Local associations in Nordics much more on the ball, says ING

In part two of an interview with Zico Yeh (pictured), head of structured investments at ING Commercial Banking, Marc Wolterink asks about the role of the Netherlands Structured Investment Products Association (Nedsipa), the bank’s leverage products, the impact of the ban on commission fees and ING’s activities in the Nordics.

ING is one of the founding members of Nedsipa, which was launched in January 2014 and whose current members also include BNP Paribas (replacing RBS), Citi, Commerzbank and Goldman Sachs (replacing ABN Amro), and has up to now mainly focused on leverage products. “At the moment, [Nedsipa] is still mainly about leverage products,” says Yeh. “But once more banks start offering structured products for execution only, then education on these products becomes even more important.

“I think that execution only is an area where we need to focus more on education,” says Yeh. “It would be good if we moved towards one model, where structured products and leverage products come together within execution only. Then it will be interesting to see what the role of Nedsipa will be.”

Yeh says he is now starting to notice that investors are getting cautious that the markets might pull back after the strong rally we have seen in the last months. “But at the same time, they also do not want to miss the boat [if] the markets do take off even further,” he says.

ING’s private placements include bonus notes, where, if the market falls slightly, investors can still get a positive return and if the market rises you still have your full upside, says Yeh. “Coupon products are also still very important, and I mean worldwide, not just in the Netherlands,” he says. “It’s the search for yield. The markets can go down and you can still get a positive return in the shape of a coupon.”

Another point is that the interest rate is almost zero. The transition from saving to investing is going to be a very interesting development of course, says Yeh. “What is going to happen? With interest rates at zero plus the fact that Dutch savers pay 1.2% tax on their savings and investments, you are making a loss on your savings account. Then people are starting to ask themselves, ‘should I not start to invest my money instead?’ That’s when capital-protected notes come into play.”

Leveraged products remain popular with Dutch investors, with the turnover of structured products (mainly leverage certificates) on Euronext Amsterdam at €9.1bn in 2014 from 2,024,113 transactions. And there are currently six providers active: ING is competing with Citi, Commerzbank, Goldman Sachs, BNP Paribas and Binck for a share of the market. ING’s sprinters had a turnover of €1.9bn last year, while the total number of transactions was 709,620, which translated into a market share of 21.7% and 35.1%, respectively.

“Our advantage is that we are a Dutch issuer,” says Yeh. “Credit risk has become so relevant after Lehman. That is our advantage, especially when you are talking about the Netherlands.” Education is also becoming increasingly important, not just for leverage products, but all structured products, says Yeh. “That is something we are working on non-stop,” he says.

An example of educational initiatives is the trading game that ING is running with RTL Z (Dutch business and financial news television channel broadcasted on RTL 7) in which thousands of people participate. “Coincidentally, I came across someone earlier this week who said, ‘you know I’m still young and I am not thinking about investing, but I am going to have a look at this [trading game] because the interest rate is almost zero. I want to do something with my money’,” he says.

Commission ban
Last year a ban on so-called kick-back commissions was implemented in the Netherlands. After the UK, the Netherlands became the second European country to apply such a ban ahead of the Mifid 2 regulation, with other countries due to follow by 2017.

Yeh is positive about the move. “We are still doing the same products for our clients only the fee is more transparent. I think that’s very important,” he says. The adviser now collects the commission fee directly from the customer, instead of us paying the fee to the adviser. “That means the whole matter has become much more transparent and more understandable for the clients,” he says. If the fee is taken away for the products – depending on how they are structured – the conditions become better, says Yeh. “As far as we are concerned we have not really seen an impact when it comes to the ban on commission fees."

“You do hear of investors moving to execution only, but from what I understand that has been minimal so far,” he says. “Maybe they will do so in the future.” Many investors prefer to work with an adviser instead of having to deal with their financial affairs themselves, says Yeh. “On the other hand, there is already a large group execution only customers and for these people you just need to provide education.”

Nordics
Apart from in the Netherlands, ING is also active in the UK & Ireland and especially in the Nordics, less as issuer but more as an OTC counterparty.

“For the banks and arrangers in the Nordics, we are the supplier for the option building blocks,” says Yeh. “The local banks we work with are retail banks, the same as ourselves, who are open to source option components to get better conditions for their products. For those banks we quote options.”

The Nordic market is more diverse than other markets, not just when it comes to underlyings – in which regions they invest – but also when it comes to structures. There are far more credit-linked structures: “Yes, credit-linked notes have got a little bit of a bad name since the crisis,” says Yeh. “But when it comes down to it, they are good products as long as they are sold in the right way."

“Especially in Sweden, the local associations such as SPIS (Structured Products in Sweden) and Setipa (Swedish exchange-traded Investment Products Association) are far more “on the ball”, he says. “The members try to regulate to a certain standard for the market and, therefore, they are ensuring that there is no need for the regulator to intervene. That’s something they do very well in Sweden.”

ING was third-party provider for 60 structured products in Sweden during 2014, according to SRP data. The securities, which were mainly linked to equities, were distributed via local providers such as Carnegie, Coeli Kapitalförvaltning, Garantum Fondkommission, Oak Capital, Skandia, Strukturinvest, Svenska Garantiprodukter and Swedbank.

In Finland, ING was involved in 10 equity-linked structured products, including a number of autocalls, from Alexandria Pankkiiriliike and Front Capital in 2014.

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