Interest rate derivatives house of the year: Standard Chartered

Asia Risk Awards 2022

Bruno Lettich

The year 2022 is one that has seen the emergence of new dislocations in rates markets arising from an uneven recovery from the Covid-19 pandemic, particularly in Asia. For Standard Chartered Bank’s rates business, this has opened the door for a host of new, and clever financing solutions.

Mathieu Lépinay, Standard Chartered’s Singapore-based managing director, global head macro structuring, says the bank’s ability to use market dislocations to cheapen financing costs for clients is aided by its broad connectivity across geographies and innovative packaging capabilities.

“Some markets are reluctant to hike; some have been very quick to do so. And with our structure and connectivity in so many markets, it’s a great environment to play with. Dislocations can be across currencies or different curves – the non-deliverable curve versus the onshore curve. This creates a lot of opportunities, providing you’re able to capture them, in a packaging that makes sense for the client.”

There have been a multitude of such transactions over the past 12 months, each of which highlights Standard Chartered’s enduring strengths as an interest rate derivatives house in Asia.

These transactions are also indicative of a rebalancing of the bank’s rates business that has taken place over the past 18 months amid a rapidly changing macro backdrop. The bank’s focus now is on solutions to help clients adapt to the new market uncertainties they face in managing their interest rate exposures, something reflected in a 20% year-on-year increase in client income as of June.

“We’ve continued to expand our product offerings and continue to focus on liquidity conditions that are changing,” says Bruno Lettich, managing director, head of global rates at Standard Chartered Bank in London. “I think our results speak of that. We’re seeing increasing traction with clients, from both a market opportunity and product diversity perspective.”

Several transactions have taken advantage of the differences in liquidity conditions in different jurisdictions that the bank has operated in over the past year. For example, the bank had excess liquidity in the Philippines, which it was able to use to raise financing for clients in markets such as Vietnam and Korea, by taking advantage of dislocations across the different interest rate curves.

For a client in Korea, the bank monetised the low cost of liquidity in the Philippines by capturing a favorable PHP/VND cross-currency basis in the offshore market. It was able to provide a corporate in Vietnam with financing at an attractive level via participating in the client’s onshore VND bond issuance.

In a second series of transactions, the bank replicated this structure to deliver financing for corporate and financial institution clients in Korea. Again, the bank used the low cost of liquidity in the Philippines, Singapore and Thailand – as well as a favorable cross-currency swap basis between the local currencies and Korean won – to deliver financing at attractive levels for its clients. A total notional of $2.2 billion was raised for the bank’s clients in Korea through this structure.

We’ve continued to expand our product offerings and continue to focus on liquidity conditions that are changing. I think our results speak of that

Bruno Lettich, Standard Chartered

As Lépinay readily admits, taking advantage of interest rate differentials implied from cross-currency markets is far from a new phenomenon in the world of financing and investment.

But the cross-currency arbitrage play that has been more commonly seen over past years is dollar investors buying Japanese government bonds and swapping back to USD.

“Having a Philippine-based branch of a UK bank, purchasing a Vietnamese dong bond from a corporate client – I think that is taking it to the next level,” says Lépinay.

A similar transaction saw Standard Chartered propose a cross-currency repo to maturity transaction, which enabled its Indonesian bank client to raise USD funding on the back of Indonesian government bond holdings. With the basis between the cross-currency swap curve and the underlying bond’s yield moving higher, the client obtained a total of $100 million of financing for three to five years, at a rate of roughly 50 basis points lower than prevailing yields of comparable bonds.

As Lépinay explains, it is Standard Chartered’s broad geographical footprint across the Asia region – spanning 21 different markets – that makes such transactions possible.

The breadth of that client footprint also helps the bank recycle risks into other client transactions, which in turn allows it to deliver solutions in highly illiquid frontier markets that many banks might shy away from. Another example from the past year – a quintessential Standard Charted transaction – was a USD/VND one-year hedge to a Korean financial institution investing in Vietnam. To make it work, a portion of the risk was distributed to investor clients in Europe through synthetic VND structured notes.

Few other banks in the region, Lépinay points out, would be able to connect all these markets and take advantage of emerging market dislocations and deliver financing solutions for clients.

“I don’t think any other bank could have done all of these trades,” says Lépinay. “That’s a differentiator; that’s what makes us unique. We are probably the only bank that could have done all these trades in all these different markets.”

The Libor end-game

Mathieu Lepinay, Standard Chartered

For several years now, Standard Chartered has been one of the banks leading the way in Asia’s transition from interbank offered rates, such as the outgoing Libor, to new risk-free rates (RFRs).

In 2020, for example, the bank traded the first USD/CNY cross-currency basis swap in China referencing the CNY seven-day depository-institutions repo rate and the USD market’s new secured overnight financing rate (SOFR). Around the same time, the bank also transacted the first cross-currency swap linked to Malaysia’s local interbank offered rate (Klibor) and USD SOFR.

And the past 12 months have seen yet more milestones for Standard Chartered in Asia’s benchmark transition. In the Singapore dollar rates market, the bank helped an insurance client re-hitch a large sized portfolio of long tenor SGD interest rate swaps referencing SOR to the market’s new local RFR, Sora – no small feat, considering it required trading in the then still nascent SOR-Sora basis market.

The bank also continues to be focused strongly on the USD benchmark transition, given the large number of clients the bank has across the region with sizable exposures to US dollar Libor on their books, through bonds and loans, as well as the derivatives used to hedge them.

“There’s still a lot of work that needs to be done on Ibor transition, especially outside of the Western world, in our Asian footprint,” says Lettich. “More importantly, the big challenge will come from the US dollar Libor transition to SOFR, and how liquidity develops across varying local cross-currency derivatives markets.”

One of the local markets that has required a lot of educational work around the SOFR transition is China. To this end, Standard Chartered endeavored to help its Chinese clients understand the timelines around various Ibor cessations, the regulatory implications of those cessations and the mechanics of SOFR.

The work is beginning to pay off, with many of the bank’s Chinese corporate clients now adopting SOFR for cash products and entering into SOFR-based derivatives transitions to hedge their borrowing. On the investment side, meanwhile, they are also beginning to see interest in SOFR from their Chinese corporate clients, who had been frequent buyers of USD Libor-linked RMB structured deposits. In the past year, Standard Chartered delivered an alternative offering where the coupon is linked to range accrual on SOFR.

“Term SOFR is becoming a favourite in China for loans,” says Lépinay. “And we’ve been very quick, very proactive in positioning ourselves on that product with all the regulatory and compliance caveats that apply to both term SOFR and the local markets. In Hong Kong, Singapore, it is a fairly easy to get all the information you need. But for clients in China, while it is an important topic for them, it might be more challenging. We’ve organised seminars on the Libor transition for them; this increased market awareness, and now many have done SOFR loans and SOFR swaps on the back of these loans.”