The Cac Large 60 index is fast becoming the index of choice for Natixis in France. The index, whose components include the 60 largest companies listed on the Paris exchange, was used more than 50 times as underlying for the bank's structured products in 2016 representing an issued nominal higher than €1bn. Last year, the Cac Large 60 was linked to offerings distributed by Banque Privée Européenne, Banque Populaire, Barclays, Caisse D'Epargne, Hilbert Investment Solutions, MMA Assurances, Neuflize OBC and Groupama, making it the second in terms of traded volume and the most popular French underlying in the French market as a whole.
SRP spoke to Aurelien Rabaey (pictured), equity derivatives head of Europe, Middle East & Africa (EMEA) sales and global head of financial engineering at Natixis, about what puts the Cac Large 60 ahead of the Eurostoxx 50 and Cac 40 indices which have dominated the French market in recent years.
"Around 24 months ago we started to realise that Cac 40 was much less traded on the French market than the Eurostoxx 50," says Rabaey. "Every time €1m was sold on Cac 40 more than €10m was sold on Eurostoxx 50, so there was a huge discrepancy on the nominals sold."
Natixis started to look at the performance of both indices and found that even though generally, during the last three to four years, Cac 40 was not underperforming Eurostoxx 50, coupons of autocalls on the European benchmark were about 50bp higher, according to Rabaey. "This is not very logical because, on average, the dividend paid on the French market for French companies is usually a little bit higher than dividend paid on the Eurostoxx 50," he says.
According to Rabaey, it is not a matter of liquidity on the spot but, rather a result of a significant increase of capital at risk products in France - especially autocalls, since 2007. "When there are more volumes in autocalls on indices it has a big impact on the market because it means that investment banks have to sell more forward dividends," says Rabaey. "Everybody sells the dividend so what you get is a one way market on the implicit dividend."
Today, when the end-investor buys a capital at risk product on an index, they suffer from the fact that the market for implicit dividend is biased, something less visible on the Eurostoxx 50 than on Cac 40 because the market on the former is wider, according to Rabaey. "The nature of the structured products market is such that the end-investor is selling the implied dividend," says Rabaey. "The volumes of the structured product market is so that everybody is selling dividend and it mechanically it reduces its price. It is true on the Eurostoxx 50 but it is even truer on less liquid indices such as every local index (Cac 40, OMX30, FTSE100 etc). The implicit dividend market is not large; clients suffer from that and traders have difficulties to sell [dividend] at a good price."
That's how Natixis came up with the idea to propose to the end-investor an index, with a synthetic dividend yield, according to Rabaey. "But pricing efficiency was not enough to propose to our clients," he says.
In order to bring a real and new solution for the end-investor Natixis now proposes structured products linked to market access Indices, according to Rabaey. "What we call at Natixis a market access index is to equal-weight a broader universe, while sponsored by a well-known sponsor," says Rabaey.
For example, and in order to prevent any confusion with Cac 40, for the Cac Large 60 the bank opted for the 60 largest companies in France instead of the 40 largest companies. "We wanted to give the client access to values they did not have access to in order to propose diversification to our clients," says Rabaey.
The dividend yield in the Cac Large 60 is fixed at 5%, according to Rabaey. "It makes the index friendly for structured products," he says. "It is also transparent for end-investors and clients will not suffer from this illiquid market."
The Cac Large 60 is part of a range of market access indices used by Natixis. In the Benelux the bank has started to sell the BeNe 40, which was launched in October 2015, while in the UK the FTSE 150 was introduced, in the Nordics OMX40 is now tradable and iStoxx 70 is another solution for the whole of Europe. "Our global strategy at Natixis is to propose local underlyings to our clients," says Rabaey. "French investors want French underlyings. Belgian investors want Belgian underlyings, it is as simple as that. Those indices are not pretending to be clever, they don't pretend to be the best performing indices. We cannot predict the future. Every time there is a new crisis we see another scenario nobody thought about before."
The aim, says Rabeaey, is to bring back the liquidity on the local indices for investors. "Today this does not exist on benchmarks essentially because of the illiquidity of the dividend," says Rabaey. "On the retail side, we want to differentiate by bringing local solutions to local investors via this range of market access indices."
In the second half of 2016, Natixis' clients experienced the early redemption of many structured products linked to the Cac Large 60 which were launched one year ago. The first two products dedicated to French IFAs, Autocall R Septembre 2015 and Autocall R Décembre 2015, were both redeemed early by the bank and paid back 110% after one year, according to Rabaey.
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