Taiwan’s regulator, the Financial Supervisory Commission (FSC), has been speeding up the deregulation of the island’s derivatives market as demand for the products increase as long as banks have the proper risk management and KYC requirements in place.

 

This is creating new and unique opportunities in Taiwan’s derivatives market, as local banks are seeking international partners with expertise in creating financial products for them to distribute to their clients.

Societe Generale, with over 35 years of experience in Taiwan, has been leading in creating new structured products and derivatives within the Taiwan market. The European bank now has 49 staff placed throughout Taiwan performing everything from trading fixed income products and focusing on exotic interest rate businesses, to selling structured products and fixed income products.

 

William Huang, head of global markets sales, Greater China at Societe Generale, sees a bright future in Taiwan’s derivatives business since the demand for them will likely continue to increase. On the asset side, Huang points out yield enhancement solutions and principal protected structured notes will continue to increase.

 

“The range of derivative products seen on the Taiwan markets is quite wide. In general from asset side, yield enhancement solution for FIs( insurance companies and banks), such as callable zero accreting notes, securitization products (MBS/CMO/CLO) and principal protected structured notes (CMS spread, FX dual range, and hybrid contingent coupon); alpha or beta index/ETF/equity/credit linked products in note format or repack wrapper (SPV issued to achieve alternative funding) for banks and their HNW clients,” says Huang.

 

Haung also points out that from the liability side, FX options and long tenor debt hedging demand is going to increase. “I believe from the liability side, FX option/swap for corporate hedging and long tenor structured swap for local banks’ structured deposit hedging and we are seeing more demand of long tenor debt hedging from local bank’s international bond issuance,” he adds.

Taiwanese local banks are seeing opportunities in the renmibi and China because of the impressive growth and the higher interest that comes with renminbi-dominated products. Huang has seen a spike in interest in CNY and CNH FX derivatives in the Taiwan market in the last year.

 

“In addition to the China SOE debt instruments (bonds and loan), we are seeing continuously interest on CNY and CNH FX derivatives from corporate hedging and interbank trading and very strong demand on equity linked (A-H) transaction,” says Huang.

 

Huang adds that Societe Generale has been focusing on this market, working with major distributors in Taiwan. “Societe Generale has been very active offering the above solution for not only FIs’ prop position but also for distributors’ HNW clients. One very successful example is long A short H in ELN wrapper and leverage notes on ICBC CoCo and BOC Coco,” Huang says.

Societe Generale is a major player of the structured notes market distributed by Taiwanese retail banks to so-called Professional Investors. The bank holds a major market share on that segment, above 20% during the considered period. Huang says that Societe Generale has a unique position in Taiwan’s derivative market, as it has been the first bank to take advantage of being allowed to issue long-dated callable swaps and leveraging its  advanced European distribution network and experience to offer third party distributors’ post trade service.

 

In the future, Huang and his team plan on continuing to develop their market share on Taiwan, improve its technology platform, and build deeper relationships with its clients in the market. “ We plan on extending our market share in short tenor ELN and currency options, maintaining leading market share in the long tenor liability hedging structured swap and third party distribution, and automate its light structure flow transactions,” says Huang.

 

With the FSC’s push to deregulate Taiwan’s derivative market, Huang expects to see the island’s derivative business to continue to grow and for Taiwanese investors to look for opportunities in China’s market as it also continues to liberalize.

“With the deregulation in Taiwan, we are expecting to see more derivative product types and most foreign banks to conduct the derivative business from their Taipei branches,” adds Huang. “With the yield/swap rate going higher and higher, demand on the yield enhancement may be slowing down however, this will be compensated by the strong hedging demand from the liability side.”

 

The other potential factor is the deregulation of China’s derivative market. In the past few years, the bank has been seeing high interest from the Taiwan investors (institution as well as distribution) in China market on not only equity, but also credit and FX.

 

“The deregulation in China is ongoing and accelerating, which will further boost the demand of the derivative from Taiwan investors to access China market,” says Huang.