RMB house of the year: Standard Chartered

Asia Risk Awards 2021

Standard Chartered RMB house of the year team

Standard Chartered has been front and centre of market development in China for many years – and continues to make its influence felt in the country, especially through its support of benchmark reform and the internationalisation of the renminbi.

Operating in China for more than 160 years, Standard Chartered has among the most comprehensive set of licences of any of its peers, which helps the UK bank continue to offer its clients innovative solutions.

The bank has also built up a comprehensive team trading RMB and selling RMB-based products. Standard Chartered has more than 10 RMB traders split between mainland China and Hong Kong, and claims to have the largest onshore sales team of any of its peers, with more than 20 regional branches in the country.

“I don’t think it’s easy to replicate the risk management that we have. We have a very deep understanding of the market and a wealth of tools at our disposal. This is extremely important for us as a bank and dealer,” says Charles Feng, Standard Chartered’s head of macro trading for greater China and north Asia.

Interest rate reform

As Beijing has started taking steps towards a more market-based benchmark for interest rate swaps, Standard Chartered has made sure that it has been there to support this development.

Last year, the People’s Bank of China (PBoC) – the country’s central bank – said in a white paper that it intended to adopt the depository-institutions repo rate (DR) as its preferred fixing in the domestic financial markets. This followed a move in 2019 to compel banks in the country to price new floating rate loans using the more market-based loan prime rate (LPR).

The DR reform is China’s response to the global Libor transition. Banks will stop contributing to the Libor benchmark at the start of 2022, and major markets are now looking at what should replace it.

This has placed additional hedging needs on corporates that have exposures in both the renminbi and in foreign currencies. Sensing an opportunity in China, Standard Chartered used its deep knowledge of the onshore and offshore markets, as well as its strong structuring capability, to provide its clients with innovative hedging solutions across different benchmarks.

I don’t think it’s easy to replicate the risk management that we have. We have a very deep understanding of the market and a wealth of tools at our disposal. This is extremely important for us as a bank and dealer

Charles Feng, Standard Chartered

One example of this was a cross-currency basis swap that referenced both the secured overnight financing rate (SOFR), the risk-free rate that is to replace US dollar Libor, and China’s onshore DR.

The trade – the first of its kind in China to reference these two key benchmark rates – was executed on the interbank cross-currency swap market via China Foreign Exchange Trade System (CFETS).

In April this year, Standard Chartered had another first, when the UK lender executed the first ever USD/CNH cross-currency basis swap referencing both the onshore LPR and US dollar Libor (in this particular case, the six-month rate). The client required the swap to be deliverable in order to fully hedge its RMB loan exposure. A hedge in the format of a USD/CNY non-deliverable swap would have introduced additional basis risk to the client, which is why the transaction was executed in the way that it was.

This solution has helped financial institutions hedge out the LPR exposure embedded in their renminbi-denominated loans – and thus enabled some of these firms to expand their lending business to a broader client base.

Putting these innovative products together was not easy, though, especially since there is still insufficient liquidity in such instruments.

“The derivatives market for these benchmarks is still underdeveloped. This results in inefficiencies, and makes pricing the transactions difficult,” says Feng. It also makes it challenging to offload the risk into the market, he adds.

Nonetheless, Standard Chartered has been able to deploy a combination of hedging solutions across onshore and offshore, and to price these derivatives even without a relatively liquid swaps market on those new benchmarks, largely thanks to its deep understanding of local policies and how the various benchmarks are correlated. Standard Chartered’s international expertise has also helped deliver these solutions.

“SOFR swaps and options are an important part of our global footprint, and we are now able to marry this with our local expertise in order to offer these packaged solutions to our clients,” says Mansoor Ahmad, regional head of structuring, Greater China and North Asia structuring at Standard Chartered. “I see such product offerings becoming more common– not just for us, but also for the Street in general.”

