Investor knowledge in the Asia-Pacific region is steadily climbing, and with the market increasingly suffering the lack of diversity in listed products, the time is nearing for issuers, exchanges and regulators to consider expanding the product scope, according to Societe Generale.
There haven't been any new types of listed structured products in the region for quite a while, and even a market as mature as the listed structured products space in Hong Kong has seen a lack of diversity, as outlined by the recent report by Hong Kong's Financial Services Development Council (FSDC), said Keith Chan (pictured), head of Cross Asset Listed Distribution at Societe Generale's Global Markets in Asia Pacific.
"However, Apac investors are growing more sophisticated. These days, we see more investors who have done their homework and understand the products very well," said Chan. "That's a very good sign for the eventual expansion of new payoffs in the listed markets, and there is significant potential in Asia once the market is ready to broaden."
The FSDC report called for the introduction of yield enhancement, capital protection and participation products, as well as non-leveraged products, namely discount certificates and bonus certificates, to the listed segment.
In Singapore, the recently announced daily leverage certificates (DLCs) to be listed on the Singapore Exchange (SGX) by Societe Generale present investors with a new and attractive avenue for expressing directional views, Chan said.
"DLCs provide eligible Singapore investors with an additional investment avenue to capture short term market moves, in a more simple and transparent manner than most products currently available," said Chan. "We think simplicity is important, and a straightforward 3x or 5x daily leverage is easier to understand than the various pricing complexities with multiple maturities and strike levels that apply to structured warrants, for example."
The DLCs will be the first leveraged products of their kind in Asia, offering investors fixed daily leveraged exposure to a number of Asian indices, including the MSCI Singapore, Hang Seng Index (HSI) and Hang Seng China Enterprises Index (HSCEI). The products use either the standard net total return index, with a built-in leveraging factor within the product formula, or a leveraged version of the respective index. Both approaches offer identical outcome for the investor, but the global trend appears to be to go for formula-based products on the standard indices for the sake of simplicity, Chan noted.
Investor appeal is generated not just from the perks of DLCs being a listed instrument on SGX, and a relatively straightforward valuation, but also a transparent cost and fees structure, and just as importantly - liquidity and tradability, Chan argued. "As a committed market maker, Societe Generale will be quoting bid/ask throughout SGX working hours, so investors can actively and seamlessly trade intraday."
Notably, DLCs and leverage and inverse products, or ETFs (L&Is) offer very similar payoffs, providing a daily leverage performance. Chan noted the primary difference is that L&Is are generally limited to 2x leverage in Asia. "The limit on L&I products' leverage comes from fund or asset management restrictions. However, DLCs are a different type of instrument - most importantly, they are issued by a bank, so leverage levels can be more flexible as seen in Europe," he said.
"With the first round of DLC products in the whole region, it is critical that we spend time and effort on investor education, particularly on key features such as the compounding effect of DLCs," Chan said. Societe Generale is working closely with SGX on education efforts through seminars and other innovative methods such as webcasts. "Investor education for new product launches should be comprehensive and we are prepared to put in the necessary time and effort."
The 10 DLCs being listed next week fall within the structured warrants regulatory framework, with only the formula in the termsheet being different, and as such do not require any rules being changed or addressed, Chan pointed out.
"Once the niche has somewhat matured and the environment is right, with satisfactory investor education and the regulator and exchange being ready, we may potentially explore offering products with higher leverage levels and on a wider range of underlyings," he said, pointing out that there are products with up to 15x leverage on the European DLC market, where Societe Generale is a major issuer. "We're looking forward to bringing more of our experience [from Europe] to the Asia-Pacific region."
Globally, Societe Generale is amongst the largest structured products distributors, with over half a million tranches registered in the SRP database, generating sales of over US$21bn.
In the Asia-Pacific region, the group has distributed nearly 2,500 products, with total estimated sales volume of over US$3.5bn.
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