Morgan Stanley targets EU expansion with ‘solutions’ approach

Morgan Stanley remains a top five issuer in the US market with more than US$9.5 billion sold to date this year across over 2,000 products. In Asia Pacific, the US bank is also among the top foreign issuers of structured products with almost 900 structures sold in 2021 worth US$3.2 billion. In Europe the bank has lost some ground over the last few years but remains an active player with more than 40,000 products marketed this year, mainly leverage & flow, worth US$800m.

After the appointment of Sam Losada as co-head of the global corporate equity solutions business at the end of 2020, the bank has bolstered its equity capital markets capabilities with the addition of several senior equity derivatives bankers in Europe and Apac.

Sustainability has become a key driver of activity in the structured products market - Clementine Declercq

SRP spoke to Clementine Declercq (pictured), executive director, institutional equity division, who has led the France structured products team since 2015, to discuss Morgan Stanley’s activities and plans as it enters a new expansion phase to increase its structured products footprint in the old continent.

“Morgan Stanley is a leading investment bank in equities and one area on which we have been increasingly focused is the equity derivatives franchise,” says Declerq, who added Belux and Switzerland to her portfolio of responsibilities recently. “[We] also have one of the highest credit ratings in the industry, which shows the strength of our business model and our resilience.”

In the structured products world, the bank is focused on increasing its footprint across markets and regions such as Belgium and Luxembourg.

“While we continue to build up our client offering in these countries, we also aim to be even more active in their respective structured product industries, for example through joining bodies such as Belsipa this year, says Declerq, adding that the goal is to continue developing new ideas and opportunities for the bank’s clients in markets across Europe.

“France is one of our core markets in the region and we have a wide and diverse network of clients. It is one of the few countries in Europe where institutional clients are investing in structured notes for their own account.”

Evolving landscape 

As with any sharp market correction, new opportunities have arisen from the events following the breakout of the Covid pandemic – over the last few years a number of issuers have changed their strategy and moved to de-risk their structured products books, a trend that was accelerated after the market crash of 2020. 

“The market has changed and the competitive landscape is narrowing in certain places,” says Declerq. “[This] is opening opportunities for other players to fill the gap. We believe this can help to build a healthier market with less concentration of risk and better diversification of credit exposure.”

Declerq points at the French market where the long-term autocall business has dominated most of the activity in recent years.

“[This] has brought with it risk to some trading books – and while it can be a healthy business if managed correctly, sudden drops in the market - as we saw last year – can make risk management quite challenging,” she says.

Although some of those players have been able to balance some of their risks through business with institutional clients, Declerq notes that another key trend in the market is the shift towards a reduction in the duration of products so the risk can be recycled faster.

“Traders prefer shorter maturities. The shortening of the investment term is also happening across the board now and as a result, we are seeing activity pick up in shorter maturity products (five to six years),” says Declerq.

Offering 

From a product perspective, the US bank is among a group of issuers at the forefront of development trends in areas such as thematic indices.

“We recently developed several indices including one which tracks leading fintech companies. Other themes and sectors we have captured with our indices include healthcare and technology,” says Declerq.

“Sustainability has become a key driver of activity in the structured products market as well.”

One of Morgan Stanley’s most recent launches in this space is the Solactive ISS ESG Future of Plastic Index which is the result of the work of the equity derivatives unit with the MS Global Sustainable Finance (GSF) team.

The index provides a benchmark comprised of index of companies addressing the plastic waste issue with new practices and solutions. Starting with the Solactive GBS Developed Markets Large & Mid Cap Index universe, the Solactive ISS ESG Future of Plastic Index avoids companies with low liquidity, major environmental, social, or governance (ESG) risks, and companies with ties to products contributing to marine ecosystem degradation, such as microbeads or significant single-use plastic packaging.

The index is constructed by investing in the equally weighted basket of the 50 leaders stocks ranked at the top of a proprietary scoring methodology, and has been deployed across 32 products worth an estimated US$58m marketed in Ireland, Germany & Austria and Sweden.

“This was the first index we launched as part of our Plastic Waste resolution initiative, which was rolled out in 2019,” says Declerq. “Through this initiative, [the bank] has committed to tackling the growing global challenge of plastic waste in the environment.”

According to Declerq, by utilising the capital markets and partnering with its clients and employees, the initiative aims at preventing, reducing and removing 50 million metric tons of plastic waste from entering rivers, oceans, landscapes and landfills by 2030. 

“We also began a collaboration with the National Geographic Society in January 2020, through which we are helping to finance several projects aimed at reducing plastic waste and ocean conservation.”

Beyond autocalls

When it comes to structured products, Morgan Stanley has a solutions oriented approach than having a factory set-up, working closely with its clients to ensure it delivers the best new ideas and alternatives to meet their investment goals.

“One of Morgan Stanley’s key strengths is how interconnected we are - our sales and structuring teams work closely to ensure we are delivering on our clients’ expectations,” says Declerq.

While autocallable structures still dominate the retail landscape across Europe, depending on the market, there are other options that may be of interest to investors.

“Recently we have seen more interest for twin win products from investors seeking protection because they had a view that the market was too high,” concludes Declerq. “The autocallable structure has also evolved to become smarter and you can see different variations and options around barrier levels and coupons which can offer a good investment proposition to the end investor.

“Conversely, the institutional market is slightly different, and you see more tailored bullet structures, without autocallability.”

Year to date

Morgan Stanley has maintained its strong activity in the European structured products market in H1 21 bringing to market 141 non-flow products, according to SRP data.

The bank’s European activities were focused on France (103/US$407m), the UK (23/US$38m), and Italy (8/US$20m). In Germany, Morgan Stanley is a top 10 issuer of leverage products by issuance with more than half a million live products worth US$1.2 billion.

Across Europe, the most dominant underlyings for non-flow structured products issued by Morgan Stanley in H1 21 were TotalEnergies (21/US$64m), the Eurostoxx 50 index (17/US$147m), and the FTSE Custom 100 Synthetic 3.5% Fixed Dividend Index (16/US$21.8m). In the flow & leverage category, the US bank’s issuance is dominated by DAX-linked structures (78,273/US$183m), followed by the DAX/XDAX (24,193/US$55.6m) and Gold (19,362/US$43.3m).

Payoff types deployed by the bank in H1 21 include knock-out/autocalls (132/US$428m), reverse convertible (71/US$169m), protected tracker (61/US$260m), and worst of option (61/US$110m). The most common payoff types among flow & leverage products issued this year is the leverage with stop loss (385,486/US$907m), leverage long with stop loss (76,810/US$149m), and leverage short with stop loss (62,932/US$122m).