Equity derivatives house of the year: UBS

When China’s stock market came roaring back to life last year, UBS was perfectly positioned, with its leading equity derivatives franchise, to capitalise upon the revival in international investors’ appetite for China exposure.

Last September, major stock indexes in China saw their largest single-day gains since the 2008 financial crisis, after Beijing announced a package of measures to boost the economy. The markets then rallied again in February this year, fuelled by Chinese start-up DeepSeek’s breakthrough in artificial intelligence, and also in April, off the back of easing tariff tensions.

Even juicier returns were on the table for UBS’s international clients – such as long-only funds, hedge funds, insurance companies and superannuation funds – which took exposure through derivatives, rather than owning the securities outright. This was especially true for China’s small-cap CSI 1000 index, which has jumped by over 60% since last September.

“China was the big focal point, particularly because of last year’s Q4 rally, DeepSeek, and then also the [US] tariffs,” says Shane Carroll, head of Apac derivatives strategy. “That’s where we saw the bulk of our flows, particularly in CSI swaps and options, which is something that UBS is very strong in.”

Hedging of market neutral strategies had created a dislocation on the CSI 1000 that UBS could monetise for its clients with equity index swaps and options. Index swaps are a popular product for market neutral strategies. Due to limited availability of hedging instruments for international investors, the borrow cost on these products is elevated, and that translates into higher outperformance rates that UBS can provide to clients that are long Chinese indexes.

For example, an investor who goes long on a one-year CSI 1000 swap could, at certain points this year, receive an outperformance of up to 17% on top of the total return of the index, while paying the US dollar secured overnight financing rate (SOFR).

The outperformance can also be further monetised through options, either using the rate to fund a put option or reduce the premium on call options, says Carroll.

While the bulk of the option pricing benefit comes from the outperformance rate, UBS is particularly well placed to offer competitive pricing because of the size of its China equity derivatives business and ability to quote a wide range of indexes.

UBS also has a wholly owned subsidiary in onshore China that is active in equity structured products, and can therefore provide valuable insights to the investment bank on such trends in the onshore of equity derivatives market.

“We fully leverage our entire franchise to offer clients trades that capitalise on this market dislocation, thereby monetising the outperformance rates,” says Alistair Holroyd, head of equities derivatives institutional flow, Asia ex-Japan.

“It’s truly a broad-based collaboration across the bank, involving the derivatives desk, the delta-one desk, strategists and our global distribution teams.”

Holroyd adds that these types of trades have been popular not only in Asia, but with clients across the globe – from the US and Europe, and even to South America.

We fully leverage our entire franchise to offer clients trades that capitalise on this market dislocation, thereby monetising the outperformance rates

Alistair Holroyd, UBS

Consistently competitive

Hong Kong’s equity structured products market has also recovered in the past 12 months, following several years of muted flows while China stocks were stuck in a bear market.

“Since September last year, we’ve seen better client flow from private banks compared to the previous year,” says Lin Qian, head of Apac equity derivatives & QIS structuring. “In particular, we’ve seen around a 30% pick-up in client activity in Hong Kong.”

UBS boasts one of the largest structured product flow desks on the street in Hong Kong, where the most popular products among private bank clients include fixed-coupon notes, autocallables, accumulators and decumulators.

One of UBS’s private bank clients praises UBS for being consistently strong and competitive in its structured product pricing, noting that some other dealers would be very active at certain times in the past year, but then pull back from the market at other times.

Romain Barba, head of structuring, Asia-Pacific, says that part of UBS’s strength in this product segment stems from collaboration with the investment bank’s wealth management business. Another advantage, he adds, is the bank’s ability to recycle risks through bespoke structured trades for its hedge fund clientele.

“Proximity to [UBS] wealth management allows us to test payoffs early. As the region’s largest wealth manager, when UBS decides to distribute a new product, a new payoff structure, some other distributors will follow suit. This proximity fosters innovation,” says Barba.

