Themes that hit the headlines this week included product structuring and ESG, a boost in annuity sales, and the strength of ETF trading volumes.

The European market for structured products faces a new challenge in the wake of the new ESG regulation. The implementation of the EU Taxonomy Regulation in the upcoming years will make more data available to market participants about the sustainability of major companies in the EU. Moreover, a new EU Green Bond framework will create a gold standard for issuances with a specific environmental use of proceeds, according to the law firm.

“There's uncertainty as to what regulators think about how ESG products should be structured, as well as investor preferences and certain sustainability aspects,” said Patrick Scholl, partner and head of Mayer Brown's Banking & Finance practice in Germany. “A few weeks ago, the market seemed to have a clear view about nuclear power, coal and gas, and now we’re wondering how ESG will look if the military and defence industry becomes more important for the Western world.”

The key to launching a successful dispersion trade is to have a strong investment theme,” Alice Tan, Maybank Singapore

Staying in the thematic sphere, investor demand for products offering a balance of protection and growth dominate in 2021. Increased market volatility and growing inflation drove total US annuity sales to the highest levels since 2008, and the third highest recorded in history, according to results from the Secure Retirement Institute (SRI) US Individual Annuity Sales Survey.

Total annuity sales were US$254.6 billion in 2021, up 16% from 2020. In the fourth quarter, annuity sales were US$62.8 billion, seven percent higher than in Q4 2020. The fourth quarter registered index-linked annuity (Rila) sales, at US$10.3 billion, 22% higher than prior year. In 2021, Rila sales were US$38.7 billion, 61% higher than in 2020.

The largest Malaysian bank by assets has distributed multiple tranches of dispersion warrants for its private clients in Singapore. These ‘provide route to markets for investors on the Russian-Ukrainian conflict’. Having seen great interest in market-neutral strategies, Maybank Singapore first launched the dispersion warrants earlier this year, with a one-year tenor.

“The key to launching a successful dispersion trade is to have a strong investment theme,” Alice Tan, head of private wealth and head of products and investment solutions at Maybank Singapore, told SRP. “We have launched baskets along the lines of energy versus consumer staples and European financials versus European consumers.

“Normally a basket of 10 underlying assets should be sufficient to command attractive pricing,” she said without disclosing the traded notional and stock names.  

Korean investors increasingly opted for riskier products in 2021 as capital-protected structures lost almost 10% in market share. Capital-at-risk products claimed 61.3% of the South Korean market in 2021, an increase of nine percent year-on-year (YoY). Some KRW54.2 trillion (US$47.5 billion) was invested in 16,430 structured products that put full capital at risk between 1 January and 31 December 2021, up from KRW48.7 trillion (from 14,733 products) the previous year. Average sales volumes, at KRW3.3 billion, remained level.

Financial products and service providers and growing numbers of institutional and retail investors are using different listed wrappers to take advantage of their tradability, overall transparency, and low ownership cost. Depending on the jurisdiction, listed products may also be benefit from tax advantages.

ETFs have been the main driver of activity and volumes within the broader ETP universe as measured by flows, but the listed structured products market - known as the flow & leverage market, has spurred a wave of slice and dice innovation triggering significant underlying asset growth. Investors now have an ever-increasing choice of exposures to accommodate virtually all types of desired allocations in their investment portfolios via structured warrants, daily leverage and turbo certificates, as well as callable bull/bear contracts (CBBC) or leveraged/inverse notes.

Over the course of the last decade, exchange-traded products (ETPs) have witnessed a spectacular growth, breaching US$7 trillion in assets under management (AuM) at the end of 2020. Research firm ETFGI reported recently that ETFs and ETPs listed globally gathered a record US$1.14 trillion in net inflows in the first eleven months of 2021.

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