The structured products market in the Nordics is innovative in terms of payoffs, it could learn from others, according to the panelists on the Thoughts from the Outland panel at the SRP's Third Nordic Structured Products & Derivatives Conference 2017, held in the Grand Hotel in Stockholm on September 27, 2017.

"For Germany and Austria, we have seen a declining amount of product volume in the past few years," said Bodo Gauer (pictured), head of structured retail products for Austria and Germany at Credit Suisse. With falling interest rates, it has been almost impossible to provide capital protected structures, such as fixed income products or capital protected notes, according to Gauer. "These products don't exist in these markets, and this is the main reason for the shrinking market," he said. "Capital protected notes are much lower risk, while yield enhancement products don't have capital protection. More informed and sophisticated clients, however, still have the chance to compete against inflation."

The Italian market for structured products should be examined from two different angles, primary and the secondary markets, according to Nicola Francia, head of PIP external network Italy and public distribution Italy and France at Unicredit. "If we focus on the secondary market, which is most of the volume, 2017 compared to last year looks definitely better, with an increase of 10%, on average, in terms of turnover," said Francia. "Italy is the second largest market in Europe after Germany and, in secondary market turnover, there is a change in that we see far fewer leveraged products." According to Francia, the secondary market in Italy peaked in 2015, corresponding with an increase in leveraged products across Europe. "From that time, we have seen, year-on-year, a decrease of 30%, which has been overcompensated by a big growth in investment products tripling this year, from €4bn to €12bn," said Francia.

A similar change can be observed in primary, which "is shrinking" with a projected decrease of 65% on structured products, according to Francia. "The good news in this shrinking scenario, however, is that there is a change in the portfolio composition from plain vanilla bonds to investment certificates which represent a good case of structured products in Italy," said Francia.

As far as the future of leverage and yield enhancement products, and special purpose vehicles, it is important to appreciate investor desires. "Normally, investors in Austria and Germany want to have short tenor products, nice coupons and nice protection, which does not necessarily work," said Gauer. Capital protection in Germany is very important, with investors wanting between 35-60% or 35-40% protection for products with coupons between 4% and 6% in euros, according to Gauer. "We saw huge success when we created products that had 70% and 80% buffers," he said.

The interest in leverage products has dropped in both Italy and Switzerland over the past few months, according to Francia. "It is a common trend in Europe, where only the Nordic market is going up year after year," said Francia. "This is the only market in Europe which is increasing in terms of annual turnover." The peak of the European market was in 2015, when assets under management stood at €100bn. "Right now, we project that it will reach €70bn at the end of 2017," said Francia. "The only growing market is the Swedish one, overpassing Germany, which historically has been number one."

One of the reasons for the decrease in leveraged products over the past two years is the focus on fixed leverage with increasing leverage issue after issue, according to Francia. "As everybody knows, those products imply a compound effect on the daily performance," said Francia. Italian investors understood the compound effect when it was too late and when they have already lost enough funds, he said. "It is difficult for a private or a retail investor to understand why, in one year, the underlying index is up 10% and not up x times 10%, and that is because of the compound effect," said Francia. "Looking at the Italian experience, we see lots of interest in investment products and this is also a trend because of lower interest rates."

Francia also noted that a lot of Italian investors want coupons because Italian government bonds have paid very high interest rates, as opposed to today, when bonds are paying nothing.  "The idea to have a coupon of 5-7% conditionally is really appealing to investors," said Francia.

The shift from private banks in Asia from mutual funds to structured products linked to the same funds - because they see the yield of those funds is around 2-3%, suggests structured products are being used as a tool for protection. "This is a trend in Italy as well," said Francia. "All the regulation is also pushing against leverage, against SPVs, against complication and in favour of plain vanilla, liquid products, secondary market execution flow." According to Francia, the real winner of the change that will happen next year is asset management. "All the structured products creators are now looking at the mutual funds as underlyings," said Francia.

If a fund has a 2% management fee and an investor has owned it for four or five years, he or she pays 10%, while, in Germany, if you use the same structured product, you would pay about 2.5%, according to Gauer. "It is just for the revenue of the distributors and the fund industry is making money out of it," said Gauer.

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