Hong Kong's Securities and Futures Commission (SFC) published the findings from its latest survey on the sale of non-exchange traded investment products, revealing a 19% drop in the aggregate amount of sales from the previous survey two years ago.
The SFC study covered the period from April 1, 2015, to March 31, 2016, and only concerned sales to retail clients. Respondents reported sales of structured investment products (SIPs), government and corporate bonds, swaps and repos, collective investment schemes and hedge funds, while leveraged FX products, insurance products, listed securities, exchange-traded funds and exchange-traded derivatives, amongst others, were excluded.
Based on 1,602 replies, the SFC registered a 15% increase in the number of licensed entities that sold products to clients in the period to 244, as compared with 213 in the previous survey.
In contrast, sales dropped 19% to HK$388bn (US$50bn), primarily due to an $83bn drop in sales of interest rate swaps.
SIPs, including accumulators, equity linked notes (ELNs) and FX options, accounted for 44% of total sales, followed by fixed income products with 29%, collective investment schemes with 14% and swaps and repos at 8%.
Sales of SIPs, while still the largest segment of the market, were also on the decline, dropping 3% from the previous survey to $167bn. Notably, SIPs generated $329bn in sales for the prior survey, in 2011-12, nearly double the latest figure.
Within the class, currency-linked products, including accumulators, decumulators and FX options accounted for 61% of the aggregate volume, followed by equity-linked products, including accumulators, decumulators and ELNs, with 36%.
Notably, accumulators and decumulators were the only structures within the class to see growing sales in 2015-16, climbing 43% and 27%, respectively, as compared with the previous survey.
"Most of this year has been good. Accumulators, decumulators, range accrual callables are quite popular," a senior Hong Kong-based derivatives executive told SRP, noting that accumulators' knockout features and gearing are in high demand in Hong Kong. "In particular, plays on the most popular stocks in Hong Kong have been gaining in popularity, as investors latched on to capture the recent upside."
Based on the top five currency-linked products reported by each survey respondent, EUR/USD was the most common currency pair, accounting for 59% of the total, followed by GBP/USD at 13% and AUD/USD with 11%. Notably, the USD/CNY accounted for only 10% of sales, down from 24% in 2014.
"Due to the depreciation of the CNY over the past year-and-a-half, the Chinese currency has become a less attractive play," the Hong Kong-based derivatives executive explained. "People are generally bearish but CNY is not easy to short, so investors tend to avoid the yuan currency play altogether."
Similarly, the USD/JPY constituted 62% of the currency-linked SIPs market, according to the 2013-14 SFC survey, but only 6% in 2016.
Little changed from the previous survey, less than 0.2% of the SIPs during the observation period were authorised by the SFC, meaning that the vast majority of products do not fall under SFC regulation, but also can't be marketed to the public. More than 90% of the aggregate transaction amount was in unauthorised products.
It takes easily a 10-to-20-minute phone conversation to complete a single retail sale of even the more simple products under the SFC authorisation framework, according to the banker. "Distribution is a bit more restricted, but ELIs, which are SFC-approved, are still there.
"KYC considerations and investor wariness mean that the market audience is not as large as in 2008, and the regulatory environment is understandably challenging, but overall the market is quite healthy, with many and diverse issuers and clients," the banker said.
A total of 606 tranche products have been added to the SRP database in 2016, including 279 FX offers, as well as 117 plays on single shares and 57 products on basket of shares.
Click the link to view the full survey.
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