Alain Alev, HSBC: Investment and capacity have created a two-speed system
As part of a series of interviews with regional and global heads of equity derivatives, SRP spoke to Alain Alev, head of structured equity derivatives sales, Europe, Middle East and Africa (EMEA) at HSBC, about business models, market challenges and opportunities in the structured products market.
Cross-asset or specialist product - which business model does HSBC favour?
There are really two different ways to approach this business. Either the organisation is specialised by product and asset class, and the trading team, structuring team and sales team sit within each asset class; or the organisation has real cross-asset structuring, trading and coverage. HSBC is set up in a way where sales and structuring teams remain specialised by asset class but in the meantime participate in a number of cross-selling initiatives and processes, which are part of account management to make sure they are organised not only from a product perspective but also from a client coverage perspective. So there are specific groups covering private banks, institutional clients, retail distributors, etc.
Do you think there is a shift towards a cross-asset set-up in the market?
Some banks are doing it and others not. There are always reasons to choose a particular business structure. It really depends on the mix of products the different providers are good at and the clients they serve. From an HSBC perspective, one of the main focuses for the structured equity derivatives business is on wealth management and private banking firms. In general they are trading heavily equity-linked structures, and that's why our main focus is on the equities but that doesn't mean we cannot serve them with FX-linked products, fixed income products or other strategies that may suit their needs.
Do you think the market is moving towards a two-tier environment where there will be some firms offering all products to all clients and others just picking up whatever is left and focusing on particular clients, jurisdictions, asset classes, etc.?
The structured products market has consolidated and concentrated into a handful of large providers that dominate issuance and volumes across jurisdictions. This makes it difficult for smaller or new entrants to operate in this market. Those banks with global reach are better positioned than those with limited reach. Investment and capacity has also created a two-speed environment with a handful of providers being able to offer a fully automated platform and others still relying on the reverse inquiry model. Clients are demanding higher connectivity but not all providers offer that level of service.
About ten years ago any bank could enter the market and do business because clients were looking for just two things: the best pricing and payoff innovation. Nowadays, clients want to be connected to a platform where they can access pricing and structuring tools, and they want to be able to trade any kind of underlying asset (equities, baskets, ETFs, algo, quantitative indices...) and choose from a large pool of payoffs. The minimum requirement is electronic pricing but others are now requesting full click and trade capabilities as well as fully automated post-trade services.
Do you expect more consolidation in the market as a result of the regulatory overhaul and the requirements to operate a structured products business?
More consolidation is expected in the structured products market on both the buy-side and sell-side. On the one hand providers are going through a consolidation phase with a number of investment banks reviewing their operations, sales force, etc. and the appearance of niche players that will focus on marginal bits of the market with some kind of segment specialisation. On the client side, we have also seen consolidation in Europe and Asia. There is now a smaller number of big distributors compared with a few years ago when any market would have a number of medium-size distributors. Distribution has become a key element in the new environment as those with access to well-developed distribution networks will be able to increase their sales. Regulatory requirements for distributors are more constraining and those with a critical size will be able to gain market share because of their capabilities to offer post-sales services such as liquidity, etc. The reality is that this business is not only more complex than it was, it's also more expensive to run.
We expect that the structured products industry will continue to develop but with a smaller number of players which will have a bigger market share, and some niche players that may be able to secure their profitability by specialising in particular underlyings/products.
Some providers are stronger on their structuring capabilities and others have access to massive distribution networks. Is this a problem?
To succeed in the structured equity business a combination of good structuring capabilities and distribution networks is needed. Structured products issuers need to have in place good product development capabilities, a solid suitability framework and robust risk management capabilities. The larger an issuer is, the more risk management capacity is required.
Where do you see the opportunities in the market?
At HSBC we are developing our capabilities to provide solutions that can be used by institutional clients. We have seen already an increased demand for hedging, diversification and asset allocation using proxies that can be assimilated to structured products. These sophisticated investors are looking at structured products as an alternative to traditional assets used in their investment portfolios.