Regulation is often regarded as an enemy to financial innovation. The more rules a bank must follow, the harder it is to unearth new products and create new sources of revenue.
But when authorities opt to relax financial regulations, banks and other firms rush into the void to exploit fresh business opportunities – and those that move quickest often stand to gain the most.
Once China decided to ease access to its foreign exchange market, Standard Chartered Bank didn’t hang around. In May, the State Administration of Foreign Exchange allowed dealers to offer options referencing FX rates against onshore renminbi. Twenty days later, the bank was executing Asian-style options and forward transactions for corporate clients in the region.
“Literally, within days, we were the first among international banks in China to close the first deals after the regulatory release,” says Mathieu Lépinay, global head of macro structuring at Standard Chartered Bank Singapore.
Lépinay attributes the bank’s speedy response to its in-depth knowledge of local regulatory developments.
“It shows how well we understood the market, and how quickly we were able to deliver a new product, which the regulator allowed because it was useful for the corporates,” Lépinay says.
When it comes to building local know-how, it helps to have a large presence on the ground. In China and India, Standard Chartered’s team comprises structuring, sales and trading. The units are part of a global franchise that spans nearly 150 jurisdictions covering 59 markets.
New business opportunities linked to deregulation in China and India provided the bank’s main area of growth.
“A large part of our new trades came from regulatory developments in the two biggest markets in Asia: China and India. There has been a liberalisation trend that’s linked to what I call the ‘onshorisation’ of derivatives. These countries are trying to make sure that a broader range of financial services linked to derivatives are available onshore with the objectives of getting market share and opening their markets further,” says Lépinay.
India’s central bank relaxed its ban on the trading of complex derivatives such as swaptions and structured options by banks and corporates at the start of the year. This followed a move to allow local and foreign banks to trade non-deliverable forwards in a special economic zone in Ahmedabad from 2020.
Meanwhile, China has released a slew of measures to ease foreign access to domestic markets, including by opening up foreign exchange trading this year. The country is also preparing to unveil its Swap Connect scheme, which allows dealers to trade interest rate swaps onshore.
Standard Chartered’s sales pitch in China and India largely comprised best practice by some of the corporates in the region, products that have worked in other markets, and a track record of corporate clients with a successful hedging strategy.
“One of the key areas where we have been able to help our clients is to understand what the new regulations mean, the alternatives we can offer them on the back of the changes and whether these are actually beneficial to them,” says Saurabh Tandon, global head of FX options trading at Standard Chartered Bank in Singapore.
The derivatives rule change in India this year allowed Standard Chartered to complete a USD/INR hedge via non-vanilla FX instruments for a client that wanted to reduce its hedging costs further instead of using vanilla hedging products.
These structured hedges include more complex products, such as barrier options and forwards, which knock out at expiry or at any time, Tandon says. “The product already exists in other markets, and with new regulations in India we were able to do it for our clients,” he adds.
The opening up of the South Asian region has presented further opportunities in new markets such as Nepal. Standard Chartered became the first bank in the region to complete an FX options deal in Nepalese rupee – a USD/NPR call spread option to hedge the client’s FX risk.
But it wasn’t an easy task. The deal required extensive discussions with Nepalese regulators before approval was granted. Risk-managing the trade was also a challenge, given that Nepal has no options market and a very limited market for non-deliverable forwards.
The bank ended up selecting proxies with “a high degree of correlation” to replicate the position, says Lépinay. The bank managed any basis risk between the two instruments to maintain the hedge.
“There was no way to perfectly hedge that in the market,” says Lépinay. “And that to me is a very important strength that we have as a bank, to be able to offer hedges in markets that are not necessarily very deep or very liquid.”
Standard Chartered’s liquidity provision was put to the test in a transaction for a Korean investor with significant exposure to Vietnam. The illiquid market for Vietnamese dong makes hedging VND positions difficult, but the client needed to hedge $200 million-equivalent of VND-denominated debt and equity investments.
Standard Chartered managed to create market liquidity by sourcing other transactions that required hedging in the opposite direction. It provided a USD/VND non-deliverable cross-currency swap to a European client, which used the swap to hedge its VND bond issuance, and it sold a non-deliverable VND synthetic note to offshore investors.
“If you ask any bank to quote a Vietnamese dong FX hedge in $200 million, I think everybody will tell you no,” Lépinay says. “What we’ve done is find a flow in the other direction that would allow us to quote this dollar VND FX hedge for the Korean client.”
Standard Chartered has also completed deal-contingent transactions in the past year. One example involved an FX hedge linked to an underlying M&A transaction in the Philippines worth $1.2 billion.
“I would say maybe four banks can offer liquidity in dollar/peso vanillas, but for a bank to offer a deal-contingent in that, we were probably the first,” Tandon says.
Like other dealers, Standard Chartered has also put substantial investment into its trading platforms. The latest enhancements to its single-dealer platform cover FX option products. Tandon says Standard Chartered is the only bank so far to offer streamed volatility swaps and Hong Kong dollar vanillas on its single-dealer platform. It is also one of the few banks to offer liquidity for both FX options and precious metal options.