The landscape for derivatives is evolving

The low interest rate environment that has dominated since 2009 has seen the market for structured products flourish. But as interest rates start to go up, questions are being asked about how the market will evolve.

Against this backdrop, banks will have to come up with even more innovative solutions for clients, according to Kokou Agbo-Bloua, Global Head of Flow Strategy & Solution, Financial Engineering at Societe Generale.

Every solution is the sum of different building blocks, explains Kokou, “In our business, creativity is key. You can innovate and use your imagination but there are parameters; you need to make sure that the products are appropriate and above all that they serve the interests of the client.”

Structured products can be complex, he says, and the range of solutions in the market is vast. “There are as many derivatives as there are situations or pay-offs or hedging issues that clients want to mitigate. The opportunity is huge,” he said.

Given this complexity, regulators are quite rightly focused on clients and Kokou fully understands these concerns. “The question is not about whether or not derivatives are good or bad per se, it is what people use them for and whether the people who trade derivatives fully understand them,” he says. Indeed the “Product Governance” section under the Mifid II regulation is designed to achieve greater transparency.

“The future for structured products will be innovation,” says Kokou. “Innovation centres not only around the products but also on the ‘story’. We can be creative around dispersion – rather than making a trade for example around something going up or down you can structure a solution around how correlated or not markets are. You can also combine more cross asset elements into a product or look at thematic investments such as ESG or green themes. The universe of innovation is quite large.”