clients trading these products increased 40%. Meanwhile, the trade count from flexible forwards with corporates is up 60% year-on-year.

Landmark deals

On the institutional side, the Swiss bank achieved notable success in US dollar/Turkish lira trades, Reaud says. For hedge funds, the currency pair provided significant carry opportunities as the Turkish lira has not depreciated as quickly as anticipated, given how the interest rate differential was reflected in forward market pricing. These options trades would, therefore, bet that the forwards price was wrong.

However, buying outright call options became expensive and dealers found themselves constrained around capacity. Instead, exotic FX options like digitals became a popular, and cheaper, way for UBS to cater to demand.

“The volumes we’ve seen have been exceptional and [digitals] have been one of the best tools the market has found to operate within the constraint that banks and hedge funds have on their capital utilisation,” says Reaud.

The bank’s ability to provide ample liquidity in a low volatility environment was appreciated by one UK-based hedge fund client.

“We’ve found that UBS can source and supply liquidity better in certain markets than other banks,” the client says. “For example, in US dollar/Turkish lira, they were able to find local supply to offset our risk, whereas other banks had to show wider prices.”

We started the journey in wealth because that’s the biggest audience we have, but we are in the process of rolling out exactly the same philosophy to the corporate bank and the corporate client advisers

Adrian Boehler, UBS

The bank also provided a unique solution for a Chinese ‘unicorn’ corporate client that needed to hedge a large offshore renminbi (CNH) exposure. The client was prohibited from collateralising through a credit support annex, and given the size of the hedging programme, they would often face credit-constrained liquidity providers.

In response, UBS worked on creating a one-year spot margined FX forward where the exposure would periodically reset based on the movement on USD/CNH spot every three months. It created the effect of a collateralised position, as cashflows were determined by the movement in spot, covering up to 90% of a typical variation margin exchange.

Gaurav Pugalia, head of macro structuring for Asia-Pacific at UBS, explains that the team took inspiration from the interest rate market, such as a resettable cross-currency swap, for the structure. Here, he says the trade contained some residual mark-to-market exposure due to the forward point moves, but the volatility mostly lied in spot.

“By resetting the forward every three months, it neutralises the spot moves and it doubles our credit capacity in comparison to a vanilla instrument,” he says.

The transaction was worth around $800 million notional.

Scaling up

While wealth managers and domestic Swiss corporates have always been a key client group for UBS, the acquisition of Credit Suisse last year and its integration has expanded the pool of clients that its FX derivatives team can draw from. The wealth management business now represents $4.26 trillion of invested assets, as per UBS’s third-quarter results.

“The integration hasn’t so much changed our strategy, but it’s certainly accelerated the strategy because it has given us an increased footprint and scale in these two important areas where we were already very focused on,” says Adrian Boehler, global head of macro distribution at UBS.

25%

Percentage rise in total FX derivatives trading volumes year-on-year

Over the past year, the FX business has focused on delivering liquidity to clients of the former Credit Suisse franchise. Starting with linear derivatives and vanilla FX options, the team worked on connecting the bank’s pricing systems to clients still running on the previous Credit Suisse infrastructure. It completed the first phase of the project at the end of June, and by the end of September the bank had connected clients to its pricing streams for all structured forwards and some exotics.

In addition to boosting the bank’s reach in the wealth management sector, the integration has further opened the door to third-party client advisers that also service domestic Swiss corporates.

“We’ve found that they [corporate client advisers] are, by and large, on much of the same infrastructure as the client advisers in wealth,” Boehler says. “We started the journey in wealth because that’s the biggest audience we have, but we are in the process of rolling out exactly the same philosophy to the corporate bank and the corporate client advisers.”

The integration has given a fillip to FX volumes and revenues. Total FX derivatives trading volumes have risen by 25% year-on-year, and revenues from FX options trading in 2024 are currently positioned within the top three best trading years, out of the last 12 years, UBS says.

New for Neo

Another focus for UBS is its proprietary FX execution and analytics platform, Neo FX Options. The platform supports 350 options payoff structures, across 550 major and emerging market currencies and precious metals, for over 2,500 clients. External clients traded $215 billion notional of FX options on Neo, as volumes rose by a quarter in the year to end-September.

The team has sought to further improve the platform’s pre-execution capabilities. To do so, UBS hired and set up a specialist team of quants to develop algorithmically created volatility curves.

These new curves can process a larger number of data inputs such as realised spot volatility, target Greeks, and position data across its franchise. Depending on the position of the book and whether traders want to reduce risk or add a bias to their position, the algo will be able to automatically skew the bank’s price while minimising its market footprint.

“It allows us to skew pricing and offer liquidity, aiming it towards target positions that we want,” says Reaud.

Furthermore, the algorithms enable the bank to mark illiquid crosses more accurately. This includes using ‘liquid parent’ currencies that have event weightings fed into them. Traders can opt to use a fixed correlation for the cross or a correlation created by the algo. This enables the bank to tightly price more esoteric currency pairs that lack an interdealer primary market.

The bank says it can electronically price at least 90% of its clients’ options requests.

Neo FX Options also boasts pre- and post-trade analytics that help clients optimise when and how to trade. The platform has a two-variable pricing grid tool where clients can simulate the changes of the value of a trade, depending on shifting parameters like changes in spot, expiries and volatilities.

“For pre-trade, you could do sensitivity analysis about how the price changes to identify the ideal entry point that you’re aiming for,” says Edoardo Dimitri, head of macro structuring for Europe, the Middle East and Africa at UBS.

“For existing trades, you can do scenario analysis about how the valuation of the product will change during the course of its lifecycle, based on market conditions, when to unwind, and when to replace with another product,” he adds.

One US-based proprietary trading client describes the analytics delivered on Neo FX Options as “the best out there”, especially for exotic options.

“They are very good at pricing everything from dual digitals to strikeless products like forward volatility agreements, variance swaps, and puts and calls on volatility swaps, and you can run the price of those on a grid on Neo yourself,” the client says.