Feng says he hopes there will be more issuers to tap into these benchmarks in the future, to improve their legitimacy and make the wider market more aware of them. Feng says that there is a clear and growing need for more hedging tools in China, especially on the LPR benchmark, and he believes that the steps Standard Chartered has been taking in the market will contribute towards this.

“With PBoC wanting most of the loan or mortgage to be linked to LPR, banks are inevitably going to have a greater exposure to this benchmark, which will give rise to better LPR asset-liability matching,” says Feng.

Feng says that benchmark reform in China is likely to be a slow process, but that banks – such as the one he works for – have a role to play in supporting the transition.

“Ideally, the PBoC should only manage the short-term rates and let the banks manage the interest rate risk of loans by doing whatever they need to do,” says Feng.

RMB internationalisation

With yields remaining low in major developed markets, global investors have been steadily increasing their exposure to China’s fixed income market, especially Chinese government bonds (CGBs).

As interest in China’s fixed income sector has increased, so has the appetite for derivatives structures linked to the market.

“We have the capability to offer yield-enhancing investment solutions, including leveraged total return notes and range accruals linked to CGBs,” says Ahmad.

“The broad range of onshore licences that we have really puts us in a good position. Moreover, we have traders that can quote on this market in different time zones – and not every international bank can manage this.”

One of Standard Chartered’s clients, which uses the bank as its main counterparty for onshore bond transactions, says the UK bank “is able to provide a full range of services, with superb understanding of both local and international markets”. In this way, Standard Chartered enjoys the advantages of both a local bank and a global bank, says the client.

With increasing interest in China bonds, Standard Chartered is trying to extend its fixed income derivatives products – such as leveraged total return notes – to also reference policy bank bonds. There are currently three policy banks in China, which are tasked with the role of funnelling government money into public spending.

“Some sovereign wealth fund and central banks are increasing the amount of policy bank paper that they hold,” says Feng.

“As international clients develop greater understanding of these instruments, they would know that, from the domestic regulatory capital perspective, policy bank papers are treated the same as CGBs. They may even enjoy better liquidity than CGBs in secondary market trading.”

Henry Hung, executive director of macro trading in Hong Kong at Standard Chartered, adds: “It is part of our responsibility to help guide our clients on the progression among underlying assets.”

Because of the strong foreign inflows into China that have probably even exceeded the borrowing needs on foreign currencies by domestic corporates, the foreign currency deposit-loan ratio in the Chinese banking system has risen to more than 100% recently. This has increased demand for deploying surplus liquidity back to foreign currency assets offshore, especially into those names with which Chinese investors are familiar. Typical tools that Standard Chartered clients use for tapping into offshore bond markets include total return swaps and credit default swaps.

The key to offering these products is being able to efficiently hedge the risk. Ahmad says that the size of the Standard Chartered derivatives book, as well as the broad spectrum of counterparties that the bank deals with, make it easier to hedge the risk naturally.

“Because of the platform that we have and the variety of clients that we deal with, one trade that we make on one side can often be used to hedge a trade that we’ve made on the other side,” says Ahmad.

This helps to reduce the amount of balance sheet that such derivative positions consume, and, therefore, the capital hit that the bank takes, he says. Ahmad adds that this allows Standard Chartered to price more aggressively than some of its competitors might be able to do so.

RMB funding

Another feather in the UK bank’s cap is its ability to keep lending costs low, largely thanks to the balance sheet it has in centres outside of Hong Kong, as well as the deep pool of RMB funding that the bank has built up.

“Standard Chartered has the capability to offer onshore RMB FX hedging tools to investors in multiple local centres dealing directly with Standard Chartered Bank local entities. This simplifies the documentation requirements for the clients. We are one of a very few international banks that can offer this flexibility,” says Ahmad.

“Risk-managing a derivative from a local centre, where positions can be hedged back to back, is one thing. But the ability to actually do a balance-sheet consuming transaction in renminbi at a local centre is going to become more and more important.”