History of Structured Products

Belgium is one of the oldest structured product markets in Europe. But sales and issuances in the country have dropped, in part influenced by the Financial Services and Markets Authority’s moratorium on the distribution of particularly complex structured products. In 2018, €3.6bn was collected from 285 products (an average of €13.6m per product), compared to €12.2bn from 584 products in 2008 (€21m per product).

The three most common wrappers used are medium-term notes, unit-linked life products (Class 23) and Sicavs (société d'investissement à capital variable, or open-ended collective investment schemes). Only KBC has issued products under the Sicav framework.

The market is typified by fully capital protected structures which represented 68% of the collected sales volumes in 2018, up from 60% in 2017. The number of 90% protected structures, which peaked at 140 in 2015, is down significantly (57 in 2018 compared to 120 in 2016).

A large proportion of products (70% between 2015 and 2018) have tenors of six years or longer. Although the biggest demand is for euro-denominated products, Belgian distributors have increasingly been using foreign currencies such as the US dollar, the Norwegian krone, the Swedish krona or the Australian dollar. This is often related to the shorter investment terms some foreign currencies can offer.

Equities remain the underlying of choice, with an increasing number of products linked to proprietary or house indices. Payoffs based on the constant maturity swap spread are also popular.

The Brazilian market has experienced steady growth during the last five years, the main reason being the introduction of the certificado de operações estruturadas (COE) in 2015 - a structured note similar to the one issued in the US and Europe. In 2018, the market for COEs was close to US$3bn for a total amount 50,000 products, according to the B3 exchange.

Top underlyings include the Brazil Consumer Price Index, Ibovespa Brasil Index, Taxa CDI, USD/BRL exchange rate and S&P 500. The products usually have a term of between one and three years, and more than 90% have a 100% capital protection. The most popular structures currently include capped and uncapped calls, autocalls with a worst of feature and digitals: these account around 80% of the Brazilian products.

The Canadian structured product market was the first in the Americas to reach a relatively large size though volumes have since stagnated. The market is dominated by the same group of domestic Canadian banks.

The market comprises two large groups of products – notes and guaranteed investment certificates (GICs). Notes consist of both protected and non-protected offerings, while all GICs are fully protected. Product structures are similar to those in the US, with an average tenor of five years.

About half of all products are fully protected, while the majority of the other half have at least contingent capital protection. The most popular underlyings are domestic indices or stocks, with baskets of Canadian financial institutions featuring prominently.

The wealth management community in China is facing a number of challenges, including a new asset management regulation introduced by the national central bank in Q1 to promote more transparency in the market. The new rules restrict commercial banks' off-balance-sheet financial products and on-balance-sheet products (fixed interest rates). As a result, banks had to enhance their on-balance-sheet products by offering more structured products. According to SRP data, the Chinese market has been growing and will continue to grow during 2019.

Total sales volume in 2018 was CNY34.5bn. Main distributors include Agricultural Bank of China, HSBC, Citibank, Shenzhen Ping An Bank, China Guangfa Bank, China Merchants Bank, China Construction Bank, Citic Securities and Bank of East Asia. Structured deposits have been growing in popularity since mid-2018. Other products are wrapped as wealth management schemes.

Most of the structured deposits include range or digital, range options linked to exchange rates (USD/HKD, USD/JPY, EUR/USD). The rest of the products usually comprise knock out, capped call, bull bear, accrual, shark fin, worst of option payoffs. The most popular underlyings are Gold, CSI 300 Index, USD 3M Libor and CSI Smallcap 500.

Finland favours equity baskets (41% market share) and credit indices like Markit CDX High Yield (19%). Credit defaults and autocalls are very popular in the Nordic country - both have a market share of over 35%.

Nearly 85% of all products sold in Finland don’t have capital protection: in 2018, only one fully capital protected product was launched. Both big providers and small distributors have moved to launching more private banking products in recent years.

Autocallable products with conditional protection have been favourites of the French market for the past two years. Products are offered to retail investors as a public offer or as a private placement. Life insurance is the major distribution channel, mainly due to tax advantages. Therefore, structured products are largely distributed as unit-linked life insurance wrapped notes (vie wrapper).

Structured products in corporate treasuries regained popularity after a 2018 French government tax reform introduced a flat tax of 30% (prélèvement forfaitaire unique) on revenues originating from savings and capital gains.

The vast majority of structured products have been issued under the European medium-term note programme. Only a few providers continue to issue structured mutual funds, which are mainly used to meet the requirements of the equity savings plan tax-free wrapper.

