Private banking access to equity-linked structured products in Asia Pacific is set to be revolutionised after a group of global banks clubbed together to create a centralised ordering system.
The system, named Contineo, was launched in January this year and will become fully operational in June. It provides an electronic messaging network to connect buyers and sellers, which will simplify market structure and provide transparency in what is an opaque market with little solid information on value or volumes. Contineo is funded by Barclays, BNP Paribas, Goldman Sachs, HSBC, JPMorgan and Société Générale, together with technology firm AG Delta. Julius Baer is the first private bank involved with the system.
Combination “The benefit of Contineo for us is a combination of three things,” says Lemuel Lee, head of third party distribution, Asia Pacific, equity derivatives group, JPMorgan. “The first is efficiencies. A lot of this business is existing business, but to have a network where issuers and distributors congregate, we expect efficiencies in terms of the way we operate the business. The second benefit is from a cost perspective. In terms of where we invest in our technology resources, there is a finite amount of funding, so we need to be very nimble.
“Thirdly, ultimately, we hope it brings us to a wider network of clients, but that’s a double-edged sword because as you bring more efficiency into price discovery and competition, then naturally more players come into the market. Having said that, there may be clients we are not covering that join this network.”
Contineo charges annual licence fees to both the buy and sell sides. The platform allows the trading of: equity-linked notes; knock-out equity-linked notes; accumulators; decumulators; fixed coupon notes; daily range accrual notes and over-the-counter options.
“There are things that will be bespoke in nature that we will not be able to sell on the platform,” says Lee.
“The purpose for efficiency is that we will be selling commoditized products. I don’t think any of the banks or distributors have any plans at present to put through more bespoke products on the platform. That may be long-term.”
“Contineo is a very similar system to the way you book hotels on the internet now,” says Jeffrey Juan, managing director, head of EFS (equity and funds structured markets) solutions sales, non-Japan Asia at Barclays. “Every product provider has limited resources, so everyone has come together to create this platform. The older clients in private banking want to cut costs. The best way is to improve the IT systems to help do this.”
He says that client behaviour is changing. “They don’t want to receive prices from different product providers every day. They want a summary. If the industry doesn’t go this way, it would lead to each bank deploying ever-increasing resources to build our own systems to connect to each client, so why not do it together? It’s not about increasing business for us, but maintaining our current market share without incurring a lot of IT costs.”
Mark Munoz, managing director of Contineo, is coordinating the project.
He is keen to emphasise the greater convenience of the system, but the advantages in a world where regulators are demanding greater transparency from banks are also key.
Looking for the same thing “Previously, if somebody were to send a message to get a quote, they’d get maybe 10 messages back from different providers all through email,” says Munoz. “They’d have to assemble them together through Excel. It’s been very messy. All of the banks are moving off the voice and email because it’s not compliance-friendly. It works, but it’s obviously very difficult for them to do an audit or to get a trail of information back to an order. They’re all migrating into this platform and they’re all telling their clients to migrate into this platform. I think that as much as the private banks are looking for automation, the sell side are looking for the same thing.”
Along with players such as Vontobel and FinIQ, one of Contineo’s main competitors comes from the partnership between Singaporean bank DBS and Swiss firm Leonteq. The two announced late last year an initiative for the origination and distribution of equity derivative structured products. In March they followed this by linking up with two more companies, Numerix and Avaloq, to set up an integrated multi-issuer investment products distribution system (IPDS) with an initial focus on Asia Pacific.
“The partnership between DBS and Leonteq is to cater to a growing demand among Europe-based institutional investors for equity structures on Asian products issued by highly rated issuers,” says Calvin Yeap, head of equity derivatives trading, DBS Bank. “Currently, the notes distributed by Leonteq account for about a quarter of the structured equity derivatives notes DBS issues in Asia and Europe.
“The partnership between DBS, Leonteq, Avaloq and Numerix arose out of a need to find a solution to improve the efficiency and scalability of the entire trade life cycle, which will benefit both the buy and sell side.”
With equity derivatives as the starting point, he says Leonteq and Numerix, in consultation with DBS, will design, build and implement the IPDS, which will eventually span different asset classes and multiple issuers.