Latin America's structured products market is undergoing an equity revolution. Historically, investors have favoured fixed-income underlyings and payouts, but political and economic stability has driven down interest rates, causing many fixed-income returns to sour. One consequence has been a charge into equity underlyings by investors seeking an asset class that can provide the profits they need, and Societe Generale Corporate and Investment Banking (SG) has seized this opportunity to carry the torch for equity structuring in the region.
"SG stands apart from its competitors as the principal driver of innovation in the structured equity derivatives market," says Santiago de Velasco, responsible for derivatives investor relations at Mexican distributor Actinver. "Their origination and trade execution is second to none, while their secondary market services are transparent and seamless. SG can be credited with moving the structured equity derivatives market to a new level," he says.
The bank has demonstrated exceptional adroitness across the whole region in the past year and remains unparalleled in terms of equity structuring. SG captured 90% of listed equity-linked structured products issued in Mexico, and has traded with over 90% of active Mexican private banks. It achieved a 70% market share in Chile's highly competitive structured products market and is the only structurer to issue products linked to the local Ipsa index. In Brazil, SG has led the market in providing hedge fund-linked products to family office clients, while it has also made significant moves in countries including Argentina, Columbia, Costa Rica, E- Salvador, Honduras, Panama and Uruguay.
In addition, SG has innovated by designing products using 'intelligent indexes' from SG Index, by offering commodity-linked structured products in copper-producing Chile, and by its ability to provide products not only on local underlyings but also in local currency.
"Of the SG structured product issuances traded in Latin America over 2007, half were denominated in local currencies," says David Armstrong, managing director, equity derivatives, Americas at SG in New York. "This trend reflects a preference for local-oriented products," he says. "And the higher interest rates in Latin America compared to the US and Europe translate into cheaper principal protection and a higher participation rate."
In Mexico, the region's most developed market, SG is reaping the rewards of being able to list its products on the Mexican Bolsa. In 2007, the bank rolled out its largest ever note issuance on the exchange: a two-year Autocall Global Coupon Note for Scotiabank (Mexico). Denominated in local currency and linked to a combination of regional and international indexes, issuance totalled 550 million Mexican pesos (US$51.5 million).
It has taken two years for the pioneering move to bear fruit. The Bolsa required that products be listed on another major exchange to gain a listing in Mexico, so SG also lists its products on the Luxembourg Stock Exchange. "SG is now able to design products in any currency, on any underlying and using any type of payout, subject to approval by the exchanges," says Julien Lascar, director for Latin America structured product sales at SG in New York. "The listing of products on the Bolsa means that SG's offerings are easy and cost-effective to trade, and can be settled in Mexican pesos, which avoids foreign currency hurdles."
Chile's retail market, has a bigger appetite for equity underlyings than other countries in the region and has been subject to a series of firsts by SG. The bank has capitalised on the familiarity of Chilean investors with mutual funds as an investment vehicle, and has been the major structurer in terms of new ideas and closing deals. Currently, 75% of mutual funds operating in Chile have SG options in their financing and hedging structures. The first guaranteed fund by Scotiabank was launched linked to a basket of eight equally weighted stocks with a notional amount of US$20 million.
The bank further demonstrated its prowess in Chile when it became the first bank to quote and sell products structured on the local Ipsa index. Nominal traded in 2007 was between US$25 million and US$30 million, all denominated in local Chilean pesos. SG continues to hold 100% market share on options linked to the Ipsa. Last year, a principal-protected fund launched by BBVA Chile was linked to the index.
Another example of SG's commitment to the Latin American market can is the key educational component of its structuring platform. The bank issues a monthly newsletter dedicated to the region's markets. The SG Structured Products Newsletter has proven a valuable educational tool, keeping investors appraised on developments in the industry and providing detailed explanations of new and innovative structures.
The week on Risk.net, December 2–8, 2017Receive this by email