Despite what some might think, a single bank can’t always have the best price, give the best terms on a trade or have the best ideas.
This philosophy underpins UBS’s pivot towards a solutions-orientated structured products business, where it functions as gatekeeper to a host of innovative investment strategies, exposures and execution capabilities – potentially even those offered by other financial institutions.
The approach has found its purest expression through its auction profile swaps (APS) platform. Here, the Swiss bank works with a client to create a basket of investments, ranging across asset classes, to match their goals. The client then enters into a swap with UBS to gain synthetic exposure to this basket.
So far, so ordinary, but what’s unique is what takes place behind the scenes. UBS acts as the client’s sole swap counterparty, but the swap pay-out is not determined by the bank alone. Instead, UBS auctions off the execution of each discrete derivative that makes up the total investment profile to a panel of dealers.
The dealer that offers the best terms for each component is assigned the trade and enters into a back-to-back hedge with UBS, which passes the performance of the swap straight through to the client. The end-investor gets to leverage the execution capabilities of a series of dealers while facing only a single counterparty and maintaining a single trade line item; the external dealers get access to a new business channel; and UBS gets a fee-based revenue stream for handling the auction and administering the swaps.
“Our clients are fully empowered. They will have a view on the banks they would like to participate with, depending on who they perceive as being strong in the different assets that are involved in the auction process. Then we will deal with the operational burden,” says Shane Edwards, global head of structured solutions at UBS in London.
A Japanese asset manager used the APS platform this year to enhance a ¥19.5 billion ($173 million) Japanese government bond fund with an absolute return equity overlay. The Cayman Islands unit trust, which UBS set up for the client, offered a separate share class for the client’s chosen European and US long/short equity exposures. The bank provides the returns to the trust by entering into a swap agreement with it and several other investment banks to execute a competitive monthly auction process to deliver the best price.
There’s so much appetite for yield enhancement, with interest rates negative or zero in parts of the world. If you can offer a low-risk, yield-enhancing solution, clients are very keen to understand itShane Edwards, UBS
Edwards says the ability to tramp down costs related to derivatives transactions through the APS platform has made it an attractive innovation to buy-side clients, as it fits in with their objective to squeeze every drop of additional returns from their portfolios.
“There’s so much appetite for yield enhancement, with interest rates negative or zero in parts of the world. If you can offer a low-risk, yield-enhancing solution, clients are very keen to understand it,” he says.
The APS platform belongs to an outsourcing infrastructure UBS has built out in recent years with one clear objective: to provide clients with a one-stop shop for designing and trading structured investments. Utilising the banks’ platforms, clients can access a wealth of investment ideas, analytical tools, monitoring dashboards and execution services under one roof.
Actively managed certificates
The central component of this infrastructure is the bank’s flagship single-dealer platform, Neo, which structured product investors can use to design and customise actively managed certificates (AMCs). These are single securities with a pay-off linked to a basket of reference assets selected by the investor.
With AMCs, an investor can pick and choose from a huge variety of investment ideas sourced from across the Street and package them all in a single product. Through Neo, the same investor can rebalance their exposures across the selected strategies and monitor the associated transaction reports and valuations, as well as utilise analytic tools to seek out new opportunities.
“We have two AMCs within several existing funds. The certificates are useful for regulatory reasons, as they do not trigger Ucits look-through requirements, so they are easier to incorporate in certain portfolios. Our trading desk is using Neo for allocation purposes and we find it very efficient,” says Tobias Windmeier, senior portfolio manager at Union Investment in Germany.
I have the freedom to select from any investment bank some active strategies, and on top of that they supplied streamlined, standardised methodology for trading the underlying strategiesCo-chief investment officer at a German private bank
UBS’s Edwards says AMCs and Neo have both been designed to remove bureaucratic and operational hurdles from investors, and allow them to launch myriad strategies with minimum hassle. Recently, the bank also rolled out the Actively Managed Portfolio Solutions platform to package up sophisticated risk premia strategies in AMCs. Clients can now build their own portfolio of strategies, sourced from a wide range of dealers, and have UBS bundle the exposure in a single security and take care of the execution, hedging and risk management on their behalf.
