Changing perceptions about the relative risk and return profile of G-3 versus emerging market currencies has caused central banks and sovereign asset managers to seek out new investments in emerging markets. As a result, official institutions have teamed up with counterparties that can offer strong advice, access and execution in currencies ranging from the South African rand through to the Chinese renminbi.
Double-A rated Standard Chartered – despite its lack of a US primary dealer licence – has emerged as a pre-eminent partner for central banks when it comes to forex dealing, particularly in emerging currencies. The bank offers 24-hour forex coverage and pricing capabilities, most of it via its electronic trading system, in more than 100 currencies around the world, and has pioneered the development of onshore and offshore foreign exchange cash and derivatives products, particularly in Africa, Asia and the Middle East. It also offers sovereign funds investment opportunities ranging from structured products to co-investments in private equity, real estate and infrastructure.
Standard Chartered interacts with official clients through a dedicated public sector team, set up nearly three years ago. It comprises government-related experts (ex-central bank, ministry of finance and International Monetary Fund officials) in major financial hubs and in country relationship managers in countries in which it has a presence.
Central banks have access to a comprehensive suite of government bonds, swap products and forex forwards covering all maturities in more than 40 markets. Just looking at forex swaps, Standard Chartered can offer forex swaps to central banks seeking to withdraw or inject cash into the domestic system (rather than via repos or T-bills), deploy currency overlays to differentiate their asset composition from their forex exposure or the active management of forex positions.
“Standard Chartered’s comprehensive research and professional trading capabilities meet our forex trading requirements,” says Lu Thi Thu Hien, head of correspondent banking at the State Bank of Vietnam, who adds the bank offers “easy access” and “trading advice” for both emerging market and G-7 currencies.
The bank’s primary focus is not on instruments. It aims to offer clients strategic expertise and tailor-made services, with particular attention on helping central banks to implement diversification strategies into emerging markets. Advice ranges from helping to align the currency composition of reserves with stated objectives for holding reserves (including drafting reserve management policies and investment guidelines) through to providing investment information on the structure and suitability of individual markets (including guidance on how regulatory changes will affect reserve management, even where central banks may be exempt from the regulations).
“Even in May 2013, when then Fed chairman Ben Bernanke announced tapering and emerging markets sold off quite significantly, we did not see any signs of central banks pulling out of emerging markets,” says Jukka Pihlman, Standard Chartered’s head of central banks and sovereign wealth funds in Singapore. “Indeed, many used it as an opportunity to buy at a lower rate.”
This trend can be witnessed across a range of currencies, with one of the hottest destinations being assets denominated in won. Standard Chartered’s strong local presence in South Korea has enabled it to capture a high volume of deal flow. The bank has also captured business in Singapore dollars and it is a similar story in Malaysian ringgit, Philippines peso, Indonesian rupiah and South African rand investments. “More recently in the lead-up to and following the Indian election in July, we have also seen some central banks buying Indian rupee as well,” says Pihlman.
But it is its work in assisting central banks with their investments in renminbi assets that has made Standard Chartered really stand out from the majority of its peers. Notably it was a lead arranger for the UK’s £300 million ($470 million) equivalent bond issue – the first G-7 sovereign to issue in renminbi – that was taken into UK reserves. But Standard Chartered offers a complete suite of services, ranging from broad overviews about the risks and opportunities from investing in offshore renminbi assets through to assisting central banks with their onshore licence and quota applications.
For example, Standard Chartered hosted two foreign reserves management workshops, one for East African central banks and another for south Asian and Association of Southeast Asian Nations (Asean) central banks, during the past year. The workshop in Nairobi, held in early 2014, covered exchange rate management, money markets, fixed income and derivatives in addition to a presentation on investment opportunities in renminbi. Gerald Nyaoma, a director in the financial markets unit at the Central Bank of Kenya, which invests 0.7% of its reserves in offshore renminbi, described the workshop as “beneficial”. He adds that Standard Chartered is “competitive” in offering money market products such as fixed-term deposits, including deposits denominated in renminbi.
Pihlman says that initially central banks were slow to buy into renminbi as they had no peer-to-peer comparison and there was little incentive to be a ‘first mover’. “But now, the tables have turned,” he says, with “at least 60 central banks investing globally in renminbi”. “There are so many central banks invested in renminbi that questions are being asked of those that are not.”
Standard Chartered is often a first point of contact. For example, it helped Nepal Rastra Bank at the start of its review of offshore and onshore renminbi. Rajendra Pandit, director of the foreign exchange management department at Nepal Rastra Bank, recalls how Standard Chartered officials made presentations about the offshore renminbi market to the central bank’s senior officers and investment committee members – a development that also helped to change the bank’s thinking about reserves investments. He adds that Standard Chartered offered a process on how to invest offshore, securing an initial deposit equivalent to $20 million as it “provided the knowledge and confidence to invest in renminbi instruments”. Nepal Rastra Bank has now invested in offshore renminbi bonds and has direct trading in the onshore market, according to Pandit.
"Onshore is the end game," says Pihlman, who notes that the onshore market is obviously a lot larger than the offshore market and the same Chinese Ministry of Finance bond can pay well over 100 basis points more onshore, although towards the end of 2014 the onshore/offshore spread narrowed and for a few days in November 2014 the offshore 10-year bond yield was actually slightly higher than the onshore equivalent. "Some bigger central banks skip the offshore market completely and go onshore. But because of the timescale it takes to get a licence and it not being the most transparent process, there are many central banks still active in the offshore market. Offshore offers more freedom. Also, you cannot do things like term deposits with commercial banks in the onshore market so central banks are continuing to do that in the offshore markets."
Concerns among some central bankers about the health of some emerging markets, coupled with a deflated share price and heavy regulatory fines in the US, may create headwinds for Standard Chartered in future. But central banks have already placed billions of US dollars with the bank in various currencies including offshore renminbi, much of it in the form of unsecured deposits as well as reverse repo deposits. “Central banks are very important providers of liabilities for us,” says Pihlman, “and we are humbled by the trust shown to us. Our popularity sometimes creates ‘quality problems’ in that we may be flushed with liquidity in some jurisdictions and we have concentration limits for client segments.”
The Central Banking awards were written by Christopher Jeffery, Robert Pringle, Tristan Carlyle, Daniel Hinge, Arvid Ahlund and Maria Espadinha.