Société Générale

Altough year for structured products in Asia saw Société Générale's (SG) equity derivatives team lead the market into Chinese capital-guaranteed products, maintain its lead in the Hong Kong warrant market, and continue to provide innovative, fast and flexible structures to both retail and institutional players.

"It was a difficult year," says Raphael Blot, managing director, equity derivatives at SG. "Two to three years ago in Hong Kong, 70% of the net money going into mutual funds was going into capital-guaranteed funds. The numbers for July 2004–July 2005 are down to something like 12%. So in this difficult market environment, we came up with some new concepts and products."

And so in 2005 SG became the first bank to offer a fully hedged capital-guaranteed product in China, a product fully protected by international standard CPPI (constant proportion portfolio insurance) technology. According to Wilson Lee, also managing director, equity derivatives at SG: "The last two years have seen a couple of different types of capital protected funds in China. They were capital protected (not guaranteed) or guaranteed by a trust or corporate entity that would not assess and monitor the risk the same way an international derivatives player would."

The launch of a capital-guaranteed fund may not raise any eyebrows in the Asian structured product market, but Blot says this was one of the most complicated and involved deals his team has made. "We never had a single other deal which tied up so many resources for so long," he says. "We had legal, financial engineering, marketing people working on this for over a year."

Unable to work on its own in China, SG teamed up with Harvest, at the time the fifth-largest asset manager in China, to develop the product. Harvest was chosen for its excellent contacts with the regulators, and because it is one of the top asset managers in China.

Once the product had been developed, SG had to create the capital guarantee. Aside from the lack of standardisation of existing guarantee structures in China, there is no zero-coupon market in China. "So we had to find ways to back up the capital guarantee – we used agency bonds, government bonds. But we found a third barrier: there is no law in China that says a bank can guarantee a fund."

As Blot says: "When considering the regulation in China, if it is not specifically stated that you are allowed to do something, it is probably safer not to do it."

Lee says: "So we had to become quite creative in that area." SG chose to link up with Shanghai Pudong Development bank, which already had a credit card joint venture in place with Citibank and was felt to be a suitably professional institution with which to develop a capital guarantee. "We had to go to the CSRC (China Securities Regulatory Commission) and the CBRC (China Banking Regulatory Commission) – and we were granted an approval to do this guarantee. I guess second time around it will be easier," says Lee.

The final challenge for SG is monitoring the fund. "We had to figure out ways to get the information passed down to us, because it is quite a complex involved process in China. But we eventually got it launched," says Lee.

Another managing director, equity derivatives at SG, Nicolas Reille, says: "We learned a lot on this China deal, which will help us in other emerging markets. I don't think there are so many investment banks today with the expertise to do capital-guaranteed funds in emerging markets like China."

While SG has become active in bringing equity derivatives to emerging markets, its warrants business remains core to its Hong Kong activities. "If you do not have a good warrants business, you are missing one leg of your equity derivatives business," says Blot. "Warrants enable you to offload some of the volatility coming through structured products."