Equity derivatives house of the year: Societe Generale Corporate and Investment Banking

Asia Risk Awards 2022

Societe Generale Corporate and Investment Banking (SG CIB) has long been regarded as a leading bank for equity derivatives in Asia-Pacific. Two years ago, its position hung in the balance as costly structured products hedging burned a €200 million ($192 million) hole in the equity trading division. Lessons have been learned, leaving the bank’s business in the region arguably stronger and more resilient than ever.

The turnaround harks back to a strategic decision to shift the equity structured products business away from riskier payoffs in the wake of the losses. It also reflects the bank’s enduring ability to deliver pioneering solutions carefully tailored to meet investors’ needs.

A core part of the strategy saw SG CIB reinvent a portion of its autocallable business by reducing the amount of ‘worst-of’ products on its books. These instruments use correlation between stocks or indexes to bolster the coupon. Issuers are left with a short correlation position that is difficult to hedge. Dealers have been caught out time and time again, not least during the equities market sell-off of early 2020, when indexes fell in tandem, leaving issuers with hundreds of millions of dollars of losses.

Now, the French dealer hopes to improve revenue stability with a new suite of products – both linear and non-linear.

“Our product pivot meant we reduced market share on correlation autocalls, but we’ve more than compensated for this through both new products and past offerings as well,” says Jung-Jin Yoon, head of global markets cross-asset sales for Asia-Pacific at SG CIB in Hong Kong.

The introduction of fixed-dividend autocall notes to Asia-Pacific investors is one example of how SG CIB’s strategic pivot away from correlation products is beginning to pay off for the bank.

SG CIB is a pioneer in fixed-dividend indices, having developed and traded the first fixed-dividend index in 2014, and debuting a range of such indices for investors in Europe over subsequent years.

These strategies work by reinvesting dividends paid by constituents on a specific equity index underlying and subtracting a fixed payout from the performance, typically 5%. SG CIB says the design is intended to remove some of the uncertainty caused by a reliance on dividend implied values.

The products have been a staple of Europe’s structured products market for almost a decade, but struggled to find traction in Asia-Pacific where worst-of payoffs have long been the go-to structure. In the past year, SG CIB started pitching fixed-dividend autocalls to Australian asset-management clients, explaining the protection benefits these structures offer in an uncertain market environment.

A fixed-dividend autocall trade linked to Australia’s benchmark S&P/ASX 200 index (AS51) with an Australian asset manager, was a first in Asia-Pacific. Tenors range between five and six years, a shift from the three-year tenor worst-of products traditionally sold in the region.

“We have worked closely with distributors to share that it’s safer to have an autocall payoff linked to a model index with a fixed dividend component, rather than going to a worst-of structure,” says Olivia Chen, managing director for SEA and AUS distribution sales at SG CIB in Singapore. “We’re very happy to have opened this new market on fixed div autocalls in Australia, which we will continue to grow going forwards,” she adds.

Another example of payoff innovation saw the bank introduce the first ‘3–1’ autocall to the Korea retail market. The new product, which allows SG CIB’s trading teams to mitigate their hedging and correlation risks, works like this. At inception, the payoff looks very much like a traditional autocall. The notes are linked to a worst-of basket of three equity indexes and have a three-year tenor. But, if the notes do not autocall within one year all that changes and the product morphs to reference only the worst-performing underlyer.

As well as reducing the trading risks for SG CIB compared with the traditional autocalls, this mechanism shortens the duration of the product, reducing the risk of principal loss for investors in the products.

Won Seok Choi, head of cross-asset distribution for Korea at SG CIB, says these features make the new 3–1 autocall a ‘win-win’ for both SG CIB and investors.

“It’s really good for the investor, when they’re concerned about potential losses while the product has not autocalled,” he says. “But it’s also good for SG CIB’s trading position because reducing the underlying from the three to mono [a single index] after one year also reduces the correlation risk.”

The product is gaining good traction, with 55 tickets and a total notional of 290 billion won issued between June 2021 to December 2021.

Elsewhere, the bank continues to develop its quantitative investment strategies (QIS) on behalf of institutional clients in Asia. One transaction saw SG CIB work with an asset manager in Australia running mandates for multiple pension funds to deliver various QIS strategies with low correlations to traditional asset classes. In another transaction, the bank structured an index that allowed a Chinese securities house client to gain an indirect exposure to offshore funds at a time when the outlook for onshore stocks looked grim.

“The product scope is radically different this year,” adds Yoon. “Now it’s all about risk aversion, downside protection and promoting principal protection. If the work had not been done the past two years, I think we would be in a different scenario today. Overall, I think the franchise is now much more solid.”

Warrants winners

In Hong Kong’s fiercely competitive warrants market, no bank has been present for as long as SG CIB, which, in 2022, celebrated its 25th anniversary as an issuer on the Hong Kong Exchange (HKEX).

Hong Kong has the largest derivatives warrants market in the world, and SG CIB has for many years consistently been one of its top issuers.

The bank is the largest callable bull and bear certificates (CBBCs) issuer on HKEX, in terms of the total number of product issuance and sold notional in the Hong Kong market. Across both warrants and CBBCs, SG CIB recorded a market share of roughly 12%.

But the bank is not resting on its laurels and continues to strengthen its franchise by adding new index underlyings. In the past year, the bank began issuing new listed products on HKEX for investors wishing to bet on the trajectory of US equities.

“In Hong Kong, we expanded our underlying range to cover US tech last year, to provide investors with an opportunity to gain exposure to the volatility of the US indexes during the Asia trading hours,” says Horace Chow, director of cross-asset listed distribution sales at SG CIB.

In Q4 2021, SG CIB also issued 10 derivative warrants in Taiwan, linked to the Taiwan Stock Exchange Weighted Index (TWII). The inaugural launch marks a milestone in the development of the bank’s franchise on the listed structured products market.

Chow says it is not easy for foreign banks to succeed in growing market share in Taiwan’s fiercely competitive and local broker-dominated warrants market. However, the bank is already making inroads, and expects to grow market share further in the next 12 months.

“In Taiwan, we have started to grow our market share, in a market where competition is very tight as it’s dominated by local brokers. So, we needed more creative ideas, both on the sales and marketing side in Taiwan, to help keep increasing our market share and increase the awareness of our brand.”