House of the year, Indonesia: CIMB Niaga

The past 12 months have seen a significant shift in Indonesia’s investment market. With global interest rates plummeting as central banks looked to protect their economies from the fallout of the Covid-19 pandemic, interest in less conventionally structured solutions began to bloom.

CIMB Niaga, Indonesia’s pre-eminent derivatives house, was perfectly positioned to capture this shift in investment appetite among its local corporate clients.

“The other local banks don’t have this capability of selling structured products,” says Ferdinand Wawolumaya, head of trading and structuring at the bank. “You could go to the foreign banks, but they do not have the network here. We have a very big network and we can offer our structured products everywhere. This product suite [is complementary]. That is why, in this very volatile year, we should be proud of what we’ve achieved.”

These rupiah-denominated structured products were especially popular at the beginning of this year. For example, IDR-callable fixed rate notes were particularly popular with those clients seeking higher yielding long-term investments with fixed returns. This year the bank has registered a 138% increase in five-year callable fixed rate notes sold, representing roughly 69% for total IDR rates sales volume.

Callable range accruals, which pay an accrued above-market rate on each day the underlying stays within a particular range, also proved very popular this year.

“We started offering IDR callable range accruals at the beginning of the year,” says Wawolumaya. “Bank Indonesia is expected to cut rates, so it is safe for the client to enter into this structure.”

We have a very big network and we can offer our structured products everywhere

Ferdinand Wawolumaya, CIMB Niaga

CIMB Niaga has also capitalised on changes in appetite for USD-denominated structured products, demonstrating again its aptitude to innovate in response to client needs in changing markets. In recent years long-dated USD range accrual notes have been a staple investment for clients. But with the US Federal Reserve cutting rates to historically-low levels amid the Covid-19 pandemic, the upside that clients used to enjoy when investing in these products has all but disappeared.

In response CIMB Niaga offered shorter-dated USD products with tenors of between six months and a year, embedded with a digital option to provide additional yield.

Wawolumaya says the bank’s growing suite of structured product solutions not only provides a wider choice for clients than was available in the past, but also has additional risk management benefits for the trading desks. Those benefits in turn, helps the bank to provide liquidity on various instruments to its clients, says the structuring head.

“I am a trader and I need to manage my risk,” he says. “Imagine that institutional investors want an exposure to a bond. I know where I can get out because I have swaps that are coming from structured products. Also, whenever a client wants to pay fixed on an interest rate swap, I have structured products. This variety of instruments is complementing one another and helping us to be comfortable with taking risk.”

The head of trading is also proud of how the bank supported its clients in managing extreme foreign exchange volatility at the height of the market turmoil brought about by Covid-19. Indonesia’s currency was one of the worst performing currencies in Asia during March and April, depreciating 15% against the USD year on year. The pressure on IDR left the bank’s corporate customers – a large number of whom have significant long-term forex exposures – scrambling for hedges.

As one of the key liquidity providers for Indonesia’s domestic non-deliverable forward (NDF) instruments, CIMB Niaga was able to help its clients manage their forex risk during this challenging period. These transactions helped to reduce the pressure of the weakening IDR on its clients during the crisis.

Bank Indonesia introduced the rupiah-settled onshore fixed NDF in 2018 both as a complement to existing onshore forex instruments and as an alternative to the dollar-settled offshore NDFs. The central bank runs daily domestic NDF auctions, offering attractive pricing compared to other instruments.

“The domestic NDF pricing is much cheaper than the deliverable forward market – it can be as much as 50 pips at a time,” says Wawolumaya. “Bank Indonesia is offering a very attractive rate compared to deliverable forwards to promote this product.”

The volume of domestic NDF transactions increased 10% during March and April compared with January volumes.

Wawolumaya says corporate clients typically hedge with one-month tenors, which they roll over until their exposures mature. CIMB Niaga also provides domestic NDF hedges to small and medium-sized enterprises that have smaller exposures relative to large corporates, he adds.