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Gaurav Perti, Standard Chartered

Standard Chartered Bank

This year was expected to be a turbulent one for India's capital markets. Yet worries over a double dip recession, inflation, fiscal deficits and the fallout from the euro crisis did not stop Standard Chartered Bank from blending innovation with creativity in its structured products activities.

Riding the waves of volatility, StanChart focused on "marrying house views with customer sentiment, ensuring client portfolio diversification, a rigorous approach to product sales and strengthening the risk management framework," says Gaurav Perti, head of structured products at Standard Chartered Bank in Mumbai.

"Our strategy over the past year has been ‘product innovation with a firm grip on risk management'," says Perti. The bank has been extremely sensitive to customer risk aversion, with the need for capital preservation their top requirement. Despite a slowdown in the first halves of of 2010 and 2011, customers have invested more than $37 million in StanChart structured notes from the beginning of 2010 to date.

"Like all banks in the region, there have been country-specific issues that have made trading structured products difficult and hit customer sentiment," says one investor in Mumbai. "StanChart has nonetheless remained very innovative in delivering different types of structure to us."

Two distinct periods have emerged, says Perti. One of growth when equity markets regained their pre-crisis levels, and a period of adverse news and deteriorating returns that resulted in India's equity market being the worst performer in Asia in the first quarter of 2011.

The first period was marked by lingering risk aversion following the global financial crisis, which meant most investors missed out on the equity market rally in the latter half of 2010, says Perti. In line with the bank's house view and customer sentiment, StanChart launched structures such as digitals and ladders, which benefit from mildly bullish to bullish markets.

While capital preservation remained a common theme across products during this period, to ensure client participation in structured products the bank focused on innovation that stayed within the risk profile of its customers, as well as greater comprehensiveness in disclosures to clients.

The next period, however, saw a rapid deterioration in the investment environment, while commodity-led inflation showed itself in core inflation. "Adverse political news and governance issues coupled with weak global fundamentals caused a flight of capital from Indian equities," says Perti. "In line with global markets, our in-house view and customer risk profiles, we diversified into alternative underlyings such as gold," he says.

Attracting in excess of $1 million, one of StanChart's most popular offerings was the Bajaj Allianz Shield Plus II, a structured note on its insurance platform, consisting of a single premium, unit-linked insurance plan with an equity-linked debenture (ELD) as the underlying investment.

Launched to provide investors with the double benefit of insurance cover and an investment in an ELD, the structured product offers capital protection, a high participation rate in the equity index and a lock-in of higher returns. The insurance policy has a tenor of 10 years and maximum maturity age of 75 years. The ELD is for a fixed term of five years, after which investors have the option of reinvesting for the remaining five years in any fund offered by Bajaj Allianz Life Insurance Company.

The bank also issued a structured note on a gold underlying wrapped in a portfolio management service (PMS) solution. Aimed at investors looking for capital protection and an investment in a safe asset class, the PMS wrapper made the structure more tax-efficient and had operational advantages, says Perti. The note was offered to customers over a 10-day period and attracted a modest $590,000. The bank also offered investors a short-term bear, long-term bull structured note wrapped in a PMS. Riding market volatility to give moderate positive returns, the note was aimed at investors seeking capital protection, potential equity upside and a barrier rebate that was better than fixed deposit returns. StanChart currently has $780,000 tied to the structures.

The bank had market stress plans in place, in which "exceptional events would throw us into action," says Perti. Customer asset allocations were revisited, market updates were presented and customers were told the status of products that were held in their portfolios. "Our investment advisors played a key role in reaching out to customers and holding their hands during trying times," he adds.

Structured product performances, in particular, were tracked centrally on a monthly basis. "We launched a range of structured notes with maturity periods spanning 18 to 36 months," says Perti. "These were structures that were simple and easy for customers to understand, met basic customer requirements of capital protection, upside participation and minimum coupons that could beat deposit rates on an after-tax basis, across asset classes such as equity and gold, and disclosed all risks to the customer."