Asia ex-Japan Derivatives House of the Year: Societe Generale


Societe Generale, although long regarded as one of the leading franchises of derivatives in Asia-Pacific (Apac), is traditionally, at least, best known for its dominance in a specific industry above all, said Jérôme Niddam , Head of Global Markets for Apac. at Societe Generale in Hong Kong.

Over the past year and a bit, that has changed. The markets division of investment banking has recalibrated its long-term strategy and turned to new areas of activity in derivatives solutions.

“If you look back a few years ago, our business model was more focused on structured equity products,” says Niddam. “Today, we have succeeded in rebalancing the mix of activities. We have innovated more in terms of financing and cross-border solutions. This has been a key area of ​​development for us over the past few years, and we now have very strong capabilities across the region. “

The implementation of the new strategy started several years ago. Under the plan, the equity franchise would aim to maintain its leadership in structured products. But the bank would also seek to diversify its equity activity by reducing exposure to riskier products and by starting to deploy a new generation of structures that would continue to offer attractive returns for end investors.

At the same time, the equity franchise would seek to expand its presence in the high growth markets of the Apac region, with particular emphasis on China and India.

After a difficult first quarter for the bank at the global group level in 2020, the process has accelerated. In an extremely stressed market environment at the start of the Covid-19 pandemic, structured product portfolios across the street suffered losses on unhedged dividend exposures.

Group profits for the first and second quarters were hit, before recovering sharply in the second half. But the assured rebound in global equity markets also helped the bank to anticipate the restructuring of its structured products business.

Automatic call products linked to indexes such as S&P 500, Eurostoxx 50 and Kospi expired prematurely as spot prices broke pre-set barriers. These worst-off structures have not been reissued but have been replaced by new payoffs with less correlation sensitivity, and which provide better carry for trading portfolios.

As a result of these efforts, diversification across the bank’s structured product portfolio has increased significantly, leading to a substantial reduction in overall managed risks.

At the same time, the success of the new products has helped the bank maintain its flagship structured product franchise, while expanding its market access offering for China and India to global customers. The bank says its business has doubled in China and India in the past 12 months.

“The focus has been on growing China and India,” says Niddam. “To have more than doubled our activity in these markets in recent years is something we are really proud of.

In Hong Kong’s gigantic listed commodity market, the bank consolidated its position as the number one issuer by capitalizing on an explosion in demand for bullish and bearish redeemable contracts (CBBCs).

“We have invested heavily in the electronization and automation of these products, which has made us a leading transmitter in this space across the street,” says Niddam.

The success of this hub, combined with the bank’s enduring ability to innovate across all asset classes and customer segments, has helped establish an even stronger Apac derivatives business – and more than justifies this year’s victory. .

New products, new growth

To increase its presence in China and India, Societe Generale’s strategy is to help its global clients access onshore markets while offering local clients new types of revenue solutions.

In terms of access to the Chinese market, for example, the bank has developed exclusive client partnerships in a large universe of actions in the Hong Kong-China Stock Connect program. Leveraging its market access strengths, the bank provided financing – at a preferential rate – for the long stock exchange positions of Hong Kong asset management and securities companies. .

In India, the bank says its cross-margin capabilities between equity swaps and offshore futures are one of the key factors in its growth in the market over the past 12 months.

“It’s a different approach to what many of our peers take [in these two markets]Says Eric Jungers, head of linear trading and premium services at Societe Generale in Hong Kong. “We work in partnership with local players, which brings significant benefits to our international clients who are trying to access the market. We feel like we are winning in China and India.

Conversely, the bank also uses its cross-border system to help local securities firms and private wealth management clients to diversify away from mainly national investments.

The focus was on the growth of China and India. We are very proud to have more than doubled our activities in these markets in recent years.

Jérôme Niddam, Société Générale

A number of historic equity financing transactions have been executed for onshore clients over the past year. These include a first cross-border equity-linked swap and a first cross-border structured autocall swap under local documentation. Both have been negotiated with local securities houses.

In Hong Kong and Singapore, Societe Generale’s listed products business is booming, helped in part by a now growing market for CBBCs issued on the Hong Kong Stock Exchange. Turnover of CBBCs, which allow investors to make leveraged bullish or bearish or bearish bets on underlyings like the Hang Seng index, for the first time in 2020 exceeded that of derivative warrants. CBBC issuer, with a market share of 16% in terms of turnover.

“The growth of CBBCThis is still going on, ”said Keith Chan, head of cross-asset listed distributions for Apac at Societe Generale in Hong Kong. “This is a product on which we have focused a lot in recent years and we are maintaining our position in the market.

Technology has also largely contributed to Societe Generale’s success in listed products in a very competitive market for issuers, characterized by very thin bid / ask spreads. The bank’s Liquidity Provision Quality Index, a website tool that measures average buy and sell spreads, liquidity and price stability for each product, has helped bring much-needed transparency to this market for retail investors – and is now being emulated by rivals, Chan says.

“It shows the market for each product: the average spread we quote, the size we quote, and the consistency of those spreads,” Chan adds. “I think it created a lot of confidence, and now we’re seeing some of our other competitors doing the same. “

Management of market development

Beyond the franchise for equity derivatives, Societe Generale also continues to bring innovations to the market in other asset classes. In particular, last year, in credit derivatives.

A prime example is a groundbreaking securities financing transaction in which remortgage Korean Treasuries (KTBs) were, for one of the first times, used as collateral.

Historically, most of the credit support schedules of Korean law (ASCs) rely on a collateral structure that effectively prevents the re-use of assets as collateral for the financing of securities, repurchase transactions or derivative transactions. A new law was passed in 2017 to allow the reuse of KTBs in nine ASCs.

Yet for years after the regulatory change, Korean companies were still reluctant to sign new documents allowing asset reuse. Combined with an absence of ideas from international banks of ideas for effective refinancing channels, little changed until last year.

In 2020, Societe Generale, having spotted an opportunity in cross-currency base levels to monetize the reuse of KTBs, has resumed advocating with clients for the benefits of KTB reuse. The bank came up with business ideas in which it would fund dollar funding and receive KTBs as collateral. After these discussions, the bank succeeded in integrating some of its key customers to KTB reuse ASCs.

The KTBs were then refinanced through cross-currency repo rate notes, which were placed with clients as part of the bank’s variable annuity business in Japan.

“There were some interesting levels on the USD/KRW cross currency base that allowed us to show business ideas to clients and monetize the reuse of KTBs ”, explains Thomas Decouvelare, joint head of bonds at Societe Generale in Hong Kong. “This has allowed us to set up a few trades that allow reuse to educate customers, and now they understand the benefits of doing so.”

Decouvelare announces the creation of a new range of KTB The financing solutions highlight one of Societe Generale’s strengths as a derivative products house in the Asia region: its ability to innovate and find pockets of value by drawing on its large regional and customer footprint.

These first exchanges, he adds, could pave the way for KTBs join other highly rated government assets, such as Japanese government bonds, as the main source of collateral in international markets.

“This shows our ability to connect businesses across Asia, while stimulating the development of the local market,” Decouvelare says. “With the history of non-reusability and the reluctance of local participants to remortgage, you had assets that could not be refinanced despite their high quality. There was value to be extracted there.

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