The Swiss structured products market was the topic of discussion of the Fireside Chat on day one of the SRP Europe Conference in London.
There are around CHF200 billion assets under management invested in structured products in Switzerland.
Most of the money is invested in basic investment products like yield enhancement or delta one structures but we also have leverage products that are used mostly by self-directed investors - Sébastien Neukom
“The Swiss market is huge. Imagine, this is only three percent of all assets under management in Switzerland that are managed by Swiss banks,” said Sébastien Neukom (pictured), head structured products sales, SIX Swiss Exchange.
“Most of the money is invested in basic investment products like yield enhancement or delta one structures but we also have leverage products that are used mostly by self-directed investors.”
Switzerland is a bespoke market with almost all investment banks serving the Swiss b2b market or using their broker network to distribute products.
SIX currently lists around 60,000 structured products including 15,000 investment products and 45,000 leverage products.
Serge Nussbaumer, CEO and editor in chief of Payoff, a Swiss magazine about structured products, asked Neukom how the Swiss market compares to Germany, where there are more than 1.5 million listed products and issuers launch thousands of products every day.
“Investors in Germany are self-directed, they do their own research, their own trades, and for that, of course, it makes sense to have a lot of products because it's easier to trade products that are listed. In Switzerland, there are more bespoke solutions and investors prefer to work with an investment advisor,” Neukom said.
Platforms start at CHF20,000 and for that you have a new product – your own product - Sébastien Neukom
Although Switzerland has fewer listed products, open interest is higher and the size of OTC products is much larger compared to Germany, according to Nussbaumer (pictured below)
Neukom added that Swiss investors like to work with their relationship manager or investment advisor for bespoke solutions. In the past 10 to 15 years, many processes have been automated allowing relationship managers to work much more efficiently.
“For them, it's too much effort to search on the secondary market for the right product for their clients. It is much easier to use platforms that every issuer provides for their clients and there are also multi-issuer platforms where you can compare the offers.
“Platforms start at CHF20,000 and for that you have a new product – your own product. Of course, when you have one new product for one investor, it does not really make sense to list it. That is why these products are OTC traded instead,” said Neukom.
Only the so-called public distribution products, which are marketed by the issuers, are products that are listed on SIX Swiss exchange.
Listed products
The number of investment products in Switzerland has been stable the last few years with around 15,000 listed – mostly barrier reverse convertibles and tracker certificates. However, listings of leverage products more than doubled over the last two years: from 20,000 to 45,000 products.
“We saw that the investors wanted to have more aggressive products,” said Neukom, adding that to get these products, the exchange made some adjustments.
“Prior to those, we charged for every listing a fee. Of course, if a product is knocked out after a few days, it's not perfect, and then you must relist, which comes with a higher cost.”
Now, the exchange no longer charges a fee per listing, but it charges a fee per slot instead. Within these slots, issuers can list as many products as they want, whilst they are also able to delist if the product is no longer attractive and launch a new one.
“The other thing we introduced is that the market maker can actively validate their quote before the trade is done," he said. "This is very important, because then we don't have any more latency arbitrage on our exchange.
“For us, as an exchange, we have less volume in short term but in the long term we have more aggressive products – what the investors are looking for – and then it becomes to a win-win situation for the investors and for the issuers."
Trends
Visibility, and the possibility to trade a product is important for issuers, especially with online banks entering the market, according to Neukom.
“The younger generation is using these brokers […] it makes sense to list a product, and especially for the leverage products, you need to list them because it's all about speed of execution.”
In the last six to 12 months, Neukom has seen more leverage products with a knockout feature being traded.
“Barrier reverse convertibles on Swiss names such as Nestle, Novartis, and Roche are products that investors love. You need to bear in mind that in Switzerland, we don’t have high interest rates like in the rest of Europe or in the US. Rates are still low and therefore investors like to use all varieties of barrier reverse convertibles,” he said.
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