Structured products volume is down 20% year to date; broad-based equity indexes in demand

By Emma Trincal

New York, March 16 – Structured products issuance volume was muted last week in the early part of March, a month traditionally among the best, according to data compiled by Prospect News.

Agents sold $169 million in 47 deals, or more than half of the volume seen the previous week, which was already the early start of the month, and as such was not particularly strong with $404 million, according to the data.

For the year so far, volume is down 20% to $7.48 billion from $9.34 billion as of March 11.

Too soon to tell

Sources don’t attribute the trend to the decrease in the number of offerings, although it has fallen by more than 15% to 1,378 from 1,629.

“I don’t put a lot of emphasis on the number of deals,” a sellsider said.

“If volume is high and the number of deals is low, that’s actually very good news.”

Volume however is not high. January was relatively strong, but sales have declined last month.

Two does not make a trend, and March is not over yet.

“I don’t think [this 20% decline] is a trend,” said an industry source.

“We all know how bad January was.”

January was bad for the market overall. Yet volume held on then with $4.68 billion, the data showed.

Some of the factors that have helped volume this year were the pricing of block trades, which have become more common, this industry source said.

The use of broad-based equity indexes and the relative abandon of single-stock underliers have also contributed to growth as those products typically show higher notional, he added.

February

Things began to worsen last month, according to the data, as February’s volume at $2.42 billion declined by half from the previous month. It is likely that volatility began to make retail investors more risk adverse at that point.

While January’s sales were down only 8% from the year before, volume was cut by over a third in February from the year before. Sales amounted to $3.7 billion in February 2015.

The first half of March is not encouraging with $378 million issued as of March 15, nearly two-third less than at the same time a year ago, with $1.07 billion in notional.

“That’s not good. We just had a slow start this year,” said a sellsider.

Uncertainty

“It can be anything. A lot of things are up in the air. Let’s hope for better days ahead.”

What drives uncertainty, he said, was the presidential elections, but more concerning in his view was the regulatory landscape.

“TLAC of course doesn’t help,” he said. He was referring to new capital requirement rules released late last year by the Federal Reserve Board known as “Total Loss-Absorbing Capacity,” which have forced issuers to reevaluate the way they issue notes, including setting up new or amending existing issuing platforms.

“But right now everybody is talking about the Department of Labor’s proposed rules that may hurt efforts into putting structured notes into retirement accounts. It’s not healthy for the industry.”

The Department of Labor proposed fiduciary regulations may have an impact on the industry as they will affect brokers selling proprietary products and illiquid products, according to a bulletin issued in December by law firm Morrison & Foerster.

Range bound

Investors are looking for structures that make money regardless of the direction of the market and within a range, sources said. Absolute return deals as well as trigger digital notes that deliver the fixed return even on the downside as long as the return stays above a strike have been particularly successful.

As usual the action last week revolved around equities with 90% of the volume. More revealing was the prevalence of equity indexes, making for 81% of the total. The 9% market share of single-stocks contrasts with last year’s average of 17%. For the year, this asset class represents less than 6% of the total.

Not one commodity or FX deal was priced last week. Those two asset classes have registered a deep decline, reflecting investors’ aversion for risk and macro-guided trades.

“The commodity portion of the business trailed to virtually zero,” another sellsider said.

For FX deals, investors prefer the flexibility of OTC execution, he noted.

Top offerings

Goldman Sachs’ subsidiary GS Finance issued a pair of twin deals, which topped the list at $25 million each.

GS Finance Corp. issued two different 0% note offerings with a May 11, 2016 maturity linked to the Topix index.

The notes are guaranteed by Goldman Sachs Group, Inc. The issue price was 99.43% of par for one and 99.48% for the other. Investors received at maturity par plus the index return.

The third offering was brought to market by Barclays Bank plc with $14.69 million of 18-month capped leveraged notes linked to a basket of unequally weighted international equity indexes, including the Euro Stoxx 50 index, the FTSE 100, the Topix, the Swiss Market index and the S&P/ASX 200 index. The structure offered three-times leverage on the upside up to a 28.65% cap without downside protection.

The top agent was Goldman Sachs with $69 million of the volume, or 41% of the total, in five deals. It was followed by Barclays and JPMorgan.

“A lot of things are up in the air. Let’s hope for better days ahead.” – A sellsider, commenting on the slow pace of structured products issuance to start the year

“The commodity portion of the business trailed to virtually zero.” – Another sellsider

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