Foreign Exchange Derivatives Company of the Year: Standard Chartered Bank
Regulation is often seen as an enemy of financial innovation. The more rules a bank has to follow, the harder it is to unearth new products and create new sources of revenue.
But when authorities choose to ease financial regulations, banks and other businesses rush into the void to exploit new business opportunities – and those who act the fastest are often the ones who profit the most.
Once China decided to facilitate access to its foreign exchange market, Standard Chartered Bank wasted no time. In May, the National Administration of Foreign Exchange allowed dealers to offer options referencing Effects against the onshore renminbi. Twenty days later, the bank was executing Asian-style options and futures trading for corporate clients in the region.
“Literally, within days, we were the first international banks in China to complete the first transactions after regulatory publication,” says Mathieu Lépinay, global head of macro structuring at Standard Chartered Bank Singapore.
Lépinay attributes the bank’s responsiveness to its in-depth knowledge of local regulatory developments.
“It shows how well we understood the market and how quickly we were able to come up with a new product, which the regulator allowed because it was useful for businesses,” Lépinay says.
When it comes to building local know-how, it helps to have a significant presence on the ground. In China and India, the Standard Chartered team includes structuring, sales and trading. The units are part of a global franchise that spans nearly 150 jurisdictions covering 59 markets.
New business opportunities related to deregulation in China and India have been the main focus of growth for the bank.
“A large part of our new business stems from regulatory changes in the two largest markets in Asia: China and India. There has been a trend towards liberalization linked to what I call the “onshorisation” of derivatives. These countries are trying to ensure that a wider range of derivative-related financial services are available onshore in an effort to gain market share and further open their markets,” Lépinay says.
India’s central bank eased its ban on trading complex derivatives such as swaptions and structured options by banks and corporations earlier this year. This followed a decision to allow local and foreign banks to trade non-deliverable futures in a special economic zone in Ahmedabad from 2020.
Meanwhile, China has released a series of measures to ease foreigners’ access to domestic markets, including opening up foreign exchange trading this year. The country is also preparing to unveil its Swap Connect program, which allows dealers to trade interest rate swaps onshore.
Standard Chartered’s sales pitch in China and India largely included best practices from select companies in the region, products that have worked in other markets, and a track record of corporate clients with a successful hedging strategy. .
“One of the main areas where we have been able to help our customers is understanding what the new regulations mean, what alternatives we can offer them as a result of the changes and whether they are actually beneficial to them,” says Saurabh Tandon, global head of Effects options trading at Standard Chartered Bank of Singapore.
Changes to derivatives rules in India this year have enabled Standard Chartered to achieve a USD/RNI hedge via non vanilla Effects instruments for a client who wanted to further reduce his hedging costs instead of using vanilla hedging products.
These structured hedges include more complex products, such as barrier options and futures, which are canceled at expiration or at any time, Tandon explains. “The product already exists in other markets, and with the new regulations in India, we were able to do this for our customers,” he adds.
The opening of the South Asia region has offered new opportunities in new markets such as Nepal. Standard Chartered became the first bank in the region to achieve a Effects Nepalese rupee options trade – one USD/NPR call spread option to hedge the client Effects risk.
But it was not an easy task. The deal required extensive discussions with Nepalese regulators before being approved. Trade risk management was also a challenge, as Nepal has no options market and a very limited market for non-deliverable futures.
The bank ended up selecting proxies with “a high degree of correlation” to replicate the position, Lépinay says. The bank managed any basis risk between the two instruments to maintain the hedge.
“There was no way to cover that perfectly in the market,” says Lépinay. “And that for me is a very important strength that we have as a bank, to be able to offer hedges in markets that are not necessarily very deep or very liquid.”
Standard Chartered’s liquidity provision was tested in a deal for a Korean investor with significant exposure to Vietnam. Illiquid Vietnamese dong market is hedging VND tough positions, but the client needed to cover the equivalent of $200 million of VND– debt securities denominated in securities and equity investments.
Standard Chartered managed to create liquidity in the market by buying other trades that required hedging in the opposite direction. He provided a USD/VND currency swap not deliverable to a European client, who used the swap to hedge its VND the bond issue, and he sold a non-deliverable VND synthetic note to offshore investors.
“If you ask a bank to quote a Vietnamese dong Effects cover $200 million, I think everyone will tell you no,” says Lépinay. “What we did was find a flow the other way that would allow us to quote that dollar VND Effects coverage for Korean customer.
Standard Chartered has also entered into contingent transactions over the past year. An example concerned a Effects hedging linked to an underlying Mergers & Acquisitions transaction in the Philippines worth $1.2 billion.
“I would say maybe four banks can offer liquidity in dollars/vanilla pesos, but for one bank to offer a deal conditional on that, we were probably the first,” Tandon said.
Like other dealers, Standard Chartered has also invested considerable sums in its trading platforms. Latest enhancements to its unique reseller platform coverage Effects optional products. Tandon says Standard Chartered is the only bank so far to offer streaming volatility swaps and Hong Kong dollar vanillas on its single-dealer platform. It is also one of the few banks to offer liquidity at the same time Effects options and options on precious metals.