The post-crisis period saw the promotion of product simplicity, especially where payoff mechanisms are concerned, and the modification of exposure by investing into optimised indices that reinvest dividends and subtract a flat rate percentage. The use of these proprietary equally-weighted indices has been the main innovation in the French market since 2015.

The bulk of the products put full capital at risk, due to the low interest rate environment.

At the end of 2018, the Autorité des marchés financiers relaxed its regulatory framework, replacing its upstream systematic control by a downstream monitoring.

Although its 2009 peak performance in terms of sales volumes has yet to be replicated, the German market for structured products is one of the frontrunners in Europe. Average annual issuance totals 1.5 million and there are currently more than 6.7 million live structures available, nearly 10 times the size of the market back in 2011. Many international distributors and issuers are active in the German market though domestic banks dominate its not-flow space.

The leverage with stop loss, the reverse convertible and combinations of the capped call and the protected tracker structures are some of the most prevalent payoffs. The knock out type is also used in many issuances in the not-flow market.

The German market evolved from the listed warrant market, which means warrants, leverage and investment certificates, and medium-term notes dominate as wrappers. Leverage certificates represent the bulk of the issuers’ structuring choice in the last eight years.

Nearly all of the instruments available in Germany don’t rely on a capital protection feature and are primarily short-termed, ie with a tenor under one year. Roughly one-third target investors with medium-term preferences.

The underlying universe is highly diverse due to the prevalence of equity assets over FX and commodities. Domestic banks have recently started to create proprietary indices which link products with structures that take into consideration important technological or social advancements including distributed ledger technology and environmental and social governance.

The Hong Kong market is one of the largest in the world and is known as the headquarters of the Asia Pacific region. The SRP database includes the not-flow products of HSBC, Hang Seng Bank, Bank of China and Sun Hung Kai Financial (they only distribute but the products are structured by Credit Suisse).

The main product structure is the equity-linked investment except for products issued by Bank of China, which are structured deposits linked to exchange rates. There are two types of structures – linked to a single share or to basket of shares. Terms usually range from three to six months though there are also products issued for up to one year.

The typical payoff for single share linked products is either the knock out (autocall option), or the knock out and reverse convertible. For products linked to baskets of shares, the main types of payoff are the knock out, reverse convertible and worst of option.

Products are usually private placements and are not capital protected. According to the SRP database, the total sales volume for 2018 was HKD50.14bn.

The Indian market is still in its nascent stage compared to more mature markets. But in 2017 the issuance of market linked debentures was at a five-year high.

Short-term structures, which are very popular in Singapore and Hong Kong, are the product type most notably missing from the Indian scene. A majority of Indian investors prefer three-year structures, which are capitally protected with increased interest for structured products linked to stocks, currency, funds as well as the domestic Nifty benchmark. Over the past few years, the popularity of leverage products has been on the rise pushed by well-informed investors.

The Italian structured products market is characterised by diversity and complexity. Main issuances comprise investment certificates though bonds and notes are regularly issued, along with leverage and flow products. In fact, direct listings of certificates have steadily grown over the past few years, offering typical short-term structures such as bonus certificates, express certificates and autocallables.

Products with capital protection represent approximately 28% of the sales volume, with the remainder taken up by yield enhancement products. The most popular payoffs are the knock out, reverse convertible and the digital payoffs - capped call, snowball and protected tracker also feature in the top 10. The structures of the products often include unusual features such as the observation of multiple barriers for early redemption, high watermark payoffs for autocall events, or the combination of best and worst of etc.

The Italian market is innovation driven and even though local investors prefer well-known Italian stocks and indices, it gives exposure to investment in a variety of sectors and international underlyings. A majority of structured products have a mid-term lifespan.

Japan’s structured product market offers a variety of investment opportunities with flow products (deposits, notes and non-flow) consisting of structured funds, variable annuities and registered notes. By the end of 2018, SRP recorded over 2,500 live products, which collected more than US$580bn in assets under management in Japan.

Nordic banks and institutions issue over 50% of the structured products in Japan, which has been a long-time tradition of the market. Of these, more than 90% are reverse convertibles with an autocall option, with some of them including digital, knock-in and worst of option features. The most popular products feature single shares, which exclusively consist of Japanese stocks, major stock indices like Nikkei 225 and S&P 500. Other notable underlyings are share and index baskets, currency rates (with JPY/AUD and JPY/BRL being predominant).

Over the past few years, the Japanese structured products market has shifted, along with other Asian markets, to short-term, low capital protection, high coupon notes that together with the autocallable feature offer a high-risk/high-reward potential for the investors. This has proven successful as, according to SRP awards, a Japanese provider had the highest performance in Asia for 2018.

