Spain was less prepared than some European financial markets for the impact of an extended period of rock-bottom interest rates. Yields on five-year Spanish government bonds at the start of 2015 were less than half of those seen a year earlier, and this squeeze filtered through to banks' funding rates, reducing the amount Spanish investors could earn in risk-free deposits.
Interest in structured products has surged in response, as retail investors cast about for the high returns to which they had become accustomed. Commerzbank has led the charge in structuring a range of products that deliver yield in this challenging environment.
"With funding levels very low, what we have started doing is looking at new payoffs and new underlyings that can satisfy clients' hunger for yield," says Sergio Contreras, head of equity derivatives and commodity sales for Iberia at Commerzbank. "In terms of payoffs, we have a structuring team taking care of new ideas that could be attractive to investors of different risk profiles. On the other side of the structuring team we have people innovating in terms of underlyings," he adds.
In Spain, Commerzbank's operations are conducted jointly by its financial institutions marketing team and exchange-traded products distribution team. The former has established itself over the years as a leading provider of structured products in the region across equities, commodities and funds, while the latter has developed more than 2,700 products, including warrants, turbo warrants, mini futures, bonus warrants and reverse convertibles.
This diverse offering is supported by a highly responsive trading team, which has won the support of the bank's clients. "Commerzbank offers good, competitive price levels in Spanish names and they give us very quick access, which we need in order to close deals," says Belen Rodriguez, director of distribution at Bankinter in Madrid.
In terms of payoffs, we have a structuring team taking care of new ideas that could be attractive to investors of different risk profiles
On the structuring side, Commerzbank worked in tandem with Standard & Poor's this year to create an index that addresses the low interest rate environment and the need for local underlyings in retail issues. The index combines Spanish, Portuguese and Italian stocks, selected using a realised volatility filter that limits the implied volatility in a call option, thereby reducing its premium. The resulting call options are offered to investors embedded in a note format, providing southern Europe equity market exposure alongside full capital protection.
"We've seen a lot of focus on low-volatility underlyings, as in shaky equity markets these perform better than their higher-volatility counterparts. Plus these low-volatility indexes are potentially easier for clients to understand, and may provide the higher yields they are looking for," says Cristina Scarpellini, equity derivatives and commodity sales for Iberia at Commerzbank.
In this search for new sources of yield, clients have alighted upon emerging market opportunities, in addition to value investments with a background in ethical and social responsibility. In response, Commerzbank recently created a Risk Premium Index with MSCI, which goes long exposure to equities exhibiting four risk premium factors - yield, momentum, size and value - while going short the benchmark to provide smart beta exposure. The returns on this index are offered to investors through a variety of delta one wrappers.
"We chose these four factors because they exhibit low pairwise correlation. This can help address another problem investors have wrestled with recently, which is achieving diversification," says Scarpellini.
On the exchange-traded products front, a major development has been the success of the Renta 4 Directo/ICOM trading platform, launched five years ago by Commerzbank and Renta 4, a leading online broker in Spain. In 2014, Renta 4 figured among the top five brokers for market share in Spanish warrants trading, accounting for 9% of total Spanish turnover across the products covered, says Commerzbank.
The Renta 4 Directo/ICOM platform enables Commerzbank to issue new products on a daily basis, which clients can trade during extended trading hours from 9am until 10pm. Turnover has increased, particularly in capped and bonus certificates, where Commerzbank has made 500 products available, making it the biggest provider of bonus certificates in the country. Implementation of the platform also led to the improvement of the bank's offering of turbo certificates, broadening the range of stocks, indexes and euro/dollar products used as underlyings.
"As of September 30, 70% of Renta 4 trades are with Commerzbank and 74% of those are through Renta 4 Directo/ICOM. In cashflow terms, 54% of Renta 4 volumes are with Commerzbank. It is the leader for Renta 4 clients and provides better prices in several products in relation to other issuers," says Israel Pozas Alameda, head of warrants at Renta 4.