In the second part of an interview, Gidon Kessel (pictured), head of structured products at United Overseas Bank Limited (UOB) in Singapore, talks about the bank's focus on safety features within flow payoffs, the pending launch of KI Reset, and the expansion of its multi-asset offering to include rates and commodities.
According to Kessel, robust markets, improved sentiment and appetite for yield has provided strong impetus in the region. "Demand primarily remains for non-principal protected short dated flow payoffs which aim to monetize a range bound/moderately bullish view with attractive coupons," he said. "As US rates and funding improves, optics for certain capital protected payoffs are looking more attractive and as such we are seeing increasing demand from our more conservative clientele."
Recently, UOB has focused more on safety features within the bank's existing flow payoffs to provide more choice to clients who are willing to trade off coupon for features which insulate against increased market volatility, according to Kessel. "Such features may increase probability of knock-out or reduce the likelihood of knock-in."
Six months ago, UOB launched KO Glider and this week the bank is about to launch KI Reset, features which are incorporated in UOB's stepdown and FCN payoffs, according to Kessel.
"The KO Glider increases the probability of callability albeit you trade your coupon," Kessel said. "As we approach the end of the year, the clients' sentiment is changing with a more cautious stance, making the new payoffs popular."
KI Reset, which is due to be launched shortly, adds an additional reset feature to the knock-in level of between 5% and 15% depending on the customer preference in terms of trade, according to Kessel. "Clients trade a coupon but they get a safety feature of this reset adding more buffer which resets the probability of knock-in should one of the underlying constituents decline more significantly in the early part of the tenor," he said. "And considering the success of the KO Glider and the current state of the market, we expect the KI Reset to be a successful initiative as well once it is launched and people get comfortable with it."
According to Kessel such protection features -which have already been successfully implemented in other markets such as South Korea, are popular among clients who feel that the markets are toppish or who wish to have a safety net against a significant retrace of their chosen underlying basket of stocks. "This is one of the angles that we have played and which is a little bit different from that the majority of our competitors have been working on," said Kessel. "They focus more on some of the capital protected structures and on automation as opposed to protecting the existing bread and butter flow."
UOB is also expanding its multi-asset offering to include rates and commodities such as FCN & Twin Wins on WTI/Brent & Libor referenced payoffs, according to Kessel.
"Preference remains on short dated (6-15 months) non-principal protected equity flow payoffs which aim to monetize range bound moderately bullish view with attractive coupons," he said. "Such payoffs are more suited to aggressive profiled clients who prefer stepdown autocalls, FCNs, DPNs & EBNs."
Due to low volumes of local domestic stocks, most of the demand remains for US equities, although there is increasing demand for European underlyings and some Hong Kong stocks in recent months, according to Kessel.
In general, structured products remain unique in that payoffs can be tailored to suit multiple market circumstances and customers views, according to Kessel. "For example, those clients who feel the equities bull markets may subside and markets may grind down, a number of payoffs and solution can be structured to monetize that view," he said. "We have introduced a number of safety features to our vanilla payoffs and expanded our capital protected range which may be suitable for those clients with a more cautious outlook," said Kessel, adding that for clients who are more bullish, UOB offers a number of solutions which benefit from upside performance with some level of protection.
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