Intro: 00:02 If they can't see the prices in the newspaper or online, that's a problem.
Tiago Fernandes: 00:16 I think it's going to be a big problem for the financial industry in the next 10 years.
Sponsor: 00:22 This podcast is powered by Vestr, the engine behind Active Management. Vestr is a Switzerland-based fintech startup that provides software for issuers of actively managed certificates to automate their value chain fully. Visit Vestr, V-E-S-T-R dot com to schedule a meeting with an expert and to learn more about Vestr.
Stefan Wagner: 00:44 I am here today with Tiago Fernandes from SPI. It’s been a long time coming and I have really been looking forward to finally have him on the podcast. So welcome for joining me and thank you for taking the time in your busy schedule. I'm very excited to have you on the call today.
Tiago Fernandes: 01:00 Thank you, Stefan. Yeah, I mean, it's not only me, you also have a busy schedule.
Stefan Wagner: 01:05 One of the main reasons why I wanted you on the call, because as probably Hardly anybody else I could point to who has such an in-depth knowledge about structured products, not only in one market, but across the whole world. And how do actually the structured product markets differ in size and product in the sense across Europe, Asia, North America, and what is sort of driving the growth in each of these markets?
Tiago Fernandes: 01:28 It's so segmented, right? Because I'm sure if you remember, right, when I started, seventeen years ago the European market was mostly retail right it was like the big public offers that who sell the yard two yards three yards I mean I think I sold. more than four billion euros on sugar products I think it's it. I like to think he has agreed right is all the different segments of course you have the term right is very important like short term one year you know two to three years more than that but then you have the segments of. Capital protection right preserving capital. You have the income, you have, of course, the participation and the leverage products.
And if you think about that grid, each market developed slightly different. So if in Europe it was very, let's say the public offer, capital protected, where you sold, you know, billions and billions, right? Do you remember that where we used to do everything manual?
Stefan Wagner: 02:29 Yes, it worked when interest rates were high enough.
Tiago Fernandes: 02:32 Exactly, exactly. But then other markets developed in different ways, right? In Asia, you already had a big deposits market, an insurance market, and I think structured products developed more into the wealth space, and was more capital at risk. You know the auto call bulls the fix coupon notes but I'm also then more the leverage products like the cumulonimbus lighters the cumulonimbus lighters the kind of. Each market developed into a different segment and they got an expertise on it.
So I would say Europe is still very conservative in terms of the products. I think because the distribution channels in Europe developed quite a lot, you still have the retail markets, right, very capital protected. but then you also have like that the private banks which is more capital at risk trying to get out your ideals for the investors so it's more diverse. I mean it's the opposite. That is of course about everywhere.
So China mainland and I want still very capital protected in China you have the fake structure deposits I'm not sure if you know about them yet for about them yeah it is very simple products right and it ultimately, more than 100% capital guaranteed right but it allows investors to get to one little tiny conditional coupon yet exactly with the like two or three five basis points it's that's the digital and it basically allows to get to the tax scheme that saves people money right I want also similar very capital protected but then the other markets the private banks in Hong Kong, Singapore, Japan very towards the more risky products.
And then I think it's also interesting like us in Canada. You have those two markets very strong in North America. Why Latin and I will do Mexico, very interesting markets of course the onshore markets in Brazil, Chile, Peru, Argentina and so on. That are very more capital at risk again auto callable not to the leverage once so it is quite interesting right the whole. Different markets developed. We all call it structure products as an asset class but ultimately it's not that big . It varies a lot between country and the needs of the investors which I think that's why structure products are becoming so popular and going a lot because. in different markets they developed for specific needs for the investors.
Stefan Wagner: 05:25 I mean, you touched on it a little bit in the sense that, you know, what weapons certain markets are using. So there's, like, some people use warrants, notes, then there's, you know, doing deposits, you know what I mean, which is sort of very tailored to the individual versus then in the North American markets, in the US, you have annuities. What drives that in across all these different regions?
Tiago Fernandes: 05:52 I mean, it's two things, right? Protection and tax. And I mean, it's like, The protection section right, it's very important. We all know it's very easy to sell and I think that. Every investor fixes how I can protect my capital and my wealth and I think it's a main focus how I can protect my wealth and keep it. keep the participation in the growth of the equity market and other asset classes. And I think that's been attracting a lot. On the insurance side, I think it's interesting, right? Because there you have other two reasons. So, of course, you have tax. And ultimately, tax drives a lot of the growth in those markets it's not only in the us let's face it in Europe do you have in France a big benefit for, for destruction notes war embedded on the insurance proper there but you have the same in Germany rights you have the same in Italy you have in multiple countries where you have those benefits.
