Spain's structured products market has seen a shift in the product mix over the last few years. The "Iberian deposit" which dominated the market for many years alongside capital-protected funds has seen a sharp decline in issuance and sales, slowly but surely giving way to notes. The structured note which in 2014 had barely 2.2% of the market had jumped to a market share of 23% in 2015. Year to date 34% of the issuance in Spain was in the form of structured notes. SRP spoke to Borja Bravo (pictured), head of equity derivatives sales for banks and insurance companies in Spain at BBVA, about the challenges around pricing environment, how the different distribution channels have performed recently and what products will drive activity going forward.
Has the low interest rates environment impacted negatively the pricing and potential return of structured products?
Undoubtedly, the environment of low interest rates has affected each sales channel of structured products in a different way:
Retail Financial Institutions. Since 2013 there has been a dramatic drop in terms of volumes for two main reasons: limited ability to create attractive protected products and loss of interest in fixed term deposits. This has led some companies halting the issuance of this type of products. Payoff profiles have become very simple and seek to replicate time deposits with digital options on a basket of various shares with short terms (up to 18 months) with a coupon that substantially improves the return compared to a fixed term deposit.
Funds with capital protection or Formula funds. These products have been have been able to capitalise on the low interest rate environment or at least have been able to capture capital from the deposit segment. The main reason is that providers have favoured fee generation versus liability. While it is true that government bonds have narrowed their returns and products have become less attractive, capital protected products fit the risk profile of retail investors while providing good commissions for distributors. Terms have increased up to seven years but demand is still growing - something that has resulted in a number of firms issuing structured products.
Personal Banking / Private Banking: We can talk about two separate business lines of products with partial capital protection and products with full capital-at risk. Products with capital-at risk have not been affected by the low rate environment, while partially guaranteed products have experienced an increase in the demand on the back of the decrease in demand for fully protected products. Many providers began to sell products with soft-protection in order to meet the growing demand from investors who could not find where to invest.
The structured notes/bonds wrapper has established itself in the Spanish market. Is this a suitable vehicle for the Spanish market?
Yes, structured bonds have met the needs of both investors and distributors which explains their success in recent years and the positive outlook in the short term. This wrapper provides several benefits to the end investor: daily liquidity, credit benefits from the issuer and flexibility to move from one retailer to another. From a distributors' perspective, structured bonds generate fees against to compensate the liabilities in this environment of low interest rates.
Increasing regulation has benefited all participants in the market. BBVA equity derivatives sales team has been a major player in the return of this wrapper to the structured products market. We managed to meet the demand of our clients and we expect to increase our activity in short term thanks to a flexible program, backed by registering on CNMV and exclusively for our customers.
What products are driving sales in the current environment?
During this period of low interest rates we have seen highly successful products. In the retail market, the most successful option in recent years has been the digital; for funds - digital and uncapped/capped calls, in some cases with partial capital protection; in the personal banking segment, products that combine a fixed rate and an equity leg are successful for almost every entity. Finally, for private banking the phoenix pay-off is the most popular.
Beyond payoffs types, underlyings or terms, we believe the market could experience a significant increase in volumes as the distributors will offer simple, liquid and added value products, which makes them suitable for every kind investor.
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