Equity derivatives house of the year: UBS

Pooling equity derivatives and wealth management skills enabled bank to recycle risk to meet client demand

Bilal Al-Ali (left) and Thomas Fang, UBS

UBS enjoyed a strong year in Asian structured products, maintaining its number one position in Hong Kong warrants issuance and its top position as provider of multi-index autocallables in South Korea. It also continued to be the largest equity-linked notes provider in Taiwan and established a foothold in the Japanese fund distribution market.

Underpinning the successes in Hong Kong and South Korea in particular has been the partnership between the global equity derivatives team and the wealth management division in the region. The collaboration resulted in record notional traded in structured and over-the-counter products in the past 12 months. The partnership led to 10 major cross-divisional product launches, geared towards its ultra-high-net-worth segment totalling $2.3 billion, all of which were heavily oversubscribed.

One aspect proved particularly successful – the combination of the bank's booming China business with a renewed focus on its risk-recycling infrastructure, which resulted in a note linked to Chinese assets that was snapped up by wealth management and South Korean investors.

The bank structured a fixed-rate coupon note linked to Chinese assets, which pays out less as more of the companies making up the note default on their bonds. All of the linked assets were of high quality so clients looking for cash alternatives flocked to the product. The clients accepted the risk-reward profile of the product compared to other cash alternatives while the investment bank was able to sell on some of its exposure to the Chinese market and its wealth management division was able to reduce balance sheet, easing its liquidity coverage ratio burden.

"The ultimate risk-recycling product is one that needs to be a win for everyone. We believe the fixed-rate coupon note we did with wealth management and our clients in South Korea ticked all the boxes," says Bilal Al-Ali, Hong Kong-based head of quants and structuring for Asia at UBS.

"It helped us grow our China business," he continues. "It ticked the box because wealth management could benefit because of the liquidity coverage ratio (LCR) relief. It had a cash alternative part in offshore yuan and this was the only one we've seen in that currency. The clients that bought the product benefited from some of the best yields available."

The establishment of mutual stock market access between the Shanghai and Hong Kong stock exchanges prompted another collaboration between the investment bank and wealth management division. Together they developed a product to capture the narrowing of the discount gap between Shanghai-traded A-shares and Hong Kong-traded H-shares.

Before the link began operating in November 2014, A-shares were trading at a huge discount to the offshore H-shares and UBS created a product that monetized the view that this difference would collapse. The product offered investors exposure to A-shares and the ability to short H-shares. The launch raised the full $100 million quota and provided returns of close to 20% – some clients garnering returns as high as 50%.

"This is a perfect example of us leveraging our extensive research offering and promptly delivering a tangible offering for investors," says Thomas Fang, head of intermediary and Greater China sales at UBS.

At the same time, the ability of the bank to recycle risk also placed it in a strong position in Hong Kong's warrants market. By being able to match up wealth management clients looking to sell volatility with retail and hedge fund clients looking to buy volatility, UBS was able to take advantage of a surge in volume during April's bull run and offer prices when other banks could not. The firm, which held more than 15% market share in 2014, boosted this to almost 30% of warrants sold in April 2015.

"As a result of the risk recycling and our private banking network, during the most volatile times in the past 12 months, which includes the China boost in April and the volatility in June, we were able to offer structures when many of our competitors were looking to pull out," says Al-Ali.

"We kept the momentum going acting as a swap counterparty for white labelling, we showed competitive levels on our accumulators and fixed-rate coupon notes, and we dominated institutional flow and had 300% more notional volume than last year," Fang adds.

In short, the bank has had a strong year across all lines of its business, according to Al-Ali. "We've led the way this year. I don't think there's a component of the equity business in Asia-Pacific where we're not a major player or leading the way. Our revenue, and profit and loss are excellent. We've got the right business model, our Tier 1 capital is up again and things are looking good for equity derivatives," he says.

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