It's been a tough year for structured products investors in South Korea. Traditionally one of the region's strongest markets – with dealers churning out an endless supply of index products to the country's large network of securities houses to satisfy seemingly insatiable retail demand – the collapse in regional equity benchmarks over the past 12 months has hit the market hard. Many issuers and intermediaries are nursing losses, while volumes are back at 2008 levels and show scant signs of recovering.
So what better time for a relative newcomer to make an aggressive entrance into the marketplace and begin hoovering up share? Natixis – the French bank historically known for its fixed-income businesses – has spent the past couple of years building up its solutions offering across both fixed income and equity, with Asia a particular focus.
The moves are part of a co-ordinated strategy, says Nicolas Reille, the bank's Hong Kong-based head of equity derivatives sales and financial engineering for Asia-Pacific.
"Natixis's traditional strength is as a fixed-income house. But we are now also registering very strong growth from our equities business, primarily in Apac. We see it as akin to turning on our second engine. Our commitment to the region is very strong," he says.
Reille served as head of equity derivatives sales and marketing for the Asia-Pacific region at rival Societe Generale until 2009, subsequently spending five years as an entrepreneur and private investor before joining Natixis in 2014. He has brought a streak of entrepreneurial zeal with him: the bank has moved swiftly and aggressively to build its business across the region at the expense of retreating rivals, hiring top executives from other banks as they back away from the market.
Clients are certainly impressed: "Natixis are picking up business from us rapidly. They've been proactive in coming to us with good ideas on worst-of structures, for instance. Their sales pitch is very good," says a senior executive at one offshore wealth manager.
We have seen increased volumes on CMS reverse convertible notes across Asia this year, including in South Korea, and through client segments such as financial institutions and wealth managers
Samuel Plagnard, Natixis
"They are doing a good job, especially this year and towards the end of last year, as others retrench. Natixis have gone from nowhere to being in the top tier of our counterparties. They are building their product suite and are always very quick to get back to us," says one Korea-focused client.
Rivals, however, carp that Natixis's newfound success owes much to its aggressive pricing, as it bids to enter new markets and boost its share rapidly. Reille has heard such talk before. He suggests the bank is not interested in buying flow at any price, and that it is committed to building a long-term business based around being responsive to clients, not always showing the best price in a given market.
"We monitor our hit ratios across all markets very carefully. They're pretty steady at around 10% right now, which we are comfortable with as part of our focus on maintaining our margins at a high level. Long term, our strategy is based on listening to clients' needs, and providing the ideal solutions to meet them," he says.
The bank has been making waves in fixed-income markets too, its pedigree here allowing it to move early and capitalise on the trend of clients seeking to diversify away from purely equity-linked underlyings towards rate and hybrid offerings.
"The key trend we see in Korea is a growing demand for offshore investments, as investors seek to diversify their portfolios and enhance yields. On fixed income specifically, our clients, who are institutional investors such as insurers, pension funds and banks, are building their exposure to alternative investments. We have had success structuring solutions to meet their requirements. An example is hybrid structured notes, which mix different asset classes such as rates and credit," says Samuel Plagnard, head of fixed income sales and financial engineering, Asia-Pacific at Natixis in Hong Kong.
The bank has done brisk business in one of the year's biggest trades – reverse convertible notes tied to the US dollar constant maturity swap (CMS) spread. The notes, which are essentially a bet on rising rate in the US, are typically structured with a quarterly fixed coupon, with the payoff dependent on where the US dollar 10-year CMS rate is at maturity. If the rate is equal to or higher than the strike price, then investors get their full investment principal back; if it is lower, the principal is reduced.
"We have seen increased volumes on CMS reverse convertible notes across Asia this year, including in South Korea, and through client segments such as financial institutions and wealth managers," says Plagnard. "There was a slight post-Brexit slowdown, but things have picked up again as investors are settling on a scenario of a US rate hike by year-end. Interestingly, we are also seeing growing volume on the euro curve, which may continue to increase as investors judge that we have reached the bottom on euro rate levels."
Plagnard sees the trade as a taste of bigger and better things to come for Natixis as it builds an increasingly diversified client base in the region.
"For us, the CMS reverse convertible is merely a door-opener to reach new clients throughout the region. We are marketing the products in a number of formats, and also as a kicker to boost potential upside on other asset classes, such as equity-linked notes. We are therefore definitely aiming to provide attractive pricing," he says.
The week in Risk.net, May 19-25 2017Receive this by email