Commodities house of the year: Societe Generale Corporate and Investment Banking

Structured Products Asia Awards 2016

The theme for Societe Generale Corporate and Investment Banking (SG CIB)'s commodities team is consistency, which explains why the bank wins this award for the third year in a row after continuing to provide innovative solutions for clients through changing market dynamics and retrenchment by other houses.

Standout trades this year revolve around bringing value to clients, including carving out significant added premium in physical contracts by monetising options, and finding an efficient way to navigate restrictive counterparty concentration regulations in Japan.

The bank's staying power comes down to focusing on client solutions in commodities, rather than making their returns in trading. By doing that, it maintains high client satisfaction levels and sustainable returns in the asset class despite increasing restrictions.

"The market is not easy for many right now, but our strategy has been to service clients, both in the corporate and institutional investor world, where we've increased our footprint in terms of product offerings. Our angle of focusing on clients and more products rather than trying to find alternatives to a very complex environment in relation to trading has been a very good decision," says Olivier Godin, head of commodity markets for Asia-Pacific at SG CIB in Singapore.

"We are seeing players exiting the commodities business. We've tried to be proactive in providing our clients with suitable products and solutions, but we'd rather do a business we are happy to do and that the client is happy to get at a fair price. We don't do everything - we do business where we have a competitive advantage for that client. On that front, I think we've been very successful," he adds.

Monetising options

One highlight this year was a solution to allow physical traders to monetise options in their contracts - giving them a margin boost or leverage to get a competitive edge in pricing. The solution, called a chooser swap, monetises an option found in many physical contracts allowing suppliers to choose the final sale price. A supplier agrees to sell a certain amount in the future - for example, three months - and at delivery can choose which price in the past three months to sell at.

"When you look at the value that the trader extracts by selling us that option, it's allowing him to get paid more for his copper and, potentially, to propose a better deal to his buyer. By monetising this option, he crystallises the margin of his trade," says Godin.

The extra premium amounts to around 3–5% of the notional of the contract, Godin says. For example, someone trading a physical contract worth $20 million would gain up to $1 million in value by monetising the option. While a large majority of the bought option's risk is managed in the bank's books, some is being flattened out via the sale of the converse option, where buyers can enter a product by choosing at which time in the future to strike the entry reference price.

"Even though it isn't a one-to-one repacking, the consequence of selling such optionality to an investor is to reduce the risk we have on our exotic book. Otherwise we manage it as part of the global book," say Godin. "It's good if we can recycle the option, but we don't go into these trades saying we will repackage that risk another way - we are happy to take that risk."

Our angle of focusing on clients and more products rather than trying to find alternatives to a very complex environment in relation to trading has been a very good decision
Olivier Godin, Societe Generale Corporate and Investment Banking

In Japan, SG CIB found a way to give clients efficient access to commodities exposures despite new counterparty exposure limits set by regulators. The rules, released in 2014 for full compliance by 2019, limit a fund's exposure to a single counterparty to 10% of its net asset value.

An exception is made for exposures collateralised by certain government bonds, however; so by collateralising notes linked to the Bloomberg Commodity Index using bonds from Group of Seven countries, SG CIB allows investors to get their full desired commodities exposure via one counterparty. Clients buy notes linked to the index from a segregated fund in New York. The French bank takes that cash and buys G7 bonds worth 110% of the value of the assets under management and places them in the fund to collateralise the notes.

The bank expects growing demand for the solution, and estimates there is more than $1 billion in assets under management in Japanese retail commodity index-linked funds that will need to be compliant with the new credit exposure restriction.

"We are in the middle of the switch and that is why we expect our volumes will increase and our book will increase. What is most interesting is that the commodities team came up with this solution before other asset classes. Usually, you come up with a solution in equity and apply it to commodities. This time we came up with the solution, which is quite attractive and works for everyone," says Godin.

Also contributing to its consistency in the region is SG CIB's ability to provide a wider range of services thanks to the acquisition of Newedge, the futures broker and member of a number of commodity platforms, including the London Metal Exchange, which it bought out two years ago.

"This has benefited many types of client, who can now use the Societe Generale footprint where they were only aware of and trading with Newedge before, and vice-versa. That has reinforced our relationship with the client and increased the value of the franchise of the bank in Asia-Pacific," says Godin.