But I think the annuities, which is also growing in Europe, it's an interesting one. Why? Because it's not only an investment product, right? It gives you death benefits. It gives straight away a potential, let's say, if it's in annuities that will guarantee you a pension when you retire or at the beginning of a certain age. that becomes more interesting right for investors could they not just buying products to get the four or five percent yield in two or three years they are thinking okay. You know I need to protect my wife. I need to protect my family and I think putting these. annuities that guarantee you in the future an income, let's say death insurance, death annuity, or even a patient annuity. It's extremely interesting.
Stefan Wagner: 08:02 I think it's particularly interesting where you combine the traditional structured product with a life insurance or something else, that the combination of it adds so much more value on top of it, I agree. And underlying wise what is sort of I mean when I started this mainly, we started with equities as an underlying and sometimes a little bit of FX you know these dual currency notes or deposits but where is it now going sort of what is it and is it different between regions what's happening?
Tiago Fernandes: 08:33 I think it's very diverse. I don't think there is that much difference. I mean, Europe, APAC, and EMEA, and I think it's the structured products diverse, the underlying's. Still, big equity, the benchmark, like S&P, the Euro Stoxx 50, the Nika, the Cosby, the Einstein, they're still the main ones. but I think there has been a defecation also into rate products linked to your CMS basically playing the right moves. I mean that that saved the year of the French banks during covid um but what I see recently is more diversification in TPOIS. Not risk-controlled indices, but more actually the opposite.
Stefan Wagner: 09:23 Specific factors or what kind of premium are they trying to capture?
Tiago Fernandes: 09:28 Yes, KYS, specific thematic or factors, not with risk control, but more with target volatility and other things to try to leverage. And of course, of course, decrements. It's still a big topic. It's been growing a lot. Of course, you have the points and the percentage.
Stefan Wagner: 09:47 Do you have a view on which one you prefer? The one where it's a fixed reduction or a percentage reduction? instead of the dividends, in a sense, on an index?
Tiago Fernandes: 10:00 So, ultimately, each product depends on the client, right? And I think benchmark indices, let's say S&P 500, Euro Stoxx 50, adding points of percentage doesn't make any difference, you can play around with what's best, but definitely it's something that's worth for investors, as long as the dividend is not very different from the actual dividend. But I think what worries me is the single stock, especially on points, because he has a lot of leverage. It would be okay if that goes to an institutional client that knows what he's doing, and he's hedging some of the risk that he might have on Stellantis, and it's a way to hedge it or to leverage. But if it goes to retail, I would definitely not sell it.
Stefan Wagner: 10:51 Yeah, I always thought a little bit when these products came that it was partly also driven by the fact that some of the investment banks had a hard time hedging their dividend exposure in these products.
Tiago Fernandes: 11:07 Ultimately, yes, that was the reason why it was created. And let's face it, no one does anything for free. I'm still trying to find someone who does it for free.
Stefan Wagner: 11:15 I mean, you have to be compensated for your work. I mean, any rational person understands that.
Tiago Fernandes: 11:21 Exactly. And I think, ultimately, do you have competition?
Stefan Wagner: 11:26 You already touched a little bit, or you mentioned a few times, tax, but also regulatory-wise. I always find in the structure world, there is not much consistency across regions or even sometimes inside the EU, you would assume that they have the same view on it, but Belgium looks at structure products very differently than maybe Germany, for example, which are sort of the regulators of the regions where the regulations for the clearest for structure products and where has a. Well working efficient framework versus sort of what other regions have you seen where there's maybe big hurdles and what could be done about it.
Tiago Fernandes: 12:08 I think ultimately, the regulators do care about the investors, but I think there are some regulators that take a perceived way that they see structured products without even looking at them. And that affects negatively, like I did my arguments with the Portuguese regulator, I had my arguments with a few others, but I have other ones which I have very good relationship and I do talk with a lot of them, and there are some which are pro-business, and especially they want to set good standards, And they will review it but they will allow the markets to run without putting too many, too many rules that stop the market or that ultimately makes the products more expensive to investors. I'll say at the moment I am quite well impressed with the French regulator. What they've done in the last 10 years has been amazing.
Stefan Wagner: 13:13 I mean, in Europe, particularly, you know, there's the prep thing, you know, preps. And it feels to me it's changed product design and disclosure and maybe investor behavior. It's a huge burden. And I think I saw a statistic a while ago, which basically analyzed how many people actually look at the prep and it was in the single digit percentage. I don't know if you have any comments on that one.
