structured products9

Structured Products – Part 4: Structured Products Around the World

(Part of Master Thesis: Kocyigit, Eren, “The Use Of Retail Structured Products And Their Applications In Turkey”, Istanbul Bilgi University, 2010)

In this chapter; the use of retail structured products will be analyzed in different regions like Europe, North America, Latin America and Asia & Pacific. In these analyses more than 1.000.000 products’ data that is dating back to 1995 from over 30 country databases, covering markets in Europe, Asia-Pacific, North America and Latin America is used. All of the data that will be used in this chapter will be collected from the website (www.structuredretailproducts.com). Data that are used in this chapter includes all forms of structured products which are linked to any asset classes and sold to retail investors (‘The European Structured Retail Product Market’ 2009).

4.1. Retail Structured Products in All Regions

In this section Europe, Asia-Pacific, North America and Latin America regions will be compared to each other according to number of products issued and volume of products sold

In the following pages; tables 4.2 & 4.3 and figures 4.1 & 4.2 are presented. In these tables and figures; tranche products represents the products those are available for investment during a limited period only. Continuous products represent the products that don’t have a fixed maturity date and accept investments for an unlimited period. Outstanding products represent the products that are not matured yet.

In these tables and figures; total number of products issued and number of products sold between 1995 and March 2010 is shown. EURm represents millions of Euros.

 

Retail Structured Products Issued across the World

Retail Structured Products Issued across the World

As can be seen from Table 4.2 – Table 4.3 and Figure 4.1 – Figure 4.2;

• European market covers the major portions in number of products issues and volume of products sold in the last 4 years. From 1995 till 2010 March; 1.380.832 products were issued and 1.327.538 products are issued in European market. That means a market share of %96. Also if the volume of products sold is considered; amount of 2.152.921 million euro (EURm) products are bought by the investors in all over the world between 2006 and 2010 March. %68 (1.459.828 EURm) of this total volume has been sold in European Market. Asia-Pacific and North America markets have %2 share, Latin America market has lower than %1 share, when number of products issued are considered. Asia-Pacific market has %17, North America market has %14 and Latin America market has %1 share, when number of products sold are considered.
• For the products issued in Europe, it can be told that; tranche products are the most popular products among the issuers because %73 of products issued in Europe is tranche products that can be traded within certain periods. Remaining part of the products are continuous products that accept investments for an unlimited period. This ratio is about %99 for the rest of the regions. In Asia-Pacific, North America and Latin America regions %99 of total products issued are tranche products.
• For the products sold in Europe, it can be told that; tranche products are the most popular products among the issuers because %92 of products issued in Europe is tranche products. Remaining part of the products are continuous products. This ratio is about %99 for Asia-Pacific and Latin America regions, however %52 for North America region.
• In Europe %23 of total products issued are matured. This ratio is %46 for North America, %45 for Asia & Pacific and %13 for Latin America.
• In Europe %53 of total products sold are matured. This ratio is %77 for North America, %45 for Asia & Pacific and %19 for Latin America.

These tables and figures show that European market is dominating the other structured product markets in both products issued and sold. Existence of organized markets like Scoach can be seen the major reason for this domination especially when number of products is considered. These organized markets allow issuers to structure and introduce new products easily then the markets that are lack of organized markets.

North America and Asia & Pacific regions have close portions in number of products issues and volume of products sold in the last 4 years. Their market share is smaller compared to European region; however, larger than Latin America region.

Especially when North America is compared with Europe, it can be told that most of the investors in North America (especially in US) prefer to invest directly in the assets via stocks or mutual funds instead of structured products in the beginning of 2000s. (‘North America: time for structured products’ 2004) This late adaptation of the retail investors to the structured products lead North America market to fall behind the European Market.

Latin America region has a tiny portion in number of products issues and volume of products sold in the last 4 years. This tiny portion shows that in Latin America region, most of the investors and issuers are not choosing structured products in their product portfolios.

In this section total number of products issued and sold since 1995 are considered while comparisons are being made between the regions. In addition to that; in Appendix B for all the regions; number of products issued and volume of products sold between 2006 and 2010 are shown for different product types and styles.

Because of all the reasons mentioned above rest of the section will deal with European market.

4.2. Retail Structured Products in European Market

In this section number of retail products issued and volume of retail structured sold will be analyzed in terms, underlying asset classes and important issuer countries.

4.2.1. Terms of Retail Structured Products in European Market

In this section terms of structured products in European Market will be considered according to number of products issued and volume of products sold.

Table 4.3 shows the terms of retail structured products in numbers and volumes from 2006 till march 2010 in European market. In this section short term products represent the products that have maturities lower than 2 years, medium term products represent the products that have maturities between 2 and 6 years and long term products represent the products that have maturities higher than 6 years. EURm represents millions of Euros.

Table 4.3: The Terms of Retail Structured Products in Numbers and Volumes from 2006 till March 2010 in European Market.

