Innovation of the year, Americas - Barclays Capital

Barclays Capital's Investor Solutions has had a stellar year. The firm's US Investor Solutions business, established in April 2004 to provide innovative structured products and solutions to third-party intermediaries for distribution to retail investors, has gone from strength to strength and made the bank a leading structurer across the Americas.

In fact, with a 23% share of the market, BarCap is now the most prolific issuer of structured products in the US. But this award isn't about recognising sheer numbers. Rather, we are honouring BarCap for one product range in particular. The most compelling evidence of the bank's commitment to innovation can perhaps best be seen in its groundbreaking iPath exchange-traded note (ETN) programme. This was widely lauded as the success story of the US market last year and is now recognised by Structured Products as the innovation of the year across the Americas.

"When we launched iPath ETNs in June 2006, I like to think that we were responsible for a paradigm shift in the US structured products market," says Philippe El-Asmar, head of Barclays Capital's Investor Solutions, Americas. "Simply put, the notes track a reference index, trade on an exchange, offer superior secondary market liquidity and tax efficiency, and boast low fees. This unique combination of qualities has made iPath ETNs a true market success."

The notes, which were first launched on the New York Stock Exchange (NYSE), were designed to provide investors with delta-one exposure to the returns of various difficult-to-access market benchmarks. They are senior unsecured unsubordinated 30-year debt securities.

The first two notes, the iPath GSCI Total Return Index ETN and iPath Dow Jones-AIG Commodity Index Total Return ETN, began trading on the NYSE on June 7, 2006. On August 16, the iPath Goldman Sachs Crude Oil Total Return Index ETN was launched, followed by iPath MSCI India Index ETN on December 20, 2006.

Impressively, the total market capitalisation of the notes on February 26 this year stood at $1.718 billion. The iPath GSCI Total Return Index ETN garnered $203 million, the Dow Jones-AIG Commodity Index Total Return ETN pulled in $1.192 billion, the Goldman Sachs Crude Oil Total Return Index ETN $103 million and MSCI India Index ETN $220 million.

"iPath ETNs are sold without a re-offer discount, which is atypical of the structured products market," El-Asmar explains. "Rather, the ETNs accrue a daily fee and offer a weekly early redemption feature. This is designed to give investors additional comfort regarding the liquidity of their position beyond the liquidity provided by the exchange listing. This feature is also useful to market-makers seeking to exploit pricing differences between the ETNs and the underlying index basket."

As is usual in the US market, the plan to list the notes wasn't without its setbacks. In fact, the programme was reportedly more than a year in the making, with the approval process at the US Securities and Exchange Commission taking considerably longer than expected. Regulators, quite rightfully, want to feel comfortable with new types of product, but in the end, BarCap and the NYSE were able to secure product approval.

The programme's successful debut ultimately brought together three separate divisions in Barclays: Barclays Bank is the issuer, Barclays Capital is the issuer's agent and Barclays Global Investors Services is the promoter of iPath ETNs to intermediaries.

Although the ETNs are effectively simple delta-one products, Barclays should be praised for bringing an idea that was previously alien to US investors to a market which has hitherto resisted buying into innovative structures, instead continuing its love affair with reverse convertibles. What's more, as BarCap continues to offer additional ETNs and explores the opportunities of listing the products on different exchanges, it will be interesting to see if any other institutions choose to replicate the idea themselves.

WHY BARCLAYS CAPITAL WON

The structured products heavyweight has quickly established a commanding presence in the US market. Its iPath ETN programme has become the envy of competitors not just in the US, but worldwide.