The US retail structured product market was built on reverse convertibles and a culture of single-stock equity investments. For structurers, the challenge is to expand the frontiers of this space by pushing new structures and asset classes to investors, and JP Morgan has been successful in both endeavours during the past year. One of the bank's main strengths is its cross-asset platform, which has been a key element in creating a structured products range that offers exposure to all underlyings. "We have very deep derivatives capabilities across asset classes," says Nikki Tippins, managing director in the New York-based structured investments group at JP Morgan. "The structurers sit with the derivatives traders."
The bank's strength across assets has allowed it to import equity exposure into the rates market, says Tippins. As one US distribution partner puts it: "Compared to other providers, the bank has been able to maintain a high level of service across asset classes."
An in-depth knowledge of asset class derivatives has enabled the bank to launch some sophisticated offerings into the market, and has allowed it to issue a hefty 1,500 deals with a notional value of US$8 billion. An example of this sophistication is its autocallable equity-rates hybrid product linked to the S&P 500 and Libor. Kickout was contingent on the index or interest rate being either greater than or equal to its strike level on one of a series of annual observation dates, with a 5.5% coupon in year one, 11% in May of year two, 16.5% in November of year two, and 22% if the product kicks out in May of year three, the final observation date.
Although such hybrids may not seem like the height of sophistication to a European structurer, in a market where reverse convertibles comprise 85% of structured product transactions, and even worst-of products are fairly rare, pushing the boundaries with such structures is vital.
JP Morgan has developed a reputation for launching advanced structures, even for retail investors. "The bank is always thinking outside the box," says one distributor, while another acknowledges that "we have seen some very innovative structures from JP Morgan".
However, it would be wrong to assume that the bank simply unleashes novel structures into the market. One of its most interesting transactions included innovations in the main staple of reverse convertibles. In lieu of the usual single reference stock, in September the bank issued a six-month, worst-of reverse exchangeable note linked to the worst-performing stock in the Dow Jones Industrial Average, which paid a contingent interest rate of 15.25%.
Undoubtedly, the spectrum of investments offered by JP Morgan is one of its most impressive attributes. On top of offering exposure to emerging markets and FX, the bank can also give investors access to proprietary algorithmic underlyings, such as C-Igar, a commodity trading strategy, and yield alpha, an outperformance strategy. It also maintains excellent standards of client service on all fronts. When market volatility led to range notes breaching their barriers, the notes were restructured to make them attractive again, says Tippins.
JP Morgan also works with its 226 distributors, which include private banks, investment advisers, asset managers, and retail brokers, to ensure that education efforts are as rigorous as possible, whether that means developing educational material for end-investors, or building educational websites in partnership with them. The bank's own website features a database of current and previous issues that can be filtered by levels of principal protection, asset class exposure and structure. For advisers, the website offers live online pricing with a dedicated call desk to handle trade execution on the secondary market.
According to distributors, the bank's emphasis on client service has elevated it above the competition. "It definitely understands what we need on the service side, and is very competitive on pricing," says one distribution partner.
Tom Ricketts, chief executive at distributor Incapital, which has partnered with the bank, emphasises its diligence. "In our opinion, JP Morgan has taken the right approach to the market, with more transparency than most other desks, and a very long-term approach in terms of thinking about where the products will be in five years,"he says.
JP Morgan has shown a genuine commitment to developing the market for the long term, leading the way with innovative products and providing a sustained support network for distributors and clients alike. In these formative years for the US market, the bank continues to have a real impact on the development of the structured products space.
The week on Risk.net, December 2–8, 2017Receive this by email