Structured products volume holds on at $327 million ahead of widely unexpected Brexit shock

By Emma Trincal

New York, June 29 – Agents priced $327 million in 108 structured products deals ahead of “Brexit,” the U.K. referendum on Friday, according to data compiled by Prospect News.

Last week – the third week of June – compared to the previous week recorded a 29% decline in volume.

However, it was a decent volume size for a weekly period distinct from the closing month, based on the data, which show an average week of $400 million any week this year excluding the final pricing one.

For the month, volume was up 9.5% to $1.25 billion from $1.14 billion as of June 24, a rare occurrence of a month-to-date uptick seen in recent months, the data showed.

Pre-Brexit impact unclear

“Volatility picked up last week, so I can see an incentive to get in the market as pricing was good,” a sellsider said.

“Also remember, the market really thought the ‘remain’ vote would win. There was this rally on Thursday. If that was your view – and it was certainly the view of a majority of us – then it made sense to take advantage of the volatility and go long long-term.”

The referendum was about choosing whether the U.K. would “remain” or “leave” the European Union. The market was caught of guard on Friday when the U.K. voted to leave.

A structurer said Brexit was unlikely to have impacted volume last week.

“Most people expected Brexit to be a big deal, but I don’t know if it put purchases of structured notes on hold,” he said.

While the immediate reaction to Brexit on Friday was negative, causing global markets to plunge, the market recovered since Monday.

From its post-Brexit low, the S&P 500 has already regained 3.6% by Wednesday’s midday session.

“The market bounced back and volatility is still there, although it has dropped a lot from Friday. So I guess the ideal pricing conditions aren’t there anymore, but investors’ fears have receded,” this sellsider noted.

“We now have less volatility but a pretty good rally. You can’t get it both ways. I’m sure we’ll have a much better week this week.”

Top deals

The top deal was a leverage buffered note brought to market by HSBC USA Inc.

The $42.77 million of 26-month capped notes linked to the S&P 500 index offered 1.6 times leverage on the upside up to a 27.2% cap. The downside offered a 15% geared buffer.

“These deals are very standard. The volatility cap helped the pricing. It makes sense for people who are slightly bullish on the market,” the sellsider said.

GS Finance Corp. priced the second offering with $36.88 million of 18-month leveraged notes tied to the Euro Stoxx 50 index. This deal was uncapped and offered no downside protection. The upside payout at maturity was par plus 1.3 times the index return. The notes were guaranteed by Goldman Sachs Group, Inc.

Pure autocall

Finally, JPMorgan, via its JPMorgan Chase Financial Co. LLC subsidiary, issued $25 million of five-year 0% review notes linked to the least performing of the S&P 500 index and the Russell 2000 index. It was the No. 3 deal in size.

The notes were called at par plus a call premium of 9.5% per year if each index closed above its initial level on any annual call review date. On the final review date, the notes would be called at par plus 47.5% if the index closes at or above the 60% barrier level.

If the notes were not called, the payout at maturity would be par plus the return with full exposure to any losses of the worse performing index.

“This is a pure autocall play. It’s not as common as contingent coupon deals,” the sellsider noted.

He was referring to the call premium, which is paid upon the early redemption.

“You only get 9.5% when you don’t get 9.5% anymore. You only get it once. You’re not clipping the coupon over several review dates. It’s not an income deal. If you get something, you don’t get it anymore.”

Coming up

The “big block trades” ending the month should occur this week ahead of the Independence Day week, the sellsider said based on the fact that Bank of America did not price its deals last week.

The year-to-date trend is hard to predict as the final week is missing. So far volume continues to be down by the same percentage amount it has been for weeks (25% decline). Agents as of June 24 sold $16.97 billion versus $22.79 billion during the same time last year, according to the data.

DOL clouds

The sellsider pointed to regulatory hurdles as the central cause behind the slowdown.

“There are so many seminars, webinars about DOL. The industry is now trying to figure out how to do it. I’m convinced it’s a factor driving down volume,” he said.

He was referring to the new fiduciary rules announced in April by the Department of Labor requiring every broker servicing a retirement account to comply with the higher, more stringent fiduciary standard.

“Originally we thought DOL would outlaw any structured product in a retirement account. It turned out it was not the case. However, what’s clear is that any sale of structured product, mutual fund or anything in a retirement account will be treated under the fiduciary standard, which opens the door for lawsuits and requires compliance investments and new procedures.

“It has an impact on practices, on the way advisers are selling products. It affects brokers especially on rollovers.

“It’s definitely having an impact on volume.”

Difficult year

The structurer insisted on market conditions as an explanation for the declining volume this year.

“For sure regulations are not helping. But it’s mostly the market that’s putting things on hold,” this structurer said.

“This market has been very difficult so far this year. It hasn’t helped at all.

“In the first half we had volatility spikes and the energy sell-off.

“People expected rates to come up. They were positioning for that. Then things reversed. The market came back. Rates dropped.

“For the market to be active in structured notes you need to have a trending market. Investors have to be confident they can pull the trigger.

“I’m not surprised volume is down this year. It’s more a factor of volatility and market uncertainty.

“Now the Brexit and the postponing of rate hikes add even more volatility and uncertainty.

“All these things contribute to contraction in issuance, no question about it.”

JPMorgan was the top agent last week with 33 deals totaling $119 million, or 36.6% of the total. It was followed by HSBC and Goldman Sachs.

“I’m not surprised volume is down this year. It’s more a factor of volatility and market uncertainty.” – A structurer

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