Andra Belcea, Mizuho’s Head of Cross Currency Swaps Trading summarises Mizuho’s position in the busy derivatives market: “As one of the most respected, highly rated banks in Asia, Mizuho is a desirable, solid counterparty for clients when it comes to bilateral derivatives.”
Cross-currency swaps are derivatives, but also funding tools and an important part of institutions’ risk management strategies against foreign exchange and interest rate risk. In simple terms, two parties loan each other money in different currencies at a predetermined initial and final exchange rate.
“As one of the most respected, highly rated banks in Asia, Mizuho is a desirable, solid counterparty for clients when it comes to bilateral derivatives.”
Head of Cross Currency Swaps Trading
These products are also used to create investment opportunities in a foreign currency. “For example, by using cross-currency swaps, an Asian investor could buy UK gilts without being exposed to sterling risk, or a European corporate could get funding from an Asian investor,” explains Yasuji Onozuka, Director, Cross Currency trading.
Cross-currency swaps: helping global capital flow
“What I enjoy about this job is that our products are moved by real-life events,” says Andra. “As a trader, you want to work in an area that suits your personality. Some people like the fast pace of spot FX, others like the longer timescales of structured finance. I like working in an area that’s market facing but also directly impacted by client behaviour and investment flows across borders. Daily news headlines do impact our market, but our decisions are made based on the bigger picture.”
Yasuji gives an example of what this real-world connection means in practice. “Recent global events, such as the conflict in Ukraine mean that activity was slower in February and March,” adding that nonetheless Mizuho’s clients are gearing up for a busy second quarter. “The transition from LIBOR has been remarkably seamless for most–in fact activity shot up in the months following this once-in-a-generation event. We believe that there will be significant cross border issuance in the forthcoming quarter as the market has ‘priced in’ the effects of current events. Investors are eager to do business and issuers to come back to the market.”
"The transition from LIBOR has been remarkably seamless for most–in fact activity shot up in the months following this once-in-a-generation event."
Director, Cross Currency trading.
Addressing the challenges of the post-LIBOR landscape
Andrada says that the move from LIBOR for all non-US dollar currencies (with US dollar LIBOR following by June 2023) has been a challenge for many institutions as well as clients. Mizuho has been offering strategic guidance to clients managing the transition. “As a partner bank to our clients we have kept them up-to-date with the regulatory changes and have been accommodating of their needs during this transition.”
Cross currency swaps: a fast-changing market
So what factors have affected the market in recent years? Andra says that the relatively capital-heavy nature of cross-currency swaps has meant that larger institutions have had to finely balance the revenues available from such products against the requirement to hold capital against these assets.
But much is being done to address this challenge: “In the inter-dealer market cross-currency swaps are now traded as mark-to-market, instead of allowing the FX rate to fluctuate throughout the lifetime of the trade,” she explains. “We reset the present value of the trades every three months, so essentially that means that the mark-to-market fluctuations and so the capital required against them– is limited too.” Another initiative is to settle these trades to market via a new initiative pioneered by LCH and this is gaining ground with dealers.
Mizuho’s advantage: no legacy risk and a stellar reputation
Yasuji points out that the capital costs associated with legacy positions have in fact meant that several major institutions are pulling back from this market. “We are a relative newcomer in this space. That means that we don’t have a portfolio of potentially mispriced legacy risk on our books, and we do not need to be excessively defensive when pricing new clients.”
Andra is optimistic about Mizuho’s strength in the market. “Japanese investors have always been one of the pillars of global markets and Asia is increasingly important. We’re the perfect bridge between Asian capital and European investors, and vice versa.”