Deutsche sees insurance sector picking up structured products

As volatility in EUR/USD drifted lower throughout the year, foreign exchange desks suffered as muted client demand for structured products caused low levels of activity in some areas. But, for others, the stability of the exchange rate offered opportunities to risk-manage positions that were out of line with prevailing levels.

Deutsche Bank spent the quiet year looking at ways to help clients benefit from opportunities in an environment where – while volatility has been low – the risk of large market swings have made hedging exposures very expensive. To do this, the bank has come up with several risk management scenarios that lower the cost of hedging by providing specific products for the underlying activity of clients.

"The low volatility provided opportunities for sophisticated real-money investors who generated returns by going short long-term volatility via bespoke investment products," says Jeremy Monnier, global head of FX solutions at Deutsche Bank.

One risk that many international banks, particularly in Asia, wanted to hedge in 2016 was the FX vol risk, arising from structured notes such as power reverse dual currencies
Jeremy Monnier, Deutsche Bank

"One risk that many international banks, particularly in Asia, wanted to hedge in 2016 was the FX vol risk, arising from structured notes such as power reverse dual currencies. Hedging this risk was complicated by the shortage of long-term vol sellers, but we were able to connect buy- and sell-side participants, again showing the benefits of having a diversified client base," adds Monnier.

The bank has also identified demand for products covering specific circumstances, such as mergers and acquisitions, where the timing of money changing hands is subject to a great deal of uncertainty. To better match the economics of the underlying deal, the bank designed a suite of deal-contingent solutions. For unusually large transactions, it offered innovative execution strategies that balance the need for protection and confidentiality.

"We also worked with clients to risk-manage positions at a portfolio level and we worked very closely with clients throughout Brexit, for example, where the eventual outcome was unexpected but the risk was material. We encouraged clients to limit their risk exposures going into the vote," Monnier adds.

Key e-investment

Russell Lascala, global head of spot FX trading at Deutsche, says the bank's ability to continue investing in its electronic trading platform remains a real differentiator, particularly in e-FX, where the bank will continue to focus its efforts.

"We are seeing new products coming online as the result of our multi-year investment strategy. These products include exciting developments such as client algos – our ABFX GUI – and ensuring all aspects of the trade life cycle continue to meet regulatory expectations," he says.

Lascala reiterated Deutsche's strategy to turn its focus away from market share and volumes – a shift the largest FX banks all made in 2015 and this year – and emphasise core clients and quality of business instead.

"Our emphasis on quality has been successful and [it] helped us to focus on the needs of our top-tier clients," he adds.

During 2016, we saw steady corporate demand for emerging market FX hedges due to continued volatility in crosses such as USD/TRY
Russell Lascala, Deutsche Bank

As market participants adapted to a new risk environment this year, the size and breadth of Deutsche Bank's client franchise proved instrumental in its ability to provide continuous liquidity and pricing to both customers and the industry.

"During 2016, we saw steady corporate demand for emerging market (EM) FX hedges due to continued volatility in crosses such as USD/TRY. Plain vanilla hedges remained relatively expensive and we were well positioned to help clients address this challenge," Monnier says.

EM risk management

For the past two years, Deutsche has also been focusing on EM risk management solutions for clients, developing a range of EMFX products, such as the Automatic Rolling Collar, which offers protection for zero upfront premium and limited to no negative carry.

And, as political risks heading into 2017 look set to be a major issue for market participants, new customer segments may also turn to structured products.

"We believe the insurance sector may have to look at FX more closely next year, and we also expect large-cap European corporates to become more active in the use of structured products. Overall, we remain optimistic about next year and expect markets to become more liquid as volatility picks up," Monnier concludes.

Click for editor's introduction, list of interviews and awards tables