Recently curbed by French Autorité des marchés financiers (AMF) decision to count optimized indices as a mechanism in product's payoff, the French structured products market is overcoming the hurdle by focusing on single-stock structures, according to Yoni Kabalo, partner at French broker company i-Kapital.

According to Kabalo, the main innovation in the French market over the last two years has been the use of optimised equally-weighted indices that reinvest dividends and subtract a flat rate percentage. However, after the new AMF provisions, providers can no longer offer a regular distribution of coupons on optimized indices because they would count for one of the mechanisms in the rule.

"This is the type of products [distributing coupons in case of up to -20% or -30% decline of the underlying] that particularly make sense today because even if the product has not been called, the client is still entitled to his coupon, which is interesting on the current levels of the indices," said Kabalo.

Since AMF stepped in, the interest for single stocks became apparent with products linked to shares more than doubling compared to last year, according to SRP data. Sixty-six products bet on the performance of shares, of which forty-six are linked to single shares. Of these, the Total share was used eighteen times as a single underlying by Adequity, Goldman Sachs, Equitim, KBL Richelieu Banque Privée, Kepler Cheuvreux Solutions (Derivatives Capital), Many For Money, Morgan Stanley and Natixis. The share was followed by Bouygues (six products) and Carrefour, LVMH, Orange, Renault and Saint Gobain (2 products each).

Today single equity-linked products allow an attractive return, superior to the indices, and this paired with control of the risk, with barriers at -40%, -50% on single a share, according to Kabalo. "The idea is to receive coupons even in the case of falling markets which would not be possible with a prop index, or would bring a low return if linked to classic benchmarks," Kabalo said.

In line with this trend, i-Kapital has launched an autocallable medium-term note (MTN) linked to the Orange share. "The product will offer a potential annual yield of 6.7%, providing the share does not close below 30% and protects the initial capital up to a 40% decline in the share at maturity," said Kabalo. "By choosing Orange we intend to benefit from the telecommunications sector which is quite promising given the booming new technologies climate. The stock value has been relatively stable during the last three years and it seems to be robust enough in the medium term. Additionally, the stock is not very volatile, which makes our expectations of a 6.7% coupon fairly certain."

According to Kabalo, the innovation today is to boost the probability of early exit and yield across both equities- and index-linked products. "The rather high trading levels of the indices make it really crucial to design structures able to secure the coupon even in declining markets or to maximize the chances for an early redemption, whether via descending or strike min triggers," said Kabalo.

This is the case of Athena Premium Novembre 2017, a 10-year play offering an early exit possibility twice a year and a 3% semi-annual (6% pa) coupon provided that the underlying Cac Large 60 EWER index is above 95% of its initial level. The index has been developed by Natixis to give clients a market access to an equally-weighted broader universe than the Cac 40. "Playing the French dynamic via the structured products (index- or share-based) has become another popular theme." said Kabalo. "While about eighteen months ago, indices like Eurostoxx 50 and Euro iStoxx EWC 50 were privileged, today there is a pronounced interest for stocks and indices reflecting the economic activities in France" he said, adding that the Cac Large 60 EWER and the SBF Top 80 EW Decrement 50 Points index (SBF) are appropriate for those who think that indices will go higher and want to maximize the early exit probabilities."

Rising equity markets this year also provided for the early redemption of products launched during both 2015 and 2016, creating big rollover opportunities, according to Kabalo. Most of the former had failed to hit the trigger on the first observation date of 2016 releasing just now a considerable volume of cash. "We are currently dealing with huge demand of structured products thanks to the specific combination of increased flow of early expiries and declining euro-denominated funds," said Kabalo.

The environment remains positive for structured products and the reason is two-fold. On the one hand, bullish markets would continue to create rollover opportunities through early redemptions, while, on the other hand, a possible small correction would bring volatility allowing the launch of products with better conditions and higher returns, according to Kabalo.

This year the French boutique has marketed twenty autocallable equity-linked products issued via Societe Generale (thirteen) and Natixis (seven).

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