Invest2 publishers2 min readPublished
Woori Bank hedges a UK borrower's 70 million pound swap on its own London book
Woori Bank says it is the first Korean commercial bank to hedge a UK client's swap on its own London book, with a 70 million pound trade. It shows Woori can now carry UK rate risk in London, though winning that business on price will take repeat deals.
The Investor · Invest desk
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What happened
- The swap came with a 70 million pound loan from Woori's London branch, both signed on Sept. 29 and sized to match, fixing the borrower's floating rate.
- Until now Woori supported overseas derivatives trades remotely through Seoul, according to the Korea Herald, and it now manages the positions in London.
- To run the book locally, the bank upgraded its headquarters integrated trading system into a global operating model that can be deployed in London.
- Woori's London trading center opened in June last year to find new revenue and covers proprietary FX, securities and derivatives plus client hedging.
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Why it matters
- capability Woori can now offer a London borrower a loan and its fixed-rate swap as one package, with both legs priced and managed in London.
- exposure The London center now carries market risk on its own book, so a badly timed hedge on a UK client swap shows up as a London profit or loss.
- precedent If the first-mover claim holds, any other Korean commercial bank in London that wants to sell a hedged loan will need its own local book and bank trading lines to match Woori.
A floating-to-fixed swap moves interest rate risk from the borrower [3] to the bank that writes the swap. In this trade that bank was Woori's London trading center, which took the position onto its own book and then hedged it in the London market [4]. The loan and the swap were both 70 million pounds [2], so the swap fixes the rate on the whole loan [1]. Woori did not name the borrower or publish the swap's pricing [14]. The claim to be the first Korean commercial bank to hedge such a trade locally on an in-house book is also the bank's own [5].
The center opened in June last year to find new revenue [9]. Its first derivatives deal with a British company came on Sept. 29 [1][2], about 15 months later [2], and the bank says it had been building the local trading setup since the center's preparatory stage [8].
Repeat volume is one outcome: Woori says it plans to broaden its derivatives offerings and widen its network of counterparties [11]. A showcase is another, with one hedged loan for one borrower and little after it. The third is growth at thin margins. Woori hedges these swaps in the London market, where it has trading relationships with international banks for liquidity and pricing [4][10]. The rate it quotes a client therefore starts from the rate those banks quote Woori.
I think the evidence supports the capability and not yet the competition. This swap was sold alongside Woori's own loan, sized to match it [2]. The borrower had an obvious reason to hedge with its lender. A swap for a UK company that borrows from another bank would be hedge business won on price alone. Lee Sung-min, head of the London Trading Center, describes a pricing business. "The London Trading Center serves as a hub connecting local market liquidity with corporate financing needs," he said [12]. "We will strengthen our pricing competitiveness and traders' ability to respond to market conditions while expanding our partnerships and derivatives offerings," Lee said [13].
Suppose Woori's next London swaps go to companies that borrow elsewhere. Then Korean lenders are competing directly for UK hedging, and this view is wrong. If the swaps keep arriving attached to Woori loans of matching size, the London book is a better way to serve Woori's own borrowers.
What to watch
- Whether Woori reports a count of London derivatives trades, or a revenue figure for the London trading center, in its results.
- Whether another Korean commercial bank in London says it books and hedges UK client swaps on its own local book.