Structured Products in Asia

2015

ISSUE: NOVEMBER

hubbis.com 1st

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This is the inaugural edition of our publication focused on the role and application of structured products within wealth management.

The priority is to educate front-line Even as a starting point, wealth manag- wealth management staff as part of the ers need to know which range of prod- broader discussion about how to evolve ucts makes most sense for them to try the structured products space in Asia. to sell – based on which of them are most likely to attract sufficient volume With volatile and uncertain markets from their specific client base, and likely to continue, practitioners need to therefore are most scalable, rather than understand which products can be sold focusing on one-off or unnecessarily in decent volume, and then how to have complex structures to satisfy just one effective conversations with their or two clients. clients about the role of different products and where they fit in portfolios. Product manufacturers need to pay attention to what’s important to the buy- One of the important areas of focus for side: the quality and consistency of their product providers and distributors service; the consistency of their pricing; today is getting clients to use a broader the level of cooperation they are willing range of products which are more suit- to provide when products don’t perform able and relevant to them. Too many as expected; and the ability to provide clients tend to use the wrong product market colour and investment ideas, as at the wrong time, and have expecta- well as a wide range of underlying pay- tions for specific products in certain offs and maturities. market environments which are not necessarily correct. Yet a lot of the time, On the one hand, this publication covers these clients could use a much simpler the business of structured products for structure to more efficiently achieve gatekeepers on the buy-side. In addi- the aim they have in the first place – and tion, with client adviser increasingly at the same time ensure better returns aware of the need to better understand at lower levels of risk. the products they are selling, the rest of the content aims to achieve this. Advisers therefore need to know how to assess whether clients should lock I hope you enjoy reading these insights in profits and, if so, when and how. and derive value from them.

ANDREW CROOKE EDITORIAL AND CONTENT DIRECTOR HUBBIS CONTENTS

Feature Articles

02 DRIVING DIVERSIFICATION AND SCALABILITY IN STRUCTURED PRODUCTS As Asian investors have increased their level of engagement with structured products in 2015, their focus on diversification via some different strategies is healthy for the market.

16 ENGINEERING INVESTMENTS TO ADD MORE VALUE The flexibility of structured products means they can offer investors a variety of investment options that vanilla financial instruments cannot, and dovetail closer to the investment expectations of buyers.

22 A COLLABORATIVE APPROACH TO RAISE THE BAR More practical tools and information needs to go into the process of educating relationship managers and clients about how and where structured products fit into their portfolios.

32 CREATING A BIGGER ROLE FOR STRUCTURED PRODUCTS IN PORTFOLIOS Redefining structured products as investment solutions and highlighting the benefits of them for risk control will create a difference in making them more widely used in portfolios.

38 HOW FINTECH PLATFORMS WILL EVOLVE THE INVESTMENT INDUSTRY The increasing use of financial technology platforms that can enhance the transparency, pricing efficiency and order execution process for structured products trades is expected to pave the way for greater investment in these instruments.

i STRUCTURED PRODUCTS IN ASIA 2015 1888240-001 EDG ad (A4).ai 1 9/2/2015 1:05:15 PM

Solutions built on a strong foundation

J.P. Morgan is one of the most established providers of structured products to the Asian region. Working closely with ﬁnancial intermediaries and local distribution networks, J.P. Morgan meets the needs of a wide variety of investors in the fast growing markets of Hong Kong, Singapore, China, South Korea, Taiwan, Malaysia, and Thailand.

For more information, contact us: [email protected] or (852) 2800-7888

jpmorgan.com

J.P. Morgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, ﬁnancial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities Inc., J.P. Morgan Securities plc and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in EMEA and Asia-Paciﬁc, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank, N.A. CONTENTS

Expert Insights BNP PARIBAS 08 COMPARING STRUCTURED PRODUCTS IN EUROPE AND ASIA OUR COMMITMENT David Schmid of Leonteq Securities YOUR BUSINESS GROWTH 14 THE DO’S AND DON’TS OF STRUCTURED PRODUCT ISSUANCE Richard Wu of Leonteq Securities

19 THE VALUE OF INVESTING IN BASIC STRUCTURED PRODUCTS Peter Williams of Leonteq Securities

26 INCOME THROUGH STRUCTURED SOLUTIONS Steve Tang of Leonteq Securities

28 INNOVATION AND TRENDS IN FX PRODUCTS IN ASIA PACIFIC Ken Tan of BNP Paribas A workforce of over 9,500 people Dynamic presence in 14 markets 30 INNOVATION AND TRENDS IN COMMODITIES More than 150 years of expertise Ker Lih Gan of J.P. Morgan Connected by extensive network

36 HOW RMs CAN USE TECHNOLOGY TO IMPROVE THEIR VALUE to Europe, Middle-East Africa, PROPOSITION the USA and Latin America Mahesh Bulchandani of FinIQ

42 LAND TO GIVE BUYERS AND SELLERS SPACE TO EXPAND PRODUCTS Erdem Ozgul of Numerix

46 ADVICE ON ADVANCED STRUCTURES Duane Bong of Leonteq Securities

49 Directory

PEOPLE AND FIRMS WHO SUPPORTED THIS PUBLICATION We very much appreciate the participation and contribution of key individuals and firms in the structured products community.

Published by Hubbis. Printed in November 2015 in Hong Kong. © Hubbis (HK) Limited 2015

All rights reserved. No portion of this book may Michael Stanhope be reproduced, duplicated or copied by any Chief Executive Officer means without the prior written consent of the Hubbis publisher. No legal responsibility can be accepted T (852) 2563 8766 by the author or publisher for the content which E [email protected] appears in this publication. W www.hubbis.com bnpparibas.com.hk ii STRUCTURED PRODUCTS IN ASIA 2015 BNP PARIBAS OUR COMMITMENT YOUR BUSINESS GROWTH

IN ASIA PACIFIC A workforce of over 9,500 people Dynamic presence in 14 markets More than 150 years of expertise Connected by extensive network to Europe, Middle-East Africa, the USA and Latin America

bnpparibas.com.hk 4% to 5% 83% 400

Structured products account Investors tend to place the most The number of pay-offs based for only 4% to 5% of overall value in investment returns when on the four basic elements of wealth investments in Asia looking at structured products, structured products: capital Page 8 according to audience sentiment at protection, yield enhancement, a Hubbis event in Singapore participation, and leverage Page 17 Page 19

30,000 USD1 bn 10%

It is estimated there were about Leonteq and Numerix have spent If a product had a 10% delta 30,000 structured products with almost USD1 billion over seven and you put USD1 down, a volume of over USD300 billion years to create the if it ended up in the money in Asia Pacific in 2014 technology behind LAND it would be worth USD10 Page 26 Page 43 Page 47

Hubbis content colour coding

REGULATION & COMPLIANCE SKILLS

INVESTMENTS STRATEGY & BUSINESS

FAMILY WEALTH TECHNOLOGY

iii STRUCTURED PRODUCTS IN ASIA 2015 Illuminiating the market The most innovative network for equity linked structured products.

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Live. Now. Join our community in as little as 30 days. FEATURE ARTICLE

Driving diversification and scalability in structured products

As Asian investors have increased their level of engagement with structured products in 2015, their focus on diversification via some different strategies is healthy for the market.

This year has, overall, been one of the strongest for structured products that “There are some many players have seen since 2007. products which the bank can create for clients For the first eight months of 2015, the low interest rate, low volatility environ- to make more of the ment acted as a tail-wind to force volatility yet without clients to look at different types of risking too much capital.” products in the market, says Lemuel Lee, head of third party distribution in the equity derivatives group at J.P. SEBASTIEN DUPUY Morgan in Asia Pacific. “We have seen DBS Bank a spike in more innovative products.”

He says that four categories of product, in particular, have found favour with wealthy individuals which hadn’t really According to Albert Yuen, managing expectations, adds Bart Wong, manag- been on their radar before. director and head of product marketing ing director and head of Credit Suisse’s at BOC International, one of the trends custom assets group in the private These include: delta 1 products, to he has seen is appetite among inves- banking and wealth management group provide access to certain markets and tors to get access to specific markets in Asia Pacific. themes; investable indices, to serve as or products. an enhancement to ETFs and passive He sees the market at an interesting management; fund derivatives; and The diversity in interest is a healthy juncture – also as a result of the mac- innovation around pay-offs, in line with reflection of investor sophistication as ro-economic and political factors, a greater willingness to take more risk. well as their understanding of market which can cause major movements.

2 STRUCTURED PRODUCT IN ASIA 2015 OUR JOB: BRIDGING MARKETS OUR JOB: BRIDGING MARKETS TO OFFER YOU SMART TO OFFER YOU SMART INVESTMENT IDEAS Driving diversification and scalability in structured products

WITH YOU, AS ONE TEAM WITH YOU, AS ONE TEAM

#1 Overall #1 Equity Products #1 Currency Products Global Derivatives #1 OverallStructured Product House # 1 Overall#1 Equity ProductsMost Innovative Provider of House of the Year #1 Equity Productsof the year Asia Index-Linked #1 Currency Products # 1 Overall Equity Structured Products Risk Solutions #1 CreditCredit Products Derivatives House #1 Equity Products # 1 Overall Currency House of the year #1#3 InterestCredit Products Rateof the Productsyear Asia Best Provider of # 1 Overall Credit Commodity-Linked Equity Derivatives #3 Interest Rate Products Structured Products House of the year # 3 Overall Interest Rate

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THIS COMMUNICATION IS FOR PROFESSIONAL CLIENTS ONLY AND IS NOT DIRECTED AT RETAIL CLIENTS. Societe Generale is a credit institution and an investment services provider authorized and regulated by the French Autorité de Contrôle Prudentiel (the French Prudential Control Authority) and the Autorité des Marchés THISFinanciers. COMMUNICATION This material has IS FORbeen PROFESSIONALprepared solely for CLIENTS information ONLY purposes AND IS and NOT does DIRECTED not constitute AT RETAIL an offer CLIENTS. from Societe Generale to buy or sell any security or financial instrument, product or services. Not all products and services offered by Societe Generale are available in all jurisdictions. This communication is not intended for or directed at retail clients. It is for professional clients only. Please contact your local office for any further Societeinformation. Generale 2012 isSociete a credit Generale institution Group and andan investment its affiliates. services © GettyImages provider authorized– FRED & FARID and regulated by the French Autorité de Contrôle Prudentiel (the French Prudential Control Authority) and the Autorité des Marchés Financiers. This material has been prepared solely for information purposes and does not constitute an offer from Societe Generale to buy or sell any security or financial instrument, product or services. Not all products and services offered by Societe Generale are available in all jurisdictions. This communication is not intended for or directed at retail clients. It is for professional clients only. Please contact your local office for any further information. 2012 Societe Generale Group and its affiliates. © GettyImages – FRED & FARID

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CIB_ASIA_RISK_210x297_EARTH.indd 1 16/06/2015 12:10 FEATURE ARTICLE

create for clients to enable investors to make more of the volatility yet “There has been appetite without risking too much capital. among investors to get access to specific markets CREATING SCALABILITY or products.” Creating product itself is not the problem for gatekeepers, says Dupuy. “Even if a client wants to take a view on an asset class they otherwise can’t really access, then we can use struc- ALBERT YUEN tured products to create a pay-off.” BOC International

Instead, given the transactional nature of Asian private banking, the challenge is to be able to find the right product at the right time for clients, which suits While volume is cyclical, some of the At the same time, he says that there the particular market sentiment and a risk-diversification strategies in par- are some products which the bank can distributor’s view. ticular have sold in the hundreds of millions, sometimes even billions, of dollars, adds Wong. REGULATION OF STRUCTURED PRODUCTS POSTÒ2008 IS…

“From funds to FX to club deals, diver- Hampering the market sity is one of the main themes I have 48% seen this year,” he explains. Just right Yuen says fund derivatives are a 14% gateway into certain structures and A WORLD OF PRICING & REFERENCE DATA new asset classes in line with the desire In need of further change AT YOUR FINGERTIPS. for more diversification. 38% TRANSPARENT. INDEPENDENT. ACCURATE. The uncertainty in relation to interest Source: Hubbis Structured Products Forum 2015 - Hong Kong rates, volatility in emerging markets The Thomson Reuters Pricing Service (TRPS) delivers award winning content to thousands of entities around and currencies, and negative short- the world every day. This service helps subscribers to price illiquid, complex and Over-The-Counter (OTC) term research on equities are among instruments. TRPS is a transparent, independent and accurate service which offers price recipes, corresponding the factors that speakers said make it market color and other relevant data sets for all evaluations. TRPS delivers extensive global content for all major asset classes including: difficult to know the extent to which “The diversity in interest markets might move or correct, nor is a healthy reflection of • CDS • CMBS • ABS • Fixed Income how long changes may last. investor sophistication as well as their understanding • CDO • CLO • MBS • + More In turn, adds Sebastien Dupuy, execu- of market expectations.” To find out more, simply email [email protected] or visit prdcommunity.com tive director and product solutions head, private banking/treasures private client, consumer banking group and wealth management, DBS Bank, this BART WONG creates uncertainty for relationship Credit Suisse Private Banking managers (RMs) and clients to decide which products to focus on.

