It was admittedly a year of change for the Asian structured products market - in Hong Kong at least. Speakers at Structured Products Asia 2005, held at the Hong Kong Conrad Hotel, pointed out that revenues from derivatives-based investments for 2005 were less impressive than those for 2004.
For some at least the 'downturn' can be explained by a case of oversaturation in a burgeoning market, a fact backed up by some recent research reports. At the end of last year, for example, a Cerulli Associates survey found that fund managers in the region believe they will have to pull out the stops in their creativity to compete with structuring banks. More than 70% of the survey's respondents were concerned about the widespread availability of structured notes.
But delegates on the sidelines of the conference also noted that while reduced revenues and increased competition may be the harsh realities, Hong Kong's market is, in fact, more than healthy, especially compared with other countries in the region. Future innovations also look set to re-ignite market vigour. These sentiments are supported by Cerulli's research, which found that 80% of respondents expect structured notes to replace mutual funds at least partially in the medium term, and that derivatives expertise has become 'essential' to Asian fund management operations.
Unsurprisingly, one area of particular interest at the conference was regulation. Legal challenges to market development may be less fearsome than those in the US, for example (where the National Association of Securities Dealers last year suggested that structured products should only be used by those with access to options trading), but regulatory concerns are ever present, noted Andrew Malcolm, a partner in the capital markets practice of law firm Linklaters in Hong Kong.
Malcolm, in his keynote presentation, upheld the importance of 'plain English' for product documentation in order to ensure regulatory compliance, and engaged the audience in questions of how advertising and prospectus details should fit together without 'dumbing down'.
Chin-Chong Liew, another keynote speaker, backed up this view. Liew, then partner at law firm Allen & Overy in Hong Kong, noted that while prospectuses may be set in stone, a real danger lies in verbal communication of a product's makeup. If the two do not match completely, then there is a chance of a distributor being accused of mis-selling, he said.
Since the conference, Liew has joined Linklaters in Hong Kong to head its Asian derivatives operations, giving the firm even greater experience in over-the-counter derivatives and structured equity, credit and fund-linked products in Asia.
Several speakers on the first day alluded to a survey in which Asia Risk, Structured Products' sister magazine, had sought information from a number of leading distributors in Hong Kong, only to find that any information provided often lacked clarity.
Sonia Leung, associate director in corporate finance at the Securities & Futures Commission (SFC) of Hong Kong, would not, however, comment on suggestions that an SFC taskforce was needed to prevent inadequate selling practices. She also said that Hong Kong's 'Code of Conduct' is working well and that no further checks are required.
Another predictably hot topic at the event was the opportunities provided by China. Although few speakers gave details of their respective company's plans to tap the market, all agreed that the relaxation of China's regulatory barriers is of great interest.
The resumption of warrants trading on the Shanghai Stock Exchange on August 22, 2005 marked the first step in opening up the country's equity derivatives market. The move, coming a decade after warrants were banned due to speculation, followed provisional measures issued on July 18 by the Shanghai and Shenzhen stock exchanges for warrants issues, and a circular from the China Securities Regulatory Commission on August 15 allowing fund managers to buy warrants issued as part of the share reform programme.
Some banks and brokers have jumped at the opportunity to enter the market. At the end of last year, for example, Tullett Prebon opened an interdealer broking operation in Shanghai through a joint venture with Chinese investment company Sitico. The joint venture, Tullett Prebon Sitico, is the first interdealer broker to receive approval from the China Banking Regulatory Commission and it plans to expand to Beijing and subsequently to other cities in China.
Meanwhile, Chinese regulators granted UK bank Barclays a branch licence for its Shanghai office. This allows Barclays, including its investment banking arm, Barclays Capital, to provide money market and foreign exchange services, and advise corporate customers on risk management and debt financing.
Sights on Singapore
But there are other regional opportunities, speakers observed. Due to new privacy laws in Switzerland, Singapore could see an upsurge in its private banking business, said Leslie Phang, head of investments Asia at Commonwealth Private Bank.
Indeed, one Singapore-based institution is leading the pack in terms of innovation, albeit at the retail, or mass affluent, level. OCBC Bank is known throughout Asia as a leading provider of structured products, and with group assets of more than $110 billion, it is Singapore's largest established local bank, sitting alongside competitors United Overseas Bank and Development Bank of Singapore as one of the country's top three structured products distributors.
According to Samuel Lin, OCBC's head of structured products, Singapore's investors prefer short-dated products with capital protection and familiar underlying assets, including foreign exchange, equity indexes, interest rates and commodities. "They also prefer 'interest income' to 'capital growth' and prefer to invest in the local currency. What's more investors are most comfortable with local banks when it comes to structured products," Lin told delegates.
Unlike most distributors in Singapore, OCBC has its own dedicated equity derivatives team and investment banking division and Lin told delegates that the bank is reducing its reliance on external parties to feed its structured products range.
Until recently, only the simpler, equity-linked structures were managed and developed in-house, while more complicated structures were outsourced to other investment banks, Lin said.
But, in keeping with OCBC's drive for innovation, he is keen to design more products in-house, and described to delegates how the bank launched a structured products platform towards the end of 2004, adding resources and staff to develop the platform, which deals in option pricing, modelling and programming.
Although some speakers appeared upbeat about regional opportunities, including Taiwan and Malaysia, the real excitement at the conference came as talk turned to hedge fund structured products.
Cameron Hedger, director of fund linked products at Credit Suisse First Boston (CSFB) in Hong Kong, pointed out that the total assets devoted to hedge funds has continued to grow at a substantial pace, with the result that there is now $1,000 billion under management worldwide. What's more, there is an ever-increasing amount of asset concentration in fund of hedge funds, with around $500 billion in fund of hedge funds in 2005.
More importantly, however, total investment in structured products based on hedge funds, funds of hedge funds and hedge fund indexes is a growth area, particularly in Asia, Hedger told delegates, noting that there is currently around £150 billion globally in these categories. "There is increasing sophistication and market acceptance among distributors and investors in this area," he added.
There has also been an evolution of the underlying assets, Hedger said. Whereas the emergence of structured hedge fund products in 1998 was linked to multi-strategy, multi-manager hedge funds, 2004 saw the emergence of structured products linked to sector-specific portfolios, either index based or at an actively managed level.
Hedger also told delegates that in the future he foresees a growth in structured products linked to single hedge fund managers and the rise of themed portfolios - for example, commodity hedge funds of Asian fund of hedge funds. Hybrid investments, with structured products linked to multi asset baskets in equities, fixed income, commodities and foreign exchange will also prove popular, he said.
Lessons and fun
Predictions aside, a number of talks at the conference centred on real case studies. Vicks Poon, head of investment strategy and strategy and research at the Global Consumer Group at Citibank in Hong Kong, told delegates how the bank's structured products sales force has to undergo a two-month training period before providing services to customers, including modules in investment theory, the advisory process and relationship management.
Internal and external exams ensure employees' competency levels, Poon said, with on-the-spot checks to ensure effective and robust, not to mention legal, sales practices.
Although such talks were no doubt educational, delegates also indulged themselves, enjoying a well-earned rest after two packed days. As with the London conference, Structured Products presented awards to those institutions that stood out from the crowd in structured products innovation (for a full list of awards see Structured Products, November 2005).
And for those delegates who were fed up of capital protection and in need of a more risky gamble, Structured Products rented a box at the superb Happy Valley Racecourse.
I hope that 2006 will prove to be an even greater success for Structured Products Asia - and if readers have any suggestions for conference topics they would like to see, please feel free to contact the Structured Products team.