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

Asia Risk Awards 2021

Societe Generale, while long regarded as a leading derivatives franchise in Asia-Pacific (Apac), has traditionally, at least, been best known for its dominance in one specific business line above all else, says Jerome Niddam, head of global markets for Apac at Societe Generale in Hong Kong.

Over the past year and a bit, that has been changing. The investment bank’s markets division has recalibrated its long-term strategy and pivoted into new areas of the derivatives solutions business.

“If you look back a few years ago, our business model was more skewed towards equity structured products,” says Niddam. “Today we’ve successfully rebalanced the business mix. We have innovated more on the financing side and in cross-border solutions. That has been a key area of development for us over recent years, and we now have very strong capabilities across the region.”

Implementation of the new strategy began several years ago. Within the plan, the equities franchise would aim to maintain its leadership in structured products. But the bank would also look to diversify its equity business by reducing exposure to the riskiest products and beginning the roll-out of a new generation of structures that would continue to offer attractive returns for end-investors.  

At the same time, the equities franchise would look to expand its footprint in high-growth markets across the Apac region, with a particular focus on China and India.

After a challenging first quarter for the bank at the global group level in 2020, the process accelerated. In an extremely stressed market environment at the onset of the Covid-19 pandemic, structured products books across the street suffered losses on unhedged dividend exposures.

First- and second-quarter profits at the group level took a hit, before recovering strongly in the second half of the year. But the ensuring rebound in global equity markets also helped the bank to move ahead of schedule on the restructuring of its structured products business.

Autocall products linked to indexes such as S&P 500, Eurostoxx 50 and the Kospi expired early as spot prices surged past pre-set barriers. Those worst-off structures were not reissued but were replaced by new payoffs with less correlation sensitivity, and which offer better carry for trading books.

As a result of these efforts, diversification across the bank’s structured products book has increased significantly, leading to a substantial reduction in overall risks managed.

Meanwhile, the success of the new products has helped the bank to preserve its flagship structured products franchise, while increasing its market access offering for China and India to global clients. The bank says its activities have doubled in China and India over the past 12 months.

“The focus has been to grow China and India,” says Niddam. “To have more than doubled our activities in those markets these past few years is something we’re really proud of.”

In Hong Kong’s mammoth listed products market, meanwhile, the bank cemented its position as a number one issuer by capitalising on an explosion in demand for callable bull and bear contracts (CBBCs).

“We’ve invested a lot in electronification and automation around these products, and that has made us a leading issuer in this space across the Street,” says Niddam.

The success of this pivot, combined with the bank’s enduring capacity to innovate across asset classes and client segments has helped establish an even stronger Apac derivatives business – and more than justifies this year’s win.

New products, new growth

To increase its footprint in China and India, Societe Generale’s strategy is to help its global clients to access the onshore markets while providing local clients with new types of revenue solutions.

On the China market access side, for example, the bank has developed exclusive client partnerships on a substantial universe of stocks on the Hong Kong-China Stock Connect scheme. Leveraging its market access strengths, the bank has been providing financing – at a preferential rate – for the long equity swap positions of Hong Kong wealth management and securities companies.

In India, the bank says its cross-margining capabilities between equity swaps and offshore futures is one of the key factors behind its growth in the market over the past 12 months.

“It is a different approach to what many of our peers are taking [in these two markets],” says Eric Jungers, head of linear trading and prime services at Societe Generale in Hong Kong. “We partner extensively with local players, which brings significant benefit to our international clients trying to access the market. We feel we’re winning in both China and India.”

Conversely, the bank is also using its cross-border set-up to help local securities houses and private wealth management clients to diversify away from mainly domestic investments.

The focus has been to grow China and India. To have more than doubled our activities in those markets these past few years is something we’re really proud of

Jerome Niddam, Societe Generale

A number of landmark equity financing transactions have been executed for onshore clients in the past year. These include a first cross-border equity-linked swap and a first cross-border structured autocall swap under local documentation. Both were traded with local securities houses.

In Hong Kong and Singapore, meanwhile, Societe Generale’s listed products business is booming, helped in part by a now fast-growing market for CBBCs issued on Hong Kong Exchange. Turnover of CBBCs, which allow investors to make leveraged bullish or bearish or bearish bets on underlyings such as the Hang Seng Index, surpassed that of derivatives warrants for the first time in 2020. Societe Generale is well established as a leading CBBC issuer, with a 16% market share in terms of turnover.

“The growth of CBBCs is still continuing,” says Keith Chan, head of cross-asset listed distributions for Apac at Societe Generale in Hong Kong. “It is a product we’ve been very focused on in the past few years, and we’re maintaining our position in the market.”

Technology has also made a big contribution to Societe Generale’s success in listed products in what is a fiercely competitive market for issuers, characterised by paper-thin bid/ask spreads. The bank’s liquidity provision quality index, a website tool that measures average bid/ask spreads, liquidity and pricing stability for each product, has helped bring some much-needed transparency to this market for retail investors – and is now being imitated by rivals, says Chan.

“It is showing the market for every single product: the average spread we are quoting, the size we’re quoting and the consistency of those spreads,” adds Chan. “I think that has built a lot of trust, and we’re now seeing some of our other competitors doing the same thing.”

Driving market development

Beyond the equity derivatives franchise, Societe Generale also continues to bring innovations to the market in other asset classes. Most notably, in the past year, in credit derivatives.

A prime example is a breakthrough securities financing trade in which rehypothecated Korean treasury bonds (KTBs) were, for one of the first times, utilised as collateral.

Historically, most Korean law credit support annexes (CSAs) rely on a pledged structure that effectively prevents the reuse of assets as collateral for securities financing, repo or derivatives transactions. A new law was passed in 2017 to allow the reuse of KTBs in new CSAs.

Yet for years after the change in regulations, there was still some reluctance from Korean firms to sign new documentation permitting resuse of the assets. Combined with an absence of ideas from international banks of ideas for effective refinancing channels, little changed until last year.

In 2020, Societe Generale, having spotted an opportunity in cross-currency basis levels to monetise the resuse of KTBs, began making the case again to clients on the benefits of KTB reuse. The bank proposed trade ideas in which it would finance dollar funding and receive KTBs as collateral. After those discussions, the bank managed to onboard some of its key clients to KTB reuse CSAs.

The KTBs were then refinanced through cross-currency repo rate notes, which were placed with clients in the bank’s variable annuities business in Japan.

“There were interesting levels on the USD/KRW cross-currency basis that allowed us to show trade ideas to clients and to monetise the reuse of KTBs,” says Thomas Decouvelaere, co-head of fixed income at Societe Generale in Hong Kong. “It allowed us to put on a few trades that allow reuse to educate the clients, and now they understand the benefits of doing that.”

Decouvelaere says the creation of a new range of KTB financing solutions showcases one of Societe Generale’s strengths as a derivatives house in the Asia region: its ability to innovate and find pockets of value by leveraging its large regional and client footprint.

These first trades, he adds, could pave the way for KTBs to join other highly rated government assets, such as Japanese Government Bonds, as major source of collateral in international markets.

“This shows our ability to connect businesses across Asia, while driving local market development,” says Decouvelaere. “With the history of non-reusability and reluctance of local participants to do rehypothecation, you had assets that could not be refinanced despite being high quality. There was value to be extracted there.”