© 2014 Thomson Reuters Thomson Reuters and the Kinesis logo are trademarks of Thomson Reuters. 4 STRUCTURED PRODUCT IN ASIA 2015 A WORLD OF PRICING & REFERENCE DATA AT YOUR FINGERTIPS. TRANSPARENT. INDEPENDENT. ACCURATE.

The Thomson Reuters Pricing Service (TRPS) delivers award winning content to thousands of entities around the world every day. This service helps subscribers to price illiquid, complex and Over-The-Counter (OTC) instruments. TRPS is a transparent, independent and accurate service which offers price recipes, corresponding market color and other relevant data sets for all evaluations. TRPS delivers extensive global content for all major asset classes including:

• CDS • CMBS • ABS • Fixed Income • CDO • CLO • MBS • + More

To find out more, simply email [email protected] or visit prdcommunity.com

Another issue for banks and gatekeepers continues to be trying to find scalable products and structures. These “A lot of private banks face are sought after also because they can constraints about whether lead to more recurring revenue. they can book the range of products that exists.” “A lot of private banks face constraints about whether they can book the range of products that exists,” says Lee.

LEMUEL LEE Where the real innovation lies, he ex- J.P. Morgan plains is in offering products as part of a campaign.

WHICH OF THESE STANDARD PRODUCTS ARE YOUR CLIENTS “To make it worthwhile [for all stake- INTERESTED IN BUYING AT THE MOMENT? holders] to sell product, it needs to be recurring,” says Lee. ELNs

40% “We need to make sure that it is simple

Accumulators so that it gets understood by investors, 35% and it can then be offered in successive quarters with some changes to the Decumulators content of the product.” 5% From Yuen’s perspective, an area of Range accruals excitement is the new China Europe 15% International Exchange.

DCIs / DCDs As a joint venture between Deutsche 5% Boerse, the Shanghai Stock Exchange and China Financial Futures Exchange, Source: Hubbis Structured Products Forum 2015 - Hong Kong this first dedicated platform with au- thorised Chinese investment products outside mainland China will bring the country’s capital market directly to “Automating the process for international investors. standard products leads to a lower cost to distribute.” STANDARDISATION AND TRANSPARENCY ON THE AGENDA The move towards automation has been another noteworthy trend in the structured products space. MARK MUNOZ Contineo This is also a positive thing as far as standardisation goes.

6 STRUCTURED PRODUCT IN ASIA 2015 The benefits of transparency, too, is WHAT UNDERLYING FROM THIS LIST WOULD YOU LIKE TO SEE USED MORE TO ENCOURAGE MORE TAKEÒUP FROM YOUR CLIENTS? something that the regulators like, also as part of the process of streamlining Funds information to reduce the volume of 27% it which is required.

FX “This is not about creating a simple 18% product in itself,” says Munoz. “Instead, it is about creating a set of tools, as Commodities 0% well as data and analytics to help automate the business and be more in-

Equities formed about what is happening.” 23% The next step, he adds, is to be able Fixed income to automate end-to-end, to be more 9% effective for clients, especially if it can lower internal costs. Custom indices

23% Wong agrees that cost efficiency is an important component of scalability. Source: Hubbis Structured Products Forum 2015 - Hong Kong STAYING RELEVANT The relevance of products is a very sentiment-driven thing, according to the panelists. WHICH 1 OF THE FOLLOWING ATTRIBUTES OF A STRUCTURED PRODUCT ARE MOST IMPORTANT TO HELP YOU SELL IT TO YOUR CLIENTS? For Dupuy, meanwhile, there is little Customised to individual needs point in offering products like accu- 65% mulators if banks believe in the concept of managing client money over Scalable to encourage greater volume the long term. 8% However, finding the ‘right’ products Capital protection also comes down to the specific client 12% segment involved.

Liquidity 12% “If we service UHNW clients, then the more it needs to be customised,” says Market access Lee. “We are focused on monetising 4% different parts of the market.”

For the mass affluent, where scalabil- Source: Hubbis Structured Products Forum 2015 - Hong Kong ity is key, the expectation among those firms which distribute to these investors is to deliver access to product “Automating the process for standard director of Contineo. “It helps in the where they get pricing, term sheets products leads to a lower cost to dis- process of selling the products to and execution in the most efficient tribute,” says Mark Munoz, managing clients in a more effective manner.” way possible.

STRUCTURED PRODUCT IN ASIA 2015 7 EXPERT INSIGHTS

Comparing structured products in Europe and Asia

European and Asian investors have markedly different product preferences, due to shifting wealth patterns, product limitations and cultural traits, explains David Schmid of Leonteq Securities.

Structured product usage in Asia has overall wealth AUM is expected to grow great potential due to its relatively min- to surpass Western Europe in 2016, iscule usage and the rapid expansion of according to a McKinsey study. wealth in the region, but this growth requires much more automation and “What is remarkable is growth in the tailoring of products, according to David number of millionaires in Asia,” said Schmid, chief executive for Asia at Schmid. “In 2009 there were 3 million Leonteq Securities. millionaires, but now there are 4.4 million millionaires. That is a 45% Schmid offered a summary of the key growth rate over five years. Asia is prob- differences between the usage of struc- ably the biggest opportunity for structured products in Asia and Europe. tured products in terms of growth.”

“In 2009 there were 3 million millionaires, but now DAVID SCHMID there are 4.4 million millionaires. That is a 45% Leonteq Securities growth rate over five years.”

Presentation Video

The key underlying statistic was the Structured products account for only http://www.hubbis.com/ mainEvent/203_Structured_Prod- growth of overall wealth in Asia, which 4% to 5% of overall wealth investments, ucts_Forum_-_Singapore/presen- is expanding at 15% per annum. Asia’s so there is plenty of growth potential. tations.php?id=220&speaker_id=

8 STRUCTURED PRODUCT IN ASIA 2015 RISING VOLUMES In total, 75% of the products sold in investors in Asia like to buy accumula- European investors have been placing Europe are equity-linked. In contrast, tors, which you come across in an OTC less money into structured products, around 40% of outstanding products in format, whether in FX or in equities.” particularly in Italy and the UK. Asia are equity-linked, and a further 50% are FX-linked. Investors in Europe also take a longer, Even so, around USD800 billion is out- more investment-themed approach to standing through 3 million products, “Other asset classes like credit and com- structured products. many of which are listed retail distribu- modities are almost non-existent,” tion products. Schmid observed. The investment horizon of the products in the continent is typically two to three years, as opposed to Asia, where is it only around six months.

“In my view there is a lack of pre-trade and market The far broader product range in Europe analytics. People need to understand risks and also comes with many more pay-off structures too; there are around 400 in de-compose risk of underlying products and transparency.” Europe, versus just a few in Asia, with the likes of accruals, accumulators and equity-linked notes representing 75% of the market. Schmid said the breadth of payout structures in Asia will grow Asia ex-Japan, meanwhile, has seen its PRODUCT TYPES with greater product transparency. structured product volumes steadily The most popular product types also grow from USD700 billion to close to pointed to some marked differences “In my view there is a lack of pre- USD800 billion today. between Europe and Asia, and in par- trade and market analytics. People ticular the preference for more listed need to understand risks and de- However, the range of products is far products in the former. compose risk of underlying products smaller in this region, with only around and transparency. 50,000 products outstanding. Schmid said that almost 50% of product issues in Europe are in a note format, “Increasing regulation since the global This is mostly because there are very such as securitisations with certificates. financial crisis has reduced the number few listed products outside of warrants in Asia, while retail distribution has fallen away since the financial crisis.

Schmid revealed that investors in the “People do not look at structured products as a black box latter tend to be very regionally focused that they buy and hold until maturity but are starting to on their preferred investments. look at them in terms of the performance they can lock in while they have the product.” “Asian investors tend to invest into Asian markets, but also we have seen recent rallies in Hong Kong. And investors are investing more into Europe too, as it is doing better.” The OTC market only accounts for 9% of products, and rightly so, but there of the entire market. “Asia is different; are still worries about the potential for Perhaps most surprising is the diversi- only 30% [of products are] in the secu- mis-selling, with people cautious after fication of structured products by un- ritised format, and about 50% are in the experience of [Lehman Brothers] derlying type. deposits, with an OTC format. A lot of minibonds in 2008.”

STRUCTURED PRODUCT IN ASIA 2015 9 EXPERT INSIGHTS

BESPOKE SOLUTIONS EUROPEAN STRUCTURED PRODUCTS AUM A key to ensure growth is for individuals to better understand the risks as- Hubbis at-a-glance 1,000,000 3,000,000

900,000 sociated with structured products, and 2,500,000 ) 800,000 have the liquidity to trade in and out of We focus on the Asian wealth management industry and Key highlights 700,000

Outstanding products 2,000,000 them. This is beginning to happen. 600,000 produce high-quality, localised content that is practical

500,000 1,500,000 and independent. This includes news, articles, research, 120,000 monthly unique website “People do not look at structured prod- 400,000 visitors 1,000,000 300,000 ucts as a black box that they buy and reports and conference-related content, and is available

Outstanding sales volumes (USDm Weekly email newsletter to 200,000 500,000 hold until maturity but are starting to in multiple formats including video, web and print. The over 34,000 regional & global 100,000 look at them in terms of the perfor- Hubbis e-learning platform consolidates this wealth of 0 0 professionals through our Year End 2011 Year End 2012 Year End 2013 Year End 2014 Year End 2015 mance they can lock in while they have knowledge into an indispensable training and proprietary database Outstanding sales volumes (USDm) Outstanding proudcts the product instead of holding it until development resource for all professionals. More than 10 annual publications maturity,” said Schmid. Dozens of thought-leadership Source: StructuredRetailProducts.com What we do Leonteq is trying to meet this need. Its discussions and surveys featured technology platform allows investment 80+ proprietary training courses and ASIA PACIFIC STRUCTURED PRODUCTS AUM advisers to pick individual stocks or over 200 hours of live baskets of shares, and structure them learning content 800,000 50,000 with specific derivatives to meet the 700,000 45,000 Events Publications Online learning

) preferences of the investor. 40,000 600,000 Presentations News & videos Case studies

Outstanding products 35,000 Thought leadership Online content Assessments 500,000 30,000 Schmid believes such automated solu- 400,000 25,000 tions will help create the ease of use

300,000 15,000 that will encourage more investments

200,000 Outstanding sales volumes (USDm 10,000 into structured products into the future. Topics we cover 100,000 5,000 It will also help the market keep up with 0 0 the rising trend of more, smaller trans- Year End 2011 Year End 2012 Year End 2013 Year End 2014 Year End 2015 REGULATION & COMPLIANCE SKILLS actions taking place. Outstanding sales volumes (USDm) Outstanding proudcts

INVESTMENTS “It’s important to have increasing rounds STRATEGY & BUSINESS Source: StructuredRetailProducts.com of automation to reduce the workload, and narrow processes need to be au- FAMILY WEALTH TECHNOLOGY tomated,” he said. JAPAN STRUCTURED PRODUCTS AUM

“There are a lot of ongoing platform 3,000 Who it is for 500,000 developments that will let us focus on 450,000 2,500

) bespoke solutions. Hubbis offers a unique platform that brings together content, thought- 400,000

2,000 leadership and collaboration - to challenge and provoke conventional

350,000 Outstanding products 300,000 “Once we can do the majority of flow thinking, with an aim to innovate and improve the Asian wealth management 1,500 250,000 on platform solutions it will free up industry across the following segments: Private Banks, Independent Wealth 200,000 1,000 some time to create bespoke solutions Management, Retail Banks, Asset Management, Insurance, Technology, 150,000 Outstanding sales volumes (USDm 100,000 500 based on risk-return appetites. Professional Services. Through our events and content channels, we reach 50,000 senior management, business heads and other key stakeholders from the top 0 0 Year End 2011 Year End 2012 Year End 2013 Year End 2014 Year End 2015 “This will, after all, generate better prod- international, regional and domestic organisations.

