Derivatives house of the year, Asia ex-Japan: Societe Generale

Asia Risk Awards 2022

Three years ago, Societe Generale embarked on a project to reposition its investment franchise and de-risk, while continuing to expand its footprint in Asia. Last year, the success of that strategic pivot was evident, as the French bank beat many analysts’ expectations to post its best-ever annual performance globally.

Societe Generale is now building on that achievement and, in Asia, its cross-asset focus is helping it adapt to an increasingly challenging macro and market environment.

Cédric Poloni, senior fixed income pricer and structurer at Societe Generale in Hong Kong, says the bank has made big strides in fixed-income derivatives, and now offers a range of flow and non-flow solutions to help clients manage the transition to a higher interest rate environment. Since the start of the year, the bank has experienced a surge in demand for vanilla payoffs, often with floating rate coupons.

This is where Start Street, an automated platform for fixed-income payoffs launched in 2019, came into its own. The tool enables Societe Generale to automate the pricing, execution and booking of a range of vanilla rates payoffs – such as steepeners, range accruals and capital floor floaters. This made it possible for the bank to capture a large chunk of the growing demand for exotic non-flow payoffs in Q1 and Q2 of this year by sending prices to clients faster than the competition.

“These products are traded a bit more as flow types of products with a very high increase in numbers of requests for quotes,” says Poloni. “Essentially, with this tool, and the speed and agility that it brings to the bank and our franchise, we’ve been able to cover all these requests, which allows us to get more proactive with our clients and become a real partner in answering all their needs.”

He says Start Street handles approximately 3,000 pricing requests a day, which equates to roughly half of Societe Generale’s fixed-income pricing requests on the distribution side of the business.

Higher interest rates have also led to innovations on the institutional side of the fixed-income exotics business. One example was the issuance in April of the first ever fixed coupon Positive Impact and Sustainability Finance Formosa note listed on the Taipei Exchange.

The clients – several local banks and one life insurance company – were interested in diversifying away from USD-denominated Formosa investments and moving into Australian dollar-denominated assets in order to manage their US dollar exposure, while benefiting from more attractive yields. The issuance also came at a time when sustainable assets were beginning to gain traction with investors in the Taiwanese market.

The issuance, a 10-year fixed coupon bond with a notional of A$149 million (US$98 million), commits the bank to finance or refinance, in part or in full, “positive impact finance” projects for an amount equivalent to the value invested in the notes.

“Investors in Taiwan nowadays, they care more and more about how their cash is invested, and its impact on the environment and society,” says Joyce Wu, director of financial institution sales at Societe Generale in Taiwan. “We sensed that some life insurance companies have started to look for products with a little bit of a shorter tenor because the yield pick-up is a lot better right now.”

Another highlight over the past year for Societe Generale in the fixed-income space has been the growth of Korean Treasury Bond refinancing. Although KTBs have high credit ratings – Aa2 according to Moody’s – they have traditionally been difficult for international banks to refinance.

What we’re focusing on, especially on the QIS side, is looking for solutions that are relevant to our clients

Eric Huang, Societe Generale

A South Korean law preventing the reuse of assets as collateral for securities financing, repo or derivatives transactions was changed in 2017 to allow limited reuse of KTBs under new credit support annexes (CSAs). However, it was only in 2020 that Societe Generale, having spotted an opportunity in USD/KRW cross-currency basis levels, could convince clients to sign KTB reuse CSAs.

Those pioneering trades proved a commercial success and, in the past year, the bank has onboarded new Korean clients to source KTBs through reuse CSAs.

There has also been an expansion of the financing channels. Societe Generale can now also source KTBs synthetically for total return swaps, as well as physically through repo transactions. The KTBs can then be recycled too, through reuse CSAs and securities lending under the Global Master Repurchase Agreement and the Global Master Securities Lending Agreement.

“We have now developed an ecosystem at Societe Generale that has led to a better match,” says Pierre Leconte, director in the bank’s cross-structuring group for Asia-Pacific ex-Japan in Hong Kong.

On top of all this, Societe Generale is in discussions with Asian clients about trading KTB repack notes. Interest in KTB financing is also emerging beyond the region, with the bank making pitches to clients in Europe and the US.

“We have moved to a more mature market,” says Leconte. “However, there are still more developments to be done. But we are now really recognised as the player [that allows investors] to source and refinance KTBs.”

Weathering the equities storm

Beyond its success in fixed income, Societe Generale has bolstered its long-standing equity derivatives franchise in Asia-Pacific by expanding its quantitative investment strategies (QIS) offering. Such strategies have proved a good option for institutional clients wishing to build portfolios capable of weathering the recent market headwinds. Over the past 12 months, the bank has seen growth of almost 20% in QIS AUM across Asia-Pacific.

“What we’re focusing on, especially on the QIS side, is looking for solutions that are relevant to our clients,” says Eric Huang, head of QIS Asia at Societe Generale in Hong Kong. “Many of our clients now are seeking ways to manoeuvre through this moment, to find a more efficient hedge or more stable carry from other sources.”

On one transaction, the bank worked with an asset manager in Australia that was running mandates for multiple pensions to deliver QISs that fitted with its investment angle. Societe Generale helped it construct a portfolio with low correlation across major asset classes, while achieving stable performance, as an alternative to traditional fixed-income assets. The client traded total return swaps linked to the strategies throughout most of 2021, based on its schedule for portfolio construction.

“They wanted to build a more diversified QIS portfolio that helps them, first of all, to achieve a stable income, but also to be able to manoeuvre through different market regimes,” says Huang.

In another QIS trade, Societe Generale structured an index that included certain offshore funds and equity investments that expressed the investment views of a Chinese securities house. The bank’s client wanted to gain exposure to offshore assets at a time when Chinese stocks appeared to be falling. The controls in China restricting capital outflows mean it is sometimes inefficient for a firm to invest directly in offshore assets. The index Societe Generale developed allows the client to gain access to such assets in a more efficient way than would be the case if it were to invest in them directly.

“Some Chinese investors are actually quite concerned about their concentration in terms of investment opportunities onshore, especially as the investment environment is getting more challenging,” says Huang. “It’s another way of innovation to cater to what the clients need and meet their specific investment conditions’ constraints.”