For Asia-Pacific currency markets, the past year could best be described as the calm after the storm. After a period of sharp price movements and intense trading across most currency pairs in early 2020, currency markets have returned to their sleepy and moderate pre-pandemic state.
â€œWe are back to the regime we faced in the FX the space before the Covid-19 crisis – no volatility; no direction; swap points and carry being completely compressed, â€explains Mathieu LÃ©pinay, global head of macro structuring on the public side at Standard Chartered. â€œThe whole challenge was therefore to see how we could get out of this situation with ideas and solutions adapted to what our customers are looking for. This, I would say, has been the main driver of our business over the past year. “
With no discernible market trends to trade on, Standard Chartered has instead used its understanding of the regulations and liquidity conditions in the region’s foreign exchange markets to come up with new ideas for optimal and profitable hedging solutions for businesses. clients.
The bank’s efforts to develop its exotic trading capabilities have also contributed to the success of its enterprise solutions business, allowing the risk generated by enterprise flows to be recycled through traded volatility and correlation products. with the hedge fund community.
It is striking, says LÃ©pinay, that in a year when currency volatility has been so low, the bank’s onshore revenues for FX the options are in fact already greater than what was recorded last year. In addition, significant volumes of volatility swaps, variance swaps and double-digit options products on a range of Asian currencies have been traded over the past year, he adds.
â€œWith the lack of currency volume over the past year, it shows that we have grown in terms of products and customers and that we have seriously focused on this region,â€ he says.
In addition, Standard Chartered also continues to make great strides in the deployment of new environmental, social and governance technologies (ESG) within its derivative product offering in Asia. At the start of the year, the bank launched ESG-linked FX forward. The product was also a milestone in Korea, as the first ESG– hedging products linked to the Korean won currency and thus setting a precedent for the future ESG market operations.
A choice of curves
One of Standard Chartered’s main strengths in the currency derivatives space has long been its ability to design solutions that take advantage of the rapidly changing Asian currency regulatory landscape. In constrained currencies such as the Chinese renminbi or the Indian rupee, the existence of onshore and offshore exchange rates offers room for innovation in the design and delivery of such solutions.
â€œIn all these currencies, you have two or three markets,â€ explains LÃ©pinay. â€œYou have the onshore market, the offshore market and, in some cases like China, you have the CNH also market. And more markets [there are], the more flexibility you have, the better you can optimize coverage solutions for customers.
A cover solution designed for a non-resident client operating in India during the past year is one example. Standard Chartered’s client company sought to cover a USD/INR exposure related to the repatriation of capital from its onshore entity, and required a deliverable INR gain on the transaction. The hedging facility could be extended to the customer on a secured basis only. However, as a non-resident, the client only had offshore assets to offer Standard Chartered as collateral.
With the lack of currency volume over the past year, it shows that we have grown in terms of products and customers and have seriously focused on this region.
Mathieu LÃ©pinay, Standard Chartered
And, given that the FX The Indian regulatory framework does not explicitly allow an Indian bank to provide hedging facilities to non-residents by guaranteeing against offshore security, the client will face an offshore branch of Standard Chartered Bank.
Standard Chartered was quick to rely on a relaxation of the Reserve Bank of India’s rules on FX transactions that entered into force in September 2020, which allowed non-residents to negotiate back-to-back with SCB India through a SCB offshore entity. This was not allowed for currency hedging transactions under the old regime.
â€œThis is how we succeeded in creating what we believe to be the first consecutive transaction where our client faced an offshore branch of the bank on an onshore site. INR deliverable transaction, â€says LÃ©pinay. â€œWe have joined what the regulations allow you to do with the exact type of hedge to satisfy our customer. This shows how quickly we adapt to new market and regulatory developments. “
A hedging solution for a business in the Philippines is another example of how the bank uses its understanding of the regulatory environment to design and deliver the most optimal hedge for clients.
The company was looking to cover itself FX risks resulting from the mismatch between its USD bond holdings and Philippine peso proceeds, and required fully deliverable flows.
However, due to the high carry costs, it was unfavorable for the client to hedge via a vanilla futures transaction linked to the onshore. USD/PHP curve. Standard Chartered has undertaken an in-depth analysis of client exposure and historical movements of various USD/PHP parameters, both onshore and offshore to determine a hedging solution that could both improve hedging efficiency and reduce costs to the client. Based on this analysis, the bank provided a solution that uses what it describes as an offshore deliverable curve.
Essentially, the client performed a three-year contract USD/PHP options-based strategy that has benefited from increased volatility and carry to the offshore market, but in a deliverable format.
â€œOf course, it’s not like we have an endless appetite for the Hong Kong vega dollar,â€ explains LÃ©pinay. “But thanks to our franchise in USD/HKD, we are able to attract both investor and business interest and match them as best as possible. This allows both parties to come in at a very good point and also allows us to hedge our risks in a reasonable way. “
â€œAgain, you can only do this if you understand, from a regulatory perspective, what is allowed in terms of cross-border transactions and in terms of product offering,â€ he adds.
One of the reasons Standard Chartered is able to provide solutions like these to corporate clients is its ability to transfer the risk generated to hedge funds and asset managers through its exotic product line.
The bank’s ability to generate and recycle large-scale risk in Asian currency pairs is demonstrated by an option-based hedging solution delivered by an asset manager in Hong Kong earlier this year.
The asset manager faced a FX asymmetry resulting from a balance sheet in Hong Kong dollars and a we liability in dollars. A balance sheet hedge was executed by the client in March 2020, through a series of USD/HKD capped forwards, an options-based strategy that involves buying a synthetic currency forward while simultaneously buying another option.
This allowed the client to hedge at 7.75, the lower limit of HKD ankle to USD, while selling options above 7.85, the upper limit of the currency’s anchor.
This trade was rightly recognized by the Asia Risk Awards in 2020, but the way it was restructured earlier with extended tenor and increased notional was even more impressive.
Since that initial coverage, the client had continued to add more USD liabilities, some of which have a longer term, on its balance sheet. As a result, the client was looking to expand both the size and content of his USD/HKD capped forward transaction with Standard Chartered.
The bank offered to restructure the initial period of one year USD/HKD capped at 18 months USD/HKD capped forward with increased height of we$ 4 billion.
In order to run a trade of this size and content, Standard Chartered had to be sure that it could transfer some of the risk in order to minimize the amount that would have to be stored.
It meant identifying potential counterparties to take the other side. Typically, according to LÃ©pinay, these would be equity-based portfolios looking for cheap option hedges or long-term investors willing to buy flight directly or through buy spreads like a game. cheap on volatility.
So, as the bank advised the asset manager on best execution for capped futures trading, it simultaneously entered into discussions with investors who might be willing to take the other side.
â€œOf course, it’s not like we have an endless appetite for the Hong Kong dollar vega,â€ explains LÃ©pinay. “But because of our frankness in USD/HKD, we are able to attract both investor and business interest and match them as best as possible. This allows both parties to come in at a very good point and also allows us to hedge our risks wisely. “
LÃ©pinay says the trade fits very well into what has been the story of the year, which is where to extract value. â€œThis shows that even when it comes to a fixed currency like the Hong Kong dollar, we have been successful in finding a solution and bringing it to our customers,â€ he says.