Since the Japanese regulator reprimanded Citibank for mis-selling structured products to high-net-worth clients in early 2005, stringent regulatory scrutiny remains a problem for ambitious issuers. But BNP Paribas' third-party distribution in Japan has showed no signs of abating. Although private banks are not the main distribution channels in Japan, local securities houses, retail banks and trust banks have emerged as the French bank's key customers. Here, we honour the bank for its commitment to the Japanese market. This award was open to all distributors and structurers in Japan, and as such was a particularly competitive award.
BNP Paribas has produced several deals this year for the retail market in Japan. One innovative product is All Best, an eight-year USD-denominated structured note linked to three different dynamic portfolios composed of mutual funds and equity indexes: the S&P 500, DJ Eurostoxx 50 and Nikkei 225. According to BNP Paribas, All Best was the first mutual fund-linked derivatives structure distributed in Japan by public offering.
The product pays an annual dividend based on the best-performing portfolio each year and offers principal protection at maturity. Each of the three dynamic baskets is invested in a range of asset classes: equities, bonds, commodities, energy and real estate. The return is based on the best performance among the three baskets, by employing the option on a modified CPPI mechanism.
The coupon amount is determined by comparing the level of the best-performing basket to the 'profit lock-in level'. If such value is above the profit lock-in level, it will be distributed to the investors as coupons. The best-of option and the profit lock-in level mechanism allow the notes to profit in most market conditions.
All Best was wrapped as a domestic unit trust and was distributed by Chuo Mitsui Trust. The product was launched twice last year and raised Yen4.25 billion (US$35.8 million). According to Mike Watanabe, Tokyo-based co-head of BNP Paribas' equity products and fund derivatives development group for Japan, and head of fund derivatives for Asia, a similar version of the same structure will be available next year.
However, most Japanese investors still favour domestic indexes or single stocks as an underlying, according to BNP Paribas' own research. What's more, new structures can be problematic because most distributors in Japan find it difficult to explain the product details to investors. Trust banks, in particular, are more used to distributing conservative products.
As a result, BNP Paribas set up a daily valuation process for All Best, as well as dedicating a team to visit Chuo Mitsui Trust's 70 branches across Japan to help train the sales force. "The All Best structure is more complex than usual Japanese structures," Watanabe says. "We helped the distributor to design the brochures and we also helped to train the sales force. We are here for the long term, and retail service is essential."
Products such as All Best have certainly won over local distributors. "BNP Paribas provides interesting products for us and we are satisfied with the service," says Koyu Asahina, senior manager, investor relationships group, planning and co-ordination department at Mitsui Trust in Tokyo.
Now that interest rates are rising slightly in Japan, BNP Paribas has manufactured a product that combines a familiar underlying with an attractive payout.
Protect II is a 10-year AUD-denominated Cayman unit trust linked to the Nikkei 225 index with a target redemption feature. The product offers 100% capital protection and a quarterly dividend if the index is above its initial value on the observations dates. Early redemption is possible when the sum of the paid dividends reaches 19%.
The product, distributed by SMBC Friend Securities' entire sales network of more than 75 branches, raised AU$183 million (US$140 million) in September. BNP Paribas plans to launch a similar product in the next few months.
Why BNP Paribas won
Distributors are impressed with BNP Paribas' commitment to assisting with preparation of marketing materials and the distribution of products. While most providers shy away from introducing new structures and new underlyings to the retail market, BNP Paribas has the capacity to support innovative offerings.
The week on Risk.net, March 10-16 2018Receive this by email