Performance analysis of the UK structured product market over the past 10 years has revealed the products that caused losses for investors and where the market needed to improve.
New analysis supplementing recent research by Lowes Financial Management (LFM) specifically focuses on the 60 products that made losses for investors during the last decade.
According to the research, some of the loss-making products were launched before the financial crisis and suffered from that event for various reasons - three were restructured mid-term by the provider to protect against potential counterparty default, which led to a loss.
In addition, they used an American capital protection barrier rather than a European barrier, which meant if the index fell below a certain point during the investment period capital was lost.
In addition, they used an alternative single index such as the Eurostoxx 50 or Nikkei 225, they were linked to emerging market or oil indices, or were linked to shares or baskets of commodities.
‘While 60 loss-making products out of close to 3,900 maturities is a formidable record for the sector – which has performed consistently well and rarely disappointed despite the periods of market volatility over the past decade – clearly there were lessons to be learned along the way,” said Ian Lowes (pictured), managing director at LFM.
‘Change has occurred. The current market has moved away from the characteristics highlighted, such as American capital protection barriers and baskets of individual stocks. These days the majority of products have the familiar FTSE 100 as the underlying benchmark and they use European end-of-term capital protection barriers.’
Morgan Stanley to pay US$5m for prime brokerage swaps shortcomings
The US Securities and Exchange Commission (SEC) has settled charges against Morgan Stanley & Co. for violations of Regulation SHO, the regulatory framework governing short sales.
According to the SEC order, Morgan Stanley hedged synthetic exposure to swaps by purchasing or selling the securities referenced in the swaps, and it separated its hedges into two aggregation units – one holding only long positions, and the other holding only short positions. However, the bank was able to sell its hedges on the long swaps and mark them as long sales without concern for Reg SHO’s short sale requirements.
The order finds that Morgan Stanley’s long and short units failed to qualify for a Reg SHO exception permitting broker-dealers to establish aggregation units because they were not independent and did not have separate trading strategies.
The SEC found that the units had identical management structures, locations, business purposes and the same strategy or objective. As a result, Morgan Stanley should have netted the long and short positions of both units together or across the entire broker-dealer and marked the orders as long or short based on that netting. However, Morgan Stanley failed to do so and improperly marked certain sell orders in violation of Reg SHO.
JP Morgan launches S&P 500 warrants in Thailand
In a first for the Thailand warrants market, JP Morgan and Macquarie Securities have issued derivative warrants (DWs) linked to the S&P 500, allowing investors to get exposure to US market during local trading hours. They have been traded on the Stock Exchange of Thailand since 28 September.
‘Volatility has risen significantly since the beginning of the year and investors are always looking for opportunities to diversify their portfolios,’ said Chayotid Kridakon, senior country officer of JP Morgan Thailand. ‘The debut of the S&P 500 warrants, which is linked to the movements of E-mini S&P 500 Futures, provide local eligible investors another alternative to gain exposure to the volatility in the world’s largest stock market.’
The move also marks the second offshore DWs offering by JP Morgan in the country following the launch of its Hang Seng warrants in March this year.
The US bank issued two DWs linked to S&P 500 in Hong Kong on 2 September and plan to introduce at least 15 derivative warrants tied to the major benchmark and Nasdaq 100 by the end of the year, as SRP reported.
In Thailand, DWs have been more popular during the last three years. For the eight months of 2020, the average daily trading value jumped 13.4% year-on-year to THB6.46 billion (US$205.7m), accounting for around 10% of the total market trading value.
ASI partners with BNP Paribas to launch ‘risk mitigation’ index
Aberdeen Standard Investments (ASI) and BNP Paribas have teamed up to launch an index designed to provide institutional investors with a reference gauge to mitigate their equity risk and reduce portfolio volatility.
The Global Risk Mitigation (GRM) Index aims to deliver a downside beta to equities of -0.2 or lower and ‘generate a reasonable level of additional convexity in large equity market falls’.
The index provides allocators with a risk mitigation route that will allow institutional investors to monetise their holding on any dealing day and also aims to minimise the impact of path dependency – by allocating to 30 underlying sub-strategies – while reducing carry cost through active management.
Launched in August the index has had an average beta of -0.21 versus the S&P 500 index. Despite this negative beta the index was able to substantially protect its first quarter gains as equity markets subsequently recovered, returning 12.9% to 22 September.
The index has been designed to limit carry costs in rising/flat equity markets thereby making it easier for investors to retain the exposure in more benign environments. This investment objective is achieved by ASI dynamically allocating across four building blocks which include a number of underlying sub-indices published by BNP Paribas.
Bitfinex expands beyond crypto, launches EQD that settle in Tether
Crypto exchange Bitfinex has expanded beyond the digital asset space by launching equity index derivatives that settle in Tether (USDT) stablecoin.
The new derivatives which include Europe 50 and Germany 30 perpetual swaps, offer exposure to traditional stock markets. Europe 50 represents the Stoxx Europe 50 index covering 50 stocks from 18 European countries; while Germany 30 represents the 30 largest German stocks in the Deutscher Aktien Index (DAX) that trade on the Frankfurt Stock Exchange.
This is the first time a crypto exchange has launched an equity product. Europe 50 and Germany 30 perpetual swaps offer up to 100x leverage and settle in USDT which can help reducing forex and interest rate risks.
The new derivatives are available in select jurisdictions and only to verified users.