Outstanding sales volumes (USDm) Outstanding proudcts ucts, more performance for clients, happier clients, and ultimately more

Source: StructuredRetailProducts.com revenue for the distributor.”

10 STRUCTURED PRODUCT IN ASIA 2015 Hubbis at-a-glance

We focus on the Asian wealth management industry and Key highlights produce high-quality, localised content that is practical and independent. This includes news, articles, research, 120,000 monthly unique website reports and conference-related content, and is available visitors in multiple formats including video, web and print. The Weekly email newsletter to over 34,000 regional & global Hubbis e-learning platform consolidates this wealth of professionals through our knowledge into an indispensable training and proprietary database development resource for all professionals. More than 10 annual publications Dozens of thought-leadership What we do discussions and surveys featured

80+ proprietary training courses and over 200 hours of live learning content

Events Publications Online learning Presentations News & videos Case studies Thought leadership Online content Assessments

Topics we cover

REGULATION & COMPLIANCE SKILLS

INVESTMENTS STRATEGY & BUSINESS

FAMILY WEALTH TECHNOLOGY

Who it is for

Hubbis offers a unique platform that brings together content, thought- leadership and collaboration - to challenge and provoke conventional thinking, with an aim to innovate and improve the Asian wealth management industry across the following segments: Private Banks, Independent Wealth Management, Retail Banks, Asset Management, Insurance, Technology, Professional Services. Through our events and content channels, we reach senior management, business heads and other key stakeholders from the top international, regional and domestic organisations.

EXPERT INSIGHTS

The do’s and don’ts of structured product issuance

With more investors looking at structured products, advisers need to be fully familiar with the regulatory requirements for selling the instruments, according to Richard Wu of Leonteq Securities.

The structured products industry has in the structured products market. undergone enormous regulatory change When US investment bank Lehman in recent years, and more rule changes Brothers declared bankruptcy in Sep- are likely to take place, with product tember 2008 many products had to be listing likely to eventually emerge in called off or redeemed. Asia, according to Richard Wu, executive director and head of compliance at At the same time, Asia’s financial regu- Leonteq Securities. lators faced large problems, with angry investors protesting outside the banks Wu noted that in some ways the market they blamed. environment once more resembled the period shortly before the global financial EDUCATION EFFORTS crisis of 2008. As a result, the Monetary Authority of Singapore has issued many notes target- “There is a low yield environment, with ing intermediaries who sell products or low interest rates and greater volatility advise clients on product purchasing. for various reasons,” he said. “Because RICHARD WU of that, it’s created a lot of interest and Despite the outrage, Wu said that Leonteq Securities more aggressive risk appetite for inves- regulators are broadly supportive of tors in banks and the wealth manage- structured products. ment industry. Investors are demanding more products to get enhanced yields.” “The key point is that the regulators do Link to Presentation Video want to see structured products on the The resemblance is important, because market, because these are quite innova- http://www.hubbis.com/ mainEvent/203_Structured_Prod- the onset of the global financial crisis tive products that are customisable by ucts_Forum_-_Singapore/presenta- revealed major structural weaknesses the investor and offer diversity to them,” tions.php?id=227&speaker_id=

14 STRUCTURED PRODUCT IN ASIA 2015 he added. However, significant public have introduced training and qualifica- LISTING LESSONS misconceptions remain, mainly regard- tions for selling structured products. Europe and the UK have focused their ing the benefits and risks attached to regulatory efforts mostly on product structured products. AREAS TO IMPROVE development. Wu said there is an obli- Although the regulatory environment gation when an issuer manufactures a A key element of dispelling these views is now more rigorous, standards can new product to design and develop a is improved client engagement and still improve. distribution strategy and put into place education, which regulators have tried a secondary market for that product. to encourage. Wu said Hong Kong’s Securities & Futures Commission typically sends “The European securities authority also “Investors have very different levels of mystery shoppers to a random 10 local asks for more transparency in the prod- knowledge and experience in trading institutions to see whether they fully ucts they sell; they are talking about products, and generally in understand- explain structured products when [issuers and distributors] disclosing ing derivatives,” Wu said. selling them. “The survey found that profit margins to the end investor and although intermediaries are using stan- the cost of hedging and distribution, so “Some regulations have made the dardised questionnaires to get client the investor knows how much you make first point [for advisers] to be that information they were not fully docu- from them,” he noted. you ask investors what they know mented, and the representatives guided about derivatives.” the investor [in filling out the form] so Europe’s regulator is also considering that they could buy more products.” creating key investment documents, They have also offered very prescriptive which standardise all key information guidance on customer advice, which Additionally, some representatives did for structured products to investors. raises compliance costs. not offer sufficient explanation about Wu’s hope is that products are listed on regional stock exchanges. “It offers re-sale opportunities and can develop a greater secondary market for investors “There is a low yield environment, with low interest rates to sell products before maturity, while and greater volatility for various reasons. This has providing objective pricing for products created a lot of interest and more aggressive risk and price discovery mechanisms,” he appetite for investors.” said. “It also removes some of the issues attached to secondary markets that are created by issuers themselves, such as non-transparent structures.”

But this potentially offsets other costs. the disadvantages or risks of the prod- He said there is a long way to go in Asia ucts, or offer investors a proper expla- to develop such structures, with ex- “These efforts may reduce the costs nation of the rationale of the products. changes in Hong Kong and Singapore attached to liabilities, and as you can yet to decide what products could even see now the costs of legal liability are Some didn’t give the product key fact go into them, and whether they have quite exorbitant in some areas, such as statement either. the technologies to support such a currency trading,” said Wu. product market. “This was just a random sample of in- There are also discussions about listing stitutions, but it shows that there are “These issues need to be worked out more products, as this will require more still problems. While the rules are in for products to be listed and traded on information disclosure, and make the place, a lot of institutions are either the market. But I think it would be good process of KYC assessments easier. Ad- not complying with them or not for the settlement and redemption of ditionally, Singapore and Hong Kong enforcing them,” he said. these products.”

STRUCTURED PRODUCT IN ASIA 2015 15 FEATURE ARTICLE

Engineering investments to add more value

The flexibility of structured products means they can offer investors a variety of investment options that vanilla financial instruments cannot, and dovetail closer to the investment expectations of buyers.

Investors should consider investing into structured products because of “True structured products their ability to closely reflect the inves- are relevant and attractive tors’ views on the market in a transpar- relative to more transparent ent manner. and direct financial When discussing the value such prod- instruments due to the fact ucts can offer investors, Jeremy Ng, they are very flexible.” deputy chief executive officer for Asia at Leonteq Securities, pointed to their inherent flexibility, using the example CHARLES PICARD of an investor wanting to buy Apple BNP Paribas Wealth Management stock, but finding it 10% over-valued.

“A cash trader would have to sit there until it drops,” he explains. Charles Picard, head of structured “They can answer any type of investor “But instead of waiting you could look products and tailor-made derivatives need, any risk-return objective in your to a simple reverse convertible [product at BNP Paribas Wealth Management risk appetite.” with Apple stock as an underlying and] in Asia, offered similar thoughts. a strike price at 90%. Because you He noted that all client types use struc- short the option you earn a premium “True structured products are relevant tured solutions, such as companies [while Apple shares trade at over 90% and attractive relative to more trans- using them to optimise their balance the initial value], and if at some point parent and direct financial instruments. sheets for finance, hedging or offshore [the Apple stock drops] you can have This is particularly due to the fact they accounting purposes, and hedge funds that as well.” are very flexible. conducting arbitrage.

16 STRUCTURED PRODUCT IN ASIA 2015 “Usually a [discretionary portfolio] is mostly bonds and equities,” he said. “We are in the sixth year of an equity bull market and if “But we are in the sixth year of an you go back the bond bull equity bull market and if you go back market has arguably lasted the bond bull market has arguably 30 years. We have to look lasted 30 years.” beyond these asset classes.” “We are getting to a point where we have to look beyond these as at some HANS GOETTI point trends end. And structured prod- Banque Internationale A Luxembourg ucts can also offer exposure to other asset classes in the commodities space, for example.”

Ng added that the products could also TECHNOLOGY AID The clear winner was ‘investment fit markets that have proven to be A key support to the proliferation of returns’, at 83%. range-bound of late. structured products over the past two years in Asia has been the increased ‘Diversification and capital protection’ “A lot of portfolio managers have an ease with which they can be modelled only gained 9% apiece, and ‘hedging’ investment benchmark to compare and constructed. received zero votes. against and in an environment where there isn’t much return, they can be Ng says this is down to marked tech- MARKET CONDITIONS range-bound,” he explained. “Some nology advances, which make it easier. Hans Goetti, chief strategist, Middle discretionary managers have used East and Asia, at Banque Internationale structured products in such a market “Technology can help take care of ex- A Luxembourg, added that structured to outperform.” ecuting structured products in an ef- products offered investors much- ficient way; otherwise it costs a lot of needed investment diversification at Similarly, the products can also take man hours,” says Ng. a time of mounting risk. advantage of an interest rate environ-

“This leaves a gap in time in which the manufacturer and distributor can WHICH OF THE FOLLOWING SHOULD BE THE MOST IMPORTANT THING engage in deeper conversations that DISTRIBUTORS LOOK FOR FROM PRODUCT ISSUERS? end up adding value for their clients or investors.” Lower price 11% Inevitably, most of these conversations Product innovation in Asia tend to revolve around yield enhancement products, which is the 0% key driver for most regional investors After sales-service to buy structured products. 39%

Delegates at a Hubbis event in Singa- Information and education pore were asked for their sentiment 50% around the question ‘Where do investors tend to place the most value in structured products?’ Source: Hubbis Structured Products Forum 2015 - Hong Kong

STRUCTURED PRODUCT IN ASIA 2015 17 FEATURE ARTICLE

ment that could begin to rise later in 2015, after years of being flat. “Technology can help take “The next rate environment is likely to care of executing structured be a hiking one, and people can look products in an efficient way; to interest rate-linked structured prod- otherwise it costs a lot of ucts to help outperform,” he said. man hours.”

Delegates at the Hubbis event in Sin- gapore were also asked for their senti- JEREMY NG ment on another topic: ‘Which of the Leonteq Securities following should be the most important thing distributors should look for from product issuers?’ The available answers were: ‘cheaper prices’; ‘product innovation’; ‘after-sales service’; and ‘information and education’. made customised solutions. Hong “I think bonds are the most overvalued Kong is more transactional; Singapore asset class on the planet,” he explained. “It is really all of the above,” said Goetti, is more structuring-focused.” “They used to be risk-free return but when asked his opinion. “However I would go for product innovation, as it’s important to find more ways to play on certain assets.” “Bonds are the most overvalued asset class. They used to You can potentially put a structure be risk-free return but not they are return-free risk.” together on almost anything you can think of and that’s where you can have an edge as a manufacturer,” he added.

The audience differed slightly in their While the yield focus of clients in both now they are return-free risk. Investors views of the question. cities looks likely to remain, Goetti should seek ways to find a hedge concluded with a note of caution. against that.” In total, 36% voted for after-sales service, while 32% voted with Goetti’s preference of product innovation. CAN STRUCTURED PRODUCTS EVER BECOME A MORE SIGNIFICANT The panellists also noted that there is PART OF DISCRETIONARY PORTFOLIOS? a slight difference in product prefer- Yes ence between investors based in Hong Kong versus Singapore. 18%

No, never “Over the past three years we have 6% seen a bigger investor appetite for flow products in Hong Kong, with roughly Only with much more adviser & client education 80% to 20% flow versus non-flow 76% products and bespoke solutions,” said Picard. “This is a bit different in Singa- pore, which is 60% flow and 40% tailor- Source: Hubbis Structured Products Forum 2015 - Hong Kong

18 STRUCTURED PRODUCT IN ASIA 2015 EXPERT INSIGHTS

The value of investing in basic structured products

Relationship managers (RMs) need to fully grasp the way structured products work and adapt them to meet HNW clients’ preferences if they are to work well, says Peter Williams of Leonteq Securities.

It is vital people selling structured prod- tection; yield enhancement; participa- ucts understand how they work. Yet tion; and leverage. this is easier said than done, according to Peter Williams, director of structured However, there are around 400 pay- solutions sales at Leonteq. offs based upon these four.

