The structured products market in Malaysia is facing increased competition from fixed deposits as a result of the introduction of the higher liquidity coverage ratio (LCR) requirements, as stipulated by the new Basel III regime, with banks having to raise gradually their LCR from 60% in June 2015 to 100% by January 2019.
Banks are fairly comfortable now with LCR compliance at the current 60%, said Chu Kok Wei, group head for treasury and markets at CIMB Group. “Having to increase towards 100% by 2018 will continue to put upward pressure on deposit rates, as banks are urged to beef up their deposit base,” said Kok Wei. “This is also the most active segment for structured deposits. In short, structured products are facing new competition from fixed deposits, which are getting more attractive in yield.”
The structured products market will retain some activity on the back of the internal valuation framework for liquidity, according to Kok Wei. “For banks who are able to value structured products fully for the long term liquidity nature, the impact could be minimal or even positive, and this also requires consistent regulatory treatment for LCR and net stable funding ratio (NSFR),” he said.
Product issuers have to be alert to changes in regulatory guidelines moving forward, said Kok Wei, “given that even fixed deposits in their current form need to be amended by 2018 to continue to be classified as qualified, term funding”.
The high fixed deposit rate has affected structured products for private banking for most of 2015, given that deposits provide a much better solution in terms of risk and reward, according to Kok Wei. “We foresee institutions that can value liquidity will be able to compete well,” said Kok Wei. “For a lot of regional private banks, if they source their products from investment banks (IBs), they could face a disadvantage as IBs tend to value liquidity closer to ‘interbank’ level, which is much lower than other commercial banks’ valuation of liquidity for banking book.”
Several market players in Malaysia have reduced their issuance of tranche products since the beginning of the first half of 2014, notably HSBC, which used to be an active issuer of tranche products and has not issued a single product to Malaysia’s retail investors this year. The high fixed deposit rate and general poor performance of underlyings have hindered the issuance, said a senior banker at HSBC.
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