Credit derivatives house of the year: Standard Chartered

Asia Risk Awards 2018

Standard Chartered, Shanghai

It has been a testing year for credit houses in Asia-Pacific’s emerging markets. The end of ultra-low interest rates, a scarcity of assets, and increasingly volatile credit markets are making it ever more difficult for banks to deliver cost-effective funding solutions. Standard Chartered has tackled these issues by devising a series of simple, yet effective, solutions that leverage the bank’s unrivalled footprint and on-the-ground expertise in the region.

“It is quite an interesting time for credit houses,” says Bikash Sarangi, global head of credit trading at Standard Chartered.

“All of these trends are affecting clients across our footprint, but our knowledge of the clients, credit and local markets, and evolving regulations, is helping us serve our clients better.”

Standard Chartered’s credit business expanded its product offering this year. The UK bank built out its loans with embedded derivatives capability in new markets such as Taiwan, China and India. It also grew its total return swaps and leveraged notes and deposits business beyond China into Singapore, Qatar and Lebanon. In China, it transacted its first onshore total return swap linked to offshore assets and documented under a National Association of Financial Market Institutional Investors (NAFMII) agreement, the Chinese equivalent of an Isda master agreement. This is an important complement to the bank’s existing onshore total return credit-linked deposit platform. 

One of the key achievements for the bank over the past 12 months has been the various solutions structured to mitigate the cost impact of rising interest rates for clients. The flagship deals that the UK lender has structured to help its clients obtain cost-efficient financing are not especially complex. However, each is demonstrative of what a bank can achieve on behalf of its clients in some of Asia’s more challenging markets through a long-term investment in ‘boots on the ground’, a strong relationship with regulatory authorities and a good understanding of local market dynamics. 

Standard Chartered found a way, for example, to deliver cost-effective US dollar financing to a bank in Bangladesh by taking taka-denominated government bonds as collateral. This was a challenging deal to structure, explains Sarangi, given local regulation and risks from possible adverse movements in foreign exchange rates. 

To use government bonds as collateral securities in Bangladesh requires prior authorisation from the central bank. Using its expertise in the market and understanding of the nuances of collateral rules in Bangladesh, Standard Chartered was able to obtain the necessary permission to accept the collateral. Various triggers were embedded into the transaction whereby the bank would receive additional cash or securities, should the local currency depreciate against the dollar and the bonds become undercollateralised. 

“The transaction required a good understanding of the local laws. We had to work with the Bangladesh central bank,” says Yuhin Gan, Standard Chartered’s global head of credit structuring.

“Our local presence and relationship with the central bank is critical when getting approval for these types of trades. Now, we are one of the few major foreign banks in Bangladesh that can provide that dollar liquidity.” 

A synthetic financing transaction executed out of the Shanghai Free Trade Zone offers a further example of how Standard Chartered’s innovative thinking is enabling the bank to deliver multiple financing solutions for clients relative to traditional vanilla loans.

It is a transaction Standard Chartered has executed for a number of clients this year. Standard Chartered’s Shanghai FTZ unit swaps RMB using the USD/CNH cross-currency curve in order to generate the US dollar funding for its clients. The structure provided the bank’s clients with efficient and streamlined financing solutions. 

“Our presence in the Shanghai Free Trade Zone allows us to access the international swap market to hedge RMB funding,” says Gan.

Like the secured financing transaction for the Bangladesh bank, Standard Chartered’s relationship and dialogue with the Chinese regulators was key to the success of the deal. “Deals like these always involve a lot of discussion with the regulators,” says Gan.

One of the key achievements for the bank over the past 12 months has been the various solutions structured to mitigate the cost impact of rising interest rates for clients

In a third landmark deal, Standard Chartered provided a client with a yield-enhancing solution, a non-traditional asset. A financial institution from Japan was looking for an investment without funding outlay because of high US dollar funding costs for Japanese financial institutions. Rising US interest rates and expectations of further hikes in the near future had pushed the cost of borrowing dollars against yen to a nine-year high at the end of 2017.

Standard Chartered helped the client by arranging a tailor-made financial guarantee that allowed the Japanese bank to synthetically invest in a project finance company, through exposure to the counterparty valuation adjustment on a project finance hedge that Standard Chartered had executed with a client from the United Arab Emirates.

“Leveraging our structuring expertise and our XVA trading inventory, we were able to provide a unique investment opportunity for the client to invest in a funding-efficient manner while gaining a specific exposure to a project finance company,” says Sarangi. 

The guarantee did not require the client’s US dollar funding, thereby helping it to avoid having to pay higher funding costs. Funding costs were further reduced by allowing the client to post Japanese government bonds it already owned under a tripartite collateral management platform managed by an independent third party on a daily basis. 

“Project finance clients hedge swaps that incur XVA,” adds Sarangi. “Of course, the investing client did not want to take an unlimited amount of risk, so we put in a schedule of what we expected the risk to be. That meant we could tell the client that their risk would be capped at a specific amount over the life of the trade, and they could see exactly what they are exposed to through the trade.”