Asia Risk awards 2010: House of the year, Singapore

DBS

DBS has established itself as a powerful force in the Singapore capital markets. The bank sees formidable US dollar/Singapore dollar trading flows, and is a major market maker for Singapore dollar-denominated bonds and money market products. It is also a powerful force in interest rate swaps and foreign exchange derivatives markets, as well as actively trading derivatives instruments across the credit, equity and commodity asset classes.

As a result, the bank acts as a risk management counterparty to a wide range of corporates and financial institutions in Singapore, with a reputation for taking on big deals as well as for its customer service. DBS can handle interest rate swap transactions denominated in Singapore dollars in excess of S$4 billion ($3 billion) and conduct trading out to maturities greater than 25 years, despite liquidity in the Singapore dollar swaps curve thinning out after 10 years.

It is a similar story for Singapore dollar foreign exchange derivatives. A treasury official at a Singapore-based utility services company is not alone in saying that DBS is unsurpassed for its Singapore dollar activities, including forex forwards. The official adds for large swap transactions, the company will employ DBS to carry out 50% of the trade and give the remainder to other dealers purely for diversification purposes. In other areas, “if DBS’s pricing is not competitive, they are open to matching the rates”.

On the investment side, DBS has less capability in obtaining non-Asian names than some global banks, particularly for credit-linked notes. “But DBS would accommodate our demand if we asked them to get that credit,” the official adds. And the bank clearly scores points for trying to meet client needs. “DBS has been consistently strong on customer service,” says Alice Heng, treasury manager at SingTel Group, who says the DBS treasury team is well resourced compared with many of its peers.

From core activities, for example, helping a blue-chip Singapore corporate to refinance a maturing euro debt at a time when the European debt markets were in a state of flux, by allowing the corporate to draw a Singapore dollar loan and converting it into euros via a cross-currency swap with DBS, through to issuing a commodity-linked note refinancing baskets of sugar, wheat, corn and soybean for a food manufacturer, DBS has been willing to find solutions to client needs.

But the Singapore bank also participated in a trade that Thio Tse Chong, head of international sales and structured debt solutions, believes represents “a new era of financial institution funding” after the bank noticed an increase in derivatives transactions specifically targeting disparities in funding levels in the marketplace. The difference between the cost of secured and unsecured funding resulted in borrowers maximising the use of collateral in their funding. DBS, flush with Singapore dollar funds, saw an opportunity to help international banks needing US dollars to fund US dollar positions.

This culminated in DBS using a total return swap (TRS) framework combined with Isda credit support annexes to swap exposures in transactions of up to seven years in maturity. Each bond or other credit instrument held by the foreign entity was paired with a TRS transaction and grouped to form a larger pool facility. The TRSs could be terminated early and new TRS put in place whenever a credit was substituted. “Collateral can be constantly replaced over the tenor of the transaction – these are quite long trades of five to seven years with some degrees of complexity,” says Thio. The structure included a SGD/USD basis swap with notional exchanged at the start and at maturity. This allowed DBS to put Singapore dollars to work but hedged the forex exposure at maturity so the counterparty did not have to worry about forex risks. The swap also hedged the funding so the counterparty pays for the funding in US dollars.

Rules were also established that governed the type of bond assets that could be used at the underlying collateral. These rules were created with the aim that DBS would be comfortable with the underlying collateral while giving its counterparties sufficient flexibility to fund most of their liquid assets. The guiding principles are to ensure the quality of the assets, reduce concentration exposures by issuance, issuers and region and ensure the assets are liquid and their valuations are easy to establish. As a result, the clients obtained lower cost funding in the currency of choice for their dynamic pool of trading and investment portfolio assets through a fully customised structure.

“It’s a combination of our credit technology, our funding capability and our forex and rates management capability as it is also foreign currency in nature,” says Paul Lau, head of interest rate, credit and equity derivatives, hybrid and quant modelling at DBS. “It is more common to have single bond collateral against funding in a repo format or a small static pool. Rarely is there a cross-currency large pool with replacement capability. In the future, we will redefine the different curves for different collateral they are providing,” says Lau. “This is the first step towards this development.”