The whole structured products market in Taiwan faces business transformation: conservative customers decrease their transaction demand as principal-protected notes (PPNs) profit narrows, whereas a large proportion of recent trades come from aggressive customers who prefer volatile investment strategies, according to Morris Huang, senior executive vice president, head of retail banking at Taipei Fubon Bank.

"However, affected by Lehman Minibond Fiasco and Target Redemption Forward Incident of Taiwan, the authorities have become cautious in banking supervision," said Huang. "They either raise the consumers' qualification of deals by revision of executive orders, or ask the banks be self-control through frequently financial examination. These regulations seem to consolidate structured products business but limit the business development as well."

Huang believes that the structured products development in Taiwan requires business transformation. "Of course, our [Taipei Fubon Bank's] first priority is to implement KYP (know your products), KYC (know your customer), and suitability assessment strictly before executing deals," he said. "After that we will continuously look for the right customers, keep them aware of the advantages of structured products over other financial instruments."

Additionally, the bank is paying special attention on product innovation, Huang explained. "We monitor the market at all times, and grasp the investment opportunity, so that we can satisfy our high net worth clients and attract potential ones," he said.

Compared with general financial instruments such as mutual funds or straight bonds, structured products provide tailor-made investment strategies for customers, according to Huang. "We [Taipei Fubon Bank] consider a flattened yield curve in recent years, which means the expected long-term rate did not rise along with fed fund rate apparently," he said. "And the demand for principle protected products, such as PPNs or PGNs, is reduced by unanticipated decreasing long-term rate. We observed a growing demand for short-term, leveraged products on the contrary, with underlying preference to equities, FXs, and interest rates."

According to Huang, retail customers prefer structured products with simple and understandable return calculation while, in addition, they also favour structured solutions with underlings that can be straightforwardly observed, "a benchmark with trustworthy price is priority". "Although buyers change their preferences to short-tenor products lately, still considerable clients prefer PPNs because of protected principal and stable cash flow," he said. "They would rather extend their investment duration, in exchange of a higher expected return."

Potential consumers highly evaluate structured products on two features: flexible investment strategies, and diversified underlying choices, according to Huang. "First of all, investors would get few chances of profit gain if an asset market is not volatile, since the asset performance may be mixed, slightly rise or fall," he said. "Structured product investors, however, could purchase assets that combine different option strategies in contrast and may therefore create more chances of profit gain by executing option position of the product," said Huang adding that some buyers would like to invest in an US equity-linked note instead of long stocks directly, to avoid downside risk of the investment.

"Secondly, structured product buyers can approach some assets inaccessible via retail channels," he said. "For instance, commodity futures, like gold and crude, are complicated assets to the public; retail buyers, however, can trace the performance of gold and crude futures and therefore earn profits by holding a commodity-linked note."

According to Huang, investment risk can be properly controlled through well-designed structure solutions. "For example, investors can long energy futures linked product with 70% principle protected," he said. "Risk exposure of the trade can be limited by adjusting its option portfolio and, in many cases, even lower than that of a direct purchase on energy futures."

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