In 2018, the total sales volume for the Mexican market was US$9.2bn, a 30% increase on 2017. The market remains highly dependent on the US economy, the main indicator being the relative volatility of the peso compared to the US dollar.

Products sold are predominantly for the short term, with 80% having a maturity below one year. For a market with such a high proportion of short-term products, a surprising amount - more than 50% - has full capital protection.

Around half the products are generally wrapped as structured bonds (bono estucturado), and another big portion as certificates of deposit (CD) and warrants (a few hundred products per year). Mexican warrants are quite similar to regular European notes.

More than 60% of the products are based on the Mexican peso/US dollar exchange rate. Top underlyings include the TIIE 28, Mexico IPC index, Eurostoxx 50 and some popular shares – Amazon, Netflix, Apple, Facebook etc. The dominant structures include dual currency, range accrual, digital, reverse convertible and a local favourite: the wedding cake.

In the wake of the Lehman Brothers collapse, the Singapore structured product market, which up to that point had consisted mainly of deposits, funds, and registered notes, changed direction towards dual-currency deposits.

While public offerings from the likes of Maybank, Overseas Chinese Banking Corporation, United Overseas Bank and Development Bank of Singapore may be few and far between, a vibrant private banking segment and a somewhat limited but steady structured warrants market cater to the needs of investors.

South Africa is the largest structured product market in Africa and the Middle East. It has seen an increase in structured products listed in foreign currencies, the most common being the US and Australian dollars, the British pound and the euro. The most common type of products is the capped call which in 2018 represented more than 87% of the market. Uncapped call products have traditionally had high sales volume, with 157 products issues in 2018 totalling ZAR 1.037bn.

The Eurostoxx 50 index has been the most successful index in terms of sales volume for the past two years amounting to ZAR 2.380bn in 2018. The FTSE/JSE Africa Top 40 Index has been the most popular in terms of number of products issued in the past 10 years (794 issuances in 2018 and 711 in 2017).

South Korea’s structured products markets consists mainly of equity and derivatives-linked securities or bonds as well as deposits, exchange-traded notes and structured funds. There are over 30,000 live products, which attracted over US$141.2 billion of investors' cash as of end of 2018, according to SRP data.

The majority of the products offered consists of autocallables in addition to simpler structures such as digital, bull bear, shark fin, uncapped and capped call. Most autocallables feature a worst of basket combined of three of the major country benchmarks such as Eurostoxx 50, S&P 500, Kospi 200, Nikkei 225 and Hang Seng China Enterprises Index. Other notable underlyings are shares, interest rates (mainly constant maturity swap rates) and commodities.

Autocallable products often have an average term of three years while the simpler structures offer a shorter term (on average one year). Over 85% of the products have no capital protection despite investor concerns prompted by market uncertainties in recent years.

The types of products sold in Spain have been the same over the years: products are typically wrapped as a bono estructurado (structured note), deposito estructurado (deposit), a medium-term note or a fondo garantizado (guaranteed fund).

Spanish investors have gravitated towards full risk capital products since 2014, with an annual average of 40% of total sales being at least 0% protected. The most common structures in 2018 were digitals, knock out, reverse convertible referencing equity indices, share baskets and single stocks.

The Nordic country has earned a reputation for sophistication, with a wide range of underlyings used and long-term products.

Sweden favours equity baskets (32% of the market) though credit indices such as Markit iTraxx Europe Crossover and Markit CDX High Yield are also popular. This is because investors like credit default products – these had a 40% market share in 2018.

Average performance was 4.4% pa in 2018. Products that are sold at an issue price between 110% and 100% are considered capital protected but 83% of products sold don’t have any capital protection at all.

New rules on structured products came into effect in 2018. Since then, providers have been cautious when launching new products as they believe the rules are unclear. Many distributors have merged or stopped providing structured products completely for similar reasons. There has also been a move towards the launch of more private banking products.

Switzerland is the largest market in the world in terms of turnover (CHF 331bn in 2018). Educational and regulatory initiatives play a key role in supporting the transparent and efficient development of the local market. A big area of focus for Swiss industry members is pension funds.

Nearly two-thirds of products in Switzerland are non-listed. Private and institutional investments play an important part in this market, which is dominated by the issuance of short-term products, almost all exclusively investment certificates. The majority of the products have a tenor between one and three years, and are non-capital protected. Yield enhancement products accounted for 46% of total turnover in 2018, according to the Swiss Structured Products Association, followed by leverage products (22%). The latter are predominately traded on the secondary market.

