Asia Risk Interdealer Rankings 2018: The winners

Societe Generale and BGC top the tables

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Bank – Societe Generale 

The year 2017 was one where budding global growth spurred a renewal of investor risk appetite to boost returns across asset classes. 

Still, investor activity exemplified an element of caution – and that remains true today. While sentiment is bullish – at least, in the short term – uncertainty looms over the long term, amid monetary policy normalisation, geopolitical risks and rich asset values. That has meant flows were directed towards products that captured the returns in the short term, but had inbuilt protection to shorten the duration or limit any future losses.

Such flows played right into the hands of Societe Generale. The French lender increased its market share in equity derivatives in the Asian region, and managed to cross-sell to clients across asset categories. The bank was at the forefront of providing liquidity to clients to combat the gyrations.

The volatility “has brought quite difficult trading conditions and relatively poor liquidity at times”, says Jerome Niddam, Societe Generale’s head of global markets for the Asia-Pacific region. “There have been opportunities for investors to deploy capital or take profits, but it has been mostly short-lived. In this context, Societe Generale has been proud to be able to consistently provide liquidity to our clients. Our flow business has evolved to be able to closely follow the market movements that allow us to adjust our product offerings accordingly.”

The most popular equity products were autocallable and bonus structures, as the equity rally meant more and more products were knocked out, paving the way for reinvestment. Investors, who were lured by the returns, didn’t just reinvest the proceeds, but also raised fresh allocation. They, however, sacrificed some yields by building in layers of protection to safeguard against a market reversal. Societe Generale’s financial engineering teams came up with versions of the autocallables and bonus structures with multiple observation points. These would enable investors to exit the product at shorter duration when risk is high. 

Jerome Niddam, Societe Generale

These new structures offered an increased probability of early redemption, and “proved particularly successful”, says Niddam: “After years of rising equity prices, investors sought to take profits and protect against any market corrections.”

For fixed-income-focused clients, Societe Generale structured a solution linked to two of the main macro viewpoints: a seemingly inevitable rise in interest rates; and a steepening of the US dollar rates curve.

While rising rates have long been on the agenda, the French bank offered clients variations of popular structures. With the rise in US rates, the standard reverse convertible payouts became less and less attractive. The French bank responded quickly by offering alternative exposures that were priced with high coupons and low put strikes. An example of this was to offer reverse convertibles referencing sterling rates, as opposed to the more standard US dollar versions or callable steepener to benefit from an attractive entry point in the dollar interest rates curve.

Mutual-fund-linked products also lured clients. Societe Generale introduced its first such product to Asian markets in 2015. Last year, it diversified the underlying by adding multi-asset and alternative strategies as a substitute for interest-rate-sensitive fixed-income funds. The lender offered clients a leveraged exposure to the upside, which meant clients continued to benefit from principal protection at maturity. Currently, around 200 funds as underlying are readily available to the banks clients, says Niddam.

The bank also launched daily leverage certificates (DLC) in Singapore. That made it the first issuer to list DLCs in Asia. Leveraging on its experience from the European markets, Societe Generale successfully launched the first batch of DLCs in July 2017. The second tranche of higher-leverage products hit the market in January 2018, and more are set to follow, says Niddam.

Societe Generale has been proud to be able to consistently provide liquidity to our clients

Jerome Niddam, Societe Generale

The DLC is another example of Societe Generale’s plan to extend its local presence in the region. The bank also opened foreign exchange office onshore franchises in India and Japan, and acquired a foreign exchange market-maker licence in China. In the last quarter of 2017, it also secured a domestic licence to be a local underwriter of Formosa bonds in Taiwan. The licence allows the bank
to act as a local underwriter and sole lead arranger for any Formosa bond issuance.

“Asia remains a key market for the bank, and the bank will continue to strengthen its local presence in the region,” says Niddam. “China will represent one of our core markets for the coming years.”

Broker – BGC

The interdealer broker market has had its own share of twists and turns in recent years. Technology, regulatory changes, opening-up of new markets, and mergers and acquisitions have all changed the face of the interdealer broker marketplace in Asia.

The last 12 months have seen a surge in electronic platforms as regulatory changes from the likes of Europe’s second Markets in Financial Instruments Directive (Mifid II) have pushed clients to seek best execution. That, in turn, has resulted in a drop of up to 20% in commission rates in some products, and taken away some business from the dealers. But the internationalisation of China’s markets is opening up new opportunities. 

“There are opportunities that aren’t initially obvious, which came to us because of our scale, especially in the regulatory landscape,” says Mark Webster, BGC’s executive managing director and general manager for the Asia-Pacific region. “We invested heavily in Mifid II compliance, and that helps us capitalise on opportunities to grow as compared to some of our smaller competitors that have not had sufficient capital to meet those regulatory costs, and [had to] downscale or even leave some markets they were previously active in. Mifid II has effectively given us an opportunity because clients know we are compliant and can meet their requirements.”

Mark Webster, BGC

The move towards the electronic trading of equities in Asia has been accelerated by Europe’s Mifid II. Market participants estimate more than half of all notional volumes this year have gone through touch platforms, compared with less than one-third earlier. Mifid II, which came into force on January 3, 2018, introduced best-execution requirements for banks and asset managers in Europe. This means demonstrating to clients the trading venue or counterparty chosen has offered the best available price, rather than just being selected on the basis of an ongoing commercial relationship.

Although Mifid II is a European piece of legislation, its scope is far-reaching. As such, Asia-domiciled funds that deal with underlying European investors also come within its purview.

While Mifid II compliance played into BGC’s hands and helped it defend market share, China was another opportunity it grabbed.

“Looking at China, we believe that here we will see the most obvious positive trend in terms of growth. Also, as China introduces reforms to its financial markets each year, it is bringing their financial markets to a place where the level of structural stability and best practices are increasing,” says Webster. “All this means [that] flows are growing very rapidly. For BGC, one of the standouts in 2017 was the continuing growth of our China joint venture and the benefits that that brings to us in Hong Kong and, indeed, throughout the region.”

China Credit BGC Money Broking Company was established in 2009, and, in the following year, it became the first Sino-foreign joint venture interdealer broking company to be granted a business licence to operate in Beijing. It offers interest rate swaps, bonds, interbank cash deposit products and foreign exchange forwards in the country.

The marketplace is changing rapidly, and the right strategy is key in navigating the changing environment. BGC is focused and investing in its electronic platforms

Mark Webster, BGC

BGC also saw volume surge in its Australia fixed-income business. It launched the service in 2016 to add to a similar offering in Hong Kong, Japan and South Korea. 

In Australia, BGC targets clients such as pension funds, asset managers and financial planners, which can’t be serviced by the main street banks as volumes may not be enough. With Australian pension funds starting to look at investment options away from property, given current valuations, BGC has been able to capture the flows into fixed income.

“That’s a business we have been growing, and we will probably double the amount of staff this year and into next,” says Webster. “We’ve expanded not just in Sydney, but also in Melbourne and Brisbane. This is a prime example of our innovation and ability to enter into markets that, traditionally, interdealer brokers have not been part of and compete effectively.”

The firm is also seeing growth in its emerging markets fixed-income business in bonds and US corporate debt. It managed to hold on to its share of the hybrid foreign exchange business in Hong Kong and Singapore, despite the rise of electronic trading.

“The marketplace is changing rapidly, and the right strategy is key in navigating the changing environment,” says Webster. “BGC is focused and investing in its electronic platforms.”