Gaining exposure to new markets is a common goal for investors in structured products, but what deters many would-be users from emerging market economies is the degree of currency risk that often accompanies it.
In recent years, onshore Latin American investors have expanded their horizons to take in new underlyings and regions, but many still prefer to take minimal currency risk, says Manuel Meza Piza, managing director, global structured solutions, Latin America, at BBVA Bancomer in Mexico City. The bank has staked its business on being the most responsive house in meeting this rapidly growing demand.
BBVA delivers exposure to instruments that clients want while removing the currency risk by using quanto structures - market shorthand for quantity adjusting - where the underlying is denominated in one currency but the payout is in the local one.
"We have very strong trading desks in Europe, the US and Latin America, and the risks are managed efficiently. In this case, a very strong presence in Latin America as well as in Europe really helps us to manage quanto features, because we have close ties that allow the trader to be very aggressive in their pricing, but also very comfortable with the risk we're taking in these structures," says Meza Piza.
Clients agree BBVA's quanto pricing is consistently among the keenest. One head of investment services at the Mexican private banking arm of a global investment bank says that, against the latter's internal models, BBVA's pricing often stands up as the most competitive.
Our traders can be very aggressive in their pricing, but also very comfortable with the risk we're taking in these structures
"I'm not sure if that comes from their access to onshore funds, being a regional bank, or whether it comes from the options and derivatives themselves, but they provide very good prices most times," he says.
Meza Piza adds that the banks' ability to include quanto features in equity as well as forex products has been popular with clients. A prominent example came in July 2014, when the bank issued a 441.15 million Mexican peso ($33.9 million) structured note, geared towards Mexican investors and offering exposure to US and Asia-Pacific underlyings.
The two-year maturity bond, issued under Mexican subsidiary BBVA Bancomer's local medium-term note programme, offered investors potential returns on a payoff that depends on the relationship between two underlying indexes: the S&P 500 and the Hang Seng China Enterprises Index.
This was also the first structured note to be issued by BBVA Bancomer that included an outperformance quanto structure, linking indexes from different markets and giving investors exposure to various geographies under one instrument.
Quanto structures in local currency also feature in BBVA's Peruvian franchise: 90% of the structured products issued by BBVA in Peru last year were quantoed into the Peruvian nuevo sol and 10% into US dollars.
While clients in Peru focused on short-tenor forex quanto structures in late 2013 and early 2014, these products faded in popularity as volatility in the currency markets at the end of last year and the beginning of 2015 increased. Consequently, equity-linked products have emerged with a larger share of the market.
Peruvian investors tend to be conservative, says Javier Swayne, BBVA's head of structuring in Peru, which the bank seeks to accommodate by offering safeguards such as capital protection and quantos on Peruvian instruments as a matter of course.
Flexible structures are a mainstay of the market in Mexico, where BBVA has a 49% share of the warrants and 43% of the structured notes markets, according to Mexican financial research and analysis company Valmer. One main focus for BBVA in 2014 was its Phoenix equity structures products, for which it launched 13 warrants over the year with a notional of 1.5 billion Mexican pesos ($107 million), using various underlyings linked to single-stock Mexican and US names, as well as broad indexes.
BBVA is currently the only issuer in the country able to offer so-called Phoenix structures, says Jose Bernal Alonso, head of equity structuring in Mexico, with dual barriers - products that come with both a coupon barrier and an autocall barrier.
"We had to work very hard and very closely with the regulators and authorities to develop an adequate vehicle that would admit these payment structures. They already exist in several markets, and demand for them among Mexican clients is strong," says Bernal Alonso.
Clients working in the private banking industry say BBVA is ahead of the local competition for the onshore structured products space. "For their quality of service and their products, they are really far ahead," says Arces Herrera, director at Banco Invex, a private financial group in Mexico City.
The week on Risk.net, July 7-13, 2018Receive this by email