Thailand allows foreign currency structured product issuance

Revision one of several set to boost local market participation

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Bangkok, Thailand

Thailand's Securities and Exchange Commission (SEC) is poised to allow foreign currency structured notes to be offered onshore in Thailand as part of a package of rule revisions that are expected to increase participation from foreign investors and allow for more product innovation, say structured product issuers.

In a notice issued on August 14, the SEC's Capital Market Supervisory Board announced it had approved the streamlining of structured notes regulations to boost flexibility and clarity.

"The revisions include: allowing issuance of structured notes denominated in Thai and foreign currencies; harmonising issuers' types and qualifications, both in public offering (PO) and private placement (PP); removing a minimum 10 million baht of face value in all cases and a minimum redemption value of 80% of principal in case of PP," the regulator said.

Vorapol Socatiyanurak, SEC secretary general tells Asia Risk he hopes the revised rules will boost flexibility and practicality in line with international best practices.

"Allowing denomination of structured notes in foreign currencies will increase flexibility since the principal and/or return of structured notes will be linked to foreign variables, such as foreign equities and foreign indexes but without compromising proper investor protection. As such, the 80% principal protection rule will still apply to structured notes issued/offered to retail investors," he says

While the response from industry has so far been positive, issuers are awaiting the publication of the revised regulations in full for further details.

"It is great for the industry to have more flexible rules. The structured note business in Thailand is still the beginning stage and there is a lot of potential to grow. However, we reserve judgment on this development until the SEC announces the amendment in full," says Nopadon Nimmanpipak, head of equity and derivatives trading at Phatra Securities in Bangkok.

The revised regulations are to come into effect in the fourth quarter of this year with the two key elements being the ability for issuers to issue in foreign currency and the removal of the 80% principal protection requirement, say dealers.

According to Jirasanit Chitprason, vice-president in the derivatives product group at Siam Commercial Bank in Bangkok, the new rules will broaden the client base and allow for more product innovation.

"This came about following requests from issuers to relax the regulations on structured notes. The regulator is trying to broaden the target client base by allowing foreign currency denominated notes and removing the 80% principal protection. This will allow issuers to be more flexible in structuring the notes," he says.

Jenvit Chinkulkitniwat, head of equity derivatives at KGI Securities Thailand in Bangkok, agrees that the 80% protection barrier for private placement notes also limits what issuers can do in terms of payoffs for a structured note.

"With this relaxation we can offer a wider range of products - for example, accumulators," he says.

In 2013, 11.57 billion baht (US$363 million) of structured notes were sold. In 2014, as of the end of July, 10.09 billion baht (US$316 million) notional has already been sold, according to figures provided by Siam Commercial Bank.

However, the majority of notes are sold to high net worth individuals and institutional investors, with equity-linked notes the most common product. High net worth individuals with an investment portfolio of 10 million baht (US$313,000) and above and 20 million baht (US$627,000) for corporates are eligible to invest in structured notes.

Chinkulkitniwat says the issuance of structured notes in foreign currencies will also encourage more foreign investors to use structured notes.

"Currently foreign investors can invest in structured notes, but these are only available in Thai baht. The problem is that it is not easy for them to hedge this as the volatility in Thai baht is high. If they invest in USD it would be a lot easier to hedge," he says.

Yields on equity-linked structured notes are also high relative to other Asian markets, with average yields ranging from 20-50% per annum, making these attractive to foreign and local investors.

"Last month we sold an equity-linked note with a yield of 30% linked to a telecommunications company with a maturity of one month," says Chinkulkitniwat.

The popularity in emerging market and Thai equities among foreign investors will also translate into increased volumes of structured notes, according to Chinkulkitniwat.

"Last year the Thai stock market was popular among foreign investors looking for exposure to emerging markets. So as foreign investors look to equity markets, they may also look to structured notes as well. The participation of foreign investment in the Thai stock market is almost 30%, so I expect the same group of clients looking to invest in the equity market to look at structured notes," he says.

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