He said RMs need to start by asking a Williams went on to offer quick descrip- client what their investment perspec- tions of some common coupon-focused tives are, and what return they want to structured product types. achieve, then begin to determine what products might be appropriate. Reverse convertibles essentially pay the client a guaranteed coupon; barrier “You can facilitate and customise prod- reverse convertibles observe a barrier ucts for the customer’s requirements,” condition and pay a guaranteed coupon; Williams noted. multi-barrier express certificates observe more than one underlying “For example, if a customer has a yield instrument; an express certificate has PETER WILLIAMS requirement of 5.5%, 6%, or 7% per an auto call feature and can be re- Leonteq Securities annum, this can be factored into the deemed early; fixed coupon notes are product and the risk of the product can essentially the same as a reverse con- be put into which underlying [financial vertible; and twin-win offers positive instrument] we use.” exposure to potential upside and down- Link to Presentation Video side movements of the underlying. KEY PRODUCT ELEMENTS http://www.hubbis.com/ mainEvent/202_Structured_Prod- He explained that structured products He added that the difference between ucts_Forum_-_Hong_Kong/presen- have four basic elements: capital pro- European and American barriers is that tations.php?id=507&speaker_id=

STRUCTURED PRODUCT IN ASIA 2015 19 EXPERT INSIGHTS

the former are observed only at a prod- The best outcome is for the stock to fixing, in which case the investor would uct’s maturity, whereas the latter are move above its strike price in the first be long the underlying at maturity. observed on a continuous daily basis. month; the product auto-call out means the client receive 100% of their no- Even then, the investor would get six Important date terminology references tional investment plus a 1.35% coupon. coupons of 1.35% upon maturity. include observation dates, which are typically quarterly or semi-annual dates The second scenario would be that the ALTERNATIVE INVESTMENTS upon which the underlying instruments product runs the full six month tenor, A bonus certificate is an alternative structure. Using DBS as an issuer, a six-month maturity US dollar-denom- inated product with underlying Tencent shares offered upside participation of “There is a low yield environment, with low interest rates 150% and a barrier of 85%. and greater volatility for various reasons. This has created In one scenario, provided Tencent’s a lot of interest and more aggressive risk appetite shares dropped by under 15%, investors for investors.” would receive their notional investment at maturity plus a 5% bonus coupon.

In the second scenario, if Tencent’s stock price had risen by 10% above the are matched against their initial fixing; with the client receiving a 1.35% initial fixing on maturity, investors and the maturity date, which is the final coupon six times over its lifespan. The would receive 115% due to the 150% fixing date of the product. worst case scenario would be that Ten- participation rate on the upside. (There cent’s stock falls below 80% of its initial is a 125% cap on the participation rate, PRODUCT PAY-OFFS Williams went on to use Tencent as a popular stock underlying in Asia to demonstrate some simple products. KEY STRUCTURED PRODUCTS TERMINOLOGY

“If you look at Bloomberg analysis; PAYOFF TYPES PRODUCT CHARACTERISTICS • Reverse Convertible • Conditional/Guaranteed Tencent has 90% buy, 10% hold and no • Barrier Reverse Convertible coupon sell recommendations across 15 ana- • Multi Barrier Express Certiﬁcate • Memory Coupon / lysts,” he said. “It looks attractive even • Fixed Coupon Note (FCN) Non Memory if you end up buying [its stock] outright.” • TWIN WIN • AutoCall Trigger • Phoenix • He gave the example of a US dollar fixed Athena • Participation coupon note structure with Tencent as an underlying, with a six-month maturity, continuous monthly observations POPULAR BARRIER TYPES DATE TERMINOLOGY and an 80% barrier. Williams said this • European Barrier: Worst Of • Strike Date (Initial Fixing) product could pay investors 16.21% per • European Barrier: Sum Of • Issue Date • • annum, or 1.35% per month. American Barrier Observation Dates (Continuous / Daily on • Maturity Date (Final Fixing) Close) “Essentially, [with this structure] your market expectation is that the underlying is either moving sideways or rising slightly,” he added. Source: StructuredRetailProducts.com

20 STRUCTURED PRODUCT IN ASIA 2015 so investors could get a maximum notional investment back plus 4.875% payment. Lastly, if the price of oil fell return of 137.5%). coupon. In scenario two, if the underly- 40% during the product tenor the client ing dropped a small amount in the first would be long the underlying. In the third scenario, if the stock had quarter the investor wouldn’t get a fallen to below 85% of the strike value coupon, but if it then rose above the Williams ended by noting the applicabil- on maturity, the client would be long strike price in the second quarter the ity of each product entirely depends on the underlying Tencent shares. investor would get a 9.75% coupon, to the client’s market expectations. “The reflect both quarters’ performance. key takeaway from these examples is Williams’ last product example was a twin-win certificate, or an instrument in which an investor can benefit from up or down movements of an underlying. His example was a one-year US dollar product using the S&P GSCI “The key takeaway from these examples is that Crude Oil Index as an underlying, with relationship managers need to understand quarterly observations. the client’s requirements and apply these into the correct structured product for them.” The product would offer a coupon of 4.875% per quarter, an American barrier level of 60% of the initial fixing, and a strike level of 100% of the initial fixing.

In scenario one, if the underlying rose In scenario three, if the price of oil rose that you need to understand the client’s above the strike price in the first or fell 10% by maturity, the investor requirements and apply these into the quarter, the investor would get their would receive a 10% participation correct structured product for them.”

RISK VS. REWARD

High returns

Moderate returns

Low returns

Low risk Moderate risk High risk

DE-LEVERAGE INVESTMENT LEVERAGE • Reduced downside • Simple exposure to • Magniﬁcation risks & upside underlying asset of potential returns • Provides investors upside returns • Full or partial with a moderate • Capital at risk capital protection risk-return proﬁle

Source: StructuredRetailProducts.com

STRUCTURED PRODUCT IN ASIA 2015 21 FEATURE ARTICLE

A collaborative approach to raise the structured products bar

More practical tools and information needs to go into the process of educating relationship managers (RMs) and clients about how and where structured products fit into their portfolios.

The level of knowledge and understanding among the majority of RMs and “Product issuers must other client-facing staff in Asian wealth also share a certain management about structured products amount of responsibility needs to improve to ensure they are capable of discussing them with clients for educating investors.” – and in a way that can clearly explain how they apply in their portfolios.

Part of this comes down to giving bankers a targeted range of products ALESSANDRO CAIRONI that are relevant to their specific group UBS Wealth Management of clients. It can also be achieved by delivering training to the bankers via a combination of different delivery formats, including mandatory training, to get the right concepts into their will help them to be able to meet their “Without a continuous dialogue, the heads most efficiently. individual objectives. sell-side cannot know what the buy-side or end-clients are thinking,” says Philip And if RMs and advisers can help their COMMUNICATION VITAL Cheng, adjunct associate professor of clients understand more about the full The relative complexity of many struc- finance at The Hong Kong University range of products they can potentially tured products makes it essential that of Science & Technology. use for their portfolios, then everyone there is more interaction among the stands to gain – as clients can assess various stakeholders involved in creat- As someone who has worked on both for themselves what is suitable and this ing and selling these products. sides, he should know. For example, he

22 STRUCTURED PRODUCT IN ASIA 2015 for client education – according to most practitioners – are stifled. “There is a lack of useful material and information While it is relatively easy for bankers to to actually help clients create a product based on a theme the make decisions.” client likes, Mark Stephens, founder and chief technology officer of Simulytics Systems, says it is far from straightfor- ward to determine which combination of equities and which level of capital MAHESH BULCHANDANI protection level will meet the target FinIQ return of the client, and with an appropriate level of risk.

He questions the extent to which clients really understand the risk in a structured explains, the sell-side needs to under- rial and information to actually help product in terms of the potential prob- stand what issues the buy-side faces in clients make decisions. ability and magnitude of losses to which terms of their sales process. they may be liable if they invest in it. The majority of the so-called efforts to Alessandro Caironi, head of capital educate clients tend to be based on a At the same time, giving clients some markets sales, APAC, at UBS Wealth few specific products, rather than what real insights and education is also an Management, says that the product Caironi says should be on the bigger opportunity for RMs to be able to dif- issuers must also share a certain amount picture in terms of why clients need to ferentiate themselves. of responsibility for educating investors. use structured products, and which types, for example, are suited to whom. STRIVING FOR SIMPLICITY This is increasingly the case given how An essential aspect to enhancing the busy the typical RM is, plus the many Without the tools, therefore, RMs, who education process is to be able to other types of products available to ultimately have the most responsibility explain products in simpler terms and choose from.

Perhaps the most important part of the WHO SHOULD TAKE THE GREATEST RESPONSIBILITY TO EDUCATE education process, he adds, is listening. CLIENTS ABOUT STRUCTURED PRODUCTS? “Rather than just trying to pitch the product of the day, the key to doing RMs / advisers sales in the right way is to start listen- 50% ing,” he urges. Product issuers

EDUCATION WANTING 18% The amount of real client education Regulators which happens leaves a lot to be desired, according to an audience sen- 14% timent poll. Investors themselves 18% According to Mahesh Bulchandani, chief executive officer for FinIQ in Asia, this is partly due to the lack of useful mate- Source: Hubbis Structured Products Forum 2015 - Hong Kong

STRUCTURED PRODUCT IN ASIA 2015 23 FEATURE ARTICLE

therefore make them more accessible to a wider audience. “Without a continuous “These products can be explained more dialogue, the sell-side cannot simply if you really explain what is hap- know what the buy-side or pening,” says Bulchandani. end-clients are thinking.”

“In Europe, they put a simple factsheet on the top to achieve this.”

PHILIP CHENG He says he believes that there is no The Hong Kong University product that cannot be described in of Science & Technology simple terms.

Yet Stephens says that a chart showing WHAT WILL HAVE THE BIGGEST IMPACT ON IMPROVING THE SALES PROCESS AND GIVING THE FRONTÒLINE MORE CONFIDENCE? thousands of reconstructed past performances across many market cycles, Limit the range of products they can sell for example, provides the best way of 6% explaining a product’s nature to a client.

Provide a targeted range of products for each client risk profile “Without such information a client may 35% not be aware of the potential conse- quences of a note should the market Better training via a combination of delivery formats 47% change suddenly in a dramatic way as it periodically does.”

Involve clients in the training process 12% MAKING IT PRACTICAL According to panel speakers, by apply- ing scenarios to a client’s portfolio can Source: Hubbis Structured Products Forum 2015 - Hong Kong help show what a structured product can do.

Indeed, it is a tall order to expect a client Pushing for this and trying to simplify This is important given the number of to be able to understand literature ex- the conversations between RMs and variations of products that exist. plaining a complex product when it may clients, for instance, is, however, easier only constitute a small part of their said than done. “We need to make it more tangible and overall portfolio. show them what solutions there might After all, Caironi says there is a vast be to address specific situations,” -ex Adds Stephens: “There is limited time amount of information that he and his plains Caironi. in a client meeting to cover very tech- bankers are required to put in front of nical and complex products, so there is clients, to help them understand the For example, by focusing on a particu- a good argument for simpler products product better. But this doesn’t make lar issue or concern that clients are likely with less complexity, and that can be the products any more relevant for a to have based on the wider markets, a explained more simply.” particular client. potential solution can be proposed.

24 STRUCTURED PRODUCT IN ASIA 2015 Getting clients involved in the process of training and education is another “Giving clients real option to improve understanding about insights and education how structured products work and how is also an opportunity they can be used within portfolios. for RMs to differentiate themselves.” “It’s one thing asking a client to sign a pile of disclaimers to say he understands the risk. It is quite another to actually give the client some real meaningful MARK STEPHENS understanding of the potential risks Simulytics Systems they face, especially in extreme market conditions,” explains Stephens.

In line with this, Stephens believes IS THERE ENOUGH CLIENT EDUCATION TODAY ABOUT THE PRODUCTS there should be a distinction made THEY ARE BUYING / SOLD? between shorter term ‘flow products’ that serve a need among HNW inves- Yes tors to be actively involved in managing 21% their money, and products which are No geared to longer tenures. 79% These might be use with trust money put aside for children, and for preserv- Source: Hubbis Structured Products Forum 2015 - Hong Kong ing and growing wealth longer term.

