Hong Kong will continue to be a gateway to China for financial products, for at least the next five to 10 years, according to a panel of distributors speaking at the SRP Asia-Pacific Structured Products & Derivatives Conference at The Renaissance Harbour View Hotel in Hong Kong on September 19. In the same breath, structured products will benefit from the re-emergence of special purpose vehicles, or SPVs, as issuance vehicles.
Exchange-traded funds will be included in the forefront of new products, with the leveraged and inverse style being welcomed with eager anticipation. "Three oil ETFs have been launched in Hong Kong, and when the leveraged and inverse ones are launched in Hong Kong, everyone knows they will be really popular, especially if the regulators allow them to be issued on A shares," said Matthew Wong (pictured above), chief operating officer at KGI Asia. "That's not available in the first batch, which will be foreign indices, and we are expecting quite a lot of these to come out before the end of this year.
"CBBCs (callable bull bear contracts) are also a very successful product, but they get knocked out, and people forget the stock code and have to find a new one," said Wong. "With ETFs, once you have a flagship, that number gets stuck in your head forever."
But the same is not true in Singapore. "I have given up on the development of the CBBC market in Singapore, but the market in South Korea is developing very quickly," said Johnny Yu, managing director, head of public distribution, Asia equities derivatives sales at UBS.
But even the Hong Kong regulator is not as welcoming as he once was. "I saw a money-making opportunity for us to issue warrants linked to the Japanese company that created Pokemon Go," said Yu. "The Hong Kong Exchange has approved Japanese underlyings before, but when we approached the Exchange and the response was quite different for a foreign underlying. They asked for a risk disclosure detailing risk factors and a story of why we want to do this. By the time, from start to finish, we thought it would take a month and the stock would be back where it started.
"Singapore used to be more relaxed on foreign underlyings, and you could issue on day three or day four, but there was no demand there," said Yu. "Hong Kong is still the place where most of the investors are."
In the investment product world, Asia is slowly welcoming back SPVs. "They are not new, not even in Hong Kong or elsewhere in Asia in retail, because that is how the Minibond was structured," said Andrew Malcolm, head of capital markets, Asia, partner at Linklaters. "Despite the very bad publicity for 10 years, the Minibond was actually a product which had a reason, which incorporated some good ideas. For the issuer or arranger, it allows a product to be structured, which is attractive to investors, because it does not transmit the credit risk of the issuer to the investor.
"At some stage, we have to step back from the public outrage and reassess the legacy, because the regulators are still very cautious because of that," said Malcolm. "The SPV structure allows investors to avoid taking on the credit risk of the issuer, and also the issuer to move its own risk, not necessarily off its own balance sheet, but to contain it and to allow it to issue a lot more product than it otherwise would.
But unlike the Minibond, "we are not looking at credit products this time round (which was the Minibond), with the underlying generally an equity product or some kind of fund product," said Malcolm.
In Thailand, the regulator is showing good signs of taking a more flexible approach to structured products, according to Nopadon Nimmanpipak, managing director, equity & derivatives trading at Phatra Securities. "There are constraints in Thailand, but the regulator has become more flexible," said Nimmanpipak. "The SEC (Securities and Exchange Commission Thailand) introduced a new regulation in August, which allows retail investors to invest more, and more flexibility for the issuer. The regulation could open up the market and allow more complexity. The motivation was to increase the variety of products available. The issuer can now issue in US dollars and all commodity-type products.
"We are looking to expand our structured products to allow clients to invest offshore," Nimmanpipak.
While the region's institutional investors are looking at asset swaps on credit-linked notes, other investors continue their love affair with the accumulator, according to Wong. "Although the renminbi move completely changed this game, as it is no longer a safe bet, and that goes into A shares or renminbi, Dim Sum bond," said Wong. "It is not like a positive carry plus swap default appreciation."
The latest wave of supply from Europe has come in the form of regulatory capital bonds. "We hear a lot about them and there seems to be a steady supply of these bonds coming from Europe and being sold to so-called Asian retail," said Malcolm. "We are not talking about retail, this is using the private bank distribution channel in a way that ensures the product does not need any regulatory approval from the jurisdiction in which it is being sold, which is a key point.
"The Chinese banks have been recapitalising themselves using preference shares, which are Tlac (total loss absorbing capacity) instruments," said Malcolm. "They are listed in Hong Kong, but they are listed on the basis of stock exchange approvals, which are expressly designed to ensure that retail investors cannot get hold of them and cannot trade them. That is quite a clear indication of where the regulator stands on the product. Product intervention is the key phrase now."
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