A new trading network will make buying and selling of complex
structured products easier and more transparent.
By Abby Schultz
Wealthy customers of private banks in Asia may end up getting a
better deal on structured products now that six banks have teamed
with a technology firm to create a network for buying and selling
these popular, if complex, securities.
Initially, the network will only affect stocks-related products,
creations like equity-linked notes - a combination of a bond and an
option on a stock that is intended to boost the overall return -
and so-called accumulators, which allow a buyer to benefit if a
stock's price keeps rising. Accumulators, of course, can inflict
severe pain if the bet is wrong. Eventually more complex products
may be added .
The deal that could eventually please your wallet will come
about because the network - a new company called Contineo - will
allow private banks connected to it to get pricing on a given
structured product from several banks at once. That will force the
banks to be ever-more competitive so their products will be
selected.
Moreover, because the network eliminates the need for banks to
set up and maintain structured-product platforms with each of their
private banking clients, it will cost the banks less, savings that
should eventually reach the buyers of these things. The large
number of private banks in the region has forced banks that sell
structured products to create multiple systems to serve all these
customers, and it's forced private banks to create these systems as
well.
"Both sides of the industry, both issuers and buyers, have been
spending a lot of money, effort, time and technology, but at the
back of it all, you have a standard set of products being traded,"
says one derivatives banker who participated in the project. In
announcing the platform to the media earlier this week, Mark Muñoz,
who is heading Contineo, said it offers banks "an easier and lower
cost way to connect to their buy-side clients."
Barclays, BNP Paribas, Goldman Sachs, HSBC, J.P. Morgan and
Societe Generale Corporate & Investment Banking are backing the
new venture along with AG Delta, a technology firm. But the network
is open to any bank that wants to join as well as other technology
firms that have built platforms for pricing and trading structured
notes, including Vontobel's deritrade and Leonteq Securities.
The idea is to have a "neutral and open" messaging network,
which Muñoz says will bring transparency as well as efficiency to
the market. It's the messaging part that he emphasizes, saying "we
want to be the Whatsapp for messaging, in terms of connecting the
buy-side and the sell-side."
Whether it really brings prices down for what the industry
considers to be plain-vanilla equity-linked products that will be
available via Contineo remains to be seen. That market is already
super-competitive, and profit margins are about as thin as you can
get.
"Every bank is issuing these notes, which is why there is little
pricing difference," says Harmen Overdijk, managing partner at
Caidao Wealth, an independent asset manager in Hong Kong that
serves high-net-worth individuals. The real advantage for customers
will be if longer-dated and more complex structures are sold,
Overdijk says.
One reason is there could be more variety in prices for a
complex security. The price, say, of a capital protected note with
a two-year maturity could depend on the credit strength of the bank
selling the note, which is less of an issue when a bank sells a
two-month equity-linked note.
Still, Overdijk says the initiative could help transparency and
pricing in the market for structured products and should be helpful
for private banks.
Muñoz likens the development of a network like Contineo to the
development of electronic platforms for trading stocks and all
kinds of other securities long ago, which often resulted in better
prices for investors. "We've seen this in other asset classes as
they move to an all-electronic network with straight-through
processing capabilities," he says. "This results in improved access
for all investors and a more efficient marketplace with better
price and risk controls."
Private banks are not part of the consortium behind the network,
but several were consulted as it was created and the plan is for
private bankers to be part of an advisory board that will shape how
the network develops, including the products it eventually can
sell.
At first, the platform will only sell stocks-related products,
specifically securities with the wonky names of equity-linked
notes, knock-out equity-linked notes, fixed-coupon notes and daily
range accrual notes as well as accumulators, decumulators and
over-the-counter options. They will not include the dreaded
mini-bonds, products sold by Lehman Brothers that collapsed after
the bank went bankrupt in 2008, and that spurred thousands of
investors to take to the streets in protest.
In fact, Contineo is limiting their distribution to private
banks, which only serve affluent investors, who are presumably more
sophisticated and aware of the risks in some of these products.
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Comments? E-mail us at abby.schultz@barrons.com
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Comments? E-mail us at asiaeditors@barrons.com
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