JP Morgan is not a bank to rest on its laurels. Winning Structured Products' North America house of the year award for another successive year, the firm has consolidated its position as the market leader in investible indexes and structured issuance, and broken new ground as a provider of innovative solutions for fixed index annuity (FIA) underwriters.
Clients praise the firm's inventive flair when it comes to creating new structures. In part, this was borne of necessity, says Larry Wilson, managing director for equity derivatives sales, North America at JP Morgan in New York: the low-volatility, low-rate environment of the past year has made structured products a much harder sell than in the previous year.
"In 2013, rates were low, but you had a decent amount of volatility in the market, and there was a wider dispersion of credits and funding levels on the Street. In 2014, we saw volatility come in and stay at relatively low levels, and a tightening of credit spreads, which made certain trades less attractive. But our ability to match various client types to different parts of our platform has allowed us to be successful in a challenging environment in the retail space, while in the institutional business we've continued to be creative in our risk recycling," he says.
The strategy is working: total structured issuance topped $11 billion across institutional and retail investors in the Americas last year.
In 2014, the bank extended its reach in the wholesale market by adding several new firms and pricing platforms to its stable. This strategic shift followed a decision to diversify away from JP Morgan Asset Management as a key distributor, in line with its overarching strategy for each of its businesses to focus on its own unique strengths.
One size doesn’t fit all. The needs of an RIA client are completely different from a broker-dealer client
One new relationship is CAIS, a fast-growing, multi-issuer financial product platform with which JP Morgan began collaborating in 2014 to service registered investment advisers (RIAs). In an increasingly fragmented market, the bank believes the adoption of a multi-issuer venue, serving as a one-stop shop for advisers, will be a strategy others seek to emulate.
Another is with Canada's Hybrid Financial. With offices in Toronto, Montreal and New York, Hybrid has helped broaden JP Morgan's footprint, says Wilson. He describes them as a "tactical relationship" for selling product into a bespoke network of broker-dealers.
"We need something that is a little more tactical, so we can direct our energies into products and distribution channels we want to focus on in a fluid manner. Hybrid gives us a chance to be successful in those channels," he says.
Such initiatives have helped to propel JP Morgan to take top-three external provider status with every large structured products distributor in the US market, complementing its leading position among private bank distributors.
"We have various distribution strategies for different parts of our platform. It's a fairly unique approach as most issuers generally have one wholesaler they use for their entire platform. But one size doesn't fit all. For example, the needs of an RIA client are completely different from those of a broker-dealer client," says Wilson.
Clients say the bank's pricing has been consistently excellent for short-dated, single-stock structures and principal-protected notes linked to broadly quoted indexes, including Euro Stoxx, S&P 500 and Russell 2000.
"JP Morgan is our gold standard," says Mark Landers, executive director and head of structured products at Morgan Stanley Smith Barney in New York. "We have seven issuers on our platform and we have quarterly evaluation reports, so we can share feedback relating to coverage, understanding client needs, secondary support, back office support and responsiveness, as well as proactive nature. For some time, JP Morgan has been number one in all those categories. They've grown their market share and are the number-one issuer with us at present. Across the board, they receive the highest marks."
Last year saw JP Morgan continue to innovate with its suite of investible indexes. The rise of its cross-asset Efficiente series has been a cornerstone of the bank's success in structured products for years, yet it is far from done innovating.
"One area we've really turned a corner on is putting the investible index content into new delivery vehicles. We were one of the first to put proprietary indexes into traditional, tranche-based, structured product issuance; in particular, in the US notes and certificate-of-deposit (CD) space, where we have over $3 billion invested in the Efficiente family," says Wilson.
Efforts began at the end of 2013 and culminated in the bank making that content available in two exchange-traded funds (ETFs), which launched in October 2014 with Global X Funds, and an agreement with Symetra to put Efficiente into their FIAs.
Greg King, head of product at Global X Funds, says JP Morgan's team were "creative and flexible" in their approach to producing the ETF-wrapped indexes for the Efficiente ETF and US Sector Rotator Index ETF, and the end product was well tailored to clients seeking algo-driven alternatives.
The race into insurance products linked to proprietary indexes was a major theme cited by all candidates for this year's house of the year award. Here, too, JP Morgan is gaining ground: life insurer Symetra launched its Edge Plus and Edge Premier products in March 2015, using the ETF Efficiente 5 index.
JP Morgan also introduced the Balanced Index framework, which uses a mean-variance algorithm to determine allocations between risky and risk-free assets, based on realised volatility. An innovative feature is that funds are only switched into cash when asset portfolios cannot be located with the desired volatility level, meaning a client's money is worked harder than a dollar invested in the standard volatility controlled index. An iteration of this framework was incorporated into a First Trust CD, and witnessed sales of more than $20 million in the second half of 2014.
The bank also installed the Efficiente concept into the First Trust Dorsey Wright Focus 5 ETF - the fastest growing ETF in the US market in 2014 - with more than $1 billion of flows registered in the first nine months alone.
An index strategist at one US-based investment adviser says: "We look at every opportunity and we don't put our name on everything that moves. We need to be comfortable with the index and the methodology, and JP Morgan was very patient with us in taking the steps we needed to be comfortable."
On the institutional side, JP Morgan has also impressed, with asset managers and insurers choosing the firm to provide solutions to a range of problems, from replicating hedge fund allocations via systematic index strategies to offloading the risks associated with variable annuity portfolios. The bank has capitalised on growing dissatisfaction among institutional investors who find their actively managed allocations do not perform as expected. It has maintained a careful balancing act between tailoring algo-driven systematic strategies to individual clients while maintaining the transparency of the underlying allocation mechanics (see institutional structurer of the year award).
Key to the bank's success in this area has been its focused approach to risk recycling. "In the structuring team, we have someone dedicated to looking at our trades and taking a holistic approach towards risk, and finding ways to recycle that - whether it is vega risk, digital risk or correlation risk. Because we have an inventory of options on our strategies, we have the ability to actually risk-recycle the volatility risk of those indexes to, for instance, monetise the difference of implied versus realised volatility," says Julien Chuard, executive director for equity derivatives structuring at JP Morgan in New York.
The bank has also been vigilant on the regulatory front. A particular area of focus has been potential changes to the tax treatment of US structured products under the Hire Act, especially Section 871(m), which could subject products that incorporate dividend-like returns to US withholding tax. The exact publication date of the relevant final regulations is unknown - though a Treasury source tells Risk.net they are expected soon. JP Morgan has been active on the topic, participating with industry groups and on its own with discussions with both the US Treasury and the Internal Revenue Service about the nuances of the structured products issuance market.
"We don't look at regulation as a hurdle; we look at it as a way of doing business. It's our job to be engaged with our regulatory partners to figure out the ways the business will change going forward," says Wilson.
The week on Risk.net, July 7-13, 2018Receive this by email