Number of Products Issued

Total

903.273

%

Short Term (<=2 years)

795.998

88%

Medium Term (>2 and <=6 years)

100.301

11%

Long Term (>6 years)

6.974

1%

Volume of Products Sold (EURm)

Total

825.216

%

Short Term (<=2 years)

189.655

23%

Medium Term (>2 and <=6 years)

415.956

50%

Long Term (>6 years)

219.602

27%

Source: www.structuredretailproducts.com

As can be seen from Table 4.3; when the terms of the products are considered in number of products issued; the products that are issued and have a maturity less than 2 years (short term products) has a share of %88 in total. Medium term products which have a maturity between 2 and 6 years have a share of %11. The products whose maturity is longer than 6 years (long term products) have a share of only %1.

When the terms of the products are considered in volume of products sold; products that are issued and have a maturity less than 2 years (short term products) have a share of %23. Medium term products which have a maturity between 2 and 6 years have a share of %50. The products whose maturity is longer than 6 years (long term products) have a share of %27.

These ratios show, short term maturity products are the most popular ones among the issuers; however medium term products are the most popular ones among the investors. In addition to that; although there are not a lot of long term products in the market, their share is %27 in volume of products sold that’s mostly because they are sold in big volumes.

4.2.2. Underlying Asset Classes of Retail Structured Products in European Market

In this section retail structured products in European Market will be analyzed according to their underlying asset classes. The analysis will be made both in number of products issued and volume of products sold.

Table 4.4 shows total number of products issued and volume products sold according to asset classes between 2006 and March 2010. In these tables for single share; SS, for single index; SI, for share basket; SB and for index basket; IB is used. In the table EURm represents millions of Euros

Table 4.4: Underlying Asset Classes of Retail Structured Products in Europe between 2006 and March 2010

Underlying Asset Class

Number of Products Issued

Volume of

% in

% in

Products Sold (EURm)

Products Issued

Products Sold

Equity (SS)

565.493

179.396

63%

22%

Equity (SI)

240.650

213.826

27%

26%

FX Rate

34.522

16.342

4%

2%

Commodities

28.548

25.037

3%

3%

Equity (SB)

13.770

133.503

2%

16%

Interest Rate

10.085

60.704

1%

7%

Equity (IB)

4.925

99.758

< %1

12%

Hybrid

2.120

42.187

< %1

5%

Fund

1.050

30.251

< %1

4%

Real Estate

810

4.813

< %1

1%

Alternatives

405

3.479

< %1

< %1

Inflation

337

11.311

< %1

1%

Credit

208

1.144

< %1

< %1

Equity (SB),Equity (SI)

139

2.456

< %1

< %1

Equity (SI),Equity (SS)

115

25

< %1

< %1

Others

75

526

< %1

< %1

Equity (IB),Equity (SS)

14

166

< %1

< %1

Equity (IB),Equity (SB)

7

292

< %1

< %1

Total

903.273

825.216

Source: www.structuredretailproducts.com

When the analysis is made following asset classes are used;

  • Equity (Index Basket): Underlying is composed of more than one equity index.
  • Equity (Share Basket): Underlying is composed of shares of more than one company.
  • Equity (Single Index): Underlying is composed of one equity index.
  • Equity (Single Share): Underlying is composed of shares in onecompany.
  • Commodities: Underlying is composed of physical commodities such as energy products, metals or agricultural products.
  • FX Rate: Underlying is composed of foreign exchange rates.
  • Interest Rate: Underlying is composed of one or more interest rates or bond prices/yields.
  • Hybrid: Underlying is a mixture of different asset classes
  • Fund: Underlying is a collective investment scheme called ‘fund’ whereby individuals typically purchase units in a fund that invests in a range of assets on behalf of the unit holders.
  • Inflation: Underlying is composed of inflation rate. In other words; increase in the general price level of goods and services.
  • Real Estate: Underlying is composed of either commercial or residential real estate (property) values/indices.
  • Alternatives: Underlying is composed of non-traditional asset classes such as hedge funds.
  • Credit: Underlying is composed of the risk of default (credit risk) associated to various companies.
  • Others: Underlying is composed of non-traditional asset classes such as sport, temperature, election results, etc…

As can be seen from Table 4.4 when the number of products issued between 2006 and 2010 March is considered; %90 of the products had an underlying asset of a single share or a single index. That means equity linked products especially single share or index linked products were the most popular products among European issuers between 2006 and 2010 March.

If the volume of products sold between 2006 and 2010 March is considered; %78 of the products in the market was equity linked products. These products have an underlying asset in 4 different forms as single index, single share, index basket and share basket. Among these types of assets; single share and single index linked products were the most popular ones among investors.

Equity linked products are followed by FX-linked products, commodity-linked products, interest rate linked products and hybrid-linked products in popularity among both investors and issuers.

4.2.3. Development of Retail Structured Products Issued and Sold in European Market

In this section development of retail structured products will be analyzed in European market both in number of products issued and volume of products sold.

