🔍
Part 1: 2015 Structured Products Recap & 2016 Outlook | Numerix Video Blog - YouTube
Channel: numerixanalytics
[0]
Jim Jockle (Host): Hi welcome to Numerix Video
Blog, I’m your host Jim Jockle.
[8]
In our continuation of our discussion on 2016,
today we’re going to focus on structured
[13]
products.
[14]
Joining me today is Tim Mortimer, managing
director of FVC, and Keith Styrcula, the Chariman
[18]
of the Structured Products Association, good
afternoon gentlemen.
[22]
Keith Styrcula (Guest): Good to be back here
with you, Jim.
[23]
Jockle: Good afternoon, Tim.
[24]
Tim Mortimer (Guest): Good afternoon, how
are you?
[26]
Jockle: Alright so Tim, let me turn to you
first.
[29]
Let’s talk about 2015.
[31]
So clearly we’ve had a lot of perspective
in terms of the stock market, in terms of
[37]
performance, so of the recent, vintage 2015
structured products, how are things performing?
[42]
Mortimer: Ok, so there’s been quite a bit
of market volatility over this year.
[44]
Both the SMP puts you at 100, Euro stocks
index broadly flat over the year, with quite
[47]
a bit of volatility in the summer.
[51]
The products which are perhaps 2 or 3 years
in length, the picture of that longer period
[60]
has been pretty much upward, so most products
should return something in line with the underlying.
[67]
Certainly no buffers or barriers have been
in danger as far as we could see.
[71]
So even capital risk products will return
to a healthy return.
[75]
Jockle: So that brings up some very interesting
questions.
[78]
Where volatility is seemingly to become the
new norm, from your perspective, what should
[85]
product designers and structurers be thinking
about going into 2016 to handle this new volatility
[91]
in the market place?
[92]
Mortimer: I guess it’s a matter of putting
the right protection in for capital risk products,
[94]
buffers and barriers at specific levels, or
at least the retail products making investors
[97]
aware of the likelihood for capital protection
and it actually doing its job.
[99]
And of course there’s a big difference between
what’s a suitable barrier level, 50, 60%
[108]
per index, compared to what is necessary for
a more volatile stock in order to avoid losses.
[120]
Jockle: So Keith, let me turn to you for a
moment.
[122]
You know, in light of volatility and you know,
and obviously with challenges in project design,
[128]
from your perspective what should individuals
be thinking about?
[132]
And, what is your outlook for the coming year?
[134]
Styrcula: I agree with Tim actually.
[136]
I think that the buffered, enhanced structures
are the way to go.
[139]
We’ve seen quite a bull market over the
last several years, last five years or so.
[145]
There are some indications with the volatility
that markets may be going sideways again this
[149]
time next year.
[150]
So, a product that gives you two times up
side, up to a cap, if the S&P is up 5% next
[156]
year, that instrument will give you a 10%
return, that’s pretty attractive, I think,
[161]
in a sideways market.
[162]
If you’re concerned about a downdraft in
the market, then the buffered enhanced notes
[166]
has 15% first loss protection, the markets
down 20%, the investors only about 5%, I think
[172]
it’s a terrific way of playing the indexes
and maybe a superior way of indexing, generally
[179]
speaking.
[180]
Jockle: Obviously this week, we’ve finally
seen the US move on rates, albeit 25 Bps,
[184]
but at least, you know, it’s starting to
suggest an upward trend.
[189]
For notes investors, you know, what should
individuals be thinking about in terms of
[194]
rates?
[195]
Is it panic, or is it upside?
[196]
Styrcula: Well I think we’re not going to
see another ratcheting up of the rates anytime
[202]
soon.
[203]
I think this was something the market was
anticipating, something that was long overdue,
[207]
I think the Fed was dragged kicking and screaming
into giving the 25 basis points.
[211]
I think it’s going to be probably there
for a little while.
[213]
It’s good news for structured notes because
obviously you have more upside now with higher
[218]
interest rate environment, slightly higher
interest rate environment.
[222]
You’re able to have a little bit more exposure
to the underlying commodity, FX, equities,
[228]
or even rates linked products.
[229]
So there’s some upside there.
[231]
Jockle: So Tim, let me turn to you.
[233]
Europe yet is still in the negative territory.
[235]
There still seems to be continued commitment
to keeping rates kind of where they are, either
[242]
at zero or below.
[245]
Where does this shift in the US net out for
European investors?
[249]
Mortimer: Right, the problem is in the Eurozone,
not very particular to that region and cause
[256]
and basically by the way that the Euro problems
have panned out in the last year to two years
[266]
with the sovereign debt and other issues.
[267]
In the UK sterling’s actually have similar
interest levels to the US of the five years.
