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News - Digitalising Structured Products

News

 

18.02.2020 Investors

Digitalising Structured Products

Interest in the structured products universe continues to accelerate, as global investors increasingly allocate into the asset class.

by Charles Gubert

According to data from EUSIPA (European Structured Investment Product Association), EUR 277 billion was invested into structured products by Q3 of last year1. This comes as structured products delivered roundly positive performance for end investors in 2019 despite the widespread macro and political volatility.

Market participants are generally quite bullish about the industry’s prospects. The Swiss Stock Exchange attended the SRP Europe Conference in London on 29/30 January, and shares its insights into the key trends and challenges that are impacting this burgeoning market.

ESG Becomes a Priority for Investors

Like with nearly all other investments, client appetite for ESG (environment, social, governance) products has been rising consistently, and this is prompting structured product issuers to take note, explained Sébastien Neukom, Senior Sales Manager for structured products and derivatives at the Swiss Stock Exchange. This has been driven in part by retail – especially millennial – investor demand and growing regulations – most notably the EU’s Action Plan on Sustainable Finance. The latter is expected to introduce new investor reporting requirements around ESG in addition to a taxonomy, which is being designed to help institutions benchmark their ESG performance.

MiFID II: Creating More Problems Than It Solves for Retail Investors

Structured products have also been on the receiving end of increased regulatory oversight. Tighter product governance rules introduced under the byzantine Markets in Financial Instruments Directive II (MiFID II) now requires intermediaries to validate whether certain asset classes are suitable for their clients’ risk profiles. Moreover, Neukom said that the new rules – especially the disclosure requirements – have generated added costs at banks and caused confusion at retail clients. This is because manufacturers distributing similar products often have their own bespoke fee calculation models and may explain things differently to investors. Again, this is causing significant uncertainty among retail investors.

Delivering Seamless Market Data

The sharing of reference data by structured product issuers with third parties (such as exchanges, data vendors, clients, banks, newspapers, trading platforms, CSDs) is a complex undertaking, which is often reliant on manual processing. As a result, it is an activity that is frequently beset by unnecessary costs and risks. Francesco Marcon Fiastri Sales Manager at the Swiss Stock Exchange, highlights that its unique CONNEXOR platform has helped to massively facilitate efficiencies in reference data management in the structured products ecosystem. By standardising and centralising the collection and maintenance of reference data, simplifying workflows, and reducing the number of interfaces involved in the whole exercise, Fiastri said CONNEXOR had played a major role in enhancing automation and straight-through-processing in the entire reference data process.

SDX: A Turning Point in Financial Markets

Patrick Stettler, Senior Sales Manager at SIX Digital Exchange (SDX), provided a comprehensive overview at SRP of some of the benefits SDX will bring to market users. Owned by SIX but functionally independent from it, SDX creates a regulated ecosystem supporting the listing, trading, clearing, settlement and custodying of digital assets.

Although tokenisation is not yet applicable to blue-chip equities – which are fairly liquid and transparent already – it could be used to support trading in other markets and asset classes such as debt, private equity and real estate. In the case of structured products, Stettler told SRP that the underlying technology – including the use of smart contracts – could be used to augment transparency and efficiency in the market, allowing for cost synergies to be realised. Stettler added this could make it easier for market users to issue and trade structured products.

A Leading Provider

As one of the calendar highlights of the structured product industry’s year, the SRP Europe 2020 awards took place on 29 January. The Swiss Stock Exchange won the coveted award for «Best Structured Products and Derivatives Exchange». In this rapidly changing and demanding market, clients need dynamic and agile partners. This award comes as the Swiss Stock Exchange continues to cement its reputation as a leading innovator and disruptor in the industry.



Francesco Marcon Fiastri, Sébastien Neukom, Markus Gutzwiller (Photo: Paul John Roberts)

1EUSIPA (December 4, 2019) Increasing turnover and higher volumes on the European structured products market.

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