“There should a place for structured products in both areas of a client’s portfolio,” he explains. WHICH OF THE FOLLOWING SHOULD BE THE MOST IMPORTANT THING DISTRIBUTORS LOOK FOR FROM PRODUCT ISSUERS?

“With the more conservative, longer Lower price term portion, greater emphasis on tar- 11% geting, the risk characteristics of a product is required, and the client is Product innovation not gambling with this money he wants 0% it invested,” he adds. After sales-service

This type of approach might also enable 39% bankers on both the sell-side and buy- Information and education side to introduce new instruments that have to date been largely neglected in 50% Asia because of the way the market in this region has developed. Source: Hubbis Structured Products Forum 2015 - Hong Kong

STRUCTURED PRODUCT IN ASIA 2015 25 EXPERT INSIGHTS

Income through structured solutions

While equity-based structured products ran into problems during the financial crisis of 2008, product manufacturers have returned with sophisticated products that help investors take advantage of the markets, says Steve Tang of Leonteq Securities.

It is estimated that there were about structured solutions, private banking 30,000 structured products with a total sales, at Leonteq in Hong Kong. volume of over USD300 billion in the Asia Pacific region in 2014. While Hong Kong, South Korea and Singapore demand for these products had fallen are the key markets with investments after the financial crisis, institutional in structured products with accumula- investors seem to have done their tors, equity linked notes and fixed homework and returned stronger. coupon notes taking up the limelight.

“The need for structured and tailored solutions has grown, and as clients have become more sophisticated they have become more willing to invest in these products.” STEVE TANG Leonteq Securities

“The need for structured and tailored The reason why many clients appreciate Link to Presentation Video solutions has grown, and as clients have structured products, he explains, is become more sophisticated they have because there is scope for innovation http://www.hubbis.com/ become more willing to invest in these and the market delivers sophisticated mainEvent/202_Structured_Prod- ucts_Forum_-_Hong_Kong/presen- products,” says Steve Tang, director- products, month after month. tations.php?id=508&speaker_id=

26 STRUCTURED PRODUCT IN ASIA 2015 PRIMO MULTI PERFORMANCE of -50% (or if any underlying closes In a slightly more technical approach, CERTIFICATES above 95% of its initial fixing), the inves- by entering the Dispersion Certificate, Most structured products benefit from tor will receive 100% of the denomina- the investor sells the implied correla- correlation increasing: fixed coupon tion; this means the Primo Protection tion, taking advantage of the high level notes on the worst, barrier reverse is active. of the implied correlation compared to convertible etc. As a result, trading its realisation, says Tang. desks are usually short correlation, Otherwise, if the sum of performances making the price of that correlation of each underlying is at or below the Essentially, the dispersion coupon takes extremely high compared with where barrier of -50%, and none of the under- the performance of all the stocks in the it realises. lying closes above 95% of its initial basket into account, he adds. fixing level at maturity, then the inves- The Primo Multi Performance Certifi- tor will receive the denomination Here again, the idea is for the investor cate addresses the point above, says reduced by the sum of performances not to be exposed to some specific Tang. “The investor, by entering the of each underlying. “The investor cannot stocks in the basket, says Tang, but to certificate, sells the implied correlation lose more than the initial investment,” the basket as a whole. and takes advantage from its high level.” confirms Tang. “Dispersion is hence defined at the average distance of the stocks to the average. By choosing a basket of well diversified stocks, the investor will take advantage of the dispersion among “In the context of low or negative interest rates and those stocks.” low yields, meanwhile, investors have been looking for alternatives to vanilla bonds.” LOCK THE BOND CERTIFICATE In the context of low or negative interest rates and low yields, meanwhile, investors have been looking for alternatives to vanilla bonds.

The investor benefits as well from a DISPERSION CERTIFICATES The Lock the Bond certificate may be double protection at maturity, he ex- According to Tang, most structured considered as an alternative for bond plains. This is in terms of a classic Eu- products are directional; they generate positions which have had a good per- ropean Barrier, observed on the sum of gains if the market view of the investor formance so far with the dropping rates performances, and an extra capital proves correct. environment, but which have now run protection feature, if the best perform- their course leaving investors with a lot ing underlying is above the Primo Pro- In some market conditions, some com- of downside and almost no upside, tection level at maturity. panies tend to do well and others tend explains Tang. to do badly, so there is dispersion. This Certificate also offers a high guar- In the case of a Lock the Bond event, anteed coupon, as well as an autocall “The coupons, paid on an annual basis, which he says can happen as soon as feature, if the sum of performances is are market neutral,” he explains. “The in three months’ time, the Certificate positive on any particular observation value of the coupon only depends on becomes a coupon-paying capital pro- date, adds Tang. how stocks disperse from each other tected product. and not on whether they go up or down. At maturity – if the product has not By choosing a diversified basket of “This allows the investor to move from been autocalled – if the sum of perfor- stocks, the investor extract value from the equity portfolio allocation into the mances of each underlying since incep- that dispersion phenomenon, what- fixed income portfolio allocation,”- ex tion is negative, but above the barrier ever the market does.” plains Tang.

STRUCTURED PRODUCT IN ASIA 2015 27 EXPERT INSIGHTS

Innovation and trends in FX products

Given the notorious volatility associated with FX, the arrival of structured products in this space about two decades ago was welcome. Ken Tan of BNP Paribas looks at the evolution of these structures and their advantages to clients.

It takes 30 days for the New York Stock FX structured products were primarily Exchange to match the daily trading created to counter this risk, although volumes of the FX market. The average they’re now used for a variety of pur- daily turnover of the latter is, of course poses today by sophisticated investors, enormous – USD5.3 billion worth, to explains Ken Tan, head of FX investors be precise. solutions, wealth management and

“Although these products made their debut in the market only around two decades ago, they now constitute 50% of all structured products traded in Asia.” KEN TAN BNP Paribas

Such a trading volume also points family offices distribution, global Link to Presentation Video towards the risk that market partici- markets, at BNP Paribas in Asia Pacific. pants face on a daily basis, regardless http://www.hubbis.com/ mainEvent/202_Structured_Prod- of their trading strategy, simply as a And although these products made their ucts_Forum_-_Hong_Kong/presen- function of their engagement. debut in the market only around two tations.php?id=505&speaker_id=

28 STRUCTURED PRODUCT IN ASIA 2015 decades ago, they now constitute 50% these products for re-structuring pur- more efficient products that provided of all structured products traded in Asia. poses, adds Tan. better results, at lower costs and with fewer limitations. Interest comes mainly from two catego- Initially, people were looking to buy ries of investors – private banks and options as a way to hedge their risk. The introduction of barrier or target professional investors on the one hand, features led to the rise of FX structured and corporate investors on the other. As clients started understanding the forwards, such as the accumulators, product better, they realised that target knock-out forwards, and pivots. “There are quite a few sophisticated FX hedging by options was an expensive structured products available and in proposition and looked towards ‘collars’, ON THE THRESHOLD OF A demand today,” explains Tan. “Yield or a combination of options, to achieve RISK-MITIGATING REVOLUTION enhancement structures which are the the same result at a lower cost. In the aftermath of the financial crisis dual currency investments (DCIs) and of 2008, meanwhile, Tan says the mar- CNH certificates of investment, as well Forwards were next in line to grab the ketplace was calling for better risk as, hedging structures which are the attention of hedgers, says Tan. These management practices. accumulators, target knock-out (KO) are simple contracts that defer delivery forwards and pivots are among the on the spot, which help clients mitigate The result was the emergence of ‘add- on’ features in the FX structured products space. “While many ‘add-on’ features were designed to help clients improve the risk-reward profile of their hedge and provide a certain level of “Yield enhancement structures which are the protection to the client, it was soon dual currency investments (DCIs), accumulators, discovered that it was possible to use target knock-out (KO) forwards and pivots these structures to further enhance the are among the popular products.” strike in a bid to take a more aggressive stance on the market,” says Tan.

Among the popular ‘add-on’ features created are the collar, the European knock-in, the advanced barrier, the li- popular products. It’s safe to say, FX the risk of currency fluctuations at ability knock-out, the capped loss, and hedging structures feature very promi- almost no cost. Where there were a the bonus strike. nently in the structured products space.” series of cash flows in the future, a par forward is available; it is made up of a The capped loss ‘add-on’ feature is ROLE OF FX STRUCTURED series of forward contracts, where the something that Tan says he believes is PRODUCTS forward rates are blended into a single very interesting at this moment in time. By definition, FX structured forwards FX rate. During periods of market distress, the are hedging instruments. However, the benefits of such a structure are very applications have become far more Popular as they were, however, both pronounced. The recent market event diverse over the past few years. forwards and par forwards have their in China demonstrated that the product limitations, adds Tan. compares very favourably against others Apart from using the products to hedge, in a similar category, he says. clients are also using them to trade the There is no doubt that all these products market by taking a view on it – whether helped clients achieve more, but there It does so by shortening the exposure for this is a directional or a range-bound is no denying that there was a need, the client to the risk of the structure when view. Clients have also started using demand and the possibility to create the client is in a losing position.

STRUCTURED PRODUCT IN ASIA 2015 29 EXPERT INSIGHTS

Innovation and trends in commodities

Despite the role of commodities in achieving diversification and target returns, investing in them has been trickier post-2008. But this is changing, explains Ker Lih Gan of J.P. Morgan, with simple structures to profit from the market.

Whether in Europe or Asia, the com- changes which indicate the potential modities market has about 22 important for strong growth and performance in products that traders constantly the current economic environment. observe – in isolation and as pairs. “Commodities as a growth asset is a While their behaviour has always been tough sell because in the past five years highly volatile and difficult to predict, or so, commodities have been on a the years following the financial crisis steep downward trend,” explains Ker saw a series of periods with negative Lih Gan, who is part of the commodity performance that caused investors to investor solutions team at J.P. Morgan panic and pull out. in Asia Pacific.

“The best way to monetise the de-correlations in the KER LIH GAN market is by using pair trades where the investor is long (or J.P. Morgan buys) one commodity and short (or sells) another.”

Link to Presentation Video

http://www.hubbis.com/ During the past year or two, however, “However, commodities is your best bet mainEvent/202_Structured_Prod- the markets have undergone some in an environment where rates are rising ucts_Forum_-_Hong_Kong/presentations.php?id=506&speaker_id=

30 STRUCTURED PRODUCT IN ASIA 2015 and inflation is rising in the near future,” seasonal momentum rather than simple premium between implied volatility and he adds. momentum when deciding the direc- realised volatility, says Gan. In such an tionality of trades in other asset classes. environment, it is beneficial to sell MONETISING DECORRELATION option contracts on commodities on a Before the financial crisis, there was “Seasonality momentum studies is how long-term and diversified basis. strong correlation between commodi- we decide to go long a commodity if it ties, equities and the bond markets. has performed well in the past, or short “The market has a large number of a commodity if it has not performed buyers of options but a very low number Gan points out that the last two years, well,” he explains. “In our studies, of sellers,” he says. meanwhile, have shown a marked however, we isolate the performance downward trend in the correlation in a particular month and compare it “There is a structural imbalance in the between commodities and the other with the performance in the same demand and supply economics in this markets. “We’re now seeing very low, month over the past 20 years.” market because a lot of market par- or even negative, correlations with ticipants need to hedge their risk of world bonds or US bonds,” he explains. These sorts of strategies seem to have production or consumption against become very popular after the financial rising or falling prices, but not many The best way to monetise the de-cor- crisis in 2008, he adds. investors are willing to underwrite or relations in the market, he says, is by provide insurance against that risk using pair trades where the investor is There are many advantages to them. through options.” long (or buys) one commodity and short Being a low volatility strategy, for (or sells) another. example, it is possible to remove the This characteristic of the market is what Gan takes advantage of.

If selling options over a long period of time, implied volatility is generally “Seasonality momentum studies is how we decide higher than realised volatility and most to go long a commodity if it has performed well of the options expire worthless – which is profitable for investors. in the past, or short a commodity if it has

not performed well.” The way to efficiently explore these market dynamics, Gan recommends selling a call option and a put option on a commodity underlying – which is also known as selling a straddle. Yet for any investor, studying and ana- impact of timing from investment into lysing 22 different commodities might the commodities market, which helps This is done on a daily basis. The team be difficult. investors. It also helps that the investors then delta hedges the trade to ensure trade in commodity pairs where they it reaps the insurance premium on the And comparing them and finding pairs long a commodity and short another option from the contract. that could be used to trade in a way – which captures returns within a rea- that helps monetise the de-correlations sonable range, on either side of the “The difficult part of implementing a is even tougher. market. strategy like this is liquidity in the options market,” he explains. That’s where Gan’s team comes in. LEVERAGING AN ENVIRONMENT OF SHORT-TERM VOLATILITY “This is why, when we design such a They study the momentum of the pairs, In an environment where short-term strategy, we do it on listed exchange although the importance of using the volatility is very high, there is a positive options in the commodities space.”

