Exchange traded fund (ETF)-linked structured products are expected to gain traction in Japan's structured retail products market as providers and investors increase trading activity around tracker funds, according to Tomoyuki Sasai, head of Japan equity derivatives at Credit Suisse Securities Japan.

"The demand will probably expand for domestic ETFs managed by Nomura or Nikko, but for sectors or sub-sectors ETFs such as commodity the problem of relatively low liquidity will be a hindrance," said Sasai. "There is a strong need for ETFs [featuring assets from the] US given the higher liquidity, but the strict regulations make the issuance [of these funds] rather difficult."

The difficulty in expanding the scope of underlyings used in structured notes to overseas ETFs relates to the fact that many of them are not filed which limits the settlement to cash instead of the delivery of physical underlyings, said Sasai.

"[The] JPX Nikkei 400 ETF [could be used as a] potential new underlying for structured notes," he said. "We have trading of ETFs in the private banking and mutual funds. As for Nikkei 225 leveraged index ETF, we [have also] received some requests. However, since there is no options for the corresponding index, risk management will become a task."

There were 28 ETF-linked products issued in 2014, and 10 in 2015 till February, where the index underlyings are Nikkei 225, Topix or S&P 500, with Nikkei 225 to be the majority, according to SRP data. SBI Securities debuted Nikkei 225 leveraged index ETF-linked products in the retail in December 2014, and it has issued eight corresponding products until February 2015 which are still on live.

The sales value of ETF and exchange traded notes (ETN) as of February 2015 was JPY3.59trn (US$30bn), with Nikkei 225 leveraged index ETF, Nikkei 225 index ETF and Nikkei 225 double inverse index ETF ranked as the top three ETFs, all of which are managed by Nomura Asset Management, according to a report issued by Japan Exchange Group.

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