Asia structured products desks watch volatility spike as Middle East tensions rattle markets

Structured products market participants in Asia are pondering this week’s heightened volatility, its impact on the market and possible ways to monetise it amid growing tensions in the Middle East and Iran.

Rather than adding risk, most are reassessing market levels and focusing on enhancing downside protection - James Chye, Bank of Singapore

The Korean stock market suffered the most out of its regional peers, with the Kospi 200 plunging 12.2% on a five-day basis – a swing of its historic two-day streak of sell-offs, with two circuit breakers triggered in two trading days, before rebounding from the dip.

Market participants are scratching their heads to pinpoint the exact factors that might have intensified the country’s equities sell-off. When assessing structured products, hedging activities around autocallable notes issued in Korea might not be a major factor in amplifying volatility, sources told SRP on Friday (3 March).

Those autocallable issuances have been relatively low, which means “any hedging impact would be quite small compared to liquidity,” according to a source at an investment bank’s equity derivatives desk.

Sales volumes of equity-linked securities (ELS), also known as capital-at-risk autocallables, over the past year hovered around KRW22.5 trillion (US$15.1 billion), according to data from the Korea Securities Depository’s portal SEIbro on Thursday. This figure reflected a 33% year-on-year bounce back after dipping to a low in 2024 amid the mis-selling saga on those tracking the Hang Seng China Enterprises Index but remaining half of its 2021 high.

Out of these volumes, Kospi 200-linked ELS hovered around KRW14.3 trillion. The majority of these issuances are often packaged in a worst-of basket of stock structures alongside other benchmark indices like the S&P 500 and Euro Stoxx 50 and sold to retail investors.

Investment banks – which usually act as hedging counterparties to Korean securities houses that issue autocallables – had been buying an increasing amount of call options and total return swaps (TRS) that long Korean stock exposures in the brokers’ market to hedge their positions over the past two months, a source at the exotic derivatives desk at a Korean securities house pointed out.

But market-making activities with the exotic derivatives desks at Korean securities houses were muted this week, the source noted.

“Nobody [investment bank] is asking anything right now – the market is too volatile,” the source said.

In Korea, ELS are typically issued with a lower knock-in level than those in other Asian markets, setting between 25% and 50% below the underlying’s initial strike price. This creates a buffer that prevents the investment from entering a loss zone during the market’s fall, like this week’s, the source explained, adding that knock-ins haven’t been triggered this week. 

Another speculation about hedging activities by dealers around leveraged exchange-traded funds (ETFs) on Korean stocks, which might have exacerbated the volatility of those equities, has circulated in the market, the source said. 

Retail investors purchased a record volume of put options in Korea, reaching the second‑highest level in the past five years, which was only second to the yen carry trade unwind episode in August 2024, Société Générale Strategists Vishal Ravindran and Rajat Agarwal wrote in a Wednesday (4 March) note. The strategists also noted that individual investors sold an all‑time high amount of futures during Wednesday’s selloff.

Elsewhere in Asia

Structured products’ overall trading volumes in Hong Kong SAR and Singapore were largely unaffected by this week's market drop related to geopolitical tensions, three sources said, noting that some investors preferred more conservative payoff structures.

“Rather than adding risk, most are reassessing market levels and focusing on enhancing downside protection,” said James Chye, head of investment advisory solutions at Bank of Singapore. “Overall positioning remains largely intact, but there is a clear tilt toward more defensive structures and wider buffers amid the rise in volatility.”

These defensive features include shorter tenors, deeper discount strikes and kick-in barriers, Chye said on Thursday (5 March).

Major benchmark indices in Asia finished the week down, with the Nikkei 225 down 5.5%, the Hang Seng Index down roughly 3.3%, and the CSI 300 down nearly 1.1%. By Thursday’s close, the S&P 500 edged down 1.1% on a five-day basis.

For some investors, the heightened volatility also means a chance to monetise the higher yield gained from structured products like autocallable fixed coupon notes (FCNs) and the underlying exposure to gold, oil and defence sectors, Chye pointed out.

The private banking arm of Southeast Asia's second-largest bank Oversea-Chinese Banking Corporation sees value in structures that protect against downside equity risks in the short term, including buying put options on equity indices and structures that benefit from some upside on gold, oil and safe-haven currencies, such as FCNs and step-down autocallables and accumulators, according to Chye.

“We expect a knee-jerk risk-off market reaction, which could lead to a surge in equity volatility and near-term valuation downside,” the advisory head said.

“Barring an oil shock, however, history shows that geopolitical events typically do not negatively impact equity prices on a prolonged basis. In the event of an over-reaction, investors could take this opportunity to add equity exposure,” he continued, adding that there is an expectation to see a flight to safe-haven assets.

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