Structured Products Americas Awards 2016
In many Latin American countries, stifling local regulations are a block on the size of the structured products market, but that is changing in the region's biggest economy, Brazil. And BNP Paribas has been at the forefront of developments there in the past year.
Last year saw major regulatory changes in Brazil, of which BNP Paribas was quick to take advantage. Structured certificates – or certificado de operacoes estruturadas (COEs) – have been around since January 2014, and have similar characteristics as structured notes. But the regulatory developments meant that from October 2015, COEs could be sold through third-party distributors. This has provided easier access to international exposure for local investors.
When it comes to COE business, BNP Paribas is ahead of its rivals, say sources. Issuers and distributors are exploring how they launch and distribute products, and the French bank is helping this market develop, note industry observers.
BNP Paribas began selling COEs linked to international stock indexes, foreign exchange and interest rates through its private bank in Brazil last year, with the bank seeing interest from local distributors.
It is understood to be the only firm to have developed a COE pricing system for local issuers. The French bank has been working since last year on the platform and says it is set to launch soon, but declines to give a precise date.
Pierre-Emmanuel Bouyer, the bank's New York-based Latin America head of structured product sales, says the Brazilian retail market has the potential to develop in the same explosive way as Europe's did 15 years ago.
"The only clients we had [in Europe then] for structured products were asset managers because they could only be sold through funds," he says. "Then when certificates were approved, we saw new clients come in – independent financial advisers, insurance companies, broker-dealers [and] pension funds."
It's not just Brazil, though. Several other Latin American clients also say they have been deepening their relationship with BNP Paribas as a counterparty in recent years. "We traded with BNP Paribas for about 10% of our [structured products] business in 2012; now it's more than 50%," says one. "They are one of the most active and responsive counterparties. Their research is very good, and they are one of our best counterparties in terms of pricing."
In Chile, one highlight was the bank's sale of products linked to German index provider Solactive's European ethical equity index. The index introduced a new theme to the region, says Bouyer, and is at heart a simple structure. It is based on an out-of-the-money vanilla option, so the end-client receives 100% of the index with no cap.
Local groups BCI and Banco Estado distributed the products through their asset management arms, with the former raising $40 million and the latter $11 million. What's more, this was Banco Estado's first return to structured funds in seven years.
BNP Paribas was particularly pleased with these deals, because "it is very difficult to get Latin American clients to diversify the underlyings they buy", says Bouyer.
Last year also saw BNP Paribas score significant wins with products and services already well established in Latin America. A notable example was the multi-asset diversified (Mad) index, a rules-based benchmark that takes long and short positions across asset classes. It rebalances its weightings daily based on momentum-investing principles, with an 8% volatility cap and up to 300% leverage.
"Clients thought it was exactly what they needed in an environment that was difficult to read," says Bouyer.
The bank sold $150 million in Mad-linked deposits, notes and funds to high-net-worth clients in the region last year across Chile, Colombia and Peru. Crucially, it sold the notes in local currency, adding to the structuring complexity. This was the first time BNP Paribas had sold products referencing the index across three countries in the region.
Lima-based CredicorpCapital issued its first product based on the Mad index in March last year and has issued several more since then. Nicolas Echegaray, a senior analyst at the Peruvian bank, says they liked that the benchmark offers 8% volatility for a similar price to other indexes offering 5%. This enables it to achieve relatively higher returns than similar indexes, he says. The Mad index yielded 5.23% in 2015.
Echegaray also appreciates the clear methodology and opportunity to have 300% leverage across all the underlying assets. This makes it "by far the most aggressive" such index he has seen and "the cheapest if you adjust for volatility", he says.