Best in China: Standard Chartered

Standard Chartered has yet again delivered more innovation and developed its product range and sophistication over the past 12 months, breaking new ground by using a trust wrapper and hedging one product with local securities houses, while also bringing to market the first onshore structured product linked to A-shares.

Regulation has been heightened for the sales process but not so much on product development, says Yu Dong Zheng, Shanghai-based product head of China wealth management at Standard Chartered. "As a result, we tend to avoid a lot of non-principal-protected structured notes and concentrate mainly on high-net-worth and private banking investors," he says.

The bank's continued development of structured products in China is reflected in a 27% increase in assets under management between May 2011 and the same time this year. The bank estimates that wealth management in China, based on the number of products investors are holding, will increase by 20% this year. It also notes a rise of 31% in the number of index-linked structured deposits launched in the first half of the year compared to the same period in 2011.

While foreign investment banks remain its main competition, Standard Chartered has encountered more local banks over the past 12 months. "The local banks see that by offering high-yielding deposits they may not be able to maintain their client base, so they are entering [the structured products] market. But they need some time to catch up because their clients are used to high liquidity products and tend not to do anything longer than six months or want to enter volatile markets," says Zheng. "But their entry is generally good for this industry."

UBS and Credit Suisse are the bank's most regular counterparties, though it also works with Barclays, Goldman Sachs and JP Morgan.

Standard Chartered has created a daily range accrual product, but the innovation comes in the form of an extra knock-out event that it embedded in the structure: if all the underlyings fall by more than 15%, early termination occurs. The product is designed for volatile markets and means investors do not end up stuck in the product if markets are poor and instead receive their principal back and get to keep any enhanced yield they have received.

Based on a bullish house view on the Chinese economy, the product is based on three Chinese stocks, the Tracker Fund of Hong Kong, iShares FTSE A50 China Index ETF and the iShares MSCI Taiwan Index Fund. If the underlyings close within 85-112% of their initial price, a coupon of 8.3% per annum is paid.

The bank has sold $30 million equivalent of the product in renminbi, mostly to the high-net-worth and private banking world, though there were also some sales to retail, according to Zheng.

The A-share link was extended more directly in the first product to be launched by foreign banks in China to directly link to A-shares. The 18-month product is based on the China 50 exchange-traded fund, the most liquid underlying in the A-share market.

Standard Chartered worked with UBS Securities, an onshore subsidiary of UBS, and with local securities companies for hedging the risk. "There are a lack of tools for hedging in this market and no International Swaps and Derivatives Association cover in China," says Zheng. "We asked the counterparty to place the maximum payout in a trust in which the investors become the beneficiaries at either a priority or a normal level."

When the product ends, the trust proceeds are split between the investors and the counterparty, depending on how the product has fared. "We sold $10 million equivalent, which is not ideal, but it's a start," says Zheng. There is a capital cost to the counterparty which has to put up the potential 10% coupon payments upfront.

Repeating a range of products created last year that took advantage of the appreciation in the Singapore dollar, the bank enhanced this year's offering with a product that has daily observations and provides greater opportunity to autocall if the shares of the underlying (in this case, Bank of Communications) are greater than 105% of the initial price. Designed for private banking, Standard Chartered sold around $5 million equivalent in the latest tranche, according to Lucia Yuan, a product manager in the bank's Shanghai-based wealth management team.

When autocalled after four months, the product paid a 5.61% coupon, equal to a chunky annual return of 18%. During the life of this tranche, the Singapore dollar appreciated 1.15% against the renminbi. Other underlyings have been offered in different tranches using the same structure, with overall sales at $50 million.

The bank offered a monthly observation and an annualised return of 27% with another Singapore dollar-denominated knockout product. Designed with a shorter tenor, the monthly observation enhanced liquidity. The product, based on the shares of Ping An Insurance, was terminated early in the second month and paid a 4.5% coupon, equivalent to 27% per annum.