Upcoming regulation and relatively high interest rates offered by fixed-income deposits is slowing down activity in the Malaysian structured products market, according to local bankers. The issuance of retail tranche products in Malaysia has declined, replaced with an increased number of flow products.

Tranche products, which have longer tenors, are proving less attractive as investors do not want to risk receiving coupons lower than the market rate, according to market players. “We are seeing consistent demand for Shariah-compliant structured products from our retail consumer base,” said Ahmad Shahriman Mohd Shariff, director of amanah wholesale banking at HSBC. “[However,] for the coming six months, there will be some headwind in the form of regulatory changes as well as competition from the current [fixed] deposit drive undertaken by a number of Malaysian financial institutions.”

Investors are lured by higher fixed returns on offer from Malaysian financial institutions attempting to shore up their deposit bases, said Shariff. “For investors with a low risk threshold, the increase in fixed return outweighs the incremental risk they are taking in a structured product, making it less attractive.”

Shariah-compliant structured products will be subject to new regulation under the “guidelines on unlisted capital market products under the lodge and launch framework” from the Securities Commission Malaysia, said Shariff. A source from a local bank added, “Market players want to see how the regulations pan out. Bank Negara Malaysia (Central Bank of Malaysia) wants new guidelines for structured products to be implemented by June 2015, including rules such as requiring buyers to at least acquire a diploma.”

But at the same time, there is an increased demand for Shariah-compliant structured products from high-net-worth individuals (HNWIs), said another source, at the Islamic Bank of Asia. “There is a general trend to allocate more money in structured products in Asia in general given the low interest rate,” said the source, “In Malaysia, the Middle East and Indonesia there is more demand from HNWIs, with capital-protected and real estate-linked products [driving sales], as they give better yields.”

Related stories:
Kenanga issues eight new European-style call warrants
Citi’s Sandeela: There is growing demand for Shariah-compliant products