HSBC has never been terribly interested in hoovering up market share for the sake of it, yet for the sheer breadth of its regional franchise – from the vast array of single-stock warrants it can quote on for Hong Kong and Singapore's many private banks to long-dated, local currency rates products for regional insurers in South-east Asia – HSBC is unrivalled.
Nowhere was this more evident this year than in one of the bank's key markets, Hong Kong equity-linked products. In some of the choppiest trading the region's equity markets have seen post-crisis, with the CSI 300 and HSCEI indexes suffering several intraday falls in excess of 5% during early and late July trading, Hong Kong-based clients report that the bank was still able to show prices on its full array of single-stock warrants and callable bull/bear contracts (CBBCs) at a time when other houses' spreads had blown out to unhittable levels.
Nicola Pantone, Hong Kong-based head of institutional equity derivatives sales for Asia at HSBC, credits the bank's ability to continue pricing tightly during the July rout on its strong culture of rigorous risk management and its intelligent recycling of directional flows.
"When you see more volumes, you tend to generate bigger axes and sit on bigger risks," he says. "You have to be able to stay on the right side of that. We take hedging and risk transfer extremely seriously; we haven't suffered from any of the downside market moves we've seen recently. I don't think many other houses can say that. In the warrants market, once the sell-off started, volumes collapsed but because most of the risk had already been transferred on our side, we were relaxed about our ability to keep showing prices and service clients."
The bank prides itself on its ability to offload its directional axes to a broad sweep of global players, from hedge funds looking for tactical trading opportunities in exotic equities to regional insurers, wealth managers and pension funds looking for alternative sources of yield.
When you see more volumes, you tend to generate bigger axes and sit on bigger risks… We take hedging and risk transfer extremely seriously
"We look at risk transfer in several different ways," says Pantone. "A large part of it is about finding natural buyers and sellers across different client segments. I think it's a matter of not running siloed businesses; if you run your warrants business as a stand-alone enterprise, then you'll tend to hedge by going directly to the market so you probably miss those opportunities to go looking for natural buyers that can take advantage of it."
That commitment to thoughtful risk recycling has won praise from hedge funds and other asset managers, many of whom have taken bespoke parcels of risk off the dealer's books this year - and turned a handsome profit in the process. Many credit the bank with highlighting dislocations on HSCEI volatility and skew before other houses. Coupled with its ability to offer tighter pricing than rivals with smaller single-stock franchises, it makes for a potent combination, say clients.
"For single-stock swaps on Hong Kong underlyings, I'd put HSBC in first place," says a client at one Hong Kong-based asset manager. "It has such a big local warrants business that it can naturally show more names in that space than anyone else."
"It can price better and more tightly than others on HSCEI swaps because it has such big axes," agrees a hedge fund manager. "That's been an interesting story this year."
Pantone says July's trading conditions actually created some of the best tactical trading opportunities for clients this year.
"On the institutional side, we saw an opportunity to take advantage of a dislocation in HSCEI skew. The large supply of HSCEI volatility tends to be driven by structured products sold in Korea. When you combine that with a near 25% sell off in HSCEI, we saw a massive switch of vega exposure on the Street from the Kospi 200, Euro Stoxx 50 and S&P 500 into the HSCEI. The vega supply suddenly became huge. We worked quickly to capture that side of the business and present opportunities to our clients," he says.
The bank's strengths in risk recycling extends to other markets too, say clients, including those where it has historically lagged larger European peers, such as in Uridashi products in Japan - but where it is fast catching up.
"It is never the most aggressive, but it is always very fair," says one trader at another hedge fund manager. "It is consistently excellent on pricing for Nikkei swaps. It doesn't hide behind pricing like some houses."
Far from seeking to defend its dominant share in single-stock warrants and other retail products popular with the region's ultra-high-net-worth investors at all costs, HSBC has been in the vanguard of a group of dealers embracing the region's keenness to move to a multi-issuer platform model. The bank was one of the earliest backers of Contineo, one of several competing platforms that allow rival dealers to give on screen prices to private bank clients for several popular flow products.
Pantone is sanguine on the prospect of multi-issuer platforms cannibalising the bank's dominant market share by allowing smaller players a slice of the action, instead choosing to focus on the time the initiatives will free up to allow for a deepening of the bank's relationships with its network of private bank clients.
"I don't think it will jeopardise or change massively the way we do business, or cannibalise our flows," he says. "Our business model will remain the same, and I think margins will remain broadly similar. For us, it's about adding a level of scalability with the private banks. By making our workflow far more efficient, it allows us to focus on the real value adds for our clients: innovation, trade ideas and developing new types of payoff, for instance."
HSBC's footprint in mainland China meant it was perfectly positioned to take advantage of the regulatory thaw initiated by the State Administration of Foreign Exchange in July 2014. For the first time onshore corporates were permitted to transact structured derivative products and the bank wasted no time making sure it was in a position to deliver when the changes came into force that August.
"Within the first month, not only did we roll out a pricing platform into China but we also provided sales education, performed documentation reviews and obtained product regulatory approvals, as well as established support and control functions including an automated dual-language term sheet feature. HSBC's fast reaction saw it leap into leadership role among foreign banks with impressive volumes," says Christophe Bouculat (pictured), head of foreign exchange structuring, Asia, at HSBC.
The bank's speed to market was richly rewarded. The number of active forex derivatives clients almost doubled with $800 million transacted within one month of deregulation. Total transaction volume from August 2014 stands at $5 billion.
HSBC further impressed in the foreign exchange arena with an innovative range of target redemption forward products aimed at a Taiwanese market undergoing rapid regulatory change – including a "reset" iteration allowing clients to recalibrate their hedge if spot moves significantly against them.
Fixed-income products have also been a major growth area for HSBC this year. In January 2015, the bank rose to the top of Bloomberg's ALLQ rankings for G3 credit trading in Asia. Between January and the end of July, the bank executed enough to claim top spot in the dealer rankings for six consecutive months. Last year, the bank's position fluctuated between second and thirteenth. In CNH credit trading, the bank also scored top spot by notional value of deals sold in the same period.
In rates, the bank has benefited from an increased trend among retail punters towards hybrid products, as well as tapping new sources of demand from institutional buyers across multiple South-east Asian jurisdictions. William Shek, HSBC's head of credit and rates for Asia-Pacific, argues the bank has been able to capitalise thanks to a combination of its structuring expertise and a sizeable presence in every local currency market.
"Regional demand for rates products has been growing this year," he says. "We've seen a lot of inbound requests from markets like Thailand, Malaysia and Korea. Two or three years ago, you wouldn't have seen so much demand from the region. We have seen rising demand for longer-dated products from the likes of regional insurers, who were willing to move down the curve and take some structuring risks to achieve their target yields. To offer long-dated yield enhancement products requires structuring know-how and a local currency balance sheet - and not many houses offer that."
The week on Risk.net, July 7-13, 2018Receive this by email