Capital-protected products structured with derivatives dominated the Asian equity market last year as investors looked for a silver lining amid slumping cash equity and interest rate markets. "The major trend for the year was capital-guaranteed notes and funds," said Alan Loh, managing director and Asia Pacific (ex-Japan) co-head of equity derivatives at Deutsche Bank in Hong Kong. Harold Kim, managing director of Asia Pacific equity derivatives at Salomon Smith Barney in Hong Kong, agreed, noting that "Markets were generally weak, nervous and volatile. These conditions hurt demand for bull-market products, however, these same conditions are good for capital-guaranteed products." James Rodríguez de Castro, managing director of global equity-linked products at Merrill Lynch in Hong Kong, attributed part of the increase in demand to local banks pitching these structures to retail clients. Merrill offered the first exchange-listed equity-linked notes in Singapore dollars earlier this year (DW, 7/29). Warrants structured on baskets of Chinese B shares were also popular in Asia last year. Credit Lyonnais in Hong Kong revived these instruments after pioneering the product four years ago (DW, 6/11).
The Hong Kong warrant market started preparing for take off this year (DW, 11/12). "Initially, you'll likely see a flurry of issues," said Nick Fennel, managing director and Asia Pacific co-head of equity derivatives (ex-Japan) at Deutsche Bank in Hong Kong, "after that it depends on market conditions."
In Japan, traders faced another tough year as the Nikkei 225 sank lower. "After a stellar year in 2000, the equity derivatives market in Japan fell upon hard times," said Nick Waltner, head of equity financial products at Bank of America in Tokyo. For instance, the equity-linked note market, particularly for retail clients which was strong in the previous year, evaporated as the Nikkei headed south toward 11,200 (DW, 4/30). "The ELN market really went dead after that," he added.
The Morgan Stanley Capital International index rebalance, which gave more weight to free-floating stocks, also impacted the equity derivatives market, according to Deutsche Bank's Loh. "The MSCI changes were a huge event this year. Many desks, including ourselves geared up their program trading operations for this," he noted. Hedge Funds in Japan as well as a raft of firms, including Bear Stearns, also looked to capitalize on the changes and volatility spiked on the back of the re-weighting (DW, 10/29).
Elsewhere in the Asian region, Korean regulators started planning an onshore equity derivatives market for July, a move that is being well received by the market (DW, 11/26). In Malaysia, Deutsche Bank looked to set up an on-shore equity derivatives operation for this relatively untapped market (DW, 7/23). And in Taiwan Bank SinoPac is looking to become the first domestic bank to offer equity index options as well as equity swaps (DW, 5/21).