A German private bank tapped UBS to provide an AMC linked to more than 30 risk premia strategies drawn from a variety of providers. “The major innovation in that regard was that they have made it available so that a number of different investment banks can supply strategies into the certificate. So I have the freedom to select from any investment bank some active strategies, and on top of that they supplied streamlined, standardised methodology for trading the underlying strategies,” says the co-chief investment officer at the bank.
AMCs aren’t the only investment wrapper the bank has mastered. The bank’s Investment Products and Platforms unit has also leveraged its expertise with fund wrappers, special purpose vehicles, and of course the APS framework, to service clients that want greater control over the underlying exposures.
Winning over clients with the promise of other dealers’ intellectual property may sound counterintuitive, but UBS’s strategic decision to become a solutions provider first has reaped dividends. The APS initiative, for example, is already on track to execute more than $12 billion per annum The bank’s Investment Products and Platforms unit already oversees $19 billion of assets, earning it recurring revenues from ongoing administration and management.
This business model also makes sense from an internal resources standpoint.
We have a strong origination franchise with high net-worth clients, which means we have unique pieces of risk, and may be holding residual pieces of vega on second- and third-tier stock names that other investment banks may not haveShane Edwards, UBS
“In terms of regulatory capital, we are very selective about which businesses we grow. The AMC business, the auctions business, the wrapper businesses are all light from a capital perspective, because we’re talking about transparent instruments that are typically treated well under the capital regimes,” says UBS’s Edwards.
Capital efficiency is maximised through the bank’s sophisticated risk management workflow. UBS largely automates the operation of its burgeoning risk premia business with its Aspire platform, designed to be scalable across asset classes and to cope with exponential growth in volumes.
For the risks associated with retail autocallable products, and to cope with heightened volumes in the bank’s public distribution businesses in Asia and Europe, the bank can call on a range of sophisticated institutional clients to execute risk recycling trades. This year, UBS made some high-profile hires to complement this business – including Vikesh Kotecha from Barclays in Hong Kong and Thibaut Delahaye in Europe from BNP Paribas, who report to Dushyant Chadha, global head of equity derivatives.
“We have a strong origination franchise with high net-worth clients, which means we have unique pieces of risk, and may be holding residual pieces of vega on second- and third-tier stock names that other investment banks may not have. These can be the exact same names that are interesting to hedge funds. We are cognisant of building out that whole ecosystem of different types of clients with different types of needs,” says Edwards.
UBS’s advances in building out its outsourcing platforms have rightly won it plaudits from clients. However, this is only one part of its success story. Long committed to its public distribution business, this year UBS scored several notable firsts that justify its position as a market leader.
Earlier this year the bank achieved its ambition of becoming the largest issuer of exchange-traded notes (ETNs) in the US, taking the crown from long-time leader Barclays, with a 30% market share, reaching up to $7 billion in assets under management, up 19% from 2016 year-end.
This growth has partly been fuelled by the launch of a series of innovative volatility products. In May, UBS became the first issuer to launch ETNs referencing VStoxx futures, granting US investors a new means to go long or short the most widely traded measure of European equity market volatility.
“We were keen to be first. Being short US vol has been a profitable position over the last couple of years, and introducing European vol to this client base allows them to diversify their exposure as well as to trade spread positions between US and European vol, or to gain outright long exposure at these historically low levels,” says Edwards.
Technology has also contributed to the increase in structured note distribution. Edwards credits UBS’s Equity Investor (EQI) straight-through processing platform for streamlining the issuance of standardised structured notes and boosting notionals across all regions. Clients can browse more than 1,000 securities, covering 15 markets through EQI, see quotes and execute trades without having to pick up a phone or open a chat window.
The platform’s ability to handle scale put it in good stead this year. Earlier this year, EQI executed nearly 600 trades on a single day – a record – as clients piled into popular yield-enhancing structured products.
“Volumes picked up this year as clients were knocking out of products, taking those proceeds and reinvesting. We were there to capture those volumes. Had we not invested so much in our platform, I suspect it would have been very hard to cope,” says Edwards.
The week on Risk.net, May 12-18, 2018Receive this by email