One bank has tried to push through change in the Korean structured products market – Asia’s largest – in the past 12 months, with some success. Natixis’s achievements in the region look all the more remarkable in light of the fact that it was barely on the map until fairly recently.
“From being a nascent player in the market a few years back, Natixis has clearly redefined the structured products landscape,” says a structured products distribution head at a securities house in Seoul. “The team remains at the forefront in generating innovative, bespoke investment solutions across the asset class spectrum.”
The list of innovations Natixis has brought to the Korean structured products market over the past year is a long one. A host of new autocall structures have been rolled out, including one called cobra, designed with the aim of countering bearish markets. The French bank also launched the first index in Korea specifically designed for autocallables.
The cobra autocall was put together for investors who are concerned that the equity rally over the past year has stretched valuations and heightened short-term downside risk. In a year that has already seen a considerable amount of volatility in equity markets, it has obviously been a big hit with investors.
Like a traditional autocall, cobra has two barriers consisting of a downside knock-in put and an upside call option. The upside barrier is not set by reference to the entry point, however, but linked to daily ‘best valley to peak’ (BvP) performance, defined as the daily percentage increase of an index or security from its lowest to highest value.
If the daily observed increase in the price of the underlying index or security is greater or equal to the BvP barrier, the product autocalls. Investors would then see their principal returned, plus a juicy coupon. This feature makes early redemption possible even in a severe market correction, says Nicolas Reille, head of global market sales and financial engineering for Asia at Natixis.
“It is a simple feature that you add to your traditional fixed coupon note that allows you to monetise any rebounds in a market correction environment,” Reille explains. “With this feature, in the case of a crisis, like in 2008, for instance, your probability of being called with a positive return can actually be increased thanks to short rebounds occurring on the way down.”
Natixis says it has stress-tested the cobra data using past market behaviour and is convinced the structure “significantly outperforms” traditional autocall structures. Even in a severe market sell-off, the knockout probability is around 90%, the bank says.
Cobra autocalls are just one example of Natixis’s enduring ability to engineer new structured products to meet investors’ evolving investment requirements. Natixis was also the first investment bank to launch lizard autocallables after the September 2015 China Black Monday stock market crash, which caused millions of dollars of hedging losses in dealers’ Korean structured products books. These autocallables include additional barriers across observation periods and offer investors the prospect of a higher coupon if all conditions are satisfied.
The bank claims that the product now accounts for 20–30% of all the flows in the Korean structured products market.
This year, the equity derivatives team continued to evolve its trademark lizard autocall products with new versions, such as the triple lizard and flash lizard, boasting early redemption features that provide investors with more opportunities to get back both the coupon and the principal. Half a billion dollars had already traded on these structures two months after they were launched, according to Reille.
“We were the first to bring those payoffs to the market, and the lizard in particular has been a major success in Korea,” he says. “Flash lizards and triple lizards are all based around the same idea, but with some enhancements, and we expect to have similar success in the Korean market with these new versions.”
Natixis has done more than innovate around product payoffs over the past year. In September 2017, the bank launched the first ever Korea Exchange (KRX) index specifically for autocallable products, the Kospi3. The index was a key reason Natixis was named structured products house of the year in the Asia Risk Awards 2017.
The Kospi3 offers enhanced yields on autocall products linked to the Kospi 200 equity index. It works by increasing exposure to the Kospi 200 through the use of the F-Kospi 200 index – which tracks the most liquid contracts on this index – to achieve capital efficiency and cost efficiency, and to maximise liquidity.
As of May 8 this year, Natixis had hedged more than $1 billion notional on autocalls linked to the Kospi3 index on more than 2,010 trades. Reille says the majority of the trades have outperformed their benchmark-linked products, with a handful staying in line.
“With Kospi3, we are disrupting the largest equity derivatives market in Asia. It is a major step that could change fundamentally the investors’ exposure and bring it back to its domestic market,” says Reille. “Investors’ experience has been very good. Volumes have been growing and we expect them to grow even more this year.”