[280]
In general with global correlation and everything
it will probably encourage European rates
[282]
to go up, rather than down, but not necessarily
by that much.
[285]
So, I don’t see it having a big impact.
[290]
Jockle: So one other area I’d want to address
and thank you Tim, I’ll start with you.
[295]
Let’s continue our trek around the globe,
let’s look to Asia, a lot of volatility
[300]
in the currency market, we’ve seen the devaluation
of the Yuan and now the IMF has come out saying
[307]
next year that the Yuan will be recognized
as a standard currency.
[314]
Can we start to anticipate the Yuan as underlying
and what impact, if any, will it have with
[320]
other issuers in the regions?
[322]
Mortimer: Right, it’s an interesting question.
[324]
As an underlying, it’s certainly going to
attract some interest.
[329]
Even though it’s got the new IMF, in terms
of liquidity and certain political situations,
[338]
I can’t see it becoming a very popular choice
outside of China right now, either a denominating
[348]
currency or as an underlying.
[351]
Surely, it’ll pick up, but I don’t think
it’ll immediately change the way things
[357]
are going.
[358]
Jockle: Thank you, Tim.
[359]
So now Keith, let me turn back to you here.
[360]
You know obviously, Asia very well established
market for structured products, very well
[363]
defined in Europe, and I want to address some
of the regulatory challenges that have been
[367]
going on in just a minute, but I believe issuance
has continued to grow in the US.
[374]
Are we still at that boon for products in
the US?
[377]
Styrcula: We are not quite over the threshold
where structured investments have had their
[383]
breakthrough moment.
[384]
Where we are, we’ll probably be up between
five to six percent over this time last year
[388]
with the larger issuers in a larger distribution
channels growing the channels a little bit
[394]
more.
[396]
We have a couple of things inhibiting massive
double-digit growth.
[400]
The first of which is the regulatory landscape
in the sense that there is some distributors
[405]
that are still uncertain in terms of where
structured investments are going to fall,
[410]
in terms of whether they’re conservative
investments or something that has some regular
[417]
over burdened with regulatory oversight.
[420]
The other thing is that we do see some consolidation
among some of the distribution channels, so
[425]
this year there were three major private banks
that got absorbed by other banks, it was Credit
[431]
Suisse, Deutsche Bank, and Barclays, all those
private wealth channels have been absorbed
[438]
by other firms.
[439]
So remains to be seen whether they’ll maintain
the notionals that they had in their new motherships.
[444]
Jockle: So the new motherships, to use your
phrase here, Wells, Raymond James, and Stifel…
[450]
Styrcula: Yes, Stifel Nicolaus
[452]
Jockle: So, obviously, big distribution channels
themselves.
[456]
Are you seeing more product coming up for
them or do you think it might be a little
[460]
bit more consolidation of existing product,
yet to a wider distribution platform.
[466]
Styrcula: Remains to be seen but what I think
is interesting is all three of those private
[470]
banks have been absorbed.
[471]
We’re big users of structured investments
for the client’s portfolio, this other value
[476]
and that.
[477]
So sometimes there’s something of a reverse
takeover that when firms and especially financial
[482]
advisors and registered investment advisors
are the customer using these products they’re
[486]
going to have a natural demand among their
client base to be able to access to those
[490]
products.
[491]
So we’ve seen that grows open architecture
and it is a little bit of a wait and see how
[496]
these firms will respond to it probably a
year or two before the verdict is delivered
[500]
on that.
[501]
Jockle: So one of the themes that have been
as long as we’ve been working together with
[507]
the Structured Products Association has been
education.
[510]
You know obviously these firms committed to
the platform, committed in terms of distribution.
[516]
Are they demonstrating leadership in terms
of education of that and how was the SPA and
[522]
others contributing to do that growth of knowledge
[526]
Styrcula: That’s a great question because
it’s the most important thing.
[529]
As they say in real estate, it’s always
location, location, location.
[532]
In our business, we’re always saying education,
education, education, because the more that
[536]
you educate financial advisers, the more you
educate retail investors, high net-worth investors
[541]
on the utility of structured investments it’s
kind of a soft mark way of marking it because
[546]
when they learn how the products perform,
then there creates a demand for those types
[551]
of products.
[552]
So I think a lot of firms have done a great
job in getting out there and having certificate
[557]
programs for their financial advisers so that
gives the regulators a sense of security that
[564]
we are policing ourselves as an industry.
[567]
I think in 2016 you’re going to see some
initiatives that will be widespread, we have
[573]
a model educational platform that we expect
to be rolling out in the second quarter of
[578]
2016, that we think will be fabulous; firms
that don’t have a robust education mechanism,
[583]
and this will fill that void.
Most Recent Videos:
You can go back to the homepage right here: Homepage