Digital disruptors: The digitalisation of Asian structured products

Sponsored feature: Leonteq

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The Asian structured products market is undergoing a technological revolution, which promises to smash the orthodox relationships between the buy and sell sides, and overwhelmingly increase the choices available to the end-investor. Leonteq is one firm at the crest of this new wave.

The pace of innovation in the Asian structured products market is advancing at breakneck speed. A number of financial technology providers are leading the surge; their mission to replace the staid structuring and distribution workflows of yesteryear and furnish buy-side institutions with the tools needed to build truly bespoke products and provide services to the region’s investors. 

Leonteq, a fintech and service partner for structured investment providers, titles this mission the ‘digitalisation of asset management’. The end-goal: to provide complete optionality to distribution houses in the structuring, pricing, labelling and documentation of the products they sell to clients. 

This is not a market for the faint-hearted. Competition is fierce and success favours the fleet of foot. “Every three months in this industry, the technical advancement in fintech seems to progress about 10 years,” says Frank Troise, Singapore-based head of digital distribution for Asia at Leonteq. 

“By default, the only way we can stay ahead of the curve is by consistently challenging the current business model, destroying it and creating something new. This is because we need to satiate not only our clients’ current needs, but their needs further down the road”. 

“We need look no further than Kodak [in the photography industry] and the precipitous decline of their business, as an example of what we need to consider, and not do,” he cautions.

The fintech sector’s energy is currently focused on connecting issuers and distributors – collapsing the distance between the structurers who design products in the offices of the region’s big banks and the end-investor.

“The last three years we have heard a lot of people talking about multi-issuer platforms (MIPs) and connectivity between the buy side and sell side,” says the chief executive at another structured products platform provider. “This is a hot topic. There are firms out there competing to become the main hub between the two,” he adds.

Duking it out for dominance in this arena are Contineo, Vontobel, FinIQ and Leonteq – though each has a subtly different business proposition. FinIQ, for instance, has a proprietary platform that onboards issuers and distributors, creating a digital marketplace for the sale of investment products. 

Contineo’s managing director, meanwhile, has described the platform as a ‘messaging hub’ where the buy and sell side can engage in price discovery and information exchange on everything from the sales volumes for particular products to post-trade performance data. 

Leonteq approaches digitalisation differently. Its Partners Platform offers an all-in-one fintech solution to institutions that want to industrialise the structured products value chain – from structuring and pricing, to documentation, issuance, settlement, risk management and distribution. 

Buy-side institutions can simply come onboard and white-label Leonteq’s technology, obtaining the existing intellectual property of Leonteq’s structured products issuance business to optimise their own production lines.

“For us, fintech is not just ‘disruption and/or innovation’, it is fundamentally based on service, process and pricing,” says Troise. “To use a simple analogy, we are giving them our calculator, essentially, and showing firms that there is no great mystery to structured products. In the past, the buy side would have to pay a premium for pricing and product life-cycle information because they didn’t have this calculator,” he adds. 

This open-access business model promises to subvert the established order of big issuers calling the shots and wealth managers being passive vendors of cookie-cutter investments that cannot be moulded to investors’ individual tastes, or scrutinised throughout their life cycles to evaluate performance. 

The chief executive says, “What we hear from our clients is they do not want to be bound to one sell-side company. They want to trade with different providers, they want to compare different providers. The challenge for these clients is not access to pricing engines, which are frequently offered by all the major banks as well as independent vendors, but to market data. The only way to challenge the sell side is for the buy side to have an independent tool, so they can evaluate both primary and secondary market pricing and access statistics across both metrics to assess who is the best provider”.

He adds that the next wave in digitalisation will be focused on ‘event management’, meaning providing services for the monitoring of structured investments throughout their life cycles. 

“The banks are trying to raise their game in this area, but on the other side there are fintech providers offering tools to the buy side so they can have independence in monitoring everything from projected product cashflows to barrier events,” he says.

Leonteq’s Troise says the firm is well-placed to exploit this trend in Asia: “Our tech aims to democratise risk. What does that mean? It is providing access to intellectual property that otherwise would only be available to institutions. It gives the buy side the ability to say to end-investors: ‘I will create an incredibly sophisticated portfolio for you, and I can create that at micro level for you in terms of investment size. You will have a real choice for a change, because before nothing was truly tailored for you’.”