STRUCTURED PRODUCT IN ASIA 2015 31 FEATURE ARTICLE

Creating a bigger role for structured products in portfolios

Redefining structured products as investment solutions and highlighting the benefits of them for risk control will create a difference in making them more widely used in portfolios.

Rather than structured products being considered and used as individual com- “Clients don’t want to be sold ponents with a portfolio, they need to structured products. They be increasingly viewed by both bankers want something that can be and clients as a fully integrated component within the entire portfolio. put into their portfolio to deliver whatever solution In this way, they can be used to achieve they are looking for.” specific client needs and goals, and understand the entire portfolio risk – if both parties are aware of the potential ADAM COWPERTHWAITE of different products and are able to Citi Private Bank monitor them on an ongoing basis.

As part of this, the focus needs to be on viewing them as investment solutions that fulfil the client’s objectives has been due to the focus on product- says Harmen Overdijk, managing from both a returns as well as risk- centric features. partner of CAIDAO Wealth, an inde- control perspective. pendent asset manager. This flaw in the market has been com- STRUCTURED PRODUCTS AS pounded by the fact that flow products “What stands between the current level SOLUTIONS have had a traditional strong-hold of usage of structured products and an A lot of the issues the industry has faced among clients in Asia to date. As a result, even greater usage in portfolios is the over the years in finding a greater role investors tend to view structured prod- jump from looking at single product within portfolios for structured products ucts broadly as more of a trading tool, features to understanding how [the

32 STRUCTURED PRODUCT IN ASIA 2015 offices, global markets at BNP Paribas in Asia Pacific, the key with structured “Clients should look at products is what they bring to the inves- structured products more tor. This is based on the investment as group of alternative belief the client has and whether they investments.” are able to achieve that.

“From the perspective of the sell side, we need to emphasise more and more these products as investment solutions,” HARMEN OVERDIJK he adds. Creating a bigger role for CAIDAO Wealth The recent volatility and continued uncertainty in the markets makes this structured products in portfolios a particularly good time for advisers as well as investors to think about moving product] affects a portfolio,” explains ficiently, or as a way to hedge or manage more in this direction. Harold Y. Kim, Ph.D, founder and chief risk, or to adapt a portfolio. executive officer of Neo Risk Invest- They can round out portfolios with ment Advisors. “If more people think in this way, then some of these products. there is much greater scope for struc- After all, Kim says structured products tured products to play a big role within “It is important for relationship manag- are effective in achieving things they portfolios,” says Kim. ers (RMs) and investment counsellors cannot be done otherwise, such as to understand this,” he adds, “so that changing risk profiles, and therefore the According to Stephane Honig, head of they don’t sell products in a narrow, risk-reward trade-off. sales, wealth management and family singularly-focused way.”

In this way, Overdijk adds that clients should look at structured products more as group of alternative investments. WHAT IS REQUIRED FOR STRUCTURED PRODUCTS TO PLAY A BIGGER ROLE WITHIN DPM? More broadly, Adam Cowperthwaite, Mind-set change by portfolio managers head of equities for Citi Private Bank in Asia Pacific, says that advisers need 50% to talk about these products as invest- Education of clients ment solutions. 38%

“The whole approach to structured Smaller ticket sizes products makes it sound like something 0% you need to sell,” he explains. “But clients don’t want to be sold structured Commoditisation of products products. They want something that 0% can be put into their portfolio to deliver More product innovation whatever solution they are looking for.” 13% This is more likely to come down to accessing a certain exposure more ef- Source: Hubbis Structured Products Forum 2015 - Hong Kong

STRUCTURED PRODUCT IN ASIA 2015 33 FEATURE ARTICLE

ADDING REAL VALUE While the solutions-based approach to delivering structured products to inves- “We show clients how tors is the right way to go, it is difficult different types of risk to implement. control strategies, pay-off structures and tilts can To be able to do so in practice, Kim says change potential outcomes RMs need to assess the clients’ portfo- for them.” lios and figure out what tools and ex- posures make sense, based on what the HAROLD Y. KIM, PH.D. client is looking for. Neo Risk Investment Advisors

“We do this by showing clients how different types of risk control strategies, pay-off structures and also tilts can change potential outcomes for them,” he explains. However, clients don’t always under- multiple levels. “The fact there are stand what they are trying to achieve multi-issuer platforms is powerful for At the same time, given the dynamic when they are buying structured prod- HNW investors,” says Overdijk. nature of the market, it is also important ucts, says Overdijk. to help clients understand that there Another element which is holding are always trade-offs, he adds. This might be in relation to what expo- clients back from viewing structured sure they want, or what they want to products as a key component of a port- Yet some clients react to structured achieve with the product. folio is the hurdle for advisers in products by saying they don’t like them showing an idea to a client because of as an instrument. Market trends are in the favour of the very tight KYC requirements. investor in this regard. For example a This is possibly because they have lost number of providers are providing in- The other key stumbling block, accord- money in the past. creasing amounts of transparency on ing to an audience sentiment poll, was a lack of education about how to best use products.

WHAT’S HOLDING CLIENTS BACK FROM VIEWING STRUCTURED Other aspects included the lack of a PRODUCTS AS A KEY COMPONENT OF A PORTFOLIO? clear definition of structured products;

(Lack of) education about how to best use products concern over performance uncertainty; 62% and the lack of understanding of portfolio risk. (Lack of) a clear definition of structured products 15% But panel speakers said that regulation has gone so far that advisers might not Concern over performance uncertainty even be showing clients certain prod- 8% ucts which could be useful to them as part of their portfolio. (Lack of) understanding of portfolio risk

15% For example, explains Cowperthwaite, a client with a long equity position might

Source: Hubbis Structured Products Forum 2015 - Hong Kong want to write calls against that position.

34 STRUCTURED PRODUCT IN ASIA 2015 While this is not taking a huge risk, it might feasibly be the case that an “From the perspective adviser won’t discuss this with their of the sell side, we need client if that client doesn’t tick the right to emphasise more and knowledge and education boxes to have more these products as that solution shown to them. investment solutions.” DRIVING DISCRETIONARY MANDATES There is also scope for structured prod- STEPHANE HONIG ucts to become a more significant part BNP Paribas of discretionary portfolios.

For example, says Kim, if discretionary managers start to understand how to transfer risk, and also risk versus reward with respect to structured products, he WHAT IMPACT WILL MULTIÒISSUER PLATFORMS HAVE ON THE USE OF predicts a substantial increase in usage. STRUCTURED PRODUCTS WITHIN PORTFOLIOS? Ultimately, structured products give Not much 45% portfolio managers a tool to manage their risks.

A 25% rise in volumes 45% And this is a fundamental requirement in any situation where there is an im- A 50%+ rise in volumes perative to be invested, said speakers. 9% Yet even within the investment teams of some private banks and other wealth Source: Hubbis Structured Products Forum 2015 - Hong Kong managers in the region, there is still a lack of trust to a certain extent in relation to structured products.

CAN STRUCTURED PRODUCTS EVER BECOME A MORE SIGNIFICANT The perception remains among many PART OF DISCRETIONARY PORTFOLIOS? that these are opaque, expensive and Yes illiquid, explains Overdijk. 18% What could drive change, suggests Kim, No, never is results, through seeing in reality the 6% value of using these products as portfolio tools. Only with much more adviser & client education

76% “These tools are not one-off structures and need to be viewed in a broader context,” he adds. Source: Hubbis Structured Products Forum 2015 - Hong Kong

STRUCTURED PRODUCT IN ASIA 2015 35 EXPERT INSIGHTS

How RMs can use technology to improve their value proposition

Appropriate technological platforms can help relationship managers serve their clients, provided they offer fast and thorough market and portfolio analysis, says Mahesh Bulchandani of FinIQ.

Utilising technology in HNW portfolio “If you as an RM wake up at 7am and management can help a relationship do your homework and check where manager (RM) become more effective FX and equities are, but a client calls in advising their customers, according and asks where a particular bond is and to Mahesh Bulchandani, chief executive you haven’t checked, you may be em- officer of FinIQ in Asia. barrassed. But you have 50 clients to cover, some of whom are into credit, He noted that discretionary investing while others are into FX or equity or in Asia lies at only 10% of average HNW onshore/offshore arbitrage,” he said. portfolios, versus 80% in Europe. However, the latter were looking to “To cover all this is difficult, so you need self-invest their money more. the support of technology.”

“In Europe and the US the amount of The key advantage a technological plat- self-directed investments are rising, form such as that offered by FinIQ is slowly but surely,” Bulchandani said. that, among other things, it immediately shows RMs the investment posi- MAHESH BULCHANDANI The key reason for this, he explains, is tions of a client, and the real-time FinIQ the greater availability of information, performance of those investments. which in turn leads HNW investors to believe they know what is going on and “If clients want to go above certain thus to make more of their own invest- positions [they hold], the RM should be Link to Presentation Video ing decisions. able to click and find out what the client holds and thus immediately learn more http://www.hubbis.com/ mainEvent/202_Structured_Prod- This has made the RM’s job more im- about the investment that they want to ucts_Forum_-_Hong_Kong/presenta- portant and challenging. make,” said Bulchandani. tions.php?id=503&speaker_id=

36 STRUCTURED PRODUCT IN ASIA 2015 ADVISORY INTEREST have with you as a bank and its level of PRICING IMPORTANCE A good way to convince clients to con- concentration, and marry that with your Additionally, portfolio analysis technol- sider product investing ideas is to use firm’s credit policies,” said Bulchandani. ogy can flag up investment events such technology to compare their existing as maturing bonds, allowing an RM to portfolio positions with new investment The RM can see if a client is bumping ask a client in advance how they wish ideas and products on offer. up against their leverage limits, and thus to invest this money once it is available. advise them of this immediately, as Any such portfolio view should be opposed to agreeing to leveraged in- The platform can also give clients ex- dynamic and up to date with the latest vestments that are subsequently amples of how products will react, based investments and most recent market knocked back by the bank’s risk man- upon particular strike rates or barriers. data, as well as market events such as agement department. And it can combine historical market coupons, fixings and corporate actions. performance and structured product The technology solution should there- “[Using this technology] I know I need data, revealing likely strike scenarios. fore be an integrated end-to-end solu- to show the product without leverage tion covering the front-office, middle- or find a way to bring into the dialogue “You can discuss yield and risk, and office and back-office functions. the discussion about bringing more combine with this historical movement, money. ‘Look your AUM has been stag- and can say to the client ‘this structure Bulchandani added that the ability to nant at USD3 million to USD4 million with this barrier makes sense as the analyse a client’s portfolio, recent trades and I need USD5 million or more to barrier was seen a month ago, so there- and recent proposals also helps RMs give you a higher status. Can you bring fore there is a higher chance of you avoid embarrassing incidents such as more money?’” getting knocked out and getting money recommending an investment idea that back without having a stock delivery’.” a client has recently rejected. “Information about collateral exposure is just as important as a client’s portfo- Lastly, the technology ensures RMs can FinIQ’s solution can also help RMs keep lio positions,” Bulchandani added. “You offer the best product pricing. “Pricing track of the level of leverage each client hear of clients who are shown an idea in Asia is the dominant factor,” said is exposed to. “From a front-office per- but when they try to place the order it Bulchandani. “If your clients are open spective you want to know a client’s is rejected by risk management. That is architecture you need to be so too, or credit position and what collateral they the best way to lose a client.” you may lose them to a competitor.”

