House of the year, Taiwan: CTBC Bank

A tightened regulatory environment has squeezed Taiwan’s derivatives market over the past year, but CTBC Bank has still managed to expand its structuring business across South-east Asia.

CTBC is a leading player in the derivatives market in Taiwan, with a 10% market share as of the end of March 2019, according to data from Taiwan’s central bank. A commitment to innovation has been key for the bank in maintaining this position. In the past 12 months, the bank has successfully launched a new foreign exchange structure and a commodity derivatives structure that demonstrate a combination of derivatives expertise and a strong understanding of the relevant regulatory landscapes.

The two new products were launched through overseas branches. Taiwan’s derivatives market has shrunk since the Financial Supervisory Commission tightened the regulation around the sale of forex products. However, with the trade dispute between the US and China pushing Taiwanese companies to shift their businesses into new markets, CTBC spotted an opportunity.

“We are seeing clients moving their businesses to southeastern countries due to the US-China trade war,” says Jack Wang, head of the global capital markets group at CTBC. “For example, many top-tier Taiwanese firms and industries ranging from non-tech to tech manufacturers have moved some of the production lines to India. We have been able to serve them with tailor-made solutions because of our long-time dedication in the region.”

CTBC operates in eight markets: China, India, Indonesia, Japan, the Philippines, Singapore, the US and Vietnam. Singapore is the bank’s strategic hub in South-east Asia, while Hong Kong coordinates its Greater China coverage, which now constitutes Shanghai, Guangzhou, Xiamen and Shenzhen.

“There has been a high demand for forex hedging in the emerging markets since their currencies are often volatile with high interest rates,” says Wang.

Increased demand has also resulted from recent policy dividends in countries such as India and Indonesia. In January, for example, the Reserve Bank of India eased overseas borrowing rules to save its market in a bid to attract capital flows to provide some support to a steeply depreciating rupee.

The Reserve Bank of India’s (RBI) mandatory hedging requirement for external commercial borrowings (ECBs) by Indian companies was also reduced from 100% to 70% in November 2018.

Wang says these measures have contributed to a growing demand for hedging solutions in India, which the bank is in an advantageous position to provide on account of its dual platform that can provide US dollar loans from its Singapore branch under the RBI’s ECB scheme, and cross-currency swaps from its New Delhi branch.

“It’s not easy to commence a new asset class in derivatives because a complete infrastructure needs to be set up, including risk management, system, legal documentation,” says Wang. “In an attempt to meet more clients’ needs, our New Delhi branch commenced expanding the rates derivatives product line during the past year.”

There has been a high demand for forex hedging in the emerging markets since their currencies are often volatile with high interest rates

Jack Wang, CTBC

Wang adds that the bank is expecting to see further growth in ECB hedging needs in part due to Taiwanese technology companies shifting their manufacturing to India. Taiwan-based Foxconn, formally known as Hon Hai Precision Industry, has said it plans to begin assembling Apple’s iPhone in India, for example.

In Indonesia, the central bank opened the rupiah-settled onshore non-deliverable forwards market in November in a bid to create a parallel market to offshore NDF markets. The CTBC was quick to respond using its experience in offering IDR NDF out of the Singapore branch. The relaxation of the rules provides an opportunity for CTBC to utilise both its onshore Jakarta subsidiary and offshore Singapore branch.

CTBC, already a forex derivatives leader in Taiwan, has continued to innovate and in the past year it launched a new product that it calls a window forward, a combination of a forex forward and a time option. The product, which has been traded in Singapore, India, Hong Kong and Shanghai, allows clients to choose the time to settle their forwards at the initially agreed price without bearing any additional cost.

The launch of this new product was made possible by the bank’s self-developed treasury system and credit risk-management systems, Wang says. “Building a product always has its own complexity. But what’s more difficult is the various accounting rules and reporting mechanisms in different countries. Having your in-house system makes things more efficient.”

Within the credit risk management system the bank has migrated its measurement methodology from a so-called add-on approach that analysed credit risk on an individual deal basis to what it describes as a potential future exposure (PFE) approach to that considered the overall risk profile of the bank’s portfolios.

“We have built a data interchange to allow both systems to access the treasury systems for deal information, identify and generate the correct results for the treasury systems to perform real-time credit limit check and control,” says Wang.

Another product innovation was inspired by an opportunity CTBC spotted in the energy sector. The bank structured a three-month fuel oil capped option with underlying Fuel Oil 180 CST Singapore, helping the Singaporean client reduce hedging cost and enjoy better purchase prices.

The payoff of the Asian-style option is not determined by the underlying price at maturity, but by the average underlying price over a pre-set period of time.

“The southeastern countries have accumulated a lot of energy,” says Wang. “They are open-minded to adjust their markets appropriately so that business managers can manage risks more efficiently. That leaves us plenty of opportunities to serve the Taiwanese businesses there.”

CTBC Bank remains the only Taiwanese bank capable of developing commodity pricing models and warehousing the risks generated by commodity derivatives, Wang adds.