Table 4.5 shows retail structured products issued and sold between 2006 and March 2010 in European market. In the table EURm represents millions of Euros.

2006

2007

2008

2009

2010 till March

Number of Products Issued

88.444

173.821

294.869

272.087

74.052

Volume of Products Sold (EURm)

185.699

234.673

192.910

167.480

44.454

Table 4.5: Retail Structured Products Issued and Sold between 2006 and March 2010 in European Market

As can be seen from Table 4.5; total number of products issued in Europe increased from 88.444 to 173.821 at 2007, from 173.821 to 294.869 at 2008 and reached its highest level in 2008. But After 2008, in 2009 the rise in the number of products issued stopped and a decline is observed from 294.869 to 272.087.

If the volume of products sold is considered; total number of products sold increased from 185.699 to 234.673 at 2007 and reached its highest level. The decline started in the volume of products sold after 2007. In 2008 volume of products sold decreased to 192.910, at 2009 they decreased to 167.480.

Decline was observed in number of products issued after 2008 but in volume of products sold after 2007. For both decline; ‘Credit Crunch Crisis’ can be shown as the major factor because this crisis affected investors’ risk appetite and they started to behave more conservative. Decline in the volume of products sold observed firstly because investors gave earlier response to these crisis then issuers. Summer 2007 can be considered as the beginning of this crisis (Brunnermeier 2009) and within this crisis period retail investors started to be with more caution so they avoid of taking risks and they lowered their structured products demand. That led a decline in volume of products sold just after 2007. However, issuers gave their response to this crisis after 1 year and lowered their issuance after 2008.

2010 March numbers and volumes show that crisis affect in structured products market is about to be end since in 3 months number of products issued reached %25 of their highest level in the history, volume of products sold reached %20 of their highest level in the history.

4.2.4. Important Countries for Retail Structured Products in Europe

According to Arete Consulting Limited3 till 2006, Italy and Spain have traditionally dominated the European league in terms of structured products sales, but other countries (Germany in particular, but also Belgium) have experienced strong growth in the past few years, and have in 2005 gross sales levels comparable to the ones seen in these two countries. As of 2005, the top five European markets (Italy, Belgium, Germany, Spain and France) account for 75% of total gross sales volume across Europe (‘The European Structured Retail Product Market’ 2006).

In order to analyze these countries situation from 1995 to 2010 following table can be examined. Table 4.6 shows total number of products issued and volume of products sold in European countries between 1995 and 2010 March and their market shares according to these volumes and numbers. In the table EURm represents millions of Euros.

Table 4.6: Number of Products Issued and Volume of Products sold in European Countries btw. 1995 and 2010 March

Country

Total Products Issued

Market Share in Products Issued

Total Products Sold – EURm

Market Share in products Sold

Germany

1.063.443

80%

304.720

21%

Switzerland

199.131

15%

108.244

7%

Belgium

22.303

2%

130.394

9%

Italy

8.462

1%

309.314

21%

France

8.427

1%

140.798

10%

UK

6.890

1%

90.396

6%

Spain

4.607

0%

190.855

13%

European Total

1.327.538

1.459.828

Source: www.structuredretailproducts.com

As can be seen from Table 4.6 by 2010 March; Germany have experienced very strong growth and reached first place in volume of products sold and number of products issued. Especially Germany dominates the European League when the number of products is considered with a market share of %80. Germany is followed by Switzerland with a market share of %15. The sum of these 2 countries’ market shares is equal to %95. The reason of that domination is the exchange markets located in these countries. When there are exchange markets, it is easy for the issuers to structure different types of products and quote these products to these exchange markets.

Things are different when the volume of products sold is considered. Germany is sharing the first place with Italy and both countries have a market share of %21. They are followed by 5 more major players in European League, Spain, France, Belgium, Switzerland and UK with the market shares of %13, %10, %9, %7, and % 6 respectively. In volume of products sold these top 7 players have a market share of %87 in total.

Because of the traditionally secretive nature of Swiss banking system, it is hard to estimate definite volume of products sold in Switzerland. Since Switzerland’s two largest banks, UBS and Credit Suisse has huge retail networks and asset management operations in Switzerland, a lot of surveys declared Switzerland is the biggest structured product market in volume of products sold across the world (Yumusak 2007).

4.3. Overview of Market Reviews

In this section the use of retail structured products across the world was analyzed in 4 main regions (Europe, Asia-Pacific, North America and Latin America). Main results that are found in this chapter are;

  • European market is the most active market in products sold and issued
  • Credit Crunch Crisis led a decline in both number of products issued and volume of products sold
  • Tranche products (products that are sold within limited periods) are the most favorite products; equity is the most favorite underlying asset class among European investors and issuers.
  • Germany and Switzerland is the most active countries in products issued in Europe. Germany and Italy is the most active countries in products sold in Europe.