Simplifying the Pricing Puzzle -- Barron's Asia

A new trading network will make buying and selling of complex structured products easier and more transparent.

By Abby Schultz

Wealthy customers of private banks in Asia may end up getting a better deal on structured products now that six banks have teamed with a technology firm to create a network for buying and selling these popular, if complex, securities.

Initially, the network will only affect stocks-related products, creations like equity-linked notes - a combination of a bond and an option on a stock that is intended to boost the overall return - and so-called accumulators, which allow a buyer to benefit if a stock's price keeps rising. Accumulators, of course, can inflict severe pain if the bet is wrong. Eventually more complex products may be added .

The deal that could eventually please your wallet will come about because the network - a new company called Contineo - will allow private banks connected to it to get pricing on a given structured product from several banks at once. That will force the banks to be ever-more competitive so their products will be selected.

Moreover, because the network eliminates the need for banks to set up and maintain structured-product platforms with each of their private banking clients, it will cost the banks less, savings that should eventually reach the buyers of these things. The large number of private banks in the region has forced banks that sell structured products to create multiple systems to serve all these customers, and it's forced private banks to create these systems as well.

"Both sides of the industry, both issuers and buyers, have been spending a lot of money, effort, time and technology, but at the back of it all, you have a standard set of products being traded," says one derivatives banker who participated in the project. In announcing the platform to the media earlier this week, Mark Muñoz, who is heading Contineo, said it offers banks "an easier and lower cost way to connect to their buy-side clients."

Barclays, BNP Paribas, Goldman Sachs, HSBC, J.P. Morgan and Societe Generale Corporate & Investment Banking are backing the new venture along with AG Delta, a technology firm. But the network is open to any bank that wants to join as well as other technology firms that have built platforms for pricing and trading structured notes, including Vontobel's deritrade and Leonteq Securities.

The idea is to have a "neutral and open" messaging network, which Muñoz says will bring transparency as well as efficiency to the market. It's the messaging part that he emphasizes, saying "we want to be the Whatsapp for messaging, in terms of connecting the buy-side and the sell-side."

Whether it really brings prices down for what the industry considers to be plain-vanilla equity-linked products that will be available via Contineo remains to be seen. That market is already super-competitive, and profit margins are about as thin as you can get.

"Every bank is issuing these notes, which is why there is little pricing difference," says Harmen Overdijk, managing partner at Caidao Wealth, an independent asset manager in Hong Kong that serves high-net-worth individuals. The real advantage for customers will be if longer-dated and more complex structures are sold, Overdijk says.

One reason is there could be more variety in prices for a complex security. The price, say, of a capital protected note with a two-year maturity could depend on the credit strength of the bank selling the note, which is less of an issue when a bank sells a two-month equity-linked note.

Still, Overdijk says the initiative could help transparency and pricing in the market for structured products and should be helpful for private banks.

Muñoz likens the development of a network like Contineo to the development of electronic platforms for trading stocks and all kinds of other securities long ago, which often resulted in better prices for investors. "We've seen this in other asset classes as they move to an all-electronic network with straight-through processing capabilities," he says. "This results in improved access for all investors and a more efficient marketplace with better price and risk controls."

Private banks are not part of the consortium behind the network, but several were consulted as it was created and the plan is for private bankers to be part of an advisory board that will shape how the network develops, including the products it eventually can sell.

At first, the platform will only sell stocks-related products, specifically securities with the wonky names of equity-linked notes, knock-out equity-linked notes, fixed-coupon notes and daily range accrual notes as well as accumulators, decumulators and over-the-counter options. They will not include the dreaded mini-bonds, products sold by Lehman Brothers that collapsed after the bank went bankrupt in 2008, and that spurred thousands of investors to take to the streets in protest.

In fact, Contineo is limiting their distribution to private banks, which only serve affluent investors, who are presumably more sophisticated and aware of the risks in some of these products.

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