Tiago Fernandes: 13:43 It was a very good idea free pages documents that can understand all the different products I think will say yeah that's a really nice idea I think the problem is how do you make it work in twenty-eight different countries 22, 24 languages rights. and how you can make it work, so it's not too costly, right? And we, I mean, Work state Docs tried to find a way to do it. It's something that we're quite proud. If the document ultimately is the best for the investors, I think it has some value, but I think it needs to be reviewed. I think it needs to be simplified and it needs to go what the clients want. And not what the regulators think they want.
Stefan Wagner: 14:31 Yeah, I think in this respect, it's a little bit, particularly when I look between Europe and the US, in the US, if you look at the, let's say, these big, some of them call them multi-issue platforms or something like this, they might not have that much product innovation or other innovation in it, but they spend a huge amount of time and effort on education, online seminars and everything else. And in Europe, it feels often, okay, you got… I'm sure that you got the kit and the prep. I've done my job. Why are you not buying more of it?" To be very cynical about it. I want to go a little bit on what SPI does regarding regulation and tax as they shift. How do you see issues adapting with it? And in particular, how do you guys at SPI help in that process?
Tiago Fernandes: 15:24 I always wanted to make the products more transparent, cheaper for investors. That's been my purpose in my career. Hopefully we'll see if I'm successful or not. But for example, in the US, we kind of automate the data flows between manufacturers and distributors and wholesalers. And that made the distributors be able to sell faster, quicker. And then we helped transmitting data between those much quicker, be able to do the cash flows, what is happening to each product.
We even developed our life cycle. I mean, we're doing a life cycle daily for more than 400,000 investment products every day that we calculate independently. We checked with our clients, with manufacturers, we gave it to our indicative to the distributors. And I think, ultimately, we did it. And I think we helped together with the multi-issue platforms, with the distributors, to sell more structured products, to get the distributors not to focus on manual operations or back office or middle office, and just focus on selling, right? Focus on giving a good service to clients. And we did that in the US. We're now slowly doing it in Canada. doing in Europe and we definitely going to expand to try to help the global industry you mentioned how many.
Stefan Wagner: 17:00 You must have an incredible, huge amount of data points, as you mentioned. Where do you see the major challenges, particularly in lifecycle management? There are the auto-call events, there's the barrier events, there's corporate actions, and I assume the different issuers apply corporate action differently depending on their own position or tax treatment of it.
Tiago Fernandes: 17:24 I'll give you two big problems. One, and maybe I'll be a bit cynic here, and some people might not like one of those, but I'll say the first one is the complexity of the payoffs. Like the new payoffs, small tweaks, it's a massive impact, because like, we developed Livestock software, it does 90, 93% of all live products in the US, we're quite proud of it. But the remaining seven percent is extremely difficult to try to automate. And that's like the complexity on the payoffs on a small tweak you know a small let's say the look box or does these spreads of options and it's painful and we, it’s basically where we spend like 50% of our work. It's only on that small percentage.
Stefan Wagner: 18:22 On that small last bit, but there's always a delta that you have to, you haven't managed to automate fully or have to adapt.
Tiago Fernandes: 18:29 And then last, is the market data. And it's not only for secure products, I think it's for the financial service industry. And again, you have Asma coming here, it's like, Ultimately, these products are linked to financial assets, S&P, the MSCIs of the world. And I think market data vendors are squeezing everyone for every penny. And ultimately, it's increasing the costs of producing data, of making the product cheaper.
Stefan Wagner: 19:06 I think you're touching on a very interesting point, actually, that these oligopolies of these data who own the data, they're not besides ensuring transparency and knowledge, but they are taking a big chunk for taking very little risk in the process.
Tiago Fernandes: 19:23 Well there is some risk I mean like I work structure products I just maintaining these making sure that the flows API is work it's a lot of work and investments that I need to give it back but like.
Stefan Wagner: 19:37 the licenses of the industry I mean you know that when they originally set up the foot see they gave it away for free. And then when it became a market standard then it became more and more expensive and it's not only such a product so I think this is a.
Tiago Fernandes: 19:54 financial services industry issue which I don't know we have a solution I think asthma the European level is trying right because this is not ours this is for the investors right and if they can't track, if they can't see on the newspaper or online the prices that's a problem I think it's going to be the big problem for the financial industry in the next ten years.
Stefan Wagner: 20:23 One of the trends is obviously that more and more of these digital platforms are coming, where you can get your structured products fixed. Where do you think, this is going to work with the banks? Is the bank going to lose their dominance or they're just going to be places where the risk is housed but not the distribution happens anymore?
