Insights on the Dynamics Shaping the Structured Products Universe

Insights on the Dynamics Shaping the Structured Products Universe

Twelve months have elapsed since the seriousness of COVID-19 first became apparent, leading to unprecedented worldwide disruption. The structured products market nursed sharp losses in March 2020, but surprisingly recovered quickly and the infrastructure proved to be resilient. What key lessons has the structured products market taken from 2020 and how is the market adapting its offering?

As with many other parts of the financial services industry, the structured products market has been forced to navigate COVID-19. Overall, despite some early performance set-backs, structured products have done well amid the volatility. André Buck, Global Head Sales & Relationship Management at the Swiss Stock Exchange, spoke at the virtual SRP Europe 2021 Conference, where he provided his insights on some of the dynamics currently shaping the structured product universe.

Swift Recovery of the Market for Structured Products

Although structured products nursed sharp losses in March 2020, the market recovered quickly while the infrastructure that supports it proved resilient despite the record trading volumes and various challenges posed by remote working. “We saw a 70% increase in terms of structured product transaction volumes during this period and the exchange handled it well, which is indicative of its resilience,” said Buck. As markets stabilized, Buck added many institutions adopted a thematic approach towards investing in structured products. In contrast to the 2008 financial crisis, which the industry took several years to recover from, Buck said the resumption of investor flows into structured products was much quicker in the months immediately following March 2020. He attributed this faster recovery to the fact that investors today have a better understanding of the risks and opportunities associated with structured products. Buck also noted that the recovery had been driven by retail allocators, many of whom are now using digital channels to access investment products.

Investors today have a better understanding of the risks and opportunities associated with structured products.

Global investment in structured products may be increasing exponentially but domestic allocators in Switzerland appear to be less enthusiastic. “Structured products comprise around 3% of the portfolio allocations at Swiss institutional investors, and this has been the case for several years now. Compared to ETFs (Exchange Traded Funds) which have seen spectacular growth, Swiss investors still have a cautious approach towards structured products. A number of industry believe that structured products should account for around 5% of investors’ portfolios. In order to facilitate this, institutional pension funds are benefiting from the insights and education we can give them on the virtues of structured products,” said Buck.

Crypto-Focused and ESG Products Gather Momentum

The last 12 months have seen an enormous rise in structured products and exchange traded products (ETPs) specialising in crypto-assets and crypto-currencies such as Bitcoin, something that has been propelled by the asset class’ returns. “There has been a huge demand for crypto-focused ETPs and structured products over the past few months as investors seek out new sources of returns. This interest is also driven by the fact that some investors do not want direct exposure to crypto-assets via crypto-exchanges as they are reluctant to incur the added handling costs for private keys, so are opting instead for structured products and ETPs,” said Buck. The scale of the inflows should not be underestimated. Buck said last year’s total trading turnover in crypto-focused structured products and ETPs stood at CHF 1.1 billion, whereas it topped CHF 1.2 billion in February 2021 alone.

In addition to crypto, investors are also demanding that structured product issuers incorporate more securities which factor in ESG (environment, social, governance) criteria. This is partly a reaction to COVID-19 but it is also being driven by the perception that ESG assets can help deliver superior returns. Elsewhere, EU regulators have introduced a disclosure regime for investors whereby they must publish how they incorporate sustainability risks into their investment processes – something which will further drive inflows into ESG products. ESG allocations will also be given a boost by the rollout of the EU’s ESG taxonomy, a benchmark which will help investors identify which assets are environmentally sustainable. Buck said the taxonomy would bring about greater market-wide standardization, which is vital given that so many issuers and investors have different interpretations of what counts as ESG.

Moving Into 2022 with Structured Products

The last year may have been unprecedented, but structured products handled the crisis well, evidenced by the strong  inflows and investor appetite for new asset class types like crypto and ESG. Providers such as the Swiss Stock Exchange – through its relentless focus on innovation and automation – are playing a vital role in ensuring that the structured products universe – remains vibrant. This commitment to the sector is evidenced by the recent news that the Swiss Stock Exchange won the coveted ‘Best Structured Products and Derivatives Exchange’ award at the SRP Europe 2021 conference.

Structured Products: Development of Turnover in 2020 and 2021