FINANCIAL INSTRUMENTS COVERAGE

Fixed Income and FX Equity Others Swaps

•Spot, forward, NDF, swap •Primary and Secondary •Options, exotics •Mutual Funds •Flexible forwards Markets •Accumulators •Unit Trusts •Options, exotics •Options •Decumulators •Exchange Traded Funds •Accumulators •Callable, Convertible, •Swaps •Certificates of Deposits •Target redemption forwards Inflation Bonds •Equity linked investment •Insurance •FX strategies •Interest Rate Swaps •Quanto, KI, KO ELN •Banking Deposits •Option strips •Cross Currency Swaps •Basket bull ELN •Gold Lending •Dual currency investment •Credit Default Swaps •Daily range accrual •IPO financing, Loan •Triple currency investment •Forward Rate Agreements •Fixed coupon note Financing •Digital linked investment •IR Swaptions •EQ booster notes •Loans •Overnight Index Swaps •EQ cash, exchange traded •Credit Linked Notes

Source: FinIQ

STRUCTURED PRODUCT IN ASIA 2015 37 FEATURE ARTICLE

How fintech platforms will evolve the investment industry

The increasing use of financial technology platforms that can enhance the transparency, pricing efficiency and order execution process for structured products trades is expected to pave the way for greater investment in these instruments.

The use of financial technology platforms can increase the automation of structured product execution and post- “When the markets were trade services, improving the ability of performing well nobody distributors to handle many small really cared if there were orders and make pricing more transpar- some inefficiencies or ent, say industry specialists. problems with product positioning or mis-selling.” In recent years, fintech advances have enabled structured product providers ERDEM OZGUL to deliver products far quicker and in Numerix a more efficient way, which has helped greatly when dealing with clients.

“A few years ago we were playing a whisper game, with the client calling the relationship manager (RM), who “Now, we are providing tools to the more on improving efficiencies in the then called the execution desk, who in execution desk and RMs that are mainly middle- and back-office to better turn called the product providers for to the benefit of the clients,” he ex- connect with their clients, said Mahesh prices and ideas,” said Thibaud Gogny- plained. “They get direct advice and Bulchandani, chief executive officer for Goubert, head of product and services pricing and if they are not happy with Asia at FinIQ. development at BNP Paribas Wealth the price it can be changed in a second Management in Asia. “And often the and they can trade.” “Automation of the middle- and back- client was not happy with them and so offices require change and adoption of the whole process had to start again Despite these notable improvements, technology on the buy-side as well as from the beginning,” technology providers next need to focus the sell-side,” he said. “Sell-side has

38 STRUCTURED PRODUCT IN ASIA 2015 volumes as the market matures,” he said. “Especially in Asia, HNW indi- “Now, clients get direct viduals are open architecture. They advice and pricing, and have particular accounts with particu- if they are not happy lar banks and can compare prices. If with the price it can be you as the [product salesperson] only changed in a second and use in-house prices you lose a lot of they can trade.” business, because you cannot be the best at everything.”

THIBAUD GOGNY-GOUBERT Voting at a Hubbis event in Singapore BNP Paribas Wealth Management asked the audience sentiment about which three characteristics most ap- pealed about multi-issuer platforms: one-stop service; more products/ choice; or cheaper prices. The vote was technology, but the bulk of that has a multi-issuer financial technology fairly evenly split, with 38% opting for been in market management, and less platform called LAND to overcome the first option, 29% the second, and around the processes of connecting many of the market’s limitations, to- 33% the third. with the buyer and giving them the right gether with Leonteq Securities, Avaloq price at the right time, or having auto and DBS Bank. Bulchandani said he believes the real management or processes around advantage of multi-issuer platforms is barrier watching, fixing, auto calls, ma- The creation of multi-issuer fintech that they will force distributors to focus turities or redemptions.” platforms generally confers many com- on what they are good at, so freeing up petitive advantages over single-issuer resources for them to focus upon LESSONS LEARNED platforms, agreed Bulchandani. meeting the needs of their clients. Rising regulatory demands for transparency and efficiency have acted as “I believe single-issuer platforms will “The sell-side desk can focus more on major impetuses for efforts to improve see lower and lower [product issuance] generating ideas and access, helping the connectivity of various distributors and clients.

“When the markets were performing WITH GREATER AUTOMATION UNDERWAY IN THIS SPACE, WHAT well nobody really cared if there were SHOULD BE THE MAIN OBJECTIVE? some inefficiencies or problems with product positioning or mis-selling,” said Price discovery Erdem Ozgul, managing director for 6% South Asia at Numerix. Lower fees

“But market participants like Lehman 35%

Brothers went bankrupt with over one More efficient execution and booking million OTC positions outstanding.” 35%

He noted that Numerix was appointed Streamlining information to reduce volume to put together a settlement frame- 24% work of these positions with various counterparties across 25 jurisdictions. It used this experience to help create Source: Hubbis Structured Products Forum 2015 - Hong Kong

STRUCTURED PRODUCT IN ASIA 2015 39 FEATURE ARTICLE

clients,” he said. “They will provide a with each other] with the layers, what Additionally, Ozgul noted that many better quality of service to the buy- it achieves and how it achieves it, and financial institutions have heavily-siloed side, focusing less on jobs that can be all the features.” operating systems when it comes to done by computers and more on jobs their various financial products. that can be done by humans.” He said that the biggest challenge confronting such developments is the “The banks have small, specific [IT OPENING UP fact that many private banks and systems], like sushi belts,” he said. “And Gogny-Goubert agreed that evolution product distributors have various this one only has tuna and another one would take place, with banks having to legacy IT systems. only carries salmon.” commit to becoming more open architecture, just as they have already had to do in market sectors such as cash equities and foreign exchange. “Sites like Google were open to everyone and they He likened it to the early days of the are the winners today. It’s the same in our industry. internet, an area he worked in during the 1990s. Companies that are open-minded and provide a wide range of products to clients will be “The big debate in the 90s for people the winners of tomorrow.” building internet sites was to keep clients within the site once they clicked into it,” he explained.

“So you had silly things like sites within The relative age and variety of these To have both, he says that he needs to a site. But sites like Google were open systems makes it challenging to create stand up and go from one to the next. to everyone and they are the winners a structured products platform that today. It’s the same in our industry.” can fully access and process informa- “[Overcoming these siloed systems] is tion to them all. the challenge we face.” “Companies that are open-minded and provide a wide range of products to clients will be the winners of tomorrow,” he added. WHAT IMPACT ON CLIENT APPETITE DO YOU THINK MULTIÒISSUER Another area that requires modification PLATFORMS WILL HAVE? to create such open architecture is Not much difference standardisation and comparison of 5% structured products, added Ozgul. A slight difference “Today in structured products we have 50% 30 providers but if you look under the Possibly a 25% to 50% rise in volumes hood no two products are equal and it is really difficult for investors to dif- 40% ferentiate and compare [them],” he said. Even higher than 50% growth

“We believe there is [eventually] going 5% to be one ecosystem where structured products can be specifically [compared Source: Hubbis Structured Products Forum 2015 - Singapore

40 STRUCTURED PRODUCT IN ASIA 2015

EXPERT INSIGHTS

LAND to give buyers and sellers space to expand products

The combined technology platform is designed to make it easier for investors to choose products transparently, and for product distributors to seamlessly execute these orders, said Erdem Ozgul of Numerix.

An expensively-assembled structured The four participants have done this by products trading platform created by attempting to improve every step in the Leonteq, Numerix, Avaloq and DBS is process of choosing, assessing and ex- designed to let customers select tailored ecuting a product. products while allowing distributors to simply and seamlessly execute these “We have looked at the complete value financial instruments. chain and tried to improve processes at every step,” says Ozgul. The system, called LAND in reference to the first initial of the four contribu- “We believe this can unleash financial tors, could help revolutionise the appeal markets, increase liquidity, make of structured products across more markets more transparent, accessible, Asian customers, according to Erdem and diversified, and also make them Ozgul, head of South Asia at Numerix. more regulator-friendly.”

“What are our objectives as partners? KEY PLAYERS First of all, in terms of the technology The LAND platform is designed to ERDEM OZGUL side [it is] to leverage from the technol- benefit buy-side and sell-side partici- Numerix ogy truly end-to-end [solutions], not pants alike by offering structured prod- just focusing on for example RMs (re- ucts in a transparent, commoditised and lationship managers) in terms of their highly secure fashion. relationships with clients and the execu- Link to Presentation Video tion desk or advisers or research, but Each participant brings something to looking at each participant and maximis- bear in this fashion. “Leonteq is a fintech http://www.hubbis.com/ mainEvent/203_Structured_Products_ ing the throughput or the efficiency of provider and structured product manu- Forum_-_Singapore/presentations. each participant,” he said. facturer and distributor, and its ap- php?id=223&speaker_id=

42 STRUCTURED PRODUCT IN ASIA 2015 proach has been to bring the experience Numerix, meanwhile, is a leading pricing DBS is bringing its business know-how from what it built in Switzerland where evaluation platform across all asset and regional reach and expertise as an these products are almost fully com- classes in treasury and capital markets anchor buy-side and sell-side institu- moditised,” said Ozgul. “Today in Swit- as well as insurance, which offers solution, while Avaloq offers sophisticated real-time pre-trade checks and post- trade processing. This is vital to prevent product errors or mispricing, which can be costly and embarrassing.

“For the buy-side it comes to a one-stop-shop service, Leonteq and Numerix have spent almost where they can access products from different service USD1 billion over seven years to create and dealers and use tools or RMs or independent asset the technology behind LAND; that managers or advisers to access the right product offerings marks a high barrier to entry. and capture the right opportunities in market place.” CHOICE AND EXECUTION In terms of usage, LAND is designed to be intuitive.

Investors can enter the platform, choose zerland you can buy tailored products tions with structuring, independent risk their preferred underlying, product for as low as EUR1,000 (USD1,102) in management and evaluation. structure and pay-off, and immediately nominal value, while Germany has an get a selection of the most likely prod- excess of 1.5 million products outstand- These are key requirements in an execu- ucts based upon smart data analytics ing that are listed just on its exchange.” tion- and risk-focused rules landscape. in the system, said Ozgul.

LAND’S SERVICE SOLUTION

ONEÒSTOP SHOP SERVICE TO ALL MARKET PARTICIPANTS

NumerixConnector to LAND Mul-lssuer Avaloq Banking Suites Plaorm Price discovery and order Pre-trade client suitability fulﬁlment of vanilla and bespoke checks and post-trade straight structured products across through processing (STP) mulple asset classes

Leonteq’sIntegrated LAND Web-based Mul-User Technology and Service Soluon with Secure Plaorm Plaorm 2FA login Automaon of key processes in Real-me analycs, the pre- and post-trade value A smart, fully structuring, pricing and chain integrated front-to- dealing capabilies end plaorm

Numerix’s Cross Asset Leonteq’sSmart Data Quantave Engine Analycs Suite Data capture/analysis, Real-me pre-and post-trade underlying opmizer, product CRM analycs, RFQ price heat map and post-trade aggregaon and order fulﬁlment analysis

Source: Numerix, Leonteq Securities, Avaloq, DBS

STRUCTURED PRODUCT IN ASIA 2015 43 EXPERT INSIGHTS

They also get indicative term sheets, checks, and present the customer with independent asset managers or advisers product overviews and ideas of how a non-legally binding fact sheet. to access the right product offerings the product is expected to operate and capture the right opportunities in under different scenarios. All of this is done through a secure market place,” said Ozgul. private environment that “uses the It’s important that the system offers a latest security and encryption protocols The appeal for sell-side producers is a refined set of choices, as there are 2 where data that is communicated broadening investor base, an easier way million to 3 million different products a through a public network cannot be to cover a broader array of product day on LAND. intercepted or hacked,” said Ozgul. options, and the ability to specialise at whatever product area they are par- “It has been a big data challenge, to slice UNIVERSAL TRANSLATION ticularly good at. and dice this information to end users The LAND platform is designed to uni- in a meaningful way,” said Ozgul. versally translate to every bank or in- “Today if you consider the balance stitution’s particular technology too, to sheets of banks like DBS or UOB are Meanwhile the sell-side distributors encourage the participation of more completely different and so the prod- automatically receive client documenta- sell-side and buy-side companies. ucts they can offer will be different,” tion to ensure the products meet with said Ozgul. the investor’s personal preferences and The ultimate goal is to create a struc- that the instruments don’t contravene tured products eco-system. “It is the same with [all other interna- any of his or her portfolio restrictions. tional banks].” he explained. “By bring- “For the buy-side it comes to a one- ing more institutions onto platform it Once the investor executes the product, stop-shop service, where they can enables them to focus on their strengths the system is designed to seamlessly access products from different service rather than compete where margins are go through post-trade settlement and and dealers and use tools or RMs or very tight.”

ADVANTAGES FOR BUYÒ AND SELLÒSIDE

SYNERGY IN A THRIVING, Same-side Network VIBRANT MARKETPLACE Effects: Cross-Side More competors aract Effects more issuers/buyers on the other side, leading overall to a posive effect.

