At Societe Generale, volatility derivatives are an integral part of its structured product and equity derivatives ecosystem. The bank’s position as the largest structured product issuer in a large number of markets in Asia, Europe, the US and elsewhere means that it is continuously generating positions in volatility and correlation that it needs to recycle with sophisticated financial institutions. And because of its sheer scale in structured products, it has a competitive advantage in offering pricing to clients.
SG was particularly active during 2019 selling dispersion packages, in which clients effectively sell correlation to pick up the carry. The firm enjoyed a significant win when it traded a uniquely large dispersion package — around 10-20 times the usual size — with a large asset manager, not the usual volatility hedge funds or specialised vol traders at some global pension funds that typically buy these products.
“Dispersion worked very well as a carry trade in 2019,” says James Masserio, co-head of equity and equity derivatives, global markets Americas at SG in New York. “This trade bridged an important gap in bringing new types of players to the market, and we were able to package a significant amount of the correlation that we sell through structured notes as well as the volatility we buy.”
Similar stories abound in other asset classes. For instance, the classic dollar CMS spread products favoured by institutional accounts in Asia left the bank long in a large position in 0% digital rate curve floors and a need to hedge the correlation between the two points on the curve. Again, SG was able to package the risk for hedge fund clients.
The differentiator for SG is the emphasis that it puts on its engineers working alongside sales and trading, and the way that derivatives fit into the wider investment bank, says Masserio.
“At SG we have sales, we have trading and we have engineering. That’s the third leg of the stool, and investing in a very robust group of financial engineers allows us to continuously to be on the cutting edge of innovation,” he says. “We invest and reinvest in that type of talent and that is what gives us an ongoing competitive edge.
“Volatility products and equity derivatives is what SG does — it’s our main focus, it’s the centre of our business strategy. Other banks do it too, and some of them do it well, but this is at the centre of everything we do within equities and within global markets.”
Making the right calls
The firm’s research and strategy platform also stands out for the way that derivatives are central to what it does.
“The differentiating factor from my perspective is that we are very derivatives focused because of our strengths in equity derivatives, and we have built off that into other areas such as FIC and into the structured products business,” says Mike Pintar, head of flow strategy and solutions. “We are less flow-focused and more focused on exotics and derivatives than other banks.”
The shifting tides of retail structured product demand mean that the bank has to stay nimble, with the strategy team spending a lot of time educating institutional clients about the risk recycling opportunities that become available.
“As the market evolves, we have to evolve with it,” says Pintar. “Some structured products are being issued less frequently, so we have shifted from focusing on the risk transfer business to a more systematic approach using quantitative investment strategies.”
As an example, he highlights a systematic forward volatility product on dollar interest rates, the SGI Vol Roll on Rates Index. It traded a $1bn notional deal with a US corporate pension plan that wanted to hedge its equity portfolio with a carry strategy uncorrelated with the rest of the portfolio.
On the side of independent research, SG is well known for making bold calls. Subadra Rajappa, head of US rates strategy, points to two big macro views that it pushed in 2019.
“Coming into this year we had 10 year US Treasury yields going down to 1.20% by the end of the year, a base case for recession in 2020 and for risks to yields to be systematically skewed towards the downside.
“Those calls have worked out really well, partly due to Covid, but anyway we were starting to see broadly lower yields.”
It was also early to make a call on curve steepeners, driven by its expectations of US Treasury supply. “We were early in the game on the supply side, which is such an important factor in the steepness of the curve and that again worked out.
“We take these broader themes for the directionality of rates and overlay that with trade ideas that clients can do either outright in cash or using options. Right now we are looking at conditional bear steepeners and also recommending trades to fade the richness of payer/receiver skew that fit our broader macro view.”
The rates strategy team was also ahead of the game in talking to clients about the transition from Libor to the new Sofr benchmark, with Rajappa regularly publishing research on the topic and speaking at both internal and external events. SG has so far organised 30 seminars and events on the Sofr transition, with more than 2,000 clients attending.
“Our value added is to provide insightful ideas as well as information on developments around Libor transition,” she says. “That’s something that our clients have found very helpful and we were ahead of the game on being able to get our research out.”
Revving up convertibles
SG has a long history of providing corporate solutions across asset classes — whether FX, rates or inflation hedges, structuring innovative equity-linked solutions in the convertible market or optimising share buy-back programmes.
It is now at the forefront of digitalisation. SGIMarkets, its digital offering for corporates, has been growing fast, doubling users in two years and seeing data flows to clients expanding eight times from 2016 to 2019. Clients can access pre-trade analytics, including through APIs. For instance, its FX Eagle Eye API gives clients the ability to see intraday liquidity in G10 FX and lets them optimise execution. SGIMarkets brings together digital solutions provided by businesses across the bank, including markets, financing, transaction banking and securities services.
A focus in 2019 was advising corporate clients on ways to optimise credit support annexes (CSAs) to find arbitrage and restructuring opportunities. For instance, it worked with one client that relies on cross-currency swaps for its funding needs to completely restructure its CSA in order to free up collateral and strengthen its liquidity position. SG was able to amend its existing trades to an unsecured format with limited impact on pricing and was also novated to two long-dated trades from another bank.
It also worked on the high profile $2.35bn equity offering and convertible bond sold by Tesla in May last year. That deal featured a capital increase that was priced almost flat to market, and a convertible that came with an attractive conversion premium of just 27.5%. SG was lead counterparty on the call-spread strategy designed to hedge Tesla against dilution risk, with the structure delivering one of the largest ranges seen in the market, with dilution only occurring at a premium of 150%.