Derivatives house of the year, Singapore: OCBC Bank

As Singapore’s preeminent house for currency and interest rate derivatives, OCBC Bank has been on hand to help clients adapt to the higher-for-longer interest rate regime in the past year. The Singaporean bank has been working to ease the compliance burden for its clients overseas with the launch of a new delegated service for US derivatives trade reporting.

“This year there have been two key trends that our clients have had to deal with,” says Wee Wei Min, global head of sales and structuring, global treasury at OCBC. “One, higher-for-longer interest rates mean funding costs have increased. Two, the number of cash-rich clients looking for entrepreneurial ideas has increased.”

She adds that OCBC has worked hard this year to strengthen its capabilities and continue to meet client needs, including promoting closer collaboration between the various overseas branches of the bank.

Higher for longer

In July, the International Monetary Fund said interest rates, especially in the US and the UK, may have to stay elevated for longer in order to counter persistently high inflation. Indeed, in its meeting that month, the Federal Reserve chose to push back its first interest rate cut in more than four years.

Higher-for-longer interest rates have meant a few things for OCBC and its clients. For one thing, higher interest rates will often translate into higher funding costs. This is where OCBC’s capabilities in FX solutions come in.

“We have seen multiple successes this year to help our clients get cheaper funding through cross-currency swaps,” says Wei Min.

Particular success has been seen with the USD/CNH cross-currency basis, whereby OCBC’s clients have been able to achieve cheap CNH funding from onshore Chinese banks, which is then swapped back into US dollars. OCBC has also executed a number of cross-currency swaps between the Hong Kong dollar and the CNH.

For clients who already have existing rates positions – and where their positions are in-the-money – OCBC offers the ability to simultaneously unwind trades in order to extend them at a slightly higher rate.

“With interest rates in a flux and conditions rapidly changing, we practice a dynamic hedging strategy where we constantly keep track of a client’s refinancing schedule and hedging portfolio. We take advantage of the inverted yield curve to achieve a more favourable ‘blended’ rate,” says Wei Min.

One product that OCBC is heavily marketing this year, in light of the higher-for-longer rate environment, is the US Treasury Strip. These US bonds are sold at a discount to their face value, but pay full face value at maturity.

Buying T-Strips allows OCBC clients to pay an attractive rate for an instrument with very low credit risk. As soon as the Fed cuts rates the price of the bond will go up and clients can unwind their trades.

“Our retail and corporate clients have been buying a lot of these instruments,” says Wei Min. “Everyone understands the story of higher-for-longer, but they are also anticipating one or two rate cuts this year and then a few more next year. T-Strips allow this short-term play.”

OCBC has been selling a lot of T-Strips to clients in Singapore and, in April, also started offering them to clients in Malaysia. Wei Min says the bank is about to start offering such products in Hong Kong. In Indonesia, OCBC is still waiting for approval from the regulator before it can offer T-Strips there.

DTCC reporting

Earlier this year, OCBC secured approval to establish a direct reporting line with the Depository Trust & Clearing Corporation (DTCC). This allows OCBC to report interest rate caps for the US entities of its clients and removes the need for clients to open a separate account with the US clearing house.

“The client journey is very important for us. If we can’t do the reporting for them then the client has to onboard DTCC themselves. Then, after the deal is done with us, the client has to do its own separate reporting,” Wei Min says. “We have previously helped clients with this process. Having a direct reporting relationship will save on this administrative overhead.”

Last year, OCBC also announced that it was joining both LCH SwapClear and HKEX’S OTC Clear as a direct clearing member. This gives OCBC access to a greater pool of liquidity, unlocks more competitive pricing and allows the Singaporean bank to handle larger trade sizes.

FX online

OCBC continues to develop and strengthen its online FX platform for retail clients. Over the past 12 months, the bank has increased the number of currencies it offers on the platform from 29 to 64. It has also gone from providing FX pricing and execution five days a week to providing this around the clock, allowing transact FX beyond market hours and even on weekends.

OCBC also increased its product suite to include precious metals such as gold and silver. The bank partnered with ADDX (a digital market exchange) and was the first Singapore bank to issue a tokenised equity-linked structured note for accredited investors. This allows clients to buy gold in quantities as low as 0.01 ounce.

“With gold prices rising, the ability to purchase the commodity as an FX class has been extremely popular with our retail clients. There has been a lot of buzz in the media around this, and this has helped us gain traction,” says Wei Min.