One example of a new payoff from the past year is the Quanto-Gold fixed-coupon note, launched with UBS’s wealth management clients in Q3 this year. The note allows the investor to hold an exposure to gold while earning a periodic yield. This means the investor can benefit from gold price appreciation, but also receive physical delivery of equity shares if the product knocks-in. If not triggered, the client receives its investment amount adjusted for gold performance delivered by via a gold exchange-traded fund.

Since September last year, we’ve seen better client flow from private banks compared to the previous year. In particular, we’ve seen around a 30% pick-up in client activity in Hong Kong

Lin Qian, UBS

UBS has also seen increased flows on Hong Kong listed options and structured products – particularly on Chinese tech single stocks – on the back of the rally in China equities. In Hong Kong’s market for listed structured products, such as derivative warrants and callable bull and bear certificates, UBS has maintained its leading position.

“This year, we’ve seen a strong uptick in flow on single stocks compared to the index,” says Vassili Reperant, head of public distribution Apac.

“The real change has been coming from DeepSeek, where we really saw a change of mindset and an understanding that there were low valuations and something interesting to play for in China, and especially regarding tech companies.”

Diversifying distribution

UBS has done much more than simply play to its traditional equity derivatives strengths in Asia over the past 12 months, however. The bank has also been busy broadening its distribution business by rolling out new product innovations to new types of clients in new markets. One example is the breakthrough the bank has made with fixed index annuity (FIA) products with insurance clients in Singapore and Hong Kong.

FIA products have long been popular with insurers in the US and Japan. Like a regular fixed annuity, the products provide policy-holders with a guaranteed minimum coupon. However, FIAs differ slightly in that they also benefit from upside, typically through a derivatives exposure linked to a custom-made index.

In the past year, UBS has won several mandates with life insurance companies’ fixed index products linked to the S&P 500 Engle Series, a custom volatility control index that the bank developed in close collaboration with S&P Dow Jones Indices and Robert Engle. Engle won the Nobel Prize in Economics in 2003 for his statistical modelling work on short-dated volatility prediction. The S&P 500 Engle Series uses a range of forward-looking indicators derived from Engle’s work to rebalance intraday, rather than waiting until close of business to adjust the calibration. This enables the index to react more quickly to changes in market volatility versus a traditional end-of-day vol control mechanism.

The innovation quickly grabbed the attention of life insurance companies in the region. To date, the index has been used to provide equity exposure for a nine-year fixed index endowment for a Singapore-based life insurer, as well as an Index Universal Life product with a Hong Kong-based lifer. Principal protected notes were also traded with the chief investment officer of an insurance company as a market beta replacement going into April’s ‘Liberation Day’ selloff.

One insurer client says that, while UBS is not the only bank that offers a volatility-controlled index, they chose the S&P Engle index because its index showed better results in backtesting.

“With the innovation where we work with professor Engle, we are coming into the market with a cutting-edge product that brings the volatility-control indices to a new level,” says UBS’s Lin.

Thailand’s structured products market provides another example of how UBS has diversified its equity derivatives distribution business into new channels.

“We’ve started expanding our footprint in Thailand,” says Lin. “Over the last year, we’ve established connections with a number of issuers, and they’re now distributing our notes or heading back-to-back with us.”

UBS recently contributed the derivatives component of a structured fund on dispersion, which was developed in collaboration with a local asset manager in Thailand.

The structured fund is a market-neutral strategy that involves buying a lookback call option on dispersions of several baskets of stocks. The products theme is the ongoing tariff war, with the constituent stocks of one basket selected on the basis that they are tariff-resilient and the constituent stocks of the other on the basis that they are exposed to tariffs.

“This year, we’ve continued our strategic diversification of clients, and made a strong entry into the Thai market with innovative payoffs in the equity derivatives space. We have introduced dispersion options with a lookback feature wrapping in a third-party principal protected fund format, distributing to high-net-worth individuals in Thailand,” says Lin.