HSBC leads penetration into U.S. distribution network, Greenwich says

By Emma Trincal

New York, March 1 - Greenwich Associates, in a recent survey on the market for retail structured products, found that HSBC led in the United States with penetration into 79% of the market. The second "share leader" in the United States is Barclays with 69% of the market, followed by JPMorgan with 65% of the market.

In terms of "quality leaders" as measured in a second ranking, the two U.S. leaders were Barclays followed by HSBC.

Distribution networks

The first ranking measures market penetration, a concept Greenwich defines as the number of distributors that have established relationships with a structured products sellside firm.

The second ranking derives from a poll that is "not quantitative-driven," and where "we try to understand the qualitative factors," Andrew Awad, principal at Greenwich Associates, told Prospect News, adding that results are based on franchise breadth, not sales volume.

Greenwich has established an inventory of 50 distributors for this survey, including distribution networks related to investment banks, independent distributors as well as wholesalers.

All are involved in the sale of retail structured products.

"If you're selling through your own distribution network, you could have a big volume but only one-fiftieth of the penetration rate," Awad said.

This is why a firm such as Barclays, which often tops other firms in terms of sales proceeds, is ranked second in this study behind HSBC, Awad said.

Amid the crisis

The quality leaders ranking is based on a survey polling third-party distributors regarding all aspects of their business relationships with structurers, from origination to sales and pricing, Awad added.

The Greenwich survey is the third of its kind over the past four years, Awad said.

It reflects a market in the midst of the credit crisis as Greenwich polled 79 third-party distributors of structured products from July through September 2009, asking them to rate firms for the 12-month period preceding their interview.

"This survey takes into account the dead fourth quarter of 2008 and the very slow first quarter of 2009," said Awad.

CDs matter

One lesson from the study, according to Awad, is that banks should not underestimate the importance of building a solid certificates of deposit platform as the case of HSBC illustrates.

"At HSBC, CD volume has increased quite dramatically between 2007 and 2009. And that's one of the reasons more distributors are working with them. It's partly because they have grown their CD issuance platform," said Awad.

Credit risk

Another factor influencing how and with whom distributors are the most likely to do business is credit risk, especially in the "post-Lehman Brothers" environment, said Awad. Third-party distributors are paying more and more attention to counterparty risk, which has become a key factor in selecting a structured products provider, he said.

Complete cycle

To conduct the quality leadership survey, Awad said that distributors are asked to rank sellside firms across the entire lifecycle of retail structured products, which stretches from all aspects of origination - including product design, innovation and pricing - to sales coverage, marketing support, execution and post-trade servicing.

For sales, for instance, Greenwich asked distributors whether the firms understood their needs and how well they explained the products.

Marketing would include the quality of the marketing materials, prospectus and web site offered by the sellside firm as well as how much brand or name recognition there is.

Post-trade servicing refers to secondary market quality. "Does the sellside firm provide brokers with timely product valuations, monthly reporting and secondary market support? Does the firm have the ability and willingness to provide quotes and consistent liquidity?" said Awad.

Tool for banks

The survey is bought by the banks that have an interest in the research as they look to get some feedback from the market about their own performance and that of their peers, Awad said.

"We're doing this so we can help manufacturers of structured products benchmark their position in the marketplace, evaluate their client perception of service and help them identify gaps that they need to close in respect to servicing," said Awad.

"We talk to the execution desks at the broker-dealers rather than the registered investment advisers just because the adviser population is so big. We also make the assumption that the broker-dealer's response is going to be the most critical," he said.

Asked whether the survey's methodology based on the polling of distributors asked to rate the firms they already do business with may lead to any potential bias, Awad said, "There will always be a relationship component in any business. But presumably they chose the best firm for the job. We find that there really is a correlation between market leaders and market penetration in terms of quality."

Worldwide

Globally, Barclays Capital and JPMorgan lead in market penetration, having secured relationships with 45% of distributors across Asia, Europe and the United States.

BNP Paribas, Deutsche Bank and Credit Suisse round out the top five firms in terms of market penetration.

Barclays Capital also stood out for consistently strong performance in each region.

Greenwich Associates is a consulting and research firm that focuses on institutional financial services. It is based in Stamford, Conn.

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