Bloomberg’s Abdessamad Khaled and Gaurav Kapoor discuss the performance of structured products and the role automation plays in maintaining stability.
Crises in emerging markets generally follow the same pattern: bad market news accompanied by spikes in volatility, followed by a drying out of the primary market for structured products. General nervousness is also increasing volume in the secondary market, as shaken investors seek to unwind their positions.
However, this cycle did not occur in the structured products market during the pandemic, even during the initial peaks in Covid-related volatility in the first half of 2020. Primary market volumes have so far remained reasonably strong as structured products continue to perform well. . The additional liquidity provided by central banks overcame the temptation to flee to safety.
Over the past 18 months, yield-generating products such as autocallables, which account for the lion’s share of structured product issuance in the APAC region, continued their excellent performance of recent years without suffering significant losses.
Despite the reduced liquidity in the credit market and the significant increase in default risk for sectors such as oil and gas, the bid-offer spread for structured products has remained reasonably tight. The markets have recovered so quickly that few self-closing barriers have been triggered.
Central bank action, technology and above all a higher degree of automation have played a major role in promoting this relative stability. The benefits of digitization and in particular the role of automation in maintaining stability and liquidity were felt earlier in the APAC region, where companies with a strong risk management framework are emerging. are even better off in the midst of the crisis.
Indeed, more sophisticated markets, such as Japan and Singapore, are looking to extend the automation of structured products to cover post-sales and risk management processes. At the same time, emerging ASEAN markets have also taken a liking to structured products, whose yield-enhancing characteristics offer a good solution to low interest rates.
Onshore China, for example, has massively increased its appetite for structured products in recent years, especially among local banks, which are striving to improve their risk management systems and automate workflows.
A key lesson from the pandemic is that financial markets depend on access to quality market data and pricing models – and this dependence is particularly evident in times of volatility. In an ongoing crisis, inappropriate market data creates a whole host of problems.
All financial companies, especially banks, will continue to work on their digitization strategies. It doesn’t mean that they want to cut human contact completely. In this digital model, customers will still have the option to speak with their relationship managers, but conversations will be more focused, supported by data and automation.
Ongoing market changes like the LIBOR transition, low interest rates, sudden spikes in volatility and sweeping regulatory changes will force companies to ensure they have the capacity to respond effectively, or will lose in the future. . Other initiatives, such as Unmatched Margin Rules (UMR), will require greater technological sophistication, quality market data, and robust models capable of accurately pricing structured products.
In the APAC region, the continued growth of structured products is a response to specific demographic and socio-economic challenges. For example, increasing longevity created problems for pension funds whose policies traditionally paid more if people lived longer. To cover the additional liabilities, pension funds need to increase their assets.
While interest rates and returns on more traditional asset classes remain low, structured products can help close the gap. Investors may also appreciate the high level of flexibility and customization of structured products, often seen in regional trends.
In Japan, for example, there is a preference for repackaged products whose underlyings are Japanese Government Bonds (JGB), Convertible Bonds and Credit Linked Notes (CLN). In ASEAN countries, the market is mostly made up of yield enhancing structures such as automatic stocks, but with additional demand from hedge funds for yield enhancing products in all asset classes.
In China and Taiwan, demand for the valuation and risk management of structured products is growing strongly, particularly from regional banks. Some of the more common structures include digital barrier options, Daily FX range buildups, shark fins, wedding cakes, and Basket Bull / Bear spreads with quanto features, among others.
There is also interest in structured products with ESG themes and underlyings / indices in all jurisdictions.
At the same time, initiatives are underway by local regulators to improve risk management and assessment services for structured products, opening up regional expansion opportunities for local and global wealth management and private banking companies.
The large selling companies of APAC are also looking to expand into other jurisdictions in the region. As companies in different jurisdictions seek to transparently comply with local regulations, the need to invest in technology that improves lifecycle management and distribution capabilities will become more evident.
In today’s rapidly changing landscape, building the right technological foundations to improve resilience and profitability will prove crucial.
The article was written by Abdessamad Khaled, head of structured products at Bloomberg, and Gaurav Kapoor, head of APAC at Bloomberg for risk and seller-side valuations.