It’s been a bright year for the US structured notes and over-the-counter (OTC) hedging businesses at Goldman Sachs (GS).

The banking giant has delivered US$12.5 billion traded notional of its self-issued structured notes registered with the US Securities and Exchange Commission (SEC) in the first nine months of the year following a strong third quarter, SRP data shows.

The figure represents a 1.6x increase year-on-year at the bank and a 11.8% share of the US registered structured note market.

The issuer is estimating around US$140 billion street wide in this space by year-end, according to Nolan Thompson (pictured), vice president, private investor product group at GS.

“We have seen an increase in our business among both notes and OTCs. Given the strong performance of the equity market, many notes were autocalled this year, which is a natural tailwind,” he said.

Behind the growth is an emergence of futures-based indices where GS has seen “a significant amount of demand” year-to-date, which concentrate on the S&P 500 Futures Excess Return Index (SPXFP) due to attractive pricing.

Other versions have recently been traded on its note platform include the Russell 2000 Futures Excess Return Index (RTYFPE), Dow Jones Industrial Average Futures Excess Return Index (DJIAFP) and Nasdaq-100 Futures Excess Return Index (NDXNQER) via leveraged or buffered structures.

From January to September, GS was the most active issuer of SPXFP-linked registered notes at a safe lead with US$473.5m combined notional from 277 products, compared to US$128.6m from 111 products in full year 2023. 

Among the offerings, Thompson pointed to a combination of autocall and participation features, also referred to as ‘catapult’, which have gained popularity in a high risk-free-rates environment.

“What’s interesting about these is that the performance is uncapped if the notes don’t get called,” said Thompson.

The near-immediate hit allows investors to express their bullish view on the SPXFP over a medium term by providing uncapped gains at a five-year or three-year mark.

“Clients are being thoughtful about the timing of new trades with markets near all-time highs,” he added.

As US interest rates start edging lower over the next year, the sales executive expects to see a demand shift from principal-protected notes to capital-at-risk notes and a pickup in structured notes on small- and mid-cap indices in the US.

Thompson has also observed a concentration in the product mix for structured notes compared to pre-Covid-19 pandemic. “Diversification of issuers, payout types and asset classes are top of [our] mind.”

In the smaller broker-dealer and registered investment advisor (RIA) segments, GS is one of  “very few” hedge providers that have capabilities of supporting deals at less than US$1 million with its automation of quoting and execution flow, according to Thompson.

For offshore investors, GS has significantly increased its offerings of credit-linked notes under Regulation S for both emerging and developed market credits.

“We have seen demand from our Latin American clients looking for a yield alternative in principal protected format,” said Thompson.

Goldman Sachs is the winner of Best Hedge Provider and Most Innovative Product at the SRP Americas Awards 2024.  

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