Regulatory developments in Germany and the US, turnover in Switzerland, and in-house SRP research on products linked to HSCEI and Roche.

The German Federal Financial Supervisory Authority (BaFin) has issued an order to Leonteq Securities (Europe) urging the Swiss structured products specialist to remedy deficiencies in its precautions to prevent money laundering and terrorist financing.

According to BaFin, serious deficiencies were identified, among other things, in the outsourcing of internal security measures, the application of due diligence obligations, and in record-keeping and retention obligations.

There was also regulatory upheaval in the US, where a group of 17 associations asked for an extension to comment on the new fiduciary rules proposed by President Biden.  

On 3 November, the US Department of Labor (DOL) published a 500-page proposal, ‘Retirement Security Rule: Definition of an Investment Advice Fiduciary’, aimed at protecting workers’ retirement savings by updating the regulation defining a fiduciary under the Employee Retirement Income Security Act.

The White House stated that the proposal is designed to crack down on junk fees in retirement investment advice by targeting investment products that are not regulated by the Securities and Exchange Commission (SEC), such as fixed index annuities (FIAs).

Public comments are due on 2 January 2024.

Also in the US, Luma Financial Technologies (Luma) announced a partnership with RetireOne, a US independent platform for fee-based insurance solutions.

Under the partnership, Luma will integrate RetireOne's fiduciary marketplace of commission-free annuity and insurance solutions, to enable non-insurance licensed Registered Investment Advisors (RIAs) to manage annuity products in one place.

Yield enhancement products continue to attract the interest of investors, who know how to use products to their advantage even in the current market environment - Georg von Wattenwyl, SSPA

In Switzerland, the SIX Swiss Exchange reported turnover for structured products reached CHF575m (US$637m) in October – down 4.6% month-on-month, driven by a 28.4% decrease in over-the-counter business. New listings of structured products on the exchange increased by 14.5% compared to September.

The Swiss Structured Products Association (SSPA) also published its industry report, in their case for the third quarter of 2023. According to the trade body – whose data includes listed and non-listed products – turnover of structured products sold in Switzerland amounted to CHF40 billion Q3 2023 – a 26% decrease year-on-year.

Yield enhancement had the largest turnover share, at 55% in Q3 2023, representing CHF22 billion; with foreign exchange as the preferred asset class (50%) and USD as the main currency (41%). Some 87% of turnover in this segment was not listed and 90% was traded in the primary market.

‘Yield enhancement products continue to attract the interest of investors, who know how to use products to their advantage even in the current market environment,’ SSPA chair Georg von Wattenwyl said.

Hang Seng Indexes Company and global benchmark platform Wilshire Indexes entered into a collaboration agreement to develop index-related product offerings for Greater China-based institutional investors.

The partnership is seeking to capitalise on growing demand to expand the product offering with solutions to support issuers of investment products in the region – consisting not only of structured product market but also of fund managers and ETF issuers and other market participants.

Staying in Apac, Hong Kong SAR-based EasyView is focusing on the growing demand from high-net-worth individuals as it aims at Chinese clients within the realm of private wealth.

Unlike many overseas technology providers who entered the Asian market without a deep understanding of Chinese customer needs, the company took a different approach. “We prioritise understanding our Chinese end-clients, particularly the ultra-high-net-worth individuals,” Xiuling He, product owner for structured products solutions at EasyView, told SRP.

In view of the disappointing performance of the Hang Seng China Enterprises Index (HSCEI) in 2023, SRP analysed whether this could leave issuers in South Korea facing potential losses on worst-of autocallable products.

SRP data shows that of the 4,316 products (worth US$14.3 billion) with a knock-in barrier protection, four percent of worst-of structures featuring the HSCEI index have breached their defensive barriers by less than 10% and 27% have breached their barrier by more than 10%.

Most of the products breaching their downside barriers struck in 2021 with a handful of worst-of structures that struck in 2020 also breaching their protection barriers. Autocall structures linked to the HSCEI striking in 2022 and 2023 are all at a safe distance from their barriers.  

“The environment has been relatively slow-paced which tends to give dealers time to hedge their books,” a senior equity derivatives research banker told SRP.

A similar exercise was done for Switzerland, where the performance of the share of Roche has raised concerns in some parts of the market.

Despite some market commentators claiming that ‘Swiss autocalls are 10% away from disaster’, SRP data shows that only two percent of worst-of structures featuring the Roche share have breached their barriers in 2023 by more than 10% and 4.8% have breached their barrier by less than 10%.

Image: Kanpisut/Adobe Stock.