The past few weeks have been anything but quiet in the financial services space, let alone for structured products. As people, businesses and economies are put into near total lockdown, it still too early to assess the wider ramifications of the slowdown in activity.
But while taking stock of the exact impact of this worldwide pandemic is still some distance down the line, a few events have happened recently that could be an indication of the shape of things to come.
SRP guest writer and financial engineering expert Eric Barthe, head of structuring at Anova Partners, took a look at the immediate impact the market correction had on structured products. In his article for the SRP Academy, he writes that before the drop that occurred a couple of weeks ago, the market was quiet. “Markets then dropped, structured products dropped and their delta increased. The markets became more volatile and structured products moved along with them,” he says, adding that this comes with a host of implications to structured product trading.
The sharp decline in value across asset classes triggered by the Covid-19 market crash could also mean potential losses for issuers of autocallable structures as volatility spikes. In an exclusive interview, Shane Carroll, equity derivatives strategist at UBS, told SRP, that one of the main issues at present is the complete lack of liquidity. We see that in the spot and the vol markets. Because vols are moving around so much there is not as much visibility on where the pricing is. This makes it hard to carry out transactions which is impacting spreads,” he said.
In an interview with SRP, Halo chief executive officer Biju Kulathakal, said that current market conditions mean ‘everyone wants to go through a platform’. “[Our] platform also manages the full lifecycle of investments, which has often been a difficult, time-consuming task for investors,” he said. “The infrastructure also makes it easier and quicker to evaluate and invest in structured notes…We know that people want transparency.”
Turning our attention to commodities, recent huge variations in oil prices have had knock on effects on many structured products linked to the Brent and WTI Crude. Across the SRP global database, there are more than 1,150 live products (excluding flow and leverage) worth an estimated US$1.8 billion that are linked to Brent and/or WTI crude oil. The products are available in 19 different jurisdictions of which South Korea, with 953 products has the majority of oil-linked structures on offer. In 2020 alone, there have also been more than 12,000 leverage products linked to oil, of which 7,000 tied to the Brent and 5,000 linked to the WTI.
The best of the rest
Taking a look at the wider industry, people moves at some of the industry’s largest players continued unabated. Euronext has appointed ex-JP Morgan CIB senior executive Georges Lauchard as chief operating officer and member of the managing board, while Géraldine Laussat, specialist, RFQ-hub, at Virtu Financial, parted ways with the firm. She joined Virtu in early 2019 after its acquisition of ITG RFQ-hub. Over in Asia Pacific, Rimmo Jolly has joined BlackRock as the fund manager’s new head of iShares. Based in Hong Kong, reports to BlackRock's head of iShares and index investing, Susan Chan.
In Belgium, Nagelmackers has launched the first daily ESG knockout play, the Daily Autocall ESG Leaders Diversification Note. The medium-term note, issued on the paper of Société Générale, has a maximum tenor of eight years and participates 100% in the performance of the Stoxx Global ESG Leaders Diversification Select 50 Price EUR Index – subject to 24 months backend averaging and an overall minimum capital return of 90%. It is the first time the ‘daily autocall’ mechanism is used in Belgium, according to Gianni Pauwels, product manager off balance at Nagelmackers.
China’s latest regulatory move has seen its central bank issue a new directive on interest rates to curb the high guaranteed yields offered by certain domestic lenders on structured deposits.
The new rules strengthen the self-regulatory management of deposit rates, and include the guaranteed yields of structured deposits within the scope of self-regulation. Under the new rules, the guaranteed income is included in the ‘monthly self-discipline monitoring scope, which will effectively block the current practice of some banks using structured deposits to disguise the limit of floating rates’.
The structured deposits is the most popular wrapper in the Chinese market with a 51.4% market share across more than 3700 products in 2019, according to SRP data.
Do you want to find out more about the specifics of the Chinese structured product market? Click here to access SRP’s latest market review on activity in the PRC. For a wider access to all of SRP’s market reviews, click here.