Currency-linked products could see growth surge; Lehman prices MarQCuS FX index-linked offerings

By Kenneth Lim

Boston, Feb. 11 - Foreign currency-linked products may see the same surge in popularity that commodities experienced a few years back, one market insider said Monday.

"I think a lot of the popularity is that it's a different asset class for most people's portfolios right now," said Brad Livingston, vice president of Structured Products at Fixed Income Securities Inc., which distributes structured products to brokers and dealers.

"Most people's portfolios are loaded with traditional stocks and bonds, and if you're worried about volatility in those asset classes, what you want is something with a low to negative correlation to traditional asset classes. Foreign currencies may help to do that."

Lehman prices MarQCuS-linked products

Among the recent FX-linked offerings are Lehman Brothers Holdings Inc.'s notes linked to its MarQCus Indexes, which are rules-based foreign-exchange trading indexes.

Lehman said it priced $6 million of 0% return enhanced notes due Feb. 14, 2011, linked to the MarQCuS Portfolio A Index, according to an FWP filing with the Securities and Exchange Commission.

The index is an equally weighted, monthly rebalanced portfolio of the six Lehman Brothers MarQCuS Indexes. The payout at maturity will be par plus triple any gain on the index. If the final index level is zero or declines, investors will share in any losses.

Lehman also priced $14.6 million of zero-coupon principal-protected notes with enhanced participation due Feb. 16, 2010 linked to the same index. The payout at maturity will be par plus 150% of any gain on the index. Investors will receive at least par.

Demand grows for forex products

Foreign currency-linked offerings are experiencing an uptick in demand as investors seek to diversify beyond the weak U.S. dollar and structured products increase accessibility to the retail sector, Livingston said.

"More investors are open to the idea now of investing in foreign currencies. As more offerings come to the market, as more investors become more comfortable with the asset class, there will be more demand."

Besides the Lehman products, other recent foreign currency-linked offerings include Barclays Bank plc's $50 million of Asian and Gulf currency revaluation notes due Feb. 4, 2038. The notes, which priced Feb. 6, are linked to the performance of the reference strategy, which is designed to provide investors with exposure to local currencies in specified Middle Eastern and Asian markets through short-term, liquid and diversified instruments.

The currencies include the Chinese yuan, the Hong Kong dollar, the Saudi Arabia riyal, the Singapore dollar and the United Arab Emirates dirham, all against the U.S. dollar.

FIS is also marketing a series of 0% principal-protected notes linked to a basket of Latin American currencies due August 2009 issued by Merrill Lynch. The notes will pay 100% to 120% of any gain in the basket against the U.S. dollar.

"Anything that's not the U.S. dollar," is in demand, Livingston said. "Foreign currencies as a whole are very popular."

Reducing volatility

Livingston explained that because foreign currencies tend to move differently from stocks and bonds, investors see foreign currency products as a way to hedge against movements in the more traditional asset classes.

"You can potentially reduce volatility in your portfolio because they just move differently from traditional stocks and bonds," Livingston said. "When you diversify a portfolio you're essentially hoping to reduce volatilities."

But foreign currency markets have tended to be dominated by institutional investors, Livingston said.

"In terms of access to currency markets, we didn't have it on the retail level. Maybe it was a scary proposition to trade in a foreign currency, or because you needed to open a specialized account."

That could be beginning to change.

"Most people's lives are heavily denominated in the U.S. dollar," Livingston said. "Their mortgages, their paychecks are all U.S. dollar-denominated, so people don't want to put all their eggs in one basket. They want to diversify way from the US dollar."

"I would speculate that foreign currency investing will be where commodity investing was a few years ago," Livingston added. "Commodities really got popular in the last five years as an asset class because it only really became available and accessible to investors in the last few years with ETFs and mutual funds. Currencies are the same way."

Livingston said leveraged notes and principal-protected notes are the most popular structures, and he does not expect to see a significant increase in unusual structures yet.

The structure of the products have been quite straightforward, "simply because the pricing has been favorable to the investors...They want to structure them in a way that are the easiest to understand and the fewer variables you put in, the easier to understand for the investors," he said.

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