Interest rate derivatives house of the year: Standard Chartered Bank

Asia Risk Awards 2024

Bruno Lettich

International investors piled into Indian government bonds this past year; a buying frenzy sparked by the securities’ inclusion in global bond indexes. Standard Chartered Bank, with its strong heritage in providing investors with market access products, emerged as one of the go-to banks for those looking to gain exposure to the Indian sovereign yield curve.

To help its clients access the Indian government bond market, the UK lender turned to a derivatives instrument that has long been popular with foreign investors in China, the total return swap (TRS). In October last year, the bank traded a $5 million TRS on the five-year government bond benchmark from its branch in the international finance hub, Gujarat International Finance Tech-City (GIFT City). The trade followed from the introduction of a tax exemption on income earned by non-resident investors on such transactions if undertaken with an offshore banking unit based in Gift City.

Allowing investors to quickly put on India bond positions without acquiring a licence to buy the bonds onshore and navigate local regulations, TRS became a popular trade ahead of the index inclusion. This first transaction underscores Standard Chartered’s status as a pioneer in Asia market access products, as well as its ability to respond promptly to evolving regulations and client needs.  

“With the bond index inclusion, everybody’s been looking to access India, and our clients reached out to us very early to understand what could be done on that front,” says Mathieu Lepinay, managing director, global head macro structuring public side at Standard Chartered Bank. “We follow closely market developments and aim to offer the best access routes, so we did our first TRS out of that platform. It presents a lot of benefits for clients from an access perspective.”

The bank has also continued to enhance its suite of market access products, such as TRSs, for foreign investors in China’s onshore bond market over the past year. An ongoing dislocation between in the onshore bonds and cross-currency swaps markets this past year has presented a very attractive risk return for investors into China’s bond market. Buying an onshore renminbi bond and swapping it to US dollars could generate a yield pick-up of anywhere between 50–100 basis points across a range of local, foreign, government and corporate issuers.

One new product that Standard Chartered brought to market for investors looking to capitalise upon this dislocation was a TRS with a USD/CNY FX hedge baked in. Allowing clients to enhance returns with a leveraged exposure to onshore bonds with the FX risk fully hedged, Lepinay says this all-in-one solution has been one of the trades of the year. It is a product that demonstrates Standard Chartered’s ability to bridge clients’ interests with market windows and market movements, and to facilitate its clients’ need in hunting China onshore carry income opportunities.

The bank has traded numerous TRS contracts in this format with clients including hedge funds, real money clients, banks and securities firms across Hong Kong, Korea and Europe.

“Onshore bonds in China have offered very attractive risk-adjusted returns on a swapped basis – with a yield pick-up material enough to generate interest across a wide base of clients globally. The question is: how to capture this value and deliver it to clients? Combining our strengths in terms of trading and balance sheet, Standard Chartered supported its clients putting on this access trade in a variety of funded and unfunded formats on a wide range of issuers and underlyings.” says Lepinay.

“What we’re doing is extending balance sheet and funding clients in order for them to gain exposure to the underlying onshore bonds,” he adds.

SSA success

Standard Chartered is also seeing growing success local currency sovereign, supranational and agency (SSA) bonds business across the Asia-Pacific region.

The bank launched a dedicated local currency SSA bond desk a few years ago, but the growth of this business since then has been staggering. In a very short space of time, the bank has jumped quickly up the rankings both in terms of issuer and currencies. The bank ranks third in the overall SSA EM Local Currency primary issuance league table, second in Indian rupee, and first in frontier Asian currencies. Since the desk was launched, $214 million has been issued for SSAs via 13 new issues, and the bank holds a 48% market share in Central Asia offshore markets.

Mathieu Lepinay, Standard Chartered

Back when Standard Chartered set up its SSA desk, it did so with a view that there could be a growing opportunity in emerging market (EM) fixed income, and SSA issuance specifically, in the years ahead.

“EM SSA was somewhat out of favour, from a global investor perspective, in line with general apathy towards EM fixed income,” says Bruno Lettich, head of global rates at Standard Chartered. “But we felt that there was going to be an opportunity within this cycle, to see more prominence for EM given by global investors.”

One particular market that Standard Chartered has seen astonishing SSA success in is India, where the bank now holds a 23% market share. The SSA market in India is nearly double the size it was two years ago, having seen a big boost this year ahead of Indian Government Bond index inclusion. Given that the local arrangements required to access the Indian Government Bond market is still pretty complex, many investors turned to INR SSA markets as a way of gaining exposure ahead of the inclusion quickly.

Standard Chartered has helped to place some of the most sought-after issuances. For instance, the bank was the sole lead on a five-year INR bond for the World Bank’s lending arm, the International Bank for Reconstruction and Development, which set a new high bar for secondary bid-offer spreads – roughly 2bp – in INR SSA Bonds.

In addition to India Government Bond inclusion, another factor that has been fuelling demand in the Asia emerging market SSA space is a change in the correlation between Asia emerging market rates and USD rates. Asia’s rates markets used to be well correlated to US rates, but that relationship began to break down with rates in emerging Asia becoming less correlated with USD and more correlated with China. That has increased the attractiveness of emerging Asia SSA debt for investors seeking diversification, Lettich says.

“India Government Bond index inclusion has been a key driving factor within EM Asia rates in 2024,” says Lettich. “And that plus the concept of the beta differentiation between Asia and the West, I think, really ignited an increasing demand from our investor client base.  It has proven to be an enhancer to portfolio returns bringing diversification for portfolios relative to DM bonds, which saw higher yield moves over H1 24. ” 

 Standard Chartered’s interest rate derivatives franchise across the region is also playing a big role in supporting the bank’s growing SSA franchise.

“Because of our presence in several local currency swap markets, where we can source onshore hedging needs, we were opportunistic about increasing our exposure to issuance that we were not even the primary issuer for,” says Lettich. “And in less liquid markets, issuers appreciate your ability in doing that.”

“The growth in INR denominated SSA has been a huge success for us, but the focus has now moved outside India to other markets and the relative opportunities that exist there,” says Lettich. “EM local currency bond demand is definitely increasing, and we expect we’ll see a lot more activity in this space, going forward.”

EM-EM Connectivity

Structured note issuance, denominated in Asia EM currencies, or other EM currencies and sold to Asian investors, has been another notable success over the past year.

Examples include Mexican peso denominated 10-year zero coupon callable notes sold to an Asian Private Bank, 10-year zero coupon callable notes in Turkish lira and a range of three to 10-year callable notes in offshore renminbi (CNH), Hong Kong dollar and Singapore dollar. In addition, Standard Chartered also issues bilateral structured deposits to facilitate local clients’ pursuit of enhanced yields in domestic currencies.

“This is an extension of what we’ve done in the SSA space – combining frontier currencies with investors either in the West or the East,” Lepinay says. “We’ve done deals – pretty long dated for these markets – in Kazakhstan tenge and Pakistani rupee notes that were sold to European institutional investors. And we’ve done it the other way where we’ve arranged Turkish lira and Mexican peso callable notes that were purchased by Asian institutional investors.”

“The EM-to-EM connectivity that we see in the real economy, we’re also seeing in the financial economy. That is why we’re seeing Asian investors taking risk on Mexican or Turkish rates,” Lepinay says.