With renewed market demand, new distribution channels quickly emerging

By Emma Trincal

New York, March 9 - The renewed health of the structured products industry after the Lehman Brothers debacle may best be seen in the emergence of new distribution channels, said Keith Styrcula, chairman of the Structured Products Association.

"New distribution channels are coming up with mutual funds, insurance companies and [registered investment advisers]," Styrcula said.

He was speaking Tuesday during a webinar on the current state of the global structured products markets that was organized by Numerix, an independent analytics provider for derivatives and structured products.

RIAs, mutual funds

"The RIA community is based on hordes of people leaving the bulge-bracket banks and setting up independent shops. They are very versed in structured products," said Styrcula. "This is an enormous opportunity because those are the types of intermediaries not driven by the commission but by the need to deliver the best product. It's a great group to have in the structured products industry."

Mutual funds are increasingly paying attention to structured products as well, said Styrcula.

"We're seeing an enhanced interest on the part of wholesalers at mutual funds to add on structured products to their offering. They're looking at exchange-traded notes in particular. I see ETNs expanding dramatically in the next two to three years," Styrcula said.

Insurers want in

Finally, Styrcula said that his organization is receiving many inquiries from insurance companies interested in exploring structured products as a way to manage their risks off balance sheet.

Joe Burris, head of Americas at StructuredRetailProducts.com and another speaker during the webinar, said that insurance companies in Europe have had a presence in the retail structured products market for a long time now, distributing products through their own channels and their own brands of broker-dealers.

"In Europe, insurances do a lot more structured products business than they do in the U.S." said Burris. "But we're seeing very large names in the U.S. beginning to evaluate structured products and to do the same work."

External salesforce

Stressing the growing importance of independent distribution, Styrcula noted that some of the top global agents are able to sell on a large scale simply by "reaching outside the major distribution channels."

He cited Barclays and HSBC.

"They have no proprietary distribution network, but they're able to put together a $150 million deal and get a great penetration," said Styrcula.

"Barclays and HSBC have good, well-priced products. They're breaking through and hitting the independent distribution."

Going solo

Another factor that has recently strengthened independent distribution has been the consolidation of sellside firms, added the chairman of the SPA.

"Because of the massive consolidation, you're seeing highly talented people squeezed out of the banks and starting their own boutique, using their expertise either in structured products or exchange-traded funds. They will create new types of structured investments," said Styrcula.

Global outlook

Regarding issuance, Burris said that growth was flat last year. He estimated global assets under management at $1.6 trillion, with the Americas representing 35% of it.

The Americas include the United States, Canada and Latin America.

Gross sales globally will rise by 9% to $400 billion this year, Burris predicted.

He said that the Americas, Asia-Pacific and Europe will see sales grow by 14%, 9% and 8%, respectively, this year.

Regulatory landscape

On the regulatory front, Styrcula said that the Financial Industry Regulatory Authority has so far mainly focused on principal-protected products and reverse convertible notes, referring to two recent regulatory notices issued by the U.S. regulator on those products.

"For principal-protected products, it's a little bit of a surprise since it's one of the most conservative products. But Finra is looking at the fact that the products can be mis-sold. They're also looking at pricing considerations," Styrcula said.

"For reverse convertibles, the concern is that those products may be mis-sold as bonds. Finra asked brokers to be more vigilant in their marketing. This is a stock substitute, not a bond replacement. People shouldn't be chasing it for the yield," Styrcula said.

Styrcula added that Finra is mostly targeting marketers rather than issuers.

"Issuers are comfortable that the law firms supporting their prospectus documents are among the very best in the world. That's why structured products have been resisting class-action lawsuits, unlike leveraged ETFs and mutual funds."

Trends

Styrcula gave an overview of some of the trends seen so far this year, which he said are the "direct result of the hangover from the credit crisis" and the Lehman Brothers collapse.

Among those trends, Styrcula mentioned "more demand for simplicity" and a continued demand for principal protection, particularly in the United States where demand for products insured by the Federal Deposit Insurance Corp. is "still strong even if we recover from the credit crisis."

Risk and innovation

Despite the flight to simplicity, Styrcula said that another structuring trend is the choice of "more complex indexes that are replicating hedge funds, adding leverage or embedding volatility."

"We've been moving from complex to simple. But we think that innovation will rise again. We see it in the underlying," he said.

"Obviously no one wants risky products, but at the same time we want to strike the right balance," he added.

Regarding the average deal size, both Styrcula and Burris noted that last year's fourth quarter saw record large deals in the $100 million size.

"The immediate consequence of the credit crisis was that we had a lot of smaller deals, the half-a-million type in 2009," said Styrcula.

"In the first half of last year, the market shut down. Then in the second half, we saw massive large-size deals coming back, especially in the fourth quarter with those one-hundred-million dollar deals.

"I don't think we're going to see the one-hundred-million dollar deals this year as we've seen in the fourth quarter."

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