SRP Apac 2023: relaxed regulations create opportunities in SEA

Two senior executives from major local banks in Malaysia and Thailand discussed how the regulatory shift in the past year has brought opportunities to the markets in a fireside chat at the SRP APAC Conference 2023 held in Singapore in May.

Thailand has seen major regulatory updates from the Bank of Thailand and the Securities and Exchange Commission (SEC) in relation to the issuance of structured notes in the country, according to Tortrakun Satayaprasert, senior vice president, product solutions and markets innovation at Krungthai Bank.

Specifically, the central bank has adopted a principal-based governance for derivatives-embedded products, instead of a rule-based approach. In other words, the governance of 'what is permitted to be traded' has become 'what is not permitted to be traded'.

"This has widened the range of products that we can offer onshore, more directly related to structured products," said Satayaprasert. "Another key change is that retail investors can now purchase creditlinked notes [CLNs] in Thailand.

“The products used to be limited to financial institutions through private funds.”

In addition, commodity derivatives which could only be traded for hedging purposes previously, and commodity index-linked investments can now be offered, including commodity-linked structured notes.

The minimum ticket size of THB5m (US$135K) has also been waived for structured notes. Depository receipts (DRs), a type of listed structured product designed for Thai investors to access offshore equity, now feature more eligible underlier choices and require smaller issuance volumes, according to Satayaprasert.

Prior to the new rule, there was only one DR listed with a daily traded volume of approximately THB5m. Currently there are 12 issuers trading THB200m on average.

"For structure notes, the market continues to grow, reaching US$4 billion-equivalent by sales volume in 2022," he said.

From a bank's perspective, one of the hurdles to expanding the Thai market is localisation, specifically the language barrier and human resources available as many term sheets and strategy description must be translated from English to Thai.

In Malaysia, the regulations on listed structured warrants were also relaxed as they lowered the market cap requirement that corporates ned to meet to become eligible underliers. This has enabled Maybank to offer a lot more names, according to Abdul Azzahir Azhar, regional head of equity & commodity derivatives at Maybank Investment Banking Group.

"We've also seen a reduction in the requirement to be deemed a high-net-worth investor in Malaysia," he said. "Hopefully this will lower the threshold required for people to invest, particularly in principal-protected notes, which are popular.”

In Q1 2021, the Indonesia Stock Exchange (IDX) reached out to Maybank about the launch of structured warrants following the introduction of Indonesian Financial Services Authority (or Otoritas Jasa Keuangan – OJK) Regulation No. 8/ POJK/04/2021 on 19 March 2021.

"Interestingly, it was two Malaysian banks [that entered the market] – RHB Bank first and Maybank second. [IDX] is waiting for Indonesian banks to come onboard," said Azhar, adding that Indonesia was relatively late in tapping the market among the

Association of Southeast Asian Nations (ASEAN) countries, but the bourse and regulator were actively learning from their neighbours.

Besides Indonesia and its home country, the largest Malaysian bank by market cap also has its equity derivatives presence in Thailand after it began to issue structured notes there in August 2022. On the OTC side, the best-selling and best-performing product has been the autocallable fixed coupon note (FCN) in Malaysia.

"Asian investors are addicted to yield and coupon. Malaysia is no different," he said. "There has been a significant uptick in principal-protected notes but really not enough to offset the drop we saw in the autocallable or FCN space.”

The traction of PPNs is very limited in Malaysia due to lower overnight funding compared with the Asian markets where USD-denominated structured products are common.

"There's almost no way to sell a structure with unlimited upside participation. What has been doing quite well is the shark fin payoff," he said. "We did try to explore more index-based structures, but I think Malaysia is not quite there yet in terms of the acceptance of quantitative investment strategies ideas, which require lots of time to be explained to clients."

In Thailand where interest rates also remain low, at 1.75%, investors are more interested in PPNs with a long-only strategy and long tenors like three to five years, according to Satayaprasert. Krungthai has recently traded PPNs on an an all-weather QIS index, which has climbed 10% to 15% since the product launch.