Tiago Fernandes: 20:49 So, I think a lot of the platforms got it wrong at the beginning. And you could see, right? Some of the platforms that were massive names, now they're not. There's been consolidation on the platforms. And partially, it's because ultimately, it's not that technology that matters, it's distribution. It's the advisors, right? It's the people who actually sell. Besides probably a few people, like probably you or me, no one will wake up and say, I need a structured product today.
Stefan Wagner: 21:26 No. Rarely does somebody wake up in the morning, the first thought is, oh, what I'm missing in my life is a structured product.
Tiago Fernandes: 21:33 And let's face it, even the platforms that are out there, they've been successful on automating a lot of the operations, but ultimately, they will not grow the pie. They might, as a secondary effect, from freeing people from doing the manual work to focus them on selling.
Stefan Wagner: 21:53 What other trends do you see in the market?
Tiago Fernandes: 21:58 So we talked about QRS, right? We talked about the insurance and the wrapper. I think it's a very good innovation. I think what you will see is more cross-asset coming to structured products. So, we've been very equity rights focused, especially in the last few years. I think what you will see is an expansion on the asset classes. I feel that that's where the industry is going, is going to other asset classes and provide cheap way to have access to that potential return.
Stefan Wagner: 22:31 I think a lot of the innovation lately is not so much in the, as it used to be when we started, it was all in the payoff, you know, funky Asian look back, whatever, American, European bearers, whatever. Now it is a lot either in the rapper, you know, there's different ones, and structured products now make themselves into traditional rappers like ETFs, that's all to call it, but also the underlying, you know, these indices, but then QoS or crypto or what we see a lot on our platform more and more is non-bankable assets. And often actually it's driven also to get liquidity into these non-bankable assets because once it's securitized as an ISIN, the banks are often more willing to give loanable value against it.
Tiago Fernandes: 23:18 I completely agree. I think that's where the industry is going.
Stefan Wagner: 23:22 And at SPI, you help your clients to address certain regional differences because these banks are globally, but as you touched on it, they're very different. Can you go a little more into detail how you guys help there?
Tiago Fernandes: 23:39 We try to bring transparency to structure product we try to tell our clients you know what's the market share where they missing what are the missing opportunities, where do they need to improve their funding or when they need to be more competitive. See what are the distributors out there that they need to talk they need to improve and again, I think. SPI has been very helpful for our clients. We've not pushed too much in the market or getting a lot of clients because we wanted to make it right for our current clients.
Stefan Wagner: 24:11 I mean, you have so many data points. Is there something like, you thought an analysis or result that you suddenly got of that you didn't expect at all that was really surprising in like a product or industry?
Tiago Fernandes: 24:26 So I'll tell you one thing so we do research and sometimes when I have like half an hour to spare I just spent time on data together with our research team and we did a study and say okay let's try to predict what's going to happen next month how much you going to sell next month and the following month and we try to look all the different factors and. Ultimately, it came down just to two things. Rates didn't matter. What did matter was inflation. whenever inflation goes up there is more money going to structure products and this is in the us but it's an inflation is the indicator so just give it up for everyone percent of inflation you see around. One point five billion dollars of new money coming to structure products every year. And then the second one. Which is in reality true but it's basically the turnover of the products that expire and the return.
Stefan Wagner: 25:37 If they have done well, they reinvest.
Tiago Fernandes: 25:39 They usually reinvest 100% of the proceeds. So that means the capital coming back, as well as the interest, as well as the return of the products. And it's been actually quite accurate. And I didn't expect that those two factors will… That's a really cool insight.
Stefan Wagner: 25:57 Thank you for sharing. Now, maybe a few personal questions I would like to ask you to wrap up here. For you yourself, what is sort of your definition of success?
Tiago Fernandes: 26:10 It's happiness, its purpose, it's loving what you do with family or at work. And even if it's a lot of work, if you have the drive, if it really makes you go to the next level, to learn, to push you, I think that's what I love.
Stefan Wagner: 26:31 Yep. And when you want to try to relax or you want to distract yourself a little bit, what music do you listen to? What is on your current playlist or what is on the top of your playlist right now?
Tiago Fernandes: 26:42 Pop music, I need to say, and then rock, some old rock. Yeah, ACDC, I love ACDC. I know it's probably a bit old school, but I do like UK music. I know some people might not like, but Ed Sheeran and other ones I do listen a lot, and some Portuguese music too.
Stefan Wagner: 27:03 Thank you, Tiago. It has been fascinating. Thank you very much for your insight.
Tiago Fernandes: 27:07 Thank you. Thank you, Stefan.
