Structured Products

A new structured product needs a certain volume in order for the issuing costs to be covered. The typical size is around one million. Groans across the audience… Who does have one million, be it USD, GBP, EUR or CHF, to invest in one single product? If you want to maintain a certain diversification in your portfolio by limiting the position size to 5%, you have to belong to the super-rich, the so-called Ultra-High-Net-Worth-Individuals with 20 millions of assets, to be able to ask your banker to structure a product that fits your needs. Well, not anymore. More and more banks have already or are in the process of developing online trading platforms that drastically lower the issuing costs of a product. Where previously USD 1’000.- were needed to pay for the trading, market-making, back-office operations and documentation for issuing a product, they now amount to a mere USD 50.- or even less. Hence, some issuers have lowered the economical size to issue products to less than USD 50’000.- or equivalent. That’s the power of automation at the service of the investor. If you still want to maintain the same degree of diversification, the total size of your portfolio need only amount to… 1 Million. Much more reasonable, don’t you think? Of course, not all product issuers have developed such tools. They are expensive and sometimes extremely difficult to program. Whole processes have to be reviewed, trading books reassigned or consolidated, internal resistances have to be overcome and a stable environment, based on the Internet, has to be developed. In some cases, the issuer has to make a strategic choice about which clients it wants to target. If institutional clients are the issuer’s main target, then online trading tools may not be worth its costs. Those clients’ needs go often beyond any standard product that can be programmed and easily issued by a trading machine. However, private banking clients may appreciate the fact that they can parameter their own standard products. Speaking of which, what products can be issued with these online trading tools, and how is it done? The available product range really depends on the platform of the issuer. Some have developed more products than others have. As of this moment, capital guaranteed products with or without cap, yield enhancement products like reverse convertibles, barrier reverse convertibles, worst-of barrier reverse convertibles and more variants of the same type, discount certificates and barrier discount certificates; participation products like (capped) bonus certificates or (capped) outperformance certificates can be issued. Beside the main stock indices, the underlying assets encompass a few hundred stocks. Some structures can be issued with a quanto option, and some issuers allow the products to be collaterized at the stock exchange. On the FX side, two dozen currencies can be combined. Commodities like gold or silver are also offered. Overall, the possibilities are large enough to fulfill the majority of the typical private banking needs. At least for those investors, the progress made has a real benefit: products can again be tailor-made and need not be taken from a shelf, which restores a primary advantage of structured products: they can again be parametrized to one’s needs. Off-the-shelf products did also have the additionally drawback that they had an initial trading date that was determined by the issuer. With an electronic trading platform, the investor can choose his own time and place. The method for issuing the products is simpler than filling out an online form to buy a book at Amazon. Once you know what you want, a few clicks are enough to parameter your product. Begin by selecting the desired product type, for example a capital guaranteed product. Then choose an underlying asset, the notional to invest, the maturity, the level of the capital guarantee, and then solve for the participation. After a few seconds, the price request is sent back from the issuer with the result. If the product is matching your requirements, press the ‘trade’ button and the deal is done. An electronic trading confirmation is sent from the issuer with the final details. Another advantage of these platforms is the possibility for private banking clients to compare prices. The client need only have several banking accounts (which is the regular case anyway, investors not wanting to place all their eggs in the same nest), ask each bank for a quote and trade with the bank offering the best price. The transparency is enhanced, a critic that was often attributed to structured products. The advent of the Internet did not only profit Google or Amazon. Some banks are innovating in areas that didn’t exist a few years ago. Speaking of Amazon, the future of these online trading tools is likely to be bright. I’m waiting to see the day where I can put a product “into my basket”, like I would with a book. Even better would be the thought of a GoogleBank, where one can put together the parts of an investment, and Google pulls them from the cheapest bank. The investor would have to accept Google issuer risk, though.