A strong yet volatile equity market in Hong Kong has generated increasing interest in structured products, with HSBC leading the way in distribution and retail services. As well as increasing its sales, the bank maintained its status as Hong Kong's leading distributor.
Average daily turnover in Hong Kong's equity market has risen from HK$34 billion (US$4.4 billion) at the end of June 2006 to HK$66 billion at the end of June 2007. "Traditionally, when the stock market is hot, the interest in structured products is generally weaker," says Bruno Lee, HSBC's Hong Kong-based head of wealth management for the Asia-Pacific region. "But we have seen this year that interest in stock investments in Hong Kong and interest in structured products have been growing rapidly together."
Competition from the equity sector has encouraged retail banks to take a more active role in the development of structured products, assisted by a jump in volatility that has encouraged traditionally equity-minded investors to explore the alternatives.
HSBC's structured products sales increased by 23% from 2005 to reach HK$93.5 billion in 2006. The bank experienced a 26% rise in sales in the first quarter compared with the same period last year. HSBC also saw a 17% increase in the number of tranches launched in the first quarter compared to 2006. HSBC has a 26% share of the Hong Kong structured products market, a 12% lead over nearest competitor Bank of China, according to a survey conducted by Oracle Added Value for the bank.
Lee attributes the bank's success mainly to a restructuring of the Hong Kong team in 2006, with a single investment team now looking after both structured products and unit trusts. "This allows us to be very close in terms of focusing on both traditional unit trust products and structured products," says Lee. "The flow of information lets the team leverage information in stock trading behaviour and on interest in unit trust mutual fund products, allowing us to be more innovative in structured products."
HSBC's flexible launch approach depends on a proprietary system that shares real-time information among product providers, the bank's treasury and structured products teams, and development staff, allowing the bank to shorten the time-to-market for its products. The intranet platform, which has been in place since 2004, is based on HSBC's order pooling system. It supports real-time dissemination of information including updated order size and product launch status. It also allows for the launch of products through a private placement platform to capture market timing. "This is an advantage when time is essential, for example when there are very hot IPOs or big market changes," says Sanna Wong, Hong Kong-based senior manager of investment products at HSBC. Enhancements to the system made over the past year include readjusting launch logistics. "For example, some very exotic structures used to have minimum launch sizes of a million US dollars, but now they are more popular so we are looking into lowering or getting rid of the minimum launch size of those products," says Wong.
At any given time, HSBC has 400 to 500 tranches of structured products available and can launch up to 30 tranches per day. "We can make special offerings if there are sudden market changes," says Wong. The bank has launched private placement hedge funds providing high alpha return with low volatility, and is exploring capital-protected notes linked to hedge funds for less sophisticated investors.
It actively promotes diversification and has launched a number of structured funds on different markets with yield enhancement themes, such as the Invesco Pan European 130/30 Equity Fund, MLIIF Global Enhanced Equity Yield Fund, and MLIIF Global Enhanced Equity Yield Fund.
"At times of market correction or in a highly volatile market, we structure equity-linked products with lower strikes to reduce the chance of conversion at maturity," says Lee.
"Other distributors offer different products at a different time of the month... but we have all offers accessible through our system... letting us meet demands more quickly than other banks," says Lee. HSBC has adopted an open-architecture best-of-breed proposition, carrying both HSBC and third-party products.
In Hong Kong, HSBC works with the Hong Kong University of Science and Technology to develop and analyse their proprietary Know-Your-Client survey, an annual risk-profiling questionnaire validated with a 300-sample test conducted by Oracle.
HSBC's most popular structures are traditional interest-rate and foreign exchange-linked deposits, as well as equity-linked investments such as daily range accruals. On the retail side, the bank is seeing more private placements based on volatility. "Investing in volatility is not as mainstream and is still for more sophisticated clients, but... we are seeing investors in Hong Kong become more and more educated," says Lee.
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