Читать книгу Manufacturing and Managing Customer-Driven Derivatives - Qu Dong - Страница 10

Derivative products are explicitly or implicitly embedded in many financial product types:

• retail structured products;

• insurance investment products;

• pension products;

• securitization products;

• real estate (property) products;

• etc.

There are many different ways to categorize customer-driven derivative products: by asset classes, by payoffs, by client sectors, etc. At the high level, they can also be categorized by the intended purposes of the derivative products, as seen in Table 1.1.

Table 1.1 Customer-driven derivative products

Retail structured derivative products are by far the most varied in product types and payoffs innovation across all major asset classes, including equity, commodity, interest rate, FX and credit. Structured derivative products modify the risk/reward profile and hence the risk-adjusted returns. Their returns can therefore be better defined and clarified. One can also incorporate protection barrier features into many types of product to reduce the risk of losing capital.

Structured life insurance products also become popular in the low interest rate environment, whereby insurance companies look into new investment areas and products, in order to fulfil the promised coupons embedded in certain products. As life insurance institutions will be subject to Solvency II capital requirement, the products with low guarantee will attract lower capital requirement.

Structured derivative business has undergone profound changes over the years, in manufacturing processes and distribution mechanisms. The products become more tailor-made, coupled with the fact that distribution channels are moving towards e-platforms, which in turn encourages more individual product features. The manufacturing process encompasses product design, quantitative modelling, trading and risk systems integration, and validation. The overall process has become much more complex and infrastructures must also build in various required regulatory constraints. Therefore an integrated comprehensive manufacturing approach is vital to keep the whole process economically viable. The products' competitions have also been extended towards the longer end, from traditional short-dated (e.g. typically < 5 years) products to long-dated products, including pension products serving the ageing population.

Financial promotions of derivative products not only require the sell sides to get facts right, i.e. what the product does, what the cash and tenure commitment is it is also a compliant requirement to explain clearly to the customers the risks involved. Setting a strict and high standard on products and their risk management ensures a sustainable product design process which is vital for the long-term success of the derivative business.