Stuck on structures

Chris Jeffery

Falling Asian equity markets have made life difficult for structured product providers that can no longer keep churning out accumulator structures to make incremental profits. And that's made life interesting for more innovative and exotic structured product providers.

While some investors have simply parked their money in cash until the markets bottom out, others are seeking structures that can match their higher-yield expectations - albeit that many want products with capital-protection features. Such developments should result in a more balanced structured products landscape. But life is rarely so simple.

Several structured product manufacturers say they are struggling to push their products through distributors - namely, private banks - to end investors. In part, this is due to the perception that private bankers in the region lack the prerequisite skills to offer balanced portfolio management advice and fail to understand more complex structures that often contain embedded exotic derivatives.

Investment bankers say their counterparts at private banks have become weaned on easy profits for many years by selling accumulator products that knock out every few months. As a result they are grappling to understand new instruments being offered by manufacturers. And some dealers believe private bankers in the region need further training rather than tenuous connections to local tycoons.

Manufacturers also complain that some private banks shut them out. The area is a tricky one. Some private banks operate an 'open architecture' - meaning they accept products from all providers. Others adopt a more 'closed' approach, where they tend to source products in-house. Most lie somewhere between the two.

Arguments over open and closed architecture have flared up before. The proponents of the open approach question how it is possible to give clients the best products and prices without being open to business from all. Those that prefer a more closed approach cite strong inter-company relationships, access to free research and full understanding of product combined with almost guaranteed secondary pricing as key benefits to being closed. They add that clients often have more than one private banking account.

But what appears evident is that private banks in Asia are taking a more closed approach compared with their peers in Europe, and the current volatility in the markets looks to have exacerbated this trend.

- Christopher Jeffery.

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