The German structured products market took a step forward in terms of transparency on May 1 with the introduction of issuer estimated value (IEV) for all investment products distributed to mass retail customers that require a Produktinformationsblatt (PIB) – the mandatory three-page disclosure summary document required by Bafin, Germany's financial markets regulator.
The disclosure of IEV is a voluntary measure adopted by all members of the Deutscher Derivate Verband (DDV), a national trade association representing issuers that together account for more than 90% of the German structured products market.
This move towards cost transparency forms part of the Fairness Code, which was approved by DDV members in September 2013. The DDV has aimed to stay one step ahead of upcoming regulatory changes, such as those in the revised Markets in Financial Instruments Directive and other European Union initiatives, by pressing forward with self regulation.
Any sense of market solidarity was shortlived, however. There is irritation among some structured products providers that one DDV member – HSBC Trinkaus – decided to go it alone with a commitment to post a daily estimated value figure for its certificates product range.
Rivals point out that this is not what was asked for, since the one-time publication of an IEV at the time a new product is launched is simply designed to reveal to investors the initial margin being taken by the provider. "Some issuers are being quite aggressive about the HSBC move," says one market participant. The concern is that, since HSBC has committed to posting a daily product value, the rest of the industry may be pressured into following suit. Their complaint is that the structured products market is already straining under the weight of new regulation coming out of Brussels, which makes it a bad time to be pressing ahead with additional costly initiatives.
Issuer estimated value is an important step forward for transparency on costs
Most banks' internal IT systems do not currently generate a daily estimated value figure, so it is not just a matter of taking existing data and making it publicly available. For some bank issuers, the move will involve significant IT expenditure.
Not all HSBC's rivals are lining up in opposition, however. "I am neutral on what they are doing," says one. "We are in a competitive market. If one provider wants to do something then they can go ahead and do it, and the others can decide whether to follow."
Düsseldorf-based HSBC Trinkaus is a top 10 structured products house and has put quality of service in both the primary and secondary markets at the heart of its marketing efforts to win customers, saying that greater transparency is the way forward for the market. The bank clearly feels that providing daily estimated product values will give it a competitive advantage and that it has the IT systems to handle the move, providing investors with what it calls real-time PIBs. Even some rivals forecast that it will be standard procedure across the German structured products market in two or three years' time.
In the meantime, however, for other issuers the disclosure of IEV is a one-off calculation to be included in the initial marketing documents, including the PIB.
The PIB typically first sets out the basic characteristics of the product, its tenor, what happens when barriers are hit, and so on. For a partially capital-protected note, for instance, various risk scenarios will be laid out, such as a rising market, a gently falling market, and a big downward movement in which the barrier is breached.
The IEV figure comes in the final section. Investors had grown used to receiving information on commission charges, such as the payment of an additional 2% distribution fee, but they will now see what the bank issuer believes the product is worth and will therefore be able to work out the issuer's margin. As a rule of thumb, a one-year product might have an IEV of 99%, showing a 1% margin for the provider.
Having had a chance to look at their competitors' IEVs since the beginning of May, market participants say there have been no major deviations from the average by any one issuer. Generally speaking, there is widespread acceptance that greater levels of disclosure are inevitable for the industry. "IEV is an important step forward for transparency on costs in the German structured products market," says Wolfgang Gerhardt, head of financial products at Bank Vontobel Europe in Frankfurt.
"However, it is important to note the word 'estimated' in IEV, since each bank is doing its own internal calculation," Gerhardt adds. "The market successfully delivered IEV in time for its introduction on May 1, and in the coming months all market participants will gain more experience with this new initiative."
The week in Risk.net, February 10-16 2017Receive this by email