Two of SRP’s most popular articles last week took readers on a trip to Switzerland and Russia, respectively.
In Switzerland, the market crash experienced in March saw some US$4.58bn worth of products put at risk. As benchmarks global fell to record lows, a great number of barrier products, for years a staple of the yield enhancement universe of the Swiss structured product market, have seen their protection mechanisms go to zero. According to SRP data, over 10,300 products lost their barrier protection in March. The underlyings responsible for the greatest number of breached barriers were mostly Swiss shares: of these, only LafargeHolcim and Credit Suisse triggered barriers in more than 500 products, as the 10th down the list, Novartis, fell to barrier-breaching levels in 282 products.
For Russia, Daria Plyplina, from the new project initiatives at Otkritie, told SRP that the local legislative environment only started to accommodate structured products a couple of years ago, first via exchange-traded investment bonds with a structured component and capital protection in 2016, and structured bonds without capital protection in 2018.
“There is still a lot to be done irrespective of current market conditions. The products should have a much shorter time-to-market period - be less capital consuming - whereas the legal infrastructure for such types of bonds should be further improved,” she said.
Staying with Russia for a while longer, well-publicised falls to the Brent Crude Oil spot price occurred in the early part of this year due to a dispute between the federation and the other largest oil producer in the world, Saudi Arabia. This was exacerbated by the sudden slowdown in economic and industrial activity caused by the spread of the coronavirus pandemic. The S&P GSCI Brent Crude Index, one of the most widely used benchmarks, has fallen to 46% of its level at the start of 2020, in contrast to the spot price which stands at just 33% of where it was back then. This has impacted the behaviour of a number of structured products.
On a global scale, the Covid-19 outbreak continues wreaking some degree of havoc with financial markets. Most of the focus over the last few days has been on the negative aspects surrounding the increase in hedging costs and the challenges around pricing, the impact of barrier breaches in autocall products and exchange-traded note closures.
This could be a wake-up call for the industry because regulators are going to look into those products more, and how much leverage and exposure is correct for the market.
“Fortunately, the markets were rallying compared to before the pandemic so hopefully a lot of products have moved in-the-money and that would limit the damage,” an investment banker told SRP. “The question is always how well investment banks are managing the risk during the crisis. The events around worst-ofs linked to stocks or indices leaves investment banks short volatility on those products and with events like a pandemic you are going to have implied and realised volatility skyrocketing. That has hurt a number of issuers out there.”
Despite the market turbulence, March has seen record levels of issuance in the US market with products issued at beginning of the month offering completely different terms compared to similar products issued three weeks later.
Source: Stack Exchange
People moves in the structured product space saw the former head of Vontobel Investment Banking, Roger Studer, launch Studer Family Office AG, a company which manages and invests the assets of his family and friends. He is the newly-founded company’s chairman of the board of directors.
Another high profile move saw S&P Global add Dan Draper as CEO of S&P Dow Jones Indices. Draper will replace Alexander Matturri who is retiring after 13 years leading the index business. Draper joins S&P Global from Invesco Distributors, where he served as the company's managing director & global head of exchange-traded funds since 2013.