Japan house of the year: UBS

Structured Products Asia Awards 2018

Japanese investors have never been more hungrier for yield amid negative interest rates. UBS has tapped into this appetite, unveiling over the past year a slew of income-generating products that have been lapped up by clients.

Some of the products that lured clients include: an UBS fiduciary issuer note launched as a yen cash alternative for UBS wealth management clients who need to address short-term negative interest rates, and the launch of a quantitative investment strategy with a key Japanese asset manager to target financial institutional investors to meet their income demand.

The Bank of Japan’s negative interest rate policy has pushed investors to boost risk in their quest for yield. Banks, asset managers and insurers have increased investments in foreign junk bonds and hard-to-divest securitised products, while regulators have warned financial institutions to guard against any fallout from US monetary tightening. UBS’s products are less risky and are highly liquid, giving investors the chance to exit their holding quickly in the event of a severe downturn.

A case in point is the fiduciary notes that UBS created, which provide yield to wealth management clients while allowing the bank to securitise the assets in its balance sheet.

“The product is a win-win for all concerned,” says Shunsuke Ayabe, co-head of equity structured solutions for Japan at UBS. “It has been quite successful – not just in Japan but in South-east Asia, too. It is really a unique solution in the current environment.”

The fiduciary notes are issued by UBS Luxembourg, a regulated entity, and offered to investors in Japan and South-east Asia through a special-purpose vehicle. It works as follows: UBS’s wealth management unit needs to help its Japanese clients reduce cash holdings. The huge deposits means the wealth management unit needs to deploy high-quality liquid assets to match assets and liabilities, as prescribed by current regulations. On the other end of the spectrum, UBS has assets on its balance sheet, which, if hived off, will free up capital and provide the funding to expand the core business. Meanwhile, wealth management clients are looking for yield and products that give them returns without ratcheting up the risk profile of their portfolios.

UBS’s financial engineers had a ringside view of these unfolding requirements, which enabled them to design a suitable product in the form of the fiduciary notes. First, the assets are separated from UBS’s balance sheet, and then collateralised against the fiduciary notes. Given the UBS balance sheet is freed up, it pays the note holders a spread that boosts yields.

“For clients, we recommend this product as a more strategic alternative to cash. It looks like cash, but it yields more,” says Ayabe.

UBS relies on the segregated portfolio company (SPC) format to offer an artificial intelligence (AI)-based hedge fund solution to Japanese clients and imports a European bank loan fund, to which UBS provides enhanced liquidity.

“One of the powerful aspects of the platform is the SPC for investors,” says Ayabe. “Working through the SPC, we can broaden the offering of derivatives quoted to Japanese investors.” 

For instance, a Japanese client wanted access to an AI hedge fund but a US firm didn’t have a Japanese platform to deliver the product. UBS opened up an SPC and a managed account enabling the hedge fund to offer the product.

The Swiss bank is also using its quantitative investment strategy – broadly defined as the application of statistical and financial rules to a content-based investment strategy – to solve the yield conundrum of Japanese asset managers.

In the past year, it has closed a few such transactions. Investment banks such as UBS either supply indexes for the strategy or provide access to the entire strategy itself, including commodity curve carry, cross-asset trend following, event arbitrage and credit momentum. 

All of these products have been made possible by the bank’s focus on automation across the region, which enables it to deliver a seamless integration of automated structured products flow. Now UBS’s technology team is attempting to take the next step by collating all the transaction, market and client behaviour data to feed into an algorithm that will enable it not only to react faster to market moves, but also to jump ahead of the curve and offer products before an event. 

“We built a platform that completely automates structured products flow, including term-sheet management and barrier matching. The lifecycle of the trade happens instantaneously, so a price request can be turned around within a day,” says Ayabe.