HSBC: structured products on MEA distributors’ agenda, brokerages expanding in the region

Although still in the first stages of development for onshore distribution the structured products market in the region has a “high potential for growth”, according to Elie Geagea (pictured), head of equity derivatives solutions, Middle East, HSBC.

The structured product offering is on many local distributors’ agenda, and a number of local intermediaries or brokerages are expanding in the region

“There are many enablers including an increasing local wealth/retail client base, an attractive region for high-net-worth individuals and family office institutions,” he said. “The structured product offering is on many local distributors’ agenda, and a number of local intermediaries or brokerages are expanding in the region.”

Despite the green shoots, however, a number of challenges remain such as the need to introduce new to market solutions that can compete with investor focus on fixed income/deposit linked products as a result of high local rates/low local volatility.

“The regulatory framework is also evolving but not yet mature and fluid enough,” added Geagea.

Target market

Looking at the type of investor buying structured products in the Middle East, Geagea notes that demand is driven from both distribution and non-distribution linked businesses.

On the distribution side, the main drivers of demand are Tier 1 foreign private banks based in Dubai, Abu Dhabi and Qatar for offshore accounts, but also local private banks looking to develop their structured notes offering for onshore clients as well as local retail banks looking to develop their structured deposits offering for onshore clients

“Many local banks have already developed their structured product offering for their retail clients via structured deposits -- mainly fixed income linked products,” said Geagea. “We see this in Saudi Arabia, UAE, Bahrain and Qatar.”

Geagea has also seen interest from local banks to add equity linked structured deposits capacity while some local banks “are looking to develop structured notes or certificate offering for their professional qualified investor client base - excluding mass retail distribution”.

“There are, however, some challenges facing structured products distribution in the region, including educating the end investor of the structured product market, upskilling the sales force and navigating the regulatory framework,” Geagea said.

Islamic products

Activity involving shariah-compliant v non-shariah compliant products remains uneven in the region which suggests that there is still room to grow this part of the market.

“On the structured product side, it’s mainly been conventional in the region,” said Geagea. “Given the recent high-interest rate environment, the main Sharia investments have been executed using fixed income credit linked instruments (e.g., sukuk, Islamic deposits).

According to Geagea, a lower rate environment could stimulate demand for structured solutions investments targeting higher potential returns.

Looking at the main differences between these types of products, Geagea points at the cash flow management element as well as the operating model which involves commodity trades to exchange cash flows.

“For instance, cash flows between counterparties are not paid on the derivative product itself but instead involving commodity trades,” he said. “The investment scope is also different as the underlying asset needs to be Islamic compliant - exclusions are done, for example, with shares linked to conventional banking, gambling, or alcohol.”

In addition, the legal confirmation to issue Islamic products requires the use of Islamic documentation (Islamic ISDA/CSA) and Islamic standards (TMA) versus conventional documentation and conventional standards.

According to Geagea, Sharia compliant demand can be material and there is further room for growth.

“In some GCC countries, the majority of asset owners are Islamic institutions,” said Geagea. “There is also an increasing numbers of Islamic/Sharia compliant indices on local and international markets and in a low-rate environment, Islamic structured deposits are seen by some investors as an attractive alternative to target higher potential returns.”

Market exposure

Investors in the region are increasingly showing interest in getting exposure to local markets which, according to Geagea, “is picking up slowly”.

In addition to the increasing foreign investment in local markets which has resulted on a wider offering of hedging, financing and yield pick-up derivative-based solutions, local investors are becoming more and more familiar with derivative solutions, with more interest to use derivatives as risk management tools for their local portfolios.

“Local regulatory and market instruments such as listed futures and options are also evolving in the region and there is also interest in leveraging the higher volatility occasionally observed with local shares,” said Geagea.

Regulators will play a significant role in the growth potential of structured products distribution, according to Geagea, “by having a comprehensive, clear and robust framework that brings confidence to both investors and distributors”.

“Having an open channel for dialogue with distributors, and for being responsive to distributors’ questions [will be key to grow the market] as well as applying regulatory standards and monitoring the framework in line with international and developed market practices,” said Geagea.

Outlook

The significant potential for structured products growth in the region will be supported by untapped wealth and retail client portfolios looking for appropriate structured products solutions.

“The region is attracting more and more HNW clients, with more wealth managers joining the region with expertise in structured product offerings,” said Geagea. “Many local banks are looking to develop their structured products solutions for onshore clients to offer similar solutions offered by foreign investment banks for offshore clients.”

Current market conditions - low rate, high inflation, occasional high volatility – will also continue to be enablers for structured product offerings in the region.

“There is positive momentum and positive competition happening in the region,” added Geagea. “Structured products growth in one country is expected to generate growth in other markets in the region.”

Geagea concluded noting that HSBC will be a key participant in the structured products distribution growth phase in the region given the bank’s “historical presence in the Middle East, deep engagement with local customers, long-standing expertise with structured products risk management and distribution, extensive presence in both emerging and developed markets and acting as a bridge across the East-West corridor”.

Additional reporting by Summer Wang.