Structured products specialists at the big dealers are keeping a wary eye on the frantic pace of development on these platforms. They also cite a number of roadblocks that stand in the way of a fully digitised industry. 

“This will be a multi-year success story, and it won’t happen overnight,” says the head of structured products for Asia at a European-headquartered bank. “To make these platforms scalable, they need more buy-side participation. That live usage from private banks and wealth managers demonstrates that the vendor has built something that meets client needs – and that’s everything to us,” he adds. 

Without scale, platform providers will struggle to achieve one objective essential to obtaining full digitalisation: the standardisation of structured product definitions. 

“The problem with all existing platforms is they struggle to define structured products in comparable terms. A single-dealer platform, owned by a bank, can use individualised terminology because they only issue their own products. A multi-issuer platform, though, must be able to respond to a specific request-for-quote and provide options from a range of banks that match that request. That is hard when each bank uses a different definition for each product. For a multi-vendor platform, there is a need for shared, precise definitions,” says the chief executive. 

This systemic problem is compounded by the Asian market’s particular quirks. “The difference in Asia compared to other regions is its heterogeneity,” says the structured products head. “It’s a lot more bespoke, you are launching products of smaller sizes with different payoffs to an array of clients with very different needs.” 

Leonteq is alive to this challenge. “It is easy in any business to focus on markets that are easily scalable. That is one of the advantages of the homogeneous nature of the US economy and, for many, the appeal of what China could be in the future. What is challenging is providing the same level of customer satisfaction throughout various markets that are different. But that is what our technology affords us at Leonteq. As we assess each market, we can determine how we can calibrate our systems to that local market,” says Leonteq’s Troise. See graphic: Digital pipeline – Aligned technology and processes

Other aspects of Asia’s market, though, go some way to ameliorate these challenges. Top of the list is a regulatory environment accommodative of platform innovation. 

Troise says: “The Singapore financial regulator [Monetary Authority of Singapore] is a constructive partner of ours in Asia. It is creating a fintech ecosystem conducive to the technological advancements of the market. To have the regulator and central bank of Singapore as a partner has been extraordinary. This gives us the flexibility to test new initiatives in a controlled environment with their oversight and guidance.”

He cites the example of Singapore’s Economic Development Board (EDB) providing incentives to Leonteq to utilise Singapore’s strong base of graduate and undergraduate students in Leonteq’s fintech rollout.

“Singapore’s workforce has always been highly regarded worldwide. Our ability to partner with the EDB in attracting Singapore students to join our team is an exceptional opportunity for us,” Troise says.

The next frontier for structured products platform providers strikes at the very heart of the business: ideation. The head of structured products at the Swiss-headquartered fintech company says this is an area in which financial technology has yet to exert an influence – but tackling it is the natural next step. 

“Idea origination and content is not something that has been tackled in a big way. Perhaps once these platforms scale and optimise their tools for price discovery and trade execution, then their private bank clients can take some time for introspection and start working with them on ways to help clients customise structured investments on the fly. The truth is price discovery and execution are much easier to automate; ideation, on the other hand, is not a low-hanging fruit,” he says. 

Further down the workflow, platform providers hold significant advantages over the sell side. “Banks are bound by legacy systems, whereas the newer fintech platforms are not burdened by these,” says the chief executive. “They are able to create software decoupled from what has gone before, which is more efficient and cheaper to utilise. In the past, margins have been high in the structured products market, so the sell side was not incentivised to invest in marketing tools or distribution platforms. In addition, banks find it harder to build up tech systems over a medium-term horizon as it is in their spirit to focus on the one-year frontier.”

The race to full digitalisation of the structured products market in Asia may still have a way to run, and fintech providers may find some speed bumps along the way. But there is no doubt that firms like Leonteq will reach the finish line sooner rather than later. This will be good for producers and consumers alike. 

“Structured products are historically perceived as something very complicated and mysterious. We are making them ubiquitous and easier to understand. In the US we had a famous comic-book character, Dick Tracy, who had a video watch. Then it was seen as an improbable technological leap. Now look at Apple watches today. The same will be true of structured products, and their use by everyone,” says Troise.

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