The most popular payoffs are single or multi reverse convertibles - some these include a callable or autocallable feature. SRP data shows that the most widely used asset class is equity (share basket) with a 70% market share. In terms of underlyings, Swiss investors have a home bias with Nestle, Novartis, Roche being the most common ones. The other typical basket used in Swiss products is an index one – typically Eurostoxx 50, S&P 500 and the Swiss Market Index. A large proportion of Swiss products is distributed in Asia; therefore, the US dollar is one of the most used currencies, followed by the Swiss franc and the euro.

According to numbers published by the Banking Bureau of Taiwan’s Financial Supervisory Commission, at the end of December 2018, the total outstanding notional amount for derivatives in Taiwan was US$1.28bn. Foreign exchange and interest rate contracts made up 66.8% and 33% of the total, respectively.

Notional figures have remained roughly unchanged between 2014 and 2018, from a peak of US$1.23bn (2014) to a low point of US$1.05bn (2016). Forwards and swaps have invariably accounted for the bulk of this, as their overall share has grown significantly from a combined 64.7% in 2014 to 94.6% in 2018.

In 2018, the most popular payoff was the snowball (featured in 2,759 products), followed by the knock out (2,473 products) and the accrual (1,790 products). The first two jointly appeared in 1,302 structured offerings to also form the most widely employed unique pairing in the market.

Despite the prevalence of share baskets as an underlying instrument, products linked to yield spreads and indices are also available, albeit more sporadically.

The investor sentiment in Taiwan has consistently favoured short-term offerings, with tenors shorter than three years comprising over 90% of all structured products in both 2017 and 2018.

The Dutch market has changed significantly in the past 10 years. It was worth €4bn over 440 products sold by 25 issuers - led by ABN Amro, ING Bank and Rabobank (combined market share of 75%) in 2008. It is now valued at €100m from just five issuers selling a combined 393 products.

Rabobank and ABN Amro closed their equity derivatives desk in 2013 and 2014, respectively, while in 2017 ING Bank declared it was offering structured notes only to professional financial institutions and no longer to external financial intermediaries.

The Dutch regulator, Autoriteit Financiële Markten, has been tougher than most, restricting the marketing of structured certificates and warrants via a specifically created article inserted into the Dutch law on the supervision of financial undertakings. One if its investigations has also led to providers of leverage products limiting the leverage of turbos to a maximum of 50.

Van Lanschot, Commerzbank and BNP Paribas (BNPP) are currently the main issuers of structured products in the Netherlands. Société Générale returned to the market in 2018. Van Lanschot is the issuing party behind the most structures manufactured by Kempen. The bank mainly issues partially capital protected notes, autocallables, enhanced participation notes and memory coupon notes.

Commerzbank and BNPP predominately issue listed certificates. The former’s focus lies mainly with capped bonus certificates but also discount-, guarantee- and twin-win certificates while BNPP mainly issues capped bonus certificates, which are marketed in the Netherlands as rendement certificates.

One of the largest markets providing structured retail products in Europe is dominated by autocallable products, a majority of which are linked to underlyings including FTSE 100, Eurostoxx 50 and S&P 500. The issuance of structured products in UK has increased over the past few years mainly as a result of the emergence of new distributors.

Long-term products have become more popular over the past two years in contrast to their short-term counterparts. The knock out, reverse convertible payoff structure is still one of the most common combined with worst of options, digital and capped calls, and enhanced trackers. Medium-term notes as well as deposit plans are the most typical wrappers in the market. In terms of product types, growth products are still the favourite ones accounting for about 65% of products as opposed to income ones which are seeing low but steadily rising levels. When it comes to capital repayment, all products have a European barrier. Most of the them are listed on the London or Luxembourg Stock Exchanges, with a minority on the Irish stock exchange.

The issuance of structured products in the US started in 1996 and has since gained traction as a complement to traditional retail and institutional portfolios. Active players in the market are domestic US banks as well as international investment banks with a relatively high presence of Canadian banks.

The market consists of two large groups of products – US Securities and Exchange Commission (SEC) registered note and Federal Deposit Insurance Corporation certificates of deposit (CDs) with up to $250,000 per depositor guaranteed. In addition, the market offers access to exemptions from SEC registration private placements and indexed annuities.

The market is dominated by non-protected products while the fully capital protected space offers (primarily CDs) has grown to between 10% and 15% of the market share throughout the years. The products that pay return over the investment (income products) are less popular than the growth ones that pay return at maturity.

The most popular underlyings are the S&P 500, Russell 2000 and Euro Stoxx 50.