Sheltering from the storm
Mourant du Feu & Jeune's Jonathan Rigby and Simon Felton explore the increased demand for structured products in uncertain market conditions.
With volatility in global stock markets likely to be a continuing problem for investors for the foreseeable future, Channel Islands-based structured product issuers are seeing a surge in demand for investment products that are less vulnerable to fluctuations in the value of individual stocks.
Recent years have seen a substantial increase in the number of structured product issuers domiciled in the Channel Islands. The issuers, which are spread between Jersey and Guernsey, are typically structured as closed ended corporate funds issuing preference shares listed on the CISX to UK based investors. The issuers have established programmes for the issue of structured preference shares, which are sponsored by leading investment banks including Citigroup, WestLB, Credit Suisse and Morgan Stanley amongst others, with major players entering the market on a regular basis.
Preference shares are issued in series and the performance of one series is not linked to or affected by the performance of any other series issued by the issuer. This is achieved through contractual ring fencing of the assets and liabilities in relation to each series, or by establishing the issuer as a protected cell company (in either Jersey or Guernsey) or an incorporated cell company (currently only available in Jersey).
Historically, offers of such preference shares were primarily targeted at UK resident investors acquiring the shares through ISA and PEP plans or, more recently, SIPS and SASS schemes. A listing on the CISX - a Recognised Stock Exchange for UK Inland Revenue purposes - makes the preference shares eligible to be included in the stocks and shares components of such schemes. As the popularity of equity structured products has grown, the target market has diversified and a number of issuers now also target high net worth investors, either exclusively or through targeted offers to the relevant market sector.
The return on a structured product is typically, although not exclusively, linked to the performance of a basket of shares or the performance of one or more global indices. This enables an investor in the product to obtain exposure to the performance of an entire index, basket of shares or basket of indices, at a much lower investment cost than would be the case if the investor attempted to assemble a portfolio of the constituent stocks. Although the majority of preference shares track the performance of indexes, the flexibility of the platform has seen products issued tracking the performance of a proprietary trading strategy or the performance of a basket of commodities.
Following issue of the shares the issuer invests the proceeds in a hedging investment designed to generate a return on the investment, often either a derivative contract or structured note. The issuer does not hedge its exposure by acquiring a direct interest in the shares or indices by reference to which the return on the shares is linked. This makes the issuer a cost effective vehicle through which to structure products, which would otherwise require complicated hedging arrangements or active portfolio management.
Structured products remain attractive to promoters in the current liquidity crisis, as they use capital markets and investment fund technology to access funding on attractive terms from non-institutional investors. The products also offer relative stability of funding lines, as they are subject to redemption in accordance with their terms or on maturity only and not at the option of holders. Investors are able to obtain exposure to a broad range of risk, diversified by market sector and geographical spread in a cost effective manner.
Changes in 2008 to Jersey's fund regulation regime have quickly been adopted by structured products issuers and Mourant du Feu & Jeune recently structured the first unregulated exchange traded funds in Jersey. This level of innovation and regulatory flexibility has helped keep Channel Islands' issuers at the forefront of the sector. With the outlook for global credit and equity markets remaining uncertain, we expect activity in the sector to remain strong for the medium term.
Mourant is a founder member of the CISX and acts as a Category 1 member, allowing it to act as a listing sponsor for all types of securities capable of being listed on the CISX. Mourant provides legal, administrative and listing services; a complete solution for listing services.
Mourant's Channel Islands Stock Exchange (CISX) listing services include:
- providing guidance on the CISX listing rules;
- ensuring compliance with relevant requirements of the listing rules;
- preparing and lodging formal applications with the CISX in relation to listings and continuous obligations;
- making announcements and filings in relation to listed securities;
- seeking CISX approval for the listing prospectus and other disclosure documents;
- preparation of all listing documents;
- acting as authorised representative to the issuer in connection with the listing of securities on the CISX; and
- assisting with the listing of any further securities issued on a fully fungible basis.
Please click here to download a copy of the Channel Islands Stock Exchange 10th Anniversary Special Bulletin