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Derivatives

Competition Seen Fuelling U.S. Structured Equity Takeoff

Increasing competition in the U.S. structured equity investments business could prove the necessary spark to set it on a level playing field with Europe and Asia.

Increasing competition in the U.S. structured equity investments business could prove the necessary spark to set it on a level playing field with Europe and Asia. Structured equity issuance in the U.S. lags other regions in both scale and sophistication. That's a state of affairs long blamed on cultural differences--such as U.S. investors preference for single stocks--and less sympathetic regulation. But this year has seen a slew of firms, particularly European, make heavy investment in the region.

AIG Financial Products, for example, along with Deutsche Bank, have registered shelves in the U.S. This enables them to put together note-based structured investments quickly and sell them in bulk. There are reports that European structured equity giants SG Corporate & Investment Banking and BNP Paribas may also be gearing up for a wholesale launch in the U.S.

This could squeeze margins for existing players. Charlie O'Flaherty, co-head of private investor products at ABN AMRO in New York, explained up to now firms have been competing by offering different investment products rather than by competing over price for the same structures. But more players in the market means that in the last few months investors have for the first time been able to compare the terms of a reverse convertible on a corporate such as Yahoo issued by two different derivative dealers. Previously there was little overlap in the corporates dealers would reference for reverse convertibles.

Keith Styrcula, chairman and founder of the Structured Products Association, said, "We are seeing an interesting domino effect that's very good for the market in terms of fee-compression." He noted while this is good for investors, it could encourage dealers to issue more complex investment structures with higher margins. "That does encourage adding a chocolate swirl to the vanilla, if you will," he added.

A serious stumbling block, however, still exists in the level of investor education. Investors are reluctant to enter new structures and dealers have been reluctant to go the extra lengths to explain more complex investments.

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