Jan 6, 2016

Part 1: 2015 Structured Products Recap & 2016 Outlook

In this Part I video blog Tim Mortimer, Managing Director for Future Value Consultants, Keith Styrcula, Chairman and Founder of the Structured Products Association and Jim Jockle, CMO of Numerix recap the key issues and trends impacting the structured products market in 2015 including structured product issuance, underlyings and product design. They also provide their thoughts on 2016.

Weigh in and continue the conversation on Twitter @nxanalytics, LinkedIn, or in the comments section.

Video Transcript:

Jim Jockle (Host): Hi welcome to Numerix Video Blog, I’m your host Jim Jockle. In our continuation of our discussion on 2016, today we’re going to focus on structured products. Joining me today is Tim Mortimer, managing director of FVC, and Keith Styrcula, the Chariman of the Structured Products Association, good afternoon gentlemen.

Keith Styrcula (Guest): Good to be back here with you, Jim.

Jockle: Good afternoon, Tim.

Tim Mortimer (Guest): Good afternoon, how are you?

Jockle:  Alright so Tim, let me turn to you first. Let’s talk about 2015. So clearly we’ve had a lot of perspective in terms of the stock market, in terms of performance, so of the recent, vintage 2015 structured products, how are things performing?

Mortimer: Ok, so there’s been quite a bit of market volatility over this year. Both the S&P and FTSE 100 and Euro stocks index broadly flat over the year, with quite a bit of volatility in the summer. The products which are perhaps 2 or 3 years in length, the picture of that longer period has been pretty much upward, so most products should return something in line with the underlying. Certainly no buffers or barriers have been in danger as far as we could see. So even capital at risk products will return to a healthy return.  

Jockle: So that brings up some very interesting questions. Where volatility is seemingly to become the new norm, from your perspective, what should product designers and structurers be thinking about going into 2016 to handle this new volatility in the market place?

Mortimer: I guess it’s a matter of putting the right protection in for capital at risk products, buffers and barriers at specific levels, or at least the retail products making investors aware of the likelihood for capital protection and it actually doing its job. And of course there’s a big difference between what’s a suitable barrier level, 50, 60% per index, compared to what is necessary for a more volatile stock in order to avoid losses.   

Jockle: So Keith, let me turn to you for a moment. You know, in light of volatility and you know, and obviously with challenges in project design, from your perspective what should individuals be thinking about? And, what is your outlook for the coming year?

Styrcula: I agree with Tim actually. I think that the buffered, enhanced structures are the way to go. We’ve seen quite a bull market over the last several years, last five years or so. There are some indications with the volatility that markets may be going sideways again this time next year. So, a product that gives you two times up side, up to a cap, if the S&P is up 5% next year, that instrument will give you a 10% return, that’s pretty attractive, I think, in a sideways market. If you’re concerned about a downdraft in the market, then the buffered enhanced notes has 15% first loss protection, the markets down 20%, the investors only about 5%, I think it’s a terrific way of playing the indexes and maybe a superior way of indexing, generally speaking.

Jockle: Obviously this week, we’ve finally seen the US move on rates, albeit 25 bps, but at least, you know, it’s starting to suggest an upward trend. For notes investors, you know, what should individuals be thinking about in terms of rates? Is it panic, or is it upside?  

Styrcula: Well I think we’re not going to see another ratcheting up of the rates anytime soon. I think this was something the market was anticipating, something that was long overdue, I think the Fed was dragged kicking and screaming into giving the 25 basis points. I think it’s going to be probably there for a little while. It’s good news for structured notes because obviously you have more upside now with higher interest rate environment, slightly higher interest rate environment. You’re able to have a little bit more exposure to the underlying commodity, FX, equities, or even rates linked products. So there’s some upside there.

Jockle: So Tim, let me turn to you. Europe yet is still in the negative territory. There still seems to be continued commitment to keeping rates kind of where they are, either at zero or below. Where does this shift in the US net out for European investors?