Same-Side Sell- LAND Buy- Same-Side Eﬀects Side Plaorm Side Eﬀects

Cross-side Network Unique Selling Point of the LAND Plaorm: Eﬀects: Not only a “Marketplace” but Cross-Side Increase in usage on the also a transformaonal tool Eﬀects other side increases own and a technology enabler to sides ulity due to larger future-proof your business selecon of counterpares and products.

Source: Numerix, Leonteq Securities, Avaloq, DBS

44 STRUCTURED PRODUCT IN ASIA 2015 Helping Asia lead the world in wealth management

Our products Get in touch Hubbis is the leading provider of independent Michael Stanhope content, l and training for companies providing wealth management-related T +852 2563 8766 products and services in Asia. Our is to E [email protected] help you become more competent and capable - so that you can provide suitable and trusted advice for your clients.

lets talk. hubbis.com EXPERT INSIGHTS

Advice on advanced structures

The jargon surrounding structured products can be intimidating. But with a bit of education, relationship managers can help put their HNW clients at ease with using them, said Duane Bong of Leonteq Securities.

“A lot of people say structured products structured products offer,” he said. “For are a black box and they don’t under- example, you can have a bond floor that stand how they work – they are too prevents you losing more than 5% on risky. So it’s important to understand your principal, so when prices fall you how the price moves,” according to should not lose much money.” Duane Bong of Leonteq Securities. “But in return you might have to cap Bong began by offering a basic defini- your maximum positive returns at 10%. tion of what structured products are. That is the nature of these products and we should use that to our advantage.” “They are instruments that can give downside protection, and can tailor- GREEK MEASUREMENTS make risk-return profiles to match Another key client misunderstanding is whatever the investor likes,” he said. the fact that prices change, so that a structured product offered one day “If the investor is bullish you can offer often cannot be replicated the next. him a bullish structure, and if he is DUANE BONG bearish you can give him something This occurs because many variables Leonteq Securities that makes money when prices fall.” affect the price of the options embed- ded in the structures. Bong said the financial instruments were relatively simple to understand, “We use Greeks to understand how Link to Presentation Video at least conceptually. structured product prices move,” said Bong. “From a trading perspective you http://www.hubbis.com/ mainEvent/203_Structured_Prod- “Their nature of not simply moving with want a neutral book so the trader is not ucts_Forum_-_Singapore/presenta- the market is the main advantage that affected by price movements but to do tions.php?id=221&speaker_id=

46 STRUCTURED PRODUCT IN ASIA 2015 that you need to understand the move- whether to price it today or wait,” said clients will sometimes sell call options ments first.” Bong. “Usually clients are selling volatil- for a covered call strategy. ity so it’s best for them to do so before Greeks are equations used to measure this takes place, as if they wait too long “These clients want the theta to slowly how much the price of the options em- the price will go up.” erode the value of the options. bedded within structured products change, when they are subject to certain Theta measures the value of options as “They want to collect the option market variables. they age. premium and sit on it, and hope the option expires worthless,” said Bong. There are several types. Delta describes Most options have a duration of a year, how a product’s option moves in rela- and they gradually lose value each day He noted that if a USD1 million product tion to movements in the price of the as there is less time left for the deriva- has a -0.01 theta, each day it would underlying instrument. “You can always tive to be exercised. earn the client USD1,000. ask what a product’s delta is,” said Bong. There are also a second set of Greeks, which Bong briefly described.

Gamma considers how delta changes “If an investor is bullish you can offer him a with respect to delta, vanna measures bullish structure, and if he is bearish you can give him the rate of change of delta with respect something that makes money when prices fall.” to vega, volga measures how vega changes with volatility, while charm measures theta with respect to delta.

“These measurements are like relation- “If its delta is 50%, it means there is a Bong noted that a lot of structured ships with regard to speed,” said Bong. 50% chance the product will pay out. products involved clients selling options, “If you are going at 80 kilometres per Lower delta options are used where such as equity-linked notes or dual cur- hour and you accelerate, they measure clients want to pay a smaller amount rency investments, or alternatively how quickly your speed changes.” but have a huge pay-out. So if a product had a 10% delta and you put USD1 down, if it ended up in the money it would be worth USD10.” WHICH GREEKS MEASURE PRICE MOVEMENTS

Vega describes how option prices move OptionsIncrease Decrease Increase Decrease with respect to volatility. So if vega was in Volatility in time to in the in the expiration Underlying Underlying -0.05%, as volatility drops the structure becomes more expensive by 0.05%. CALL + –+– This can be important because certain events affect volatility. PUT + ––+

For example, company stocks are often more volatile before an earnings announcement than afterwards. VEGA THETA DELTA “If a product depends on a lot of volatility and it has an earnings announcement tomorrow this can help you decide Source: StructuredRetailProducts.com

STRUCTURED PRODUCT IN ASIA 2015 47 EXPERT INSIGHTS

CORRELATION CONSIDERATIONS APPLICATIONS OF CORRELATION TO REAL LIFE Ò POSITIVE Another factor that is worth considering Many PB structures have a return which is dependent on more than 1 asset with regard to structured product in- • • Relationship is important as it has an impact on the price vestments, he added, is the level of • Positive: increase / decrease together (e.g. oil companies and oil price) correlation that exists between underlying instruments. 8 7

By using market data, product structur- 6 ers can work out how much correlation 5 there is between two assets. 4

3 “For example, oil prices have come 2 down a lot, and so have the share values 1 of BP and Shell,” said Bong. “So these 12345678 assets have a high correlation.”

Source: StructuredRetailProducts.com Other types of assets have a very low correlation, or no correlation at all. APPLICATIONS OF CORRELATION TO REAL LIFE Ò NEGATIVE “No relationship exists between such • Negative: as one increases, the other decreases (e.g. airlines and oil price) assets,” said Bong, “so their price movements are entirely random with respect 8 to each other.” 7 6

Correlation can be useful to consider 5 likely performance and therefore the 4 likelihood of products paying out in the 3 event of market movements. 2

1 For example, a US dollar investor with 1 2345678 a Singapore share would be interested to know the correlation between US Source: StructuredRetailProducts.com dollars, Singapore dollars, and Singapore share performance.

APPLICATIONS OF CORRELATION TO REAL LIFE Ò NO CORRELATION Alternatively, correlation can be used • Zero: No relationship between the assets Movements are completely random to help measure instruments that rely on a lack of correlation. 8 7

“If you have a worst-off product then 6 you want low correlations, because you 5 want one item to go wrong so that it 4 pays out as it is more risky and instead 3 you get a bigger coupon,” said Bong. 2

1 “When you choose a basket [of under- 1 2345678 lying assets] you don’t have to just ask a client ‘what are you bullish on?’” Source: StructuredRetailProducts.com

48 STRUCTURED PRODUCT IN ASIA 2015 DIRECTORY

People and firms who supported this publication

We very much appreciate the participation and contribution of the following key individuals and organisations in the structured products community to this publication. Their details and page numbers where you can find them are listed below.

PEOPLE QUOTED ADVERTISERS

Hans Goetti,Banque Internationale A Luxembourg...... 17 BNP Paribas ...... Contents - ii Stephane Honig, BNP Paribas ...... 35 Contineo ...... Contents - iii Ken Tan, BNP Paribas ...... 28 FinIQ ...... 12 Charles Picard, BNP Paribas Wealth Management ...... 16 J.P. Morgan ...... Contents - i Thibaud Gogny-Goubert, BNP Paribas Wealth Management ...... 39 Leonteq Securities ...... Inside front & Outside back cover Albert Yuen, BOC International...... 04 Societe Generale ...... 03 Harmen Overdijk, CAIDAO Wealth ...... 33 Thomson Reuters ...... 05 Adam Cowperthwaite, Citi Private Bank ...... 32 Mark Munoz, Contineo...... 06 Bart Wong, Credit Suisse Private Banking ...... 04 Sebastien Dupuy,DBS Bank ...... 02 Mahesh Bulchandani, FinIQ ...... 23, 36 Philip Cheng, Hong Kong University of Science & Technology ..... 24 Lemuel Lee, J.P. Morgan ...... 06 Ker Lih Gan, J.P. Morgan ...... 30 David Schmid, Leonteq Securities...... 08 Jeremy Ng, Leonteq Securities ...... 18 Peter Williams, Leonteq Securities...... 19 Richard Wu, Leonteq Securities...... 14 Steve Tang, Leonteq Securities ...... 26 Duane Bong, Leonteq Securities ...... 46 Harold Y. Kim, Neo Risk Investment Advisors ...... 34 Erdem Ozgul, Numerix ...... 38, 42 Mark Stephens, Simulytics Systems...... 25 Alessandro Caironi, UBS Wealth Management ...... 22

STRUCTURED PRODUCT IN ASIA 2015 49 HUBBIS PROJECTS 2016

JANUARY MAY

Forum High-Impact Brieﬁng Compliance in Asian Wealth Management Forum Commodities Thursday 21st January, Pan Paciﬁc, Singapore Tuesday 10th May, Singapore

Publication Forum Asset Management Yearbook Asian Wealth Management Forum Thursday 12th May, Pan Pacific, Singapore FEBRUARY Forum Thailand Wealth Management Forum Forum Thursday 19th May, Conrad Hotel, Bangkok Middle East Wealth Management Forum Tuesday 16th February, Ritz Carlton, Dubai Forum Philippines Wealth Management Forum Forum Thursday 26th May, Shangri-La Hotel, Manila Asian Wealth Management Forum Tuesday 23rd February, Conrad, Hong Kong Publication Indian Family Wealth MARCH JUNE Forum Independent Wealth Management Forum Forum Thursday 10th March, Pan Pacific, Singapore Structured Products Forum High-Impact Briefing Thursday 2nd June, Pan Pacific, Singapore Commodities Tuesday 15th March, Hong Kong High-Impact Briefing DPM Publication Tuesday 14th June, Singapore Independent Wealth Management in Asia Forum Publication Digital Wealth - Asia Wealth Management in the Middle East Thursday 16th June, Pan Pacific, Singapore

APRIL Publication Swiss Private Banking & Wealth Management Forum Indian Family Wealth Forum Publication Wednesday 6th April, Soﬁtel BKC, Mumbai Wealth Management in the Philippines

High-Impact Brieﬁng JULY Income strategies Thursday 14th April, Singapore Forum High-Impact Brieﬁng Malaysian Wealth Management Forum Real assets Tuesday 12th July, Le Meridien, Kuala Lumpur Tuesday 26th April, Hong Kong Publication Publication Wealth Management in Asia Family Wealth in Asia Publication Publication Wealth Management in Malaysia Digital Wealth - Asia Publication Islamic Wealth Management

50 STRUCTURED PRODUCT IN ASIA 2015 AUGUST NOVEMBER

Forum Forum Indian Wealth Management Forum Asian Family Wealth Forum Thursday 25th August, Soﬁtel BKC, Mumbai Thursday 3rd November, Pan Paciﬁc, Singapore

SEPTEMBER Forum Digital Wealth - Asia Thursday 10th November, Four Seasons Hotel, Hong Kong Forum Structured Products Forum Forum Thursday 1st September, Conrad Hotel, Hong Kong Taiwan Wealth Management Forum Tuesday 22nd November, Le Meridien, Taipei High-Impact Brieﬁng Income strategies Tuesday 6th September, Hong Kong Forum China Wealth Management Forum Forum Thursday 24th November, Grand Hyatt, Shanghai Vietnam Wealth Management Forum Thursday 8th September, Melia Hotel, Hanoi Publication SWISS-ASIA Wealth Exchange Forum Wealth THINK Publication Tuesday 20th September, Pan Paciﬁc, Singapore Wealth Planning

OCTOBER DECEMBER

High-Impact Brie fing High-Impact Briefing Alternative investments Real assets Thursday 13 th October, Singapore Thursday 1st December, Singapore

Forum High-Impact Briefing ndonesianI Wealth Management Forum Independent wealth management update Thursday 20th October, Shangri-La Hotel, Jakarta Tuesday 6th December, Hong Kong Forum High-Impact Briefing SWISS-ASIA Wealth Exchange Independent wealth management update Tuesday 25th October, ConventionPoint, Zurich Thursday 8th December, Singapore

High-Impact Brie fing Publication DPM Wealth Management in China Wednesday 26th October, Hong Kong

Publication Special Report on Insurance in Asia

Publication Wealth Management in India

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