Structured products face change

With the subprime crisis leading banks to consider splitting profitable operations from troubled investment banking, the traditional manufacturing process, where an investment bank builds and then stacks structured products onto the shelves of the private wealth arm, is coming under increasing scrutiny. “Investors are now more sensitive on the structured product side,” said Declan Sheehan, UK chief executive at HSBC private bank. “They want to know that we are not just going to HSBC Markets, but we are coming up with a tra-ding idea, internally or with the client, and we are sourcing it from the best place possible. Market volatility certainly increases the pressure for that.” Structured products, unlike the sometimes equally valuable private equity opportunities that come through to the investment bank, are not unique, stated Mr Sheehan. Therefore, what can be created within an investment bank can probably be priced and structured elsewhere. HSBC private bank has long embraced open architecture on structured products, explained Mr Sheehan. The UK private bank has a close relationship with seven to 10 external providers and two or three of them are put in competition on any particular client transaction. “We think this is the right thing to do, but with the European Mifid directive, we also have an obligation to go to a number of providers and get the best price for our clients.” The percentage of structured pro-ducts which is sourced externally varies but it tends to represent around two thirds of the total structured products in HSBC private banking clients’ portfolios, stated Mr Sheehan. But with increased volatility and difficult markets, structured products have become more expensive. “At the present, client demand for structured products is very scarce,” said Manuela d’Onofrio, head of global investments at UniCredit Private Banking. “We had many more requests when markets were in a positive phase,” she said. Mr Sheehan echoed that structured products generally have become more expensive to provide protection, but for recently they are “seeing inflows coming back into the market”. One area of interest for example, is that, because rates have gone down considerably for the US dollar, investors are looking for a yield pick up. Some investors look for participation in the upside but with some downside protection, and the way to do that is through structured products, he added.

Keeping things running like clockwork Avoiding mediocre standards of service and provision of ‘me too’ products has always been a challenge for the private banking industry. A forthcoming FT conference, supported by US provider Stanford, to be held at the Dolder Grand in Zurich, will examine lessons of maintaining quality from the Swiss market and beyond. Private bankers, including Eric Sarasin of Bank Sarasin, will debate the notion of Swissness, and how exclusive service and products can be developed, together with other key Swiss figures including Rudolf Spruengli, head of the Lindt & Spruengli chocolate manufacturer and Dr Rolf Jetzer, chairman of Swiss International Airlines. Hedge funds as an ultimate, exclusive, customised private client product will be assessed by Eleonore Dachicourt, head of the hedge funds advisory group at Credit Suisse. Bankers and consultants including Philippe Couvrecelle, chairman of Edmond de Rothschild Asset Management and Ray Soudah, head of Millenium Associates, will examine philanthropic aims and family liabilities. To register for a complimentary place to ‘Inside Wealth Management’, visit www.ftglobalevents.com/wealthmanagement or call +44 (0) 207775 6653