[HONG KONG] UBS Group AG has shifted more than US$5 billion of riskier Asia-Pacific deposits into alternative cash investments as new rules raise the cost of holding them.
The world's largest manager of millionaires' money has helped some clients such as hedge funds move their cash into assets held in structures including special purpose vehicles, according to Alessandro Caironi, head of capital market and banking product sales for Asia Pacific at the Swiss bank's wealth management arm. In return, clients receive securities such as short-term structured notes.
"Clients investing cash in these alternative products done via SPVs get a higher coupon than they normally would," Hong Kong-based Mr Caironi said. "UBS benefits from being able to keep the accounts of these deposit holders, for relationship purposes and potential transactions in future." The global implementation of Basel III capital rules designed to make banks safer is making certain deposits more costly to hold, including those from hedge funds. JPMorgan Chase & Co, Citigroup Inc, HSBC Holdings Plc, Deutsche Bank AG and Bank of America Corp have reportedly told clients that new regulations are making some deposits less profitable, or warned some they'll be charged fees on them.
The Asia-Pacific deposits that UBS has moved into alternative structures are mainly in US dollars and Japanese yen, and the money manager plans to offer other Asian currencies later this month, he said.
"In times of distress, the perception is that hedge funds are likely to withdraw the cash for other uses than let it sit in the bank," said Graham Lim, a partner at law firm Jones Day, whose focus includes banking and finance. "Banks are going to find ways to try to keep this kind of cash." Other solutions for these deposits can include lenders offering better rates for longer lock-up periods, using derivatives such as basis swaps or putting the assets in regulated money market funds which are widely seen as almost as good as cash, Hong Kong-based Mr Lim said.
Besides UBS, Citi has also been selling deposit alternatives to cash-rich clients in Asia. The collaterised fund solutions can earn investors a spread above Libor rates, according to Cyrille Troublaiewitch, head of the US bank's multi-asset group for Asia Pacific.
"So far, we have used this solution for corporates and high net worth clients," Hong Kong-based Troublaiewitch said. "Such a structure isn't a deposit and is therefore not guaranteed by any protection scheme." The new rules may require more preparation for additional or unforeseen risks. Some banks have undertaken analysis to calculate a risk-adjusted deposit value within their portfolios, according to Toby Pittaway, head of corporate and industrial banking for Asia Pacific at management consultancy Oliver Wyman.
"These analyses are being used to inform strategic decisions on how and where to manage down, or up, deposit volumes to optimise costly liquidity regulation requirements," he said.