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Best Risk adviser: HSBC |
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Also shortlisted: Citi and Deutsche Bank |
Risk advisory isn’t what it used to be. Sure, clients still have risks that need to be sold or mitigated. They need advisers to help them to find ways do it and to use their balance sheet to finance those means where necessary.
But the risk management industry is becoming increasingly bespoke, rather than product driven. Structuring deals remains at the heart of the business, but structuring is a word the industry does not like to use after the financial crisis, in particular where derivatives might be involved.
The key phrase in risk advisory today is client solutions. And when it comes to helping a broad group of clients solve risk management problems across asset classes, sectors and geographies, no firm is more impressive today than HSBC. The firm has executed advisory roles in around 60 countries over the past year and for clients in more than 100 countries.
The risk management industry sometimes suffers from a perception of being too smart for its own good. HSBC’s mantra is somewhat different: it says that in complex times, simple solutions are often the correct ones. The skill, the smarts, is not so much in solving the problem the client has, but rather in finding and understanding what the problem is.
In a world of multiple challenges, this is why risk advisory has become much more client-driven than in the past. It also explains why the business has become one of tailor-made solutions, rather than a series of products to sell to a broad range of clients.
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| Spencer Lake, co-head of global markets at HSBC |
Access to market funding, liquidity and risk management hedges remains difficult and increasingly differentiated based on geography, sector and credit rating, requiring new structures and risk management techniques to facilitate trades. However, clients’ appetite for the complex structures that used to dominate has dissipated. HSBC has structured and managed a number of capital and fund raisings, and swap portfolio restructurings for corporate and institutional clients, simplifying the management of market risk and implementing transparent bespoke hedges.
These included a foreign exchange risk analysis linked to an equity increase in its Latin American operations for a big Italian utility company, which eventually minimized the FX risk to the transaction before its completion. HSBC also helped a French corporate that was looking for long-term funding in Israeli shekels linked to a local infrastructure project by providing a 15-year currency swap from euros to shekels, which HSBC hedged through an MTN issuance in the local currency. HSBC also showed the strength of its balance sheet and willingness to use it in a two-year, £420 million ($640.6 million) equity derivative based financing for a Middle East sovereign wealth fund that enabled the fund to extract liquidity from its local equity portfolio to diversify its exposures.
Portfolio yield enhancement and efficient risk management in a risk-on, risk-off environment was another key theme. Portfolio diversification, investment efficiency and secure risk management are harder to achieve since the crisis. In particular, investors are looking to pick up illiquidity premia in the most efficient manner possible.
Solutions included creating a regulatory-efficient vehicle to allow German investors to buy leading infrastructure equity funds; and helping a US life insurer generate yield in its fixed-income portfolio by investing in a forward bond purchase on 30-year treasuries. The client immediately increased the amount of interest it earned while enhancing its carry by executing the swap at a rate well below Libor. By buying 30-year treasuries, rather than executing a 30-year swap, the client also positioned itself in a steeper yield curve. Taken together, the client realized three points of benefit over the next three years.
Regulatory changes remain the biggest risk factor in financial markets. Changes in the relative attractiveness of certain assets have led some clients to want to make dramatic shifts in their portfolios. For example, HSBC helped a UK insurance company reduce its risk to callable bonds, switching into suitable alternative senior lower tier 2 debt within a number of constraints including capital impact, duration, yield, rating and counterpart limits.
But the most pressing issue facing all those involved in risk management is the looming introduction of OTC clearing. Here, HSBC has taken a particularly active role with both regulators and clients.
“We have built all the component pieces of solving for the changing risk environment across OTC clearing platforms, collateral management, prime platform, optimization, and are linking with our custody proposition so that we are a one-stop shop that solves problems for clients,” says Spencer Lake, co-head of global markets at HSBC. “We are pragmatic and innovative across risk management. That is what the regulators want us to do, and what our clients need.”
