US SPA: structured products are better positioned

Shikha Jindal (pictured), director of cross asset sales at Barclays, noted that the overall structured product market in the US in 2019 comprised of the registered market, had a value of approximately US$50 billion. 

“Barclays was responsible for a little over US$7.5 billion of that in the registered space,” she said. “This year, we've seen quite a significant uptick in volume with the market annualizing, around US$67 billion. Barclays in particular will do a little over US$10 billion at this rate.”

This can be attributed to different factors, one of them being the market volatility that due to Covid, especially in February and March - when the market was first impacted by the news, participants jumped at the opportunity to take advantage of the volatility and lower entry points to get into the market.

“The rally that we've seen since has obviously led to more volume in the market. As we near the election, I think we might see a little bit of a pause as investors try to decide what to do and maybe wait to see how the market reacts before taking advantage,” said Jindal.

Our products have probably never been better positioned - David Walsh

David Walsh, vice president at Morgan Stanley, believes that the growth could also be attributed to various initiatives that the industry as a whole has been working on for the past few years.

“If you think about the constant education among advisors, whether that's in the independent or wirehouse space, trying to broaden the scope of the user base, a lot of efforts has been put into that over the couple years,” said Walsh.

The introduction of new tech platforms should help with the maintenance of the products as well as the distribution. “When you bring all that together, and you pair it with the current market environment. I think all of that is just starting to come to fruition," he said.

Defense of equity and enhanced yield are themes that have taught for years on end, while the current market environment is calling for investors to know how to stay invested in equity markets in a defensive way.

“Our products have probably never been better positioned and I think that's being reflected in the 15 to 20% growth number that we're all expecting through the end of the year,” said Walsh.

Drivers

In terms of product preferences, with interest rates coming down drastically, the need for yield appears to be even more significant. Callable products such as autocalls, and callable notes have emerged immensely popular this year as clients are now looking to sell downside on equities in order to generate the yield.

“In February and March, we started to see clients look for greater levels of protection,” said Jindal. “They were able to get deeper barriers on those trades, given that they were pricing keepers, so clients might have been looking at barriers that were deeper by 10 or 20% to take a little bit more of a conservative approach.”

The pandemic has also caused an eruption of activity in the structured annuity market, noted Kenneth Fitzsimons, director of annuity product management at UBS.

Annuity providers have been able to increase the cap on their offerings given the spike in volatility as well as the duration. Over time, an extension into three-year and six-year durations can be noted, along with more flexibility within the investment indices inside the annuity.

“Historically investors opted for indices such as S&P, Russell, and MSCI EAFE but now, we're starting to see a shift towards unique indices that are going into the index structures,” Fitzsimons said. “During the pandemic, annuities are designed for long-term investing, so you have that mindset that you're not concerned about the short-term downfalls in the market.”