With 2015 having come to a close and the New Year underway, Barclays is looking forward to growth opportunities despite regulatory challenges in the form of Total Loss Absorbing Capacity (Tlac) and regulation issued by the US Internal Revenue Service (IRS) under Section 871(m). "We expect a challenging year for structured products in 2016, but there are opportunities for growth," said Jorge Chancay, vice president, product issuance & development at Barclays. "It remains to be seen how different issuers react to the regulations, which we expect to be the biggest challenge for the structured products market in 2016, but the issuer landscape will likely change in the next few years as a result of the new capital requirements and regulations globally."
The biggest issue faced by structured products providers last year was uncertainty about the final Tlac regulations, according to Chancay. Tlac requires global systemically important banks to meet long-term debt requirements with the intention to bolster financial stability by improving these banks' ability to withstand financial stress and failure without imposing costs on taxpayers.
In addition, the industry as a whole will have to invest to get ready for the new reporting requirements which governs withholding on derivatives and equity-linked instruments with payments that reference dividends on US equity securities.
Barclays expects strategic partnerships to be a source of growth and is seeking to leverage its partnership with Illinois-based investment firm Elkhorn Capital to extend the UK bank's product availability, according to Chancay. "We expect continued success on market linked certificates of deposit (MLCDs) and Quantitative Investment Strategies." Barclays Bank Delaware pitched in December a new MLCD linked to the performance of the Elkhorn DWA Tactical Tilt 5% Volatility Target Index to US retail investors. Elkhorn Capital sponsors the index, which uses Dorsey Wright & Associates' (DWA) relative strength methodology to determine index components.
"Investors will be looking for opportunities to position their portfolios for a rising rates environment," said Chancay. "Higher rates will give issuers more flexibility to price a variety of structures resulting in an uptick in principal protected note issuance and more interest in interest rates as an asset class."
Interest rate-linked structured products fell out of favor in the past three years, with sales of products in this asset class falling almost 50% to $4.7bn between 2013 and 2015. Principal protected notes also suffered, having fallen to an 18% share of sales in 2015 from a 27% share of the market in 2013, as investors opted for more risk in a search for yield in the prevailing low interest rate environment of the past few years.
"The market overcame a slowdown in the fall following volatility in the market as a result of a drop of the equity market levels," said Chancay. SRP data shows that monthly structured product sales in 2015 had a downward trend after starting the year strongly, January being the month with highest sales. During the summer is when sales took a hit and did not recover through the end of the year, while issuance began to recover after hitting its nadir in October.
According to SRP data the US market rose by 4.3% to $51.9bn in 2015. Barclays closed the year in fourth place on the leaderboard with a market share of 11%, up from the previous year's 10% market share. While the UK bank's market share only increased by one percent, total sales volume year-on-year increased by almost 16%, rising to $5.66bn at the end of 2015.
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