On January 22, the European Central Bank unveiled a massive quantitative easing programme amounting to €60 billion ($67 billion) a month. Then on February 25, Germany decided to sell five-year government bonds at negative yields for the first time. Those two events, both of which highlighted the fragility of the economic recovery in Europe, acted as a catalyst to force investors to consider low-volatility equity strategies as an alternative to fixed income.
UBS has been at the forefront of catering to this shift and boosted its activity in Germany over the past year, even though, as a foreign issuer, the bank lacks the captive distribution network of domestic German banks.
The bank has maintained a market share of 8% in public distribution so far this year, according to data from Deutsche Börse's Boega system analysed by Switzerland-based Technolab Informatik. UBS is also the largest foreign issuer of income-generating equity structures such as autocallable express certificates and reverse convertible notes sold to intermediaries, with a market share of 9%. Its position was bolstered by its having transacted a notional value of €636 million in equity-linked products so far in 2015, up from €419 million in 2014.
"UBS is in the top three issuers for us," says a Frankfurt-based wealth management specialist. "The bank's offering is very broad and they are very innovative with their solutions. If there is an opportunity in the market, they contact us and they know what we are able to do with our clients. As soon as we have an exotics request from a client, UBS is normally one of our first points of call for ideas."
Elsewhere, UBS has a market share of roughly 10% in the secondary trading of income certificates on its platforms, offering around 4,000 products and posting a turnover of more than €130 million over the year.
There is a developing theme to shift out of pure equity portfolios into funds with a volatility overlay
The bank has also focused on marketing options strategies in equity portfolios that will enable insurers to lower their capital charges once Solvency II comes into force at the start of 2016. The process began with a series of roadshows to brief both insurance companies and asset managers last year, and UBS boasts a specialist team that concentrates on Solvency II compatible equity structures.
While equities typically amount to no more than 10% of insurers' asset allocation, companies are looking for capital relief wherever they can find it, says Andres Schmitz, head of derivatives distribution for Germany, Austria and the Netherlands at UBS. "There are some quite easy wins in equities. While insurers have focused on optimising fixed-income holdings they are looking at this aspect now, especially if they wish to benefit from lower charges in the transition period. It still makes a difference if you can reduce your capital charge," he says.
UBS has already executed hedges with insurers with a notional value of several billion euros, varying from vanilla put options to more complex hedging solutions such as limited recourse leveraged structures. In one instance, the bank constructed a restrike put option, giving the client the discretion to reset a put in the event of a market rally to avoid higher capital charges. Otherwise, if the put strike price remains at the same level, capital requirements would increase as the underlying asset rallies.
"There is a developing theme to shift out of pure equity portfolios into funds with a volatility overlay. You can reduce your capital holding requirements for the instruments from 39% of the value down to 20%, and that's what we're aiming for," says Schmitz.
In addition to the overlays, UBS has conducted in-depth studies on the use of synthetic equity investments, mainly in long-dated call options. Because of their embedded time value, long-dated call options retain value when subjected to Solvency II stress parameters. However, the fixed strike means the capital charges can increase if the underlying equity rallies significantly. As a result, lock-in features can be included in the option to reduce such charges.
Munich-based insurer WWK Group started equity portfolio optimisation with UBS at the end of 2013 and Michael Stoerzinger, risk manager at the company, remains pleased with the relationship ahead of the new regulatory regime.
"UBS was the most attractive partner for us," said Stoerzinger. "Every month we get a new wave of client payments that needs to be hedged and we are very happy with our deal with UBS and the procedure we use to optimise our positions. We are in direct contact with the bank once each month to update the portfolios."
The week on Risk.net, July 14–20, 2017Receive this by email