Financial Derivatives Markets: Regulatory Change and Implications for Standard Chartered Bank

Standard Chartered Bank (SCB) is a financial services company headquartered in London with operations in consumer finance, corporate banking, and treasury services. Despite its U.K. base, SCB derives approximately 90 percent of its profits from Asia, Africa, and the Middle East. Currently, SCB is restructuring its global operations in the wake of the 2008 financial crisis and subsequent market shifts and regulatory changes. As part of this adjustment, SCB’s Financial Markets division in New York enlisted the Capstone team to identify key product opportunities, potential regulatory shifts, and major growth markets for the firm’s interest rate and foreign exchange derivatives business.

The Capstone team conducted several interviews with the client to better understand the firm’s needs, the range of products offered, and the trends present in those regions where SCB operates. Following these conversations, the Capstone team conducted economic research on a variety of developing markets, focusing on exports, financial sector size, pending regulations, and prospects for synergies with the client’s existing commercial and investment banking operations. Drawing on this research, the team developed recommendations for the Client regarding which products, counterparties, and geographies it should emphasize as part of a capital optimization strategy. These preliminary findings were provided to SCB in mid-March, with the firm subsequently requesting an additional inquiry into African markets and non-bank financial firms in Asia.

After conducting this research, the Capstone team generated three major recommendations for SCB:

• Offer a wider range of foreign exchange products, particularly in non-traditional currency pairs, given the growing yet underserved and lucrative demand for these tailored solutions in emerging markets;

• Expand long-term structured trading through novation and hedge restructuring services with the intent of becoming Southeast Asia’s leader in risk warehousing; and

• Grow corporate banking services in emerging markets to take advantage of opportunities for cross-selling derivative hedges, primarily by presenting these products as natural extensions to clients’ existing banking relationships.

The Capstone also identified risks and mitigating factors for the above strategies:

• Low liquidity of non-traditional currency pairs making the offloading of unprofitable positions more difficult in a market downturn, mitigated by the margins of these specialized products more than offsetting the higher capital cost of bearing the risk; and

• Emerging market attractiveness being more volatile than traditional markets, mitigated by SCB’s greater familiarity with country- and regional-specific risks than its competitors.

Having balanced these factors, the Capstone is confident that its recommended strategy fulfills the project’s objectives and would prove beneficial to Standard Chartered.