Derivatives house of the year, Asia ex-Japan: UBS

Asia Risk Awards 2020

The UBS team

Photo: Gary Li/www.Lcygary.com

Having won Asia Risk’s equity derivatives house of the year award multiple times in the past, UBS’s strength in this asset class in the region is without question. This year, though, the Swiss bank is starting to shine in other asset classes, too, and pull together its franchise to offer greater cross-asset structuring capabilities across the board.

In terms of pure cross-asset structuring capability, UBS may not yet be quite up there with some of its rivals in Asia, but it has won enough new mandates this year to show that it is climbing up the curve – and to justify this win.

UBS launched two new initiatives at the start of the year, both aimed at pulling together the disparate strands of the bank.

One was a move to bring together the sales and structuring teams within wealth management and investment banking, under a single ‘unified capital markets’ umbrella. Conrad Huber, from Credit Suisse, was brought on board to head this in Asia.

The other was a shake-up of its investment arm, including the merging of its main equities business with its foreign exchange, rates and credit unit to form a single global markets team.

These restructuring initiatives mean that we can bring the very best of both the investment bank and the wealth management platform to our clients, independent of the client type and independent of product

Bilal Al-Ali, UBS

“These restructuring initiatives mean that we can bring the very best of both the investment bank and the wealth management platform to our clients, independent of the client type and independent of product,” says Bilal Al-Ali, head of Asia-Pacific (Apac) structured sales at UBS. “While ambitious, the initiatives have gone well to date.”

The chief operating officer (COO) of one Hong Kong-based investment company, which is a long-term client of UBS, says: “Over the past 12 months, we have definitely seen UBS move beyond the traditional equity space – to structured credit, convertible bonds, high-yield bonds, bilateral bonds, that sort of thing.”

As a result, the firm has chosen to work on a number of new structured credit products with UBS, and has been impressed by the bank’s responsiveness to evolving needs.

“There’s definitely a lot more connectivity [within UBS] at a senior level, and more of a group oversight, as opposed to being a little bit too segregated, which they were previously,” says the COO. “They have really taken the time to understand how we are working, and brought innovation to our business on the basis of that.”

Bank realignment

Realigning the business has brought UBS a number of benefits.

On the global markets side, the Swiss bank has been able to strengthen its convertible bond franchise, claiming now to be the go-to place in Asia for such products.

“This is a culmination of efforts over the last two years that have encompassed innovative structures such as packaging long-dated FX and rates hedges along with equity-linked products, which have made UBS the preferred bank in Asia for clients in these products,” says Savio Joseph, head of institutional derivative sales for Asia.

UBS has been very strong on structured credit this year, and has deployed it in a variety of client-tailored formats, including reverse repurchase agreements, total return swaps, collateral switches, repackaged leveraged notes and secured loans.

Bilal Al-Ali, UBS

“From a financing perspective, our ability to innovate has allowed us to design intelligent structures to suit our clients and our risk profiles. We have designed highly bespoke transactions for a wide range of clients [for their] Asia high-yield portfolios, as well as alternative forms of credit,” says Christine Wang, co-head of Asia structured sales.

In late October 2019, the bank started trading self-issued long-dated zero-callable total loss-absorbing capacity (TLAC) bonds – securities that are eligible for bail-in, should the bank run in to trouble, and therefore often pay a higher rate of return than more senior notes. TLAC instruments are popular with Taiwan-based investors, especially insurance companies, which, according to the bank, “value UBS’s credit story, and include it in their credit portfolios”. So far in 2020, UBS has issued more than $1 billion of long-dated zero-callable notes, primarily to Taiwanese insurers and pension funds.

On the unified capital markets side, bringing together the wealth management and institutional banking divisions has boosted the cross-selling of products in a way that wasn’t possible before.

“For example, we have been able to take structures such as single-stock dispersion products, which, typically, are sold to institutional investors, and market a variation of this to our private banking clients as well – and we have enjoyed particular success here,” says Joseph.

Dispersion products are equity structures that make money through the difference between implied and realised volatility. They tend to perform well at times when individual stocks are not strongly correlated. In 2019, UBS sold $8 million of vega on these products in Hong Kong and Japan, which Joseph believes could have been the highest on the Street.

We have been able to take structures such as single-stock dispersion products, which, typically, are sold to institutional investors, and market a variation of this to our private banking clients as well – and we have enjoyed particular success here

Savio Joseph, UBS

Despite the market moves since the Covid-19 pandemic began, UBS maintains that dispersion products performed well and that “clients were able to unwind at significant profit”. The bank says that interest in this product continues to be strong on the back of positive client experience.

Palladium trades – which provide a payout linked to the average outperformance of the assets versus the basket average, rather than seeking to capture the volatility premium in index options – have proved particularly popular this year.

At the same time, products that were primarily useful for wealth management clients – such as quantitative investment strategies (QIS) – have now made their way over to the hedge fund and institutional world. This has helped drive returns across the investment bank in Asia. For example, so far in 2020, UBS’s hedge fund clients in Asia have traded $200 million in assets under management on commodity risk premia portfolio and volatility strategies. Before the second half of last year, hedge fund clients were not really trading such strategies.

“From a product perspective, UBS Wealth Management, I believe, has the most bespoke and creative products on the Street, and a big reason why they have that has been through the collaboration with the investment bank,” says Al-Ali. “We need to keep that pipeline of ideas going, and bringing the legacy investment platforms and solutions team into the investment bank will only enhance things.”

Al-Ali says that a number of private banking clients have been “crying out” for investment bank-like coverage.

“And part of this idea for a capital markets construct is allowing that in a very, very simple and streamlined fashion,” he says.

One of UBS’s hottest wealth management spaces this year has been a leveraged structured product linked to the bank’s China Opportunity Equity Fund, which is a basket of between 40 and 70 stocks that seek to provide investors with the best opportunity in China’s offshore equity fund. This is typically a beta product, but UBS has sought to turn it into an alpha product through a structure that allows investors to take a long position on the Opportunity Fund while shorting the Hang Seng Composite Index. The product is then leveraged up a couple of times, with a stop-loss in place. UBS says this product has been hugely popular this year, with more than $300 million traded.

This product is significant in that it reaffirms positive collaboration between the different strands of the bank. The investment bank provided the hedge, the asset management arm provided the fund, and the wealth management division sells the product.

Risk recycling

UBS’s trades are underpinned by a strong risk recycling engine, which is why the Swiss bank has proved so formidable as an equities powerhouse in the past. Bringing the separate bank units closer together is only likely to strengthen this.

“We work with our trading desks and our clients to put appropriate flows into the book to facilitate our structure flow and appropriately risk-recycle,” says Al-Ali. “There are many examples this year that demonstrate our ability to recycle vega generated by structured clients into products suitable for our institutional and warrant clients’ space.”

Photo: Martin Abegglen

It was UBS’s diversity of client positions that, according to Joseph, helped the bank weather the Covid-19 volatility better than some of its competitors: “We were less affected by extreme market moves than some others, and continued to make markets – in size – even as competitors stepped back.”

Even during the height of the market turbulence, UBS executed several clips of multi-million vega transactions for customers across the Apac region in their hour of need.

Product diversification, also helped in South Korea’s highly explosive structured products market, which suffered massive autocall losses across the Street as volatility in March hit.

“You can see how the market is heavily skewed to this segment, but we have been a pioneer, and, as early as 2018, introduced single-stock equities,” says Minkyu Kim, head of Korea global markets structured sales. “The diversification has afforded some protection from the market volatility.”

UBS says the equity derivatives market in Korea is worth around $63 billion, with 98% of that represented by the index autocallable segment.

Far from pulling back from Korea – as some have done on previous occasions, when the autocall market tanked – UBS has plans to eke out an even greater share of the market, and leveraging off its new unified capital markets structure to do so.

“We are trying to bring our securities house and equities franchise in Korea together to facilitate the sale of UBS fixed income products,” says Kim. “We expect to trade credit products in early September, and are targeting long-term rate exotics by the fourth quarter this year.”

Technology and pricing

In line with the bank’s more unified structure, UBS has also been updating its technology platforms to add value across asset classes.

Since 2015, UBS has relied on an internal system called T-Pricer for pricing FX trades and delivering best execution to clients. Until now, this has only been available to traders and structurers within UBS, but this year, the bank started to roll it out to a select number of clients to allow them to better customise the products they are buying. The plan is to roll out the T-Pricer system to the full suite of clients by the end of the year.

“Feedback from pilot clients has been fantastic,” says Viknesh Kupusamy, head of global markets macro sales, Asia. “They say that it helps identify when they should enter a trade and when they should come out of it to monetise positions. This value proposition was very attractive.”

Feedback from [T-Pricer] pilot clients has been fantastic. They say that it helps identify when they should enter a trade and when they should come out of it to monetise positions

Viknesh Kupusamy, UBS

The T-Pricer system presents clients with a pricing grid and curve, so they can see exactly what their options are for structuring trades. The system can also come up with ideas for trades to put on, based on client’s preferences and market conditions.

“For example, if you think sterling is going up and another currency pair is going down, you can put that into the system, and it will generate a list of ideas with the payoff diagram in it, which tells the client exactly what strikes and other things to use to find the level that they want,” says Kupusamy.

At the moment, T-Pricer is only for the FX derivatives business, but, in line with their business realignment, UBS also plans to put interest rate products and other asset classes into it in the future.

This build-out of T-Pricer is another element that stands to position UBS for further success in the Apac region going forwards.

“I firmly believe that UBS continues to set the standard as the pre-eminent derivatives house in the region,” says Al-Ali.

“Our business is very diverse – and now there are few areas of the Apac derivatives industry in the region in which we’re not a major player or breaking new ground. Despite the significant headwinds of 2020, our structure and values have not changed. In short, we continue to rely on efficient risk recycling, a strong assets-under-management business through QIS, asset management company and finance-related products, and best-in-class technology.”