House of the year, Taiwan: CTBC Bank

Asia Risk Awards 2022

Jack Wang, CTBC Bank

CTBC Bank has once again been able to demonstrate that it is a cut above its competitors in the Taiwanese market, through its commitment to clients and a determination to launch new products ahead of others.

An important example of such product innovation is the launch of the first ever US dollar interest rate swap in the Taiwanese market linked to the Secured Overnight Financing Rate (SOFR) for a corporate client in Asia.

The client in question was an airline leasing company based in Hong Kong that wanted to translate the US dollar exposure for recent loans into a fixed liability.

The transaction, finalised in September last year, was for a five-year swap linked to one-month SOFR, with a notional value of $30 million. The client was able to lock in a fixed rate of 0.4%, while SOFR is currently trading at around 2.3%.

The hedging was booked in Singapore, while the head office in Taipei played a critical role in linking the two branches together in order to ensure appropriate position and risk management.

When CTBC first discussed the transaction with the client, in the middle of last year, the conversation centred on linking the swap to US dollar Libor, with the possibility that it would be switched over to SOFR ahead of Libor’s cessation in the middle of 2023.

“We thought about this and then asked the question: why not at least look at doing this as a SOFR transaction? The client has certainly appreciated this,” says Jack Wang, head of the global treasury sales division.

However, given that this was the first trade of its kind on the market, putting it together was far from straightforward.

“There were a lot of components. We had to convince our internal legal guys. We had to convince the client and their lawyers. And we also had to convince the trading guys. But I am definitely glad we went down this route,” says Wang.

Getting the documentation in place was the first hurdle.

“We had to go through the Loan Market Association standard documentation for describing SOFR loans, and then cross-reference this with the Isda protocol for how to calculate and disclose this compounded rate. We spent almost one month to verify all this detail for the client,” says Wang.

There were also some complexities in terms of structuring the swap, too.

“The client advised us that they might not be able to pay on the same day that we need the money, so we had to incorporate a five-day lookback calculation,” says Wang.

We asked the question: why not at least look at doing this as a SOFR transaction? The client has certainly appreciated this

Jack Wang, CTBC Bank

Such a lookback period allows the interest rate to be compounded until five days prior to period end, which helps give the client more time to prepare, since with backward-looking SOFR it can be challenging to arrange payment after the interest rate is calculated.

“This might seem like quite a trivial thing to implement, but it actually requires quite a bit of innovation to do properly,” Wang says.

Since the interbank convention for such a lookback period is two days, extending this to five “incurs additional risk, system modification and refinement of operation procedure”, says Wang.

Being first to the market with such a complex structure is never an easy thing to do, but such transactions often do win plaudits from customers – and help national players get noticed in the market.

Competing with global banks

Another area in which CTBC stood out from the crowd this year is China.

In February 2021, CTBC was selected by the China Foreign Exchange Trade System, a division of the central bank, to be a market maker for spot CNY in the Chinese interbank market.

Since then it has taken a different course of action than many of its national peers by developing an in-house market-making platform to manage the price quotes. This was launched in February 2022.

While many of the global powerhouses active in China have already gone down the route of developing their own in-house pricing platforms for the market, this is not so common for smaller regional players.

“By developing this market-making tool, we have become more competitive in terms of handling the price, handling the quote,” says Wang. “We believe that, because of this tool, our bids and our price-making is efficient. This improves our hit rate up to 50%.”

CTBC plans to continue developing and refining this system in order to deepen its penetration into the Chinese market.

“We are already performing well compared to our Taiwanese peers,” says Wang. “We now want to be able to compete with the global banks. We are confident that, if we can survive in this interbank market, we won’t have a problem to place our clients. So that’s the whole idea – and why we have been investing so heavily in the platform.”