Mortimer: Right, the problem is in the Eurozone, not very particular to that region and cause and basically by the way that the Euro problems have panned out in the last year to two years with the sovereign debt and other issues. In the UK sterling’s actually have similar interest levels to the US of the five years. In general with global correlation and everything it will probably encourage European rates to go up, rather than down, but not necessarily by that much. So, I don’t see it having a big impact.

Jockle: So one other area I’d want to address and thank you Tim, I’ll start with you. Let’s continue our trek around the globe, let’s look to Asia, a lot of volatility in the currency market, we’ve seen the devaluation of the Yuan and now the IMF has come out saying next year that the Yuan will be recognized as a standard currency. Can we start to anticipate the Yuan as underlying and what impact, if any, will it have with other issuers in the regions?

Mortimer: Right, it’s an interesting question. As an underlying, it’s certainly going to attract some interest. Even though it’s got the new IMF, in terms of liquidity and certain political situations, I can’t see it becoming a very popular choice outside of China right now, either a denominating currency or as an underlying. Surely, it’ll pick up, but I don’t think it’ll immediately change the way things are going.  

Jockle: Thank you, Tim. So now Keith, let me turn back to you here. You know obviously, Asia very well established market for structured products, very well defined in Europe, and I want to address some of the regulatory challenges that have been going on in just a minute, but I believe issuance has continued to grow in the US. Are we still at that boon for products in the US?

Styrcula: We are not quite over the threshold where structured investments have had their breakthrough moment. Where we are, we’ll probably be up between five to six percent over this time last year with the larger issuers in a larger distribution channels growing the channels a little bit more. We have a couple of things inhibiting massive double-digit growth. The first of which is the regulatory landscape in the sense that there is some distributors that are still uncertain in terms of where structured investments are going to fall, in terms of whether they’re conservative investments or something that has some regular over burdened with regulatory oversight. The other thing is that we do see some consolidation among some of the distribution channels, so this year there were three major private banks that got absorbed by other banks, it was Credit Suisse, Deutsche Bank, and Barclays, all those private wealth channels have been absorbed by other firms. So remains to be seen whether they’ll maintain the notionals that they had in their new motherships.

Jockle: So the new motherships, to use your phrase here, Wells, Raymond James, and Stifel…

Styrcula: Yes, Stifel Nicolaus

Jockle: So, obviously, big distribution channels themselves. Are you seeing more product coming up for them or do you think it might be a little bit more consolidation of existing product, yet to a wider distribution platform.

Styrcula: Remains to be seen but what I think is interesting is all three of those private banks have been absorbed. We’re big users of structured investments for the client’s portfolio, this other value and that. So sometimes there’s something of a reverse takeover that when firms and especially financial advisors and registered investment advisors are the customer using these products they’re going to have a natural demand among their client base to be able to access to those products. So we’ve seen that grows open architecture and it is a little bit of a wait and see how these firms will respond to it probably a year or two before the verdict is delivered on that.

Jockle: So one of the themes that have been as long as we’ve been working together with the Structured Products Association has been education. You know obviously these firms committed to the platform, committed in terms of distribution. Are they demonstrating leadership in terms of education of that and how was the SPA and others contributing to do that growth of knowledge

Styrcula: That’s a great question because it’s the most important thing. As they say in real estate, it’s always location, location, location. In our business, we’re always saying education, education, education, because the more that you educate financial advisers, the more you educate retail investors, high net-worth investors on the utility of structured investments it’s kind of a soft mark way of marking it because when they learn how the products perform, then there creates a demand for those types of products. So I think a lot of firms have done a great job in getting out there and having certificate programs for their financial advisers so that gives the regulators a sense of security that we are policing ourselves as an industry. I think in 2016 you’re going to see some initiatives that will be widespread, we have a model educational platform that we expect to be rolling out in the second quarter of 2016, that we think will be fabulous; firms that don’t have a robust education mechanism, and this will fill that void.

 

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