| Treasury: Ireland follows European innovation in structured products |
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| Following the lead set by the European structured products market, the market in Ireland has grown significantly in the last five years, with the market size now estimated to be approximately €2.5 billion. The most advanced markets for structured investment products in Europe are in France, Spain, Italy, Scandinavia & Switzerland, and Joann Hosey says that future development in the Irish and the UK market will closely follow their European counterparts. |
In Ireland there are a number of key players in the structured products market. These include the main Irish banks, stockbrokers, wealth management companies and life insurance companies who typically, ‘wrap’ the structured products in either a bank deposit or a life insurance policy, although other wrappers are available, e.g. notes. The market for structured products in Ireland has grown significantly in the last five years, and the market size in Ireland is estimated to be approximately €2.5 billion.
Recent market developments have included a move to more diverse underlyings & sophisticated structures following on from developments in mainland Europe. There has also been a need to develop more creative structures that take advantage of current low volatility & work well in the current low interest rate environment. | | 'The Italian market is the largest in Europe in terms of product issuance, and it is dominated by income products'. |
The structured business team in Bank of Ireland Global Markets, headed up by Brian Vaughan, has carried out a review of the structured products market in Europe recently. They believe that future development in the Irish and the UK market will closely follow their European counterparts and have looked to Europe for new ideas.
The most advanced markets for structured investment products in Europe are in France, Spain, Italy, Scandinavia & Switzerland. Ireland along with nations such as Germany, Austria and the Benelux countries are all gaining in sophistication in structured products. Switzerland continues to dominate the private banking arena with very diverse & tailored solutions. Unchanged however is the distribution of structured products which has remained retail network driven in most countries.
Innovation continues to be the name of the game. The successful players in these markets structure products with consideration being given to local tax & regulatory issues. Making the first move is important but typically good products will be replicated by competitors at a later stage.
The main developments in the European market are summarised below.
France
• There is a preference for growth products and long term structures (even out to 15 years)
• A significant change in structured payoffs has taken place - CPPI structures are popular
• Capital protection remains important
• The cancelable & callable features have become widespread
• There is little interest in emerging markets
• There is an emergence of unit trust linked capital guaranteed products
• CPPI is being enhanced using lock-ins
Italy
• The Italian market is the largest in Europe in terms of product issuance
• There is a large proportion of index linked products
• The Italian market is dominated by income products
• There is an increasing demand for payoffs that are linked to baskets of indices
• Products linked to mutual funds accounted for up to 50 per cent of the overall structured Italian retail market in 2003
• The market is seeing the comeback of more vanilla options
• Italian banks should expect the hybrid structure to be popular in 2005
• The regulatory environment is becoming increasingly restrictive
Scandinavia
• A tough interest rate environment is the best way to describe the Scandinavian market, especially in Norway where there has been a fall in interest rates from 7 per cent in 2002 to 2 per cent today
• It has seen a notable move towards hybrids, interest rates and hedge funds
• The structured products market operates in a tough regulatory environment.
• Growth products are popular and the tendency for minimum returns has disappeared
• All the successful players have strong retail recognition and tend to focus on re-issuance
• Future trends are towards emerging markets, commodity underlyings and shorter-term structures
Iberia
• The Iberian market is becoming increasingly growth orientated, and due to changes in Spanish law has become a more favorable tax and regulatory environment for structured products
• Shorter maturities dominate and full capital protection is always offered
• Diversified stock baskets and index baskets are commonly used
• Large issues on the same tranche are common
• Callables and actively managed fund underlyings are common
Switzerland
• The Swiss structured products market is dominated by the private banking sector.
• Equity-linked structures, tailored to specific requirements of private investors, are common
• There is a broader range of more innovative products available, compared to the traditional retail sector, and competition among private banks is intensifying
• structured products are viewed as an alternative to direct investment in equity markets
• There has been a switch from simple growth products to higher-margin payoffs such as bonus coupons
• Partially protected structures are becoming more prevalent on a diverse range of underlyings with both callable and cancelable features
• Interest rate products such as snowballs and step-up callable range accrual notes are meeting good demand
• There is a trend towards Fund of Hedge Funds, principally via CPPI, with Targeted redemption features embedded
• Hybrid structures and increased exposure to emerging markets, especially China continues to develop. |
Joann Hosey is a principal dealer on the global structured business team in Bank of Ireland Global Markets.
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| Article appeared in the May 2005 issue.
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