A capacity to absorb risk, wedded to a sharp sense of timing, has made HSBC a prize-fighter in foreign exchange. Its ring, Asia's foreign exchange market, is growing in size and sophistication, supported by deregulation in mainland China and innovation among global banks. HSBC has been swift to adapt in this rapidly changing environment and turn challenges into opportunities.
"Forex is the most liquid market, but lately we have noticed that this liquidity can suddenly disappear at a point in time. What sets us apart is that during such periods we were able to provide liquidity to our clients through our large internal pool of liquidity, hence we did not need to rely on the interbank market. This was something cherished by our clients," says Hossein Zaimi, HSBC's head of trading in Asia-Pacific.
One deal aptly demonstrates this advantage. Here, HSBC serviced a client-managing hedge fund and real money accounts that needed a very large renminbi derivatives trade transacted at a fixed price, but executed over a time period that threatened renminbi volatility. The size of the trade and time requested by the client made the deal unpalatable for a number of competitors, but HSBC was able to absorb the risk in its global business and transact with minimal market disruption.
The eyes of the Asian forex market fixed on Taiwan last year as new regulation was rushed through in reaction to a series of losses suffered by some corporates, which ran large target redemption forward (Tarf) positions that turned south as the renminbi tumbled against the dollar. The new rules ban the sale of long-tenor Tarfs that do not incorporate a stop-loss safeguard – forcing banks to innovate.
HSBC stole a march on its competitors by pre-developing a floored autocallable forward while the Taiwanese regulator and local banking association were still deciding upon the requirements. The structure incorporates a dual target redemption feature – automatically knocking out if either an upside target profit level is achieved or a downside loss limit is breached.
We were able to provide liquidity to our clients through our large internal pool of liquidity, hence we did not need to rely on the interbank market
One client at a Taiwanese corporate praised the product's downside protection, as well as HSBC's work in keeping them up-to-date on all trade terms, the risks involved and the worst-case scenarios. The bank has not stopped there. It has also rolled out an innovative 'reset' Tarf with an embedded spot-tracking feature that allows the client to improve the hedge rate in case of material favourable spot movements post-hedge.
Zaimi says: "Clients became worried that US dollar/Chinese yuan was no longer a one-way market. There were concerns from some clients that if the currency moved above a certain level they would be stuck with a hedge that was not performing. With the reset Tarf, the hedge rate is reset at a better level for the client once the spot price moves past a predefined threshold, so the client can improve on their original hedge rate if the market goes against them."
HSBC also capitalised on regulatory change affecting South-east Asian currencies - particularly in Indonesia, where Basel III regulations increased transaction costs at a time when the dollar was strengthening, and new regulations required corporates to hold 20% of net foreign currency liability hedged. "Both the market and external regulatory environment makes it more costly to do these hedging transactions," says Christophe Bouculat, head of foreign exchange structuring, Asia, at HSBC.
The bank sought to soothe the pain for one client through a cross-currency swap embedding a call spread. This works especially well for the current US dollar/Indonesian rupee market as it can be structured to have a wider protection range for the same price, and allows the client to buy dollars at the spot rate at maturity should it be more favourable than the hedge rate.
When the State Administration of Foreign Exchange in China permitted onshore corporates to transact structured derivatives products for the first time in August 2014, HSBC was quick off the mark to get a comprehensive product suite onto the market.
The bank's speed to market was richly rewarded. The number of active forex derivative clients almost doubled, with $800 million transacted within a month following deregulation. Total transaction volume from August 2014 currently stands at $5 billion.
What shines through all HSBC's transactions are the benefits reaped from having in-depth local knowledge of the Asian market – particularly in mainland China. One finance manager at an onshore energy company says: "HSBC, since the very beginning, has been sustaining a positive working relationship with us. There has been a series of tailor-made, flexible and effective structured products offered [and] their services are outstanding with highly practical recommendations."
The week on Risk.net, July 7-13, 2018Receive this by email