In the run-up to SRP’s 3rd Annual North American Structured Products Conference, which will be held at The Seaport Boston Hotel in Boston on June 26 and 27, SRP spoke to a number of confirmed key note speakers from products and service providers about the current state of the structured products market, their views about the industry’s challenges and what structured investments can offer.
Question: What opportunities are you looking for right now?
Lars Brandau, managing director at the German DDV: We are looking for opportunities to give customers trust in the products we provide.
Manuel Meza Pizá, managing director, global structured solutions Latin America, BBVA Bancomer: Setting up new programs and SPVs that allow us access to more clients. Equity products are being very much welcomed by investors. In the short term (three months to six months), selling volatility (European and American reverse convertibles with KI) is a good idea for us. In the long term (three to five years), long call spread with digital strip every six months linked to European names.
Chad Chuang, director, annuity product development at AXA US: Explore different payoffs to increase the performance cap rates in the current low rate environment.
Aye M. Soe, CFA/director, global research & design at S&P Dow Jones Indices: Capital preservation (volatility production) as well as macroeconomic risk hedging.
Ou Wang, director of marketing & sales at Pricing Partners: We are looking to expand our independent valuation business for complex OTC derivatives, structured MTN and bespoke algorithmic index in North America.
Question: What events do you expect to see in the market in the short-term? Where is the market going?
Brandau: We see a continuation of a strong regulatory and low interest-rate environment. We are optimistic of where the market is going provided that we can convince the customers of the advantages of the products.
Meza Pizá: We expect to see more competition in attracting clients through more sophisticated products. The low rates environment will make equity products more attractive.
Chuang: The market will remain range-bound. We may see some near-term correction in the second half of 2014.
Soe: Short- to mid-term, low rates environment will continue which will impact the type of products being offered.
Wang: I expect that as for other countries this business will request more and more transparency and transfer knowledge to give more confidence to continue developing this business.
Question: Are investors’ expectations shifting towards a particular type of product (capital protection, income…)?
Brandau: The German retail market is divided into two groups. On the one hand, the vast majority of customers have little know-how concerning financial products and need the help of their advisers. Normally they are interested in risk-free, capital-protected products. On the other hand, the self-directed customers are well informed, know exactly what they want to buy and are willing to take more risks. These investors often buy directly from the issuer or at the stockmarket and are interested in leveraged products.
Meza Pizá: We see a shift towards long-term structures with capital protection and recurring coupon with global equity underlings.
Wang: We can see these days a big appetite for autocalls on equity and Target Remption Forwards (TARFs) on FX.
Question: Is the pricing environment (low interest rates) influencing the products you are able to offer?
Brandau: Yes, the low interest rates make the classic discount and bonus products more attractive.
Meza Pizá: Definitely. Clients are extending maturities of the notes and are more prone to buy notes that don’t have 100% capital protection or have more leverage.
Chuang. Absolutely, low volatility also impacts the attractiveness of the upside potential.
Wang. Pricing Partners are not a “product” provider but we can definitely observe that low interest rate environment has a strong correlation with the MTN business growth from our clients.
Question: What is your differentiating factor with your competitors in the market?
Brandau: The DDV, as the leading association for structured products in Europe, takes a very proactive approach to the regulatory authorities. A good example of this is the Fairness Code.
Meza Pizá: Give customers what they need. We are giving them solutions with the global experience of BBVA and the local knowledge.
Chuang: Packaged convenience of variable annuity with tax deferral.
Soe: Reputation. We ensure that our products/indices are understandable to the end user by being transparent with the methodology.
Wang: We offer to MTN end user full valuation process transparency giving a real benchmark on the valuation provided by large investment banks.
Question: What are the challenges your firm is facing? And the industry?
Brandau: The major challenges are creating more transparency within structured products and regaining the trust of our customers. This process will take years. The bottom line is: we are convinced of the benefits of certificates for private investors.
Chuang: There are other regulatory requirements for annuities and we work closely with state insurance departments.
Soe: As products inundate the market, investors need better education. Continuing education programs on our end users continues to be our focus and that needs to be adopted by all the participants.
Wang: Being on time to market with market innovation techniques.
Question: Is regulation impacting your business negatively?
Brandau: In terms of costs, the impact is negative. Moreover, there are too many national regulatory authorities involved. On the other hand, the intense regulatory environment is a normal reaction to past events. The pendulum is now swinging in an over-regulatory direction.
Meza Pizá: The regulation of the structured products industry is necessary and providers must adapt to this new environment working together with the authorities.
Soe: No. Regulation is now requiring more transparency. As an index provider we are completely transparent with our rules, methodology and index construction.
Wang: Too much regulation could stop the business growth.
Question: What can structured products offer as opposed to other investments?
Brandau: Structured securities, in contrast to other financial products, can perform in every conceivable market phrase. They are liquid, passive, inexpensive and available for each risk appetite.
Meza Pizá: Ad-hoc pay-offs for every risk profile, amortizing scheme and market view can target every flavour for clients. Leverage, trigger coupons, minimum coupons, credit risk when the capital is protected, exposure downward, diversified portfolio.
Chuang: Unique payoffs for sophisticated investors. More flexibility to use more exotic options.
Soe: Structured products can be more bespoke, solution driven and tailored to meet investor’s needs versus other traditional types of investment wrappers.
Wang: Very good sharp/ratio according to client profiles toward risk aversion.