Increased volatility in global foreign exchange markets over the past 12 months has translated into a tough operating environment for most Asian banks. Against this backdrop, OCBC has managed to increase its overall trading flows whilst continuing to provide clients with effective and cost-efficient hedging solutions.
Wee Wei Min, head of treasury advisory at OCBC, says the bank's global treasury division has achieved a healthy growth in treasury sales even though higher market volatility and higher liquidity standards due to Basel III regulations have made it a challenging year for market-facing activities.
"We are definitely one of the top banks in Singapore for foreign exchange not just for US dollar/Singapore dollar crosses but overall volumes in all related Singapore dollar trades. The whole market is in an economic downturn but yet we are seeing an increase in our foreign exchange volumes, so that is a sign that clients are actually turning back to safer banks like us to do their transactional volume," says Wee.
In order to help its clients better manage forex risk, OCBC launched two variations on the traditional forward structure, a trigger cancellable forward and recoverable cancellable forward to help clients that needed to protect against the appreciation of the US dollar. The bank says it saw an initial take-up of close to $75 million at the launch of the two products.
"Traditional structures just give the client a better than market forward rate but we have gone two steps further. The client is not just getting better than forward rates but in the event that there are losses we cap their opportunity losses and also allow for compensation of these losses at maturity. And if there is upside then we also allow them to participate on the upside. We have done a number of variations of these structures across several currencies," says Wee.
While a number of clients have stayed on the sidelines as a result of reduced expectations regarding the number of hikes in US interest rates, Wee says the bank has found opportunities for clients to lock in their interest rate costs at a more efficient and cheaper rate because of the nature of the yield curve at certain times over the past year.
"For example if clients were to do a one-year swap there were times when the three-to-six month Libor rate was higher than the one-year swap. So we look out for opportunities where clients can lock in their interest rate costs at a more efficient and cheaper rate," says Wee.
OCBC's key markets are Singapore, Malaysia, Indonesia and Greater China, allowing it to leverage cross-market capabilities throughout the region. One example of the bank's cross-border structuring capability was a S$150 million ($110 million) loan it helped to arrange for a regional SME (small to medium-sized enterprise) that had operations in China and Singapore.
The client needed to inject money into China to fund its operations but was subject to foreign debt quota limits under Chinese regulations. The bank proposed a structure that allowed OCBC Shanghai to loan the SME funds onshore, with the loan backed by assets held in Singapore.
"From an interest rate perspective we had to make sure it was cheaper than the client borrowing directly from a third-party bank and we had to do both onshore and offshore hedging to make sure that the cost of the loan in Singapore does not rise more than the cost of their loan in China," says Wee.
"By understanding local regulations and what the client was able to do onshore in China, we were able to find the cheapest and most effective funding solution. This allowed the client to have a foreign exchange and interest rate hedge in place," she adds.
As part of a shift to greater pricing efficiency on its electronic trading platform, the bank has centralised its risk management for all electronically priced forex pairs in its Singapore head office. This was done by linking electronic forex liquidity at OCBC's treasury in Singapore to its overseas branches and subsidiaries. The bank says such measures translate into better pricing and value for clients.
According to a managing director at a Singaporean distributor of mechanical parts, innovative currency hedging solutions coupled with sharp pricing is what separates OCBC from its competitors.
"Their daily market updates provide another avenue for us to better understand the proposed hedging solutions and the latest developments in the market. We also appreciate that hedging solutions are customised to help us manage our forex risk more effectively," he says.
The week in Risk.net, May 19-25 2017Receive this by email