Low expectations for November, distributor says; Barclays, HSBC link accelerated notes to S&P 500

By Kenneth Lim

Boston, Nov. 17 - Structured product sellsiders are set for another month of weak volumes in November as capital markets remain hesitant and holidays shorten the final week, a structured products distributor said.

"The markets remain soft, although there's still some optimism that things might improve in the new year," the distributor said.

Persistent weakness

The distributor declined to give figures because products were still being priced, but said that the general sentiment is that November's volumes are unlikely to be better than last year's. The expected performance relative to October is hazy.

"A lot of the uncertainty that was there in October is still hanging over investors today," the distributor said. "The credit markets haven't freed up as much as was hoped, the economy, the figures that are coming out suggest that the economy remains weak. A lot of investors are still very nervous.

"Unfortunately for us the FDIC temporary liquidity guarantee program didn't apply to structured notes, so we didn't get any kind of a boost from that. The other thing that's happening is interest rates remain very low, and this kind of limits what the issuers can do in terms of offering attractive returns."

A holiday-shortened month, with the Thanksgiving holiday taking out half of the final week of November, will also not help volumes, the distributor said.

"A lot of investors have sort of thrown in the towel for now," the distributor said. "They're just going to go off for the holidays, come back next year and see what happens then...You do see a bit of slowdown near the end of the year most years, but this year maybe we'll see even more of that."

Cautious optimism

The distributor said issuers and distributors were cautiously optimistic about the coming year.

"I think the hope is that as more clarity about how TARP will be used and details about future relief packages, if any, as more clarity returns to the market, people will be better enabled to make investment decisions," the distributor said. "Maybe after Jan. 20 things might move along a little quicker - just in terms of decisions becoming clearer, not necessarily better."

Issuers link to S&P 500

A number of accelerated buffered notes linked to the S&P 500 index were launched on Monday.

Barclays Bank plc plans to price zero-coupon buffered super track notes due May 28, 2010 linked to the stock index.

If the index ends above its initial level, investors will receive par plus double the index return, subject to a maximum total payout of 133% of the principal. Investors will receive par if the index does not decline by more than 10% at maturity. Investors will lose 1% for every 1% decline beyond 10%.

HSBC USA Inc. is offering zero-coupon performance securities with contingent protection due Nov. 20, 2011 linked to the S&P 500.

If the index ends above its initial level, investors will receive par plus 109% to 115% of the return. Investors will receive par if the index declines by not more than 25%. Investors will lose 1% for every 1% decline if the index ends lower than 75% of its initial level.

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