Interest rate derivatives house of the year: Standard Chartered Bank

Risk Asia Awards 2025

The team at Standard Chartered

The past 12 months have borne witness to a role reversal between developed and emerging markets (EMs). While the US Federal Reserve has held steady on rates, Asia’s EMs are benefiting from easing inflation and a weaker dollar – conditions that have supported more accommodative monetary policies.

“In a way, it is as if the US has become the EM market, with high yields, high inflation and high volatility whereas the EM space has low rates, low inflation and low volatility,” says Mathieu Lépinay, global head of macro structuring at Standard Chartered Bank in Paris. “This is a complete flip from the last 20 years. A key driver is that the US-China trade war has led China to export its surplus capacity – and deflationary pressures – to the rest of the EM world, which is allowing their central banks to cut rates.”

For Standard Chartered Bank (SCB), with a client footprint that spans the region’s emerging markets, the trend has meant some changes to its interest rate solutions business. 

The interest rate solutions the UK lender has extended this past year still bear the hallmarks of classic SCB trades. They often involve flows in and out of Asia, as well as bespoke structures, using derivatives in far-flung, difficult-to-access, illiquid markets.

But whereas before SCB would provide solutions for clients looking to raise financing in the West, this year many of the bank’s clients have been looking towards Asia’s emerging markets for their funding needs. Likewise, clients investing in emerging markets are increasingly looking to more complex structures for yield enhancement.

“This theme has led us to adapt our traditional derivatives offering,” says Lépinay. “We’ve seen it unfold in many types of trades, whether it’s for investment, funding or hedging.”

New EM trades

One example is the trades SCB has done on the back of structured interest rate products issuance. The interest rate environment in emerging Asia over the past 12 months has led to higher demand for these products in currencies such as Korean won, Malaysian ringgit and Thai baht, with investors in the region looking to lock in rates and volatility prices at the start of 2025, as both began to trend lower, in exchange for higher coupons.

Matthieu Lepinay, Standard Chartered Bank

One bank client in Thailand was looking to hedge the market risk on the back of long-dated THB callable fixed rate investments that it was offering to onshore investment clients. SCB provided the THB callable swaps that the client needed to hedge the risk from these notes, while the bank’s ability to then recycle its own THB rates risk through global hedge fund clients enabled the bank to quickly scale the business. 

“The challenge here in many EM markets, and especially when you get to frontier markets, is the liquidity and how to create capacity for this type of position with the right structures,” says Lépinay. “We printed quite a sizable number of trades at the beginning of this year. Given the level of yields and the need for pick up, this is a business we’re seeing grow more and more.”

SCB has also used the dislocation between interest rates in emerging Asia and the West to deliver bespoke collateralised solutions to clients for cheaper funding.

In one transaction SCB provided short-term financing to its corporate clients in Vietnam. These clients had excess cash from their US dollar and were looking to borrow VND to finance their operations. SCB provided the financing using the clients’ USD deposits as security, which helped the loan to be priced in a more cost-efficient manner. Additionally, the USD deposits could be used by SCB to synthetically generate liquidity for the loans through the FX swap market.

“So, they can place that as collateral and then borrow against it,” says Alexandra Lombard, head of macro structuring for ASEAN at Standard Chartered Bank in Singapore. “The collateral helps reduce the overall credit spreads and pricing on that borrowing that they take. And, in some cases, that dollar liquidity that is placed as collateral can also be used to generate VND funding by SCB.”

We printed a sizable number of trades at the beginning of this year. Given the level of yields and the need for pick up, this is a business we’re seeing grow more and more

Mathieu Lépinay, Standard Chartered

Another deal saw SCB offer a structured investment to another corporate client that was looking for an enhanced yield on its USD deposits, which was then similarly used to secure a short-term loan facility denominated in offshore renminbi.

“In this case, they looked at a China access investment, but denominated in USD. So they can earn a high yield on that [USD denominated investment] and, again, pledge that as collateral and borrow in CNH, where the yields are much lower and also matches their working capital requirements,” says Lombard.

“These trades are not something we’ve historically seen,” says Amine Triki, managing director, global head, structured rates trading at SCB. “But given the dislocation between EM and US, we’ve seen increased activity in that space.”

Asia spread

There has been a second big theme for SCB’s rates business in the past year: it is the divergence between government bonds and swaps seen across many Asia markets.

The difference between government bonds and interest rate swaps – known as the swap spread – has been in negative territory in the US for many years, and for a variety of reasons. But in Asia, this is a relatively new phenomenon, and one that has underpinned a lot of the client activity the bank has seen in terms of interest rate solutions in the past 12 months.

“It’s a pattern we see across many other markets but are starting to see it also in some Asian currencies, and it’s really impacted our business,” Triki says.

One impact is that SCB has begun to adapt its core offering away from bread-and-butter swaps markets and going towards more exotic rates products, such government bond-linked options, targeting private bank clients in particular. Lacking an equities solutions franchise, the private bank client segment has long been a challenging one for SCB to crack. But the bank’s strengths in fixed income have helped it to capitalise on increased demand for bond-linked structured notes. 

Triki says SCB has issued around 2,000 notes in the past year-and-a-half with a total value of roughly $3 billion issued in 2024, and $1 billion in the year to date.

“In the past couple of years, we’ve onboarded a large number of new distributors of structured notes. And one specific business where we differentiate ourselves has been bond-linked or bond option-linked notes. They are pretty simple, but a nice way of taking advantage of the increased volatility in the government bond space.”

In trading it’s a balance between how to correctly manage the risk so that we can scale up the business and manage a very large amount of these options and large numbers of trades coming in daily

Amine Triki, Standard Chartered

Triki explains that bond volatility trades infrequently and so can be difficult to hedge, but the bank can find some offsets in the listed futures and repo markets. Singificant investment has also been made to reduce manual inputs into pricing, with the development of an automated valuation tool that helps SCB to execute trades faster. 

“So, in trading it’s a balance between how to correctly manage the risk so that we can scale up the business and manage a very large amount of these options and large numbers of trades coming in daily,” he says. “So that’s partly automation, and partly managing the gross risks through listed and OTC options and managing the long-dated repo around it, while keeping room to grow the book even further.”

The dislocation in the bond and swap markets has also driven demand in a more traditional business for SCB – market access trades. Here, for example, SCB can help offshore investors based in Hong Kong or Singapore to buy onshore renminbi (CNY)-denominated bonds issued by policy banks and local banks and swap them into dollars for enhanced yield.

“It’s one big theme that has made a comeback, these types of access trades,” Lépinay says. “Previously, it was driven by a demand for dollars in the onshore markets, but this time what we observe is that it tends to be almost more policy driven, where a sustained divergence between FX swap versus local currency bonds attracted significant inflow of foreign portfolio investment.”

The bank has done similar types of business in other emerging markets across the region as well, when opportunities present themselves. SCB’s ability to deliver such solutions in a variety of illiquid and difficult to access markets is made possible by the bank’s deep onshore presence and product capabilities across the region.

“We’ve seen dislocation between the local currency bond markets and the swap market in Indonesia as well, which is more niche, but attracted a lot of interest,” adds Lépinay. “Because there we saw that the short-dated Bank of Indonesia paper could swap for as much as SOFR plus 120 [bp].”

“Accessing the relative value of these markets often requires some operational set-up. It is always best for investors to be prepared, and ready to move when the opportunity comes.”