BNP Paribas: Investors grateful to Draghi and AEX

In the second part of an interview with Erik Mauritz (pictured), head of exchange-traded solutions sales, and Frans Kuijlaars, head of structured products solutions sales at BNP Paribas in the Netherlands, the pair talk about the development of the Dutch market over the past 10 years, the competition they encounter as well as the impact of regulation and the commission ban.

Ten years ago the Dutch market for structured products was blooming. Every month some 25 to 30 regular structured products (such as capital-protected notes, reverse convertibles, double-up certificates) were launched via a large number of local and foreign distributors. Nowadays, the market has changed beyond recognition, with BNP Paribas and Kempen two of the few active players in the Netherlands when it comes to regular structured products.

“If you rewind the film a little bit, to let’s say 2004/2005 until 2007, during that time we saw a lot of products,” says Kuijlaars. “What is also quite typical of that time is that many products were issued as standalone: Klik & Klaar, Yield Discovery, Yield Magnet.”

Investors appreciate that the French bank now works with a limited number of product lines, according to Kuijlaars. “In the past, the flood of products often made it difficult for them to make a distinction between the different products,” he says.

Kuijlaars sees an increasing demand from investors for these new product lines, which include memory coupon notes, but acknowledges that many parties have become less active in recent years. “At RBS, prior to BNP Paribas, we came [out] with the Royal AEX bonds and the memory coupon notes, so from that perspective, from our side, nothing has changed much. Only our competitors have become less active,” he says.

It helps if you have a product line which more or less stays the same and which you expand by issuing new series, says Mauritz. “The important thing is that the clients understand what the product does and if it does fit in with their vision,” he says.

Competition
Although there is a distinct lack of competition when it comes to regular structured products, the same cannot be said about leveraged products, a segment with no fewer than seven providers vying for a share of the Dutch market.

“We try to distinguish ourselves by having a large number of products on offer,” says Mauritz. “Apart from that, we think we offer competitive spreads – the difference between the bid and ask price. You can never say that your spreads are always the smallest, but, on average, I think we are right up there,” he says.

Another focal point is education and content, according to Mauritz. Together with Nico Bakker (an independent consultant affiliated to BNP Paribas which analyses graphs, visualises the market sentiment and develops and tests investment models), the bank provides daily technical analysis. “Every Monday, we host our own webinar. We give a lot of presentations. We do not only offer the product, but we also want to inspire our customers and provide information about the underlying markets.”

Turnover of leveraged products at Euronext Amsterdam has decrease massively in recent years: the market shrunk from €16.2bn in 2011 to €9.1bn in 2014, according to the European Structured Investment Products Association. “It is similar to the declining interest of many retail investors since the crisis. Many investors had temporary had enough anyway,” says Mauritz. “The low point was in 2013, when turnover was around €8bn. Last year, the turnover was €9.1bn, which was comparable to 2012,” he says.

If the first two months of 2015, are anything to go by, the volume could reach €13bn this year, says Mauritz. But he admits having to make some assumptions about Binck volumes since the online broker’s turbos are not traded on Euronext (Binck uses the Cats platform). “I definitely see a change, perhaps helped by [Mario] Draghi [president of the European Central Bank] and the fact that the AEX has risen by nearly 500 points and also because retail investors, with the interest rates as low as they are now, are gradually coming back,” says Mauritz.

Regulation
In 2013, the Autoriteit Financiële Markten (AFM) published a report on leveraged products that was reviewed by the regulator towards the end of 2014. The regulator concluded that certain leveraged products do not offer investors any added value because of the relatively small chance they offer for a positive return. In addition, leveraged products such as turbos, sprinters and speeders are unsuitable for accumulating wealth in the long term, said the AFM at the time.

“We have taken a number of measures at the request of the AFM to reduce the leverage factor of some of our turbos,” says Mauritz. “If you look at the volumes, they have only increased since then. The average leverage has decreased and the average holding period increased,” he says.

BNP Paribas and the other providers are now looking, in cooperation with the AFM, at whether to implement further measures. “But you can think, for example, about extra warnings or other ways to inform investors about high leverage to ensure that the right product gets to the right customer.”

Commission ban
At the beginning of 2014, the Netherlands followed the UK in implementing a ban on kick-back commission for investment companies. “What we see is that there is now a level playing field between the different products,” says Kuijlaars.

Whereas in the past kick-backs were paid for mutual funds and also for structured products, but not for exchange-traded funds, all products are now treated the same, according to Kuijlaars. “The benefit to the end customer is that he or she is now getting the best product conditions because there is no leakage of fees to the distributor,” he says. “On the distribution side, those parties who made their living from this business model were very much dependent on the kick-backs from structured products and mutual funds and they have had to adapt their business model,” says Kuijlaars.

“The same goes for the large banks,” he says. “At the beginning of 2014, they had to inform their customers that they were going to implement advisory fees. On top of that, they had to deliver the message that in the past this fee was already paid but disguised.”

Kuijlaars does not know whether investors have switched to execution-only after the ban was implemented. “Some customers have switched to execution-only because they just do not see enough added value from seeing an adviser, while some have switched to discretionary portfolio management (DPM),” he says. “They want someone else to look after their assets so they do not have to worry about it. Both for advisory and for DPM, fees will no longer be charged via kick-backs from the products; instead an advisory or DPM fee is paid once a quarter.”

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