Risk protection could spur demand for structured products, distributor says; Morgan Stanley sells ETNs

By Kenneth Lim

Boston, March 18 - Structured products with better downside protection could become more popular in the coming months as investors seek shelter from the volatility in the equity markets, a structured product distributor said.

"Given the kind of markets we're seeing these days, any kind of principal protection will give an investor better peace of mind than direct exposure," the distributor said.

The distributor was making those comments in the wake of JPMorgan Chase & Co.'s introduction of a reset feature in its reverse exchangeables.

JPMorgan on Monday announced reverse exchangeable notes tied to the common stock of Research in Motion Ltd. and to the common stock of Apple Inc. Like other reverse convertibles, the notes will pay par unless the underlying falls below the barrier level during the life of the notes and finishes below the initial price, in which case the payout will be a number of the underlying shares equal to par divided by the initial share price.

But the addition of the reset feature will reduce the initial price if the underlying falls below the barrier level during the first 30 calendar days, essentially giving the notes a second chance.

"That obviously gives you more protection on the downside, but you pay for that by getting a lower coupon," the distributor said, noting that a series of JPMorgan reverse exchangeables linked to Research in Motion priced a week ago with a 16% annualized coupon and a protection amount of 40% of the initial share price.

The new notes with the reset feature pay a 14% annualized coupon and have a protection amount of 30% of the initial share price.

Principal protection structures, such as principal guarantees, barriers and buffers, are features that investors will be