Digitisation and automation are revolutionising the way banks sell structured investment solutions. The latest developments see investments banks acting as platforms that enable professional buyers to tailor and execute their own products to the end client’s objectives. Danielle Myles reports.

David Wood

It is hard to find an area of investment banking not swept up in the move towards automation and digitisation. Some businesses, such as bond trading, are struggling to adapt; however others, including structured products, are taking full advantage.

Structured products’ digital revolution started seven or eight years ago, a time when customer inquiries were increasing. To keep pace, bankers sought faster and more efficient ways to price, create term sheets and capture trades within risk management systems. The resulting move from manual to electronic processing transformed their workflow.

Second iteration

Over the past three years, that internal digital revolution has entered its second iteration. In-house technology is being replicated as online platforms used directly by clients to perform many of the functions typically provided by their structured product bankers. It is yet another example of disintermediation in the investment banking universe.  

Record low yields have added impetus to the adoption of these platforms. When interest rates were at normalised levels, structured product investors tended to stay in their home market, but zero rates policies have spurred many to broaden their horizons.

“Investors have been looking to experiment with any type of underlying they can find – the full collection of sectors and geographies – simply because they are looking for the highest yielding asset at any given time,” says Marc Saffon, global head of engineering at Société Générale Corporate & Investment Banking (SG CIB).

For those thinking outside the box, digital platforms offer a user-friendly way to make sense of their dizzying array of options and decide their optimal product mix.

Build your own product

Digital platforms’ offerings vary from bank to bank, and are constantly improving. SG CIB’s platform, SG Markets SP – launched in early 2016 after its previous e-platform, Alpha SP, was migrated into the general SG Markets portal – sets a benchmark for end-to-end functionality.

It gives professional buyers (which are often private banks) access to the full spectrum of services needed throughout a structured product’s life-cycle. This starts with pre-trade services, including access to in-house research and analytical tools. Then it allows the client to mix and match underlyings to create a product that meets their end-client’s specific investment objectives, taking into account risk profile, yield, return, tenor, portfolio diversification and other considerations.

The platform prices each product inquiry instantaneously and creates an automated term sheet, which means an almost infinite number of products can be structured and priced before deciding which to execute. Post-trade, the platform allows clients to monitor for coupons, auto-calls, barriers and valuations over the product’s tenor.

Most platforms started life as a price discovery tool, but today that functionality is considered core competence. “It also has to provide user support to help them understand what they are pricing, where the opportunity is, and also how to communicate that to their end investor,” says David Wood, SG CIB’s global head of e-business for equity derivatives and distribution and solutions sales.

“Ultimately what we are doing is allowing the investor to make an informed decision about a bespoke product, rather than how it was in the past when they were presented with, say, the three product variations being marketed, from which they had to choose.”

Providing a full digital offering has transformed clients’ choices, he says. The responsiveness of SG Markets SP’s technology for price variations on individual products also helps, he adds, saying: “It does more than 100,000 automated price requests every month. Clients can, and do, ask very specific questions and get an answer in 20 to 30 seconds.”

For wealth managers and other distributors, digital platforms’ growing sophistication has created a new do-it-yourself approach to structured products. It marks a paradigm shift in the industry.

“Before it was more a case of the bank providing and pushing the product. Now the bank is more a platform on which professional buyers can simulate different products and scenarios,” says Mr Saffon. “More and more of them want to own the process from design to execution to monitoring the behaviour of the product.”

Online execution

Mr Saffon’s reference to execution is notable, as SG Markets SP is a trailblazer in allowing clients to trade online. While electronic secondary trading (essentially, selling the product back to the issuer) has gained momentum, primary trading has followed a different trajectory. “When we started these automation processes, we thought clients would be happy to do everything themselves,” he says. “But we have since realised that, once it comes to hitting the button to trade, many still want to talk to someone.”

In Switzerland, for instance, about 70% to 80% of SG CIB’s structured product price inquiries occur via the platform, but only about 20% of trades are executed online. Even for the most sophisticated clients, electronic platforms have not completely replaced the human element. That said, the 20% figure is significantly higher than it was two years ago.

Tim Owens, Nomura’s global head of foreign exchange (FX) and index structuring, is witnessing a similar change in attitude. As recently as last year, the expectation was that FX structured product clients wanted platforms for price discovery and to obtain indicative terms. But their preferences have evolved alongside their adoption of more open architecture.

“It’s slightly changed over the past 12 months, driven by the increasing needs of some private banks, among others, to show best execution,” says Mr Owens. “They are favouring electronic price discovery tools as well as electronic execution to streamline their processes. Clients are already very comfortable doing this for equity products, and they are becoming more comfortable executing FX products on a similar type of platform.”

While this has not extended to highly structured products, it is true for what Nomura calls ‘structured flow products’. Later this year the bank plans to include these on a new digital platform that incorporates live execution, and Mr Owens expects about one-quarter of those clients to use this functionality once it becomes available.

Natixis global head of equity derivatives Eric Le Brusq is bullish on the uptake of live execution – but only after customers become comfortable with the process. “I’m convinced that, perhaps in five years or so, click-and-trade will become a type of habit for clients. But for that to happen, clients will need training and there will also need to be a change of culture,” he says, adding that each firm has their own internal compliance requirements to consider.

The human element

For execution and other areas of structured product processing, distributors want to maintain a strong relationship with manufacturers. “Yes automating it to a degree improves efficiencies. But still being able to speak to someone and ask if they are sure of the price, whether you can tweak or customise certain things, means you have the best of both worlds,” says Meteor Asset Management managing director Graham Devile.

He is wary of anything totally automated, as it increases the possibility of errors. But structured product divisions are co-operating closely with compliance and IT teams to prevent any flaws, and to ensure each product available on the platform is compliant with the evolving regulatory framework.

SG Markets SP has rules embedded that restrict the types of transactions clients can perform. “We have limits on the size that a customer can trade, and the extremes of the product in line with our policies,” says Mr Wood. “For example, it doesn’t support things such as low strikes or very high barrier levels for a client trading directly.” There is always a salesperson available via phone or chat to guide a client on what is or is not possible.

Professional buyers’ preference for using a digital platform or picking up the phone can be affected by arrangements with their end-investor. Mr Devile makes the distinction between his end-client wanting to trade immediately, or if Meteor is structuring a deal that it sells over the following weeks.

“If you want to strike today, [digital platforms] are great as you can easily get a live price from various banks, and away you go,” he says. “But when you are forward striking, and you need to think about managing the hedge and so forth, our relationship is much more one on one with sales at the bank.” This means banks must be flexible and make clear that e-platforms are just one channel through which they can deliver structured products.  

Automation engineers

The roles performed by financial engineers have also been affected by digitisation. They continue to do bespoke structuring for institutional clients which, given their need for highly sophisticated and tailored solutions, are not using digital platforms. But for products available on the e-platform, Mr Saffon says they have become almost automation engineers, rather than just design engineers.

They still design products that include hybrid or cross-asset components, or are variations of existing products; and find the best balance between product and price, at a time that makes sense for the client. “However, as soon as it gains traction, they need to make sure the pricing and delivery is automated very quickly so it can be traded en masse by customers,” adds Mr Saffon.

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