The global financial crisis was probably the best thing that ever happened for the education of those who distribute and sell structured products, according to a panel of leading product manufacturers speaking at the SRP Asia-Pacific Structured Products & Derivatives Conference at The Renaissance Harbour View Hotel in Hong Kong on September 19.
"Since the financial crisis, we have been asked to educate more, on the retail but also on the private bank and financial adviser," said Xavier Cahierre, managing director, head of cross asset sales, Asia Pacific at Societe Generale. "On certain topics - especially underlyings, specific payoffs or even regulation - we need to have our clients updated and it's a huge part of our education," said Cahierre.
Providing education adds value, according to David Hansson, managing director, head of retail derivative products Emea & third party distribution Asia at JP Morgan. "With Mifid (the European Commission's Markets in Financial Instruments Directive), for example, we have spent a huge amount of time with our clients this year, and [also informing about] what we are seeing from the UK FCA (Financial Conduct Authority)," said Hansson.
As far as providing product expertise, when compared to Europe, private banking in Asia is more advanced, according to Hansson.
Private banks in Asia-Pacific are organised regionally and their relationship managers have been specialised in standardised products, so are relatively streamlined, so education is not that open, according to Olivier Robine, managing director, head of equity markets and commodities, Asia at Commerzbank. "In addition, the regulation is such that going into new products is cumbersome and there is a need to get approvals for something new, which can take a long time, and they need to train the relationship managers," said Robine. "We tend to talk to product people, which is our natural partner. When there is something new, if there is traction, the private bank will invite us to train the relationship managers."
In the US, Goldman Sachs has been at the head of developments in education (and trading) platforms, working alongside Incapital, a third-party distributor to produce a system called Simon. "It includes things like cartoons and makes it very easy to learn structured products," said Isaac Wong (pictured), managing director, head of derivative sales Asia at Goldman Sachs. "There are also tests, which you have to pass before you can place any order for a client.
"It is not exactly transferable, because Asia is a lot more complicated (than the US) when it comes to structured products usage. The tool required would be a little different. We are intending to roll out Simon International, which would include Emea and Asia with its straight-through processing, rather than as an educational tool."
Part of the overall education on structured products is often based on the dispelling of myths that have disrupted the sale of structured products, especially to retail investors. Some of these obstacles, such as complexity, are more easily to deal with than others. "Today products are very similar, such as autocallables. It is less complex than it used to be," said Cahierre.
The most frustrating thing is that all of the popular myths are questioned by internal compliance, rather than colleagues, according to Bernie Wai, managing director, head of private client solutions, Apac at Citi. "They need to be put in the framework when Warren Buffet bought preference shares from Goldman Sachs in the financial crisis, when there were hidden fees, no liquidity, and no share dividend. As long as there is an investment objective behind a note, all of these questions should be asked, but not exaggerated."
Wai's "more innovative" European counterparts came up with a bonus enhanced note, or Ben note. "But how do you capture a borrow opportunity whereby you can lend your stock out at 2822 at more 10% per annum to retail," said Wai. "The answer is you can't, because you have to sign SPL (structured products labelling) documents or a stock borrow loan agreement, but that will never work.
"So you have to package in a smart way," said Wai. "The education is neat and simple. It's a recovery play, whereby you sell your stock and buy a Ben note, and get the potential to lock into a 42% per annum coupon, as long as one year on, the stock is [at least] 1% higher than it is now.
Another, more practical answer to educating investors comes from making sure that the investor has a good experience and makes money, according to Hansson.
And when it comes to fees, the emphasis should be aimed more at whether or not the overall product sold presented a good deal for the customer, according to Wong.
The latest requirement for education may well come in the form of some explanation of the meaning of total loss absorbing capacity, more commonly known as Tlac, once the banks get to grips with a collection of rules are still fairly vague. "Tlac bonds will be sold as plain vanilla and I would make the argument that, with the payoff exceedingly vanilla, you could allow for some complexity," said Hansson. "A bank-issued structured note is complex, because a bank is a complex entity. Certain products with suitable disclosure could make sense, assuming the yield is appropriate for the additional risk for Tlac bonds.
While further knowledge may well need to be conveyed on the European Commission's packaged retail insurance-based and investment products regulation, and its infamous key information document, if legal counsel can ever agree on extraterritoriality, the most striking information may lie in explaining section 871M, an invention of the US Internal Revenue System. The tax is designed to raise revenue from the use of US shares and indices as underlyings outside the US. There is a chance that an accumulator (ie. OTC accumulator swaps) may not be in scope, so an accumulator on US equity may be even better than buying US equity with dividends, according to the panel.
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