In the second part of an article about Canada's NBC plans, Isabelle Paquet (pictured), director, global equity derivatives at National Bank Financial Markets, talks about how the NBC equity derivatives business is adjusting its processes to respond to the market shift towards a customised and automated set up, as well as to comply with upcoming regulation, as it continues its build up its offering in the US market.
At a business level, the market has moved towards a more bespoke type of transaction set up and that is also a challenge for NBC as a business, according to Paquet. "The average ticket size has decreased over the last few years with a backdrop of increased issuance with smaller notionals," says Paquet. "Our current products have a CAD$1m minimum notional when in the past we used to issue CAD$5m per ticket. We have to adapt our capacity to respond also to demand for more customised offering."
According to Paquet, this trend is happening in parallel with technology developments and the bank has invested in its systems as suggested with the recent deployment of TickSmith's technology to make sure it complies with all the regulatory requirements (compliance, sales, structuring, trading) around the issuance of products.
"We think developments around infrastructure (platforms) will drive some of the activity in the Canadian market," says Paquet. "This is also is line with our goal of being able to lower the minimum per product we offer."
The interest rates environment is a challenge for NBC and for the wider industry with the ability to provide competitive pricing becoming a key differentiating element. However, NBC's main challenge in the US market is to build awareness about its brand and name in the street with the end investor, according to Paquet.
"Regulation is also a challenge for the industry and for issuers of structured products because the requirements around suitability and compliance are higher," says Paquet. "However, as a responsible issuer you have to invest in training your network of financial advisors and improve your sales processes so that all the disclosures are in the product documentation."
At a product level, says Paquet, NBC has seen "continued demand for auto-callables on US and Canadian indices and stocks, but we also see space for other alternative underlyings such as European and emerging markets underlyings, as well as products linked to exchange-traded funds (ETF's)".
Capital protection remains an important element for the end investor although it is difficult to offer full protection without giving up on the upside, according to Paquet. In terms of wrappers the bank's focus will continue to be on the main two wrappers in the Canadian market, the principal protected note (PPN) and the guaranteed investment certificate (GIC) which is roughly split between 75% invested in GICs and 25% in PPN's.
"PPNs have a secondary market and can be sold at market price, and we see some investors using notes for more opportunistic investments, while the GIC's have to be held until maturity for investors who do not need liquidity," says Paquet. "We have noticed that because of the low interest rates investors are looking to use GIC's and PPN's as an alternative to some of their fixed income positions (bond portion of the portfolio), because they obtain a higher expected return than with fixed income instruments."
Despite the number of upcoming challenges ahead NBC remains committed to the structured products business "because we believe we are offering products that meet the needs of our clients", according to Paquet. "There will be changes in the way we issue and the way we sell but I don't think regulation will make this market unviable," said Paquet.
The Canadian Bank is in a stage of expansion and is looking for opportunities in the structured products market beyond its borders and Europe appears as a suitable destination as the bank's credit rating will surely provide avenues for growth. "NBC doesn't have a public distribution program to issue in Europe but is an area we are looking as we think it is also a potential market for NBC in the near future", says Paquet, adding that the bank has taken advantage of its credit rating and also capitalised on the need from investors for currency hedging. "Most of the demand we get from European investors is for diversification purposes, and we do a significant amount of US dollar and Canadian dollar transactions, and with US and Canadian underlyings, but have also issued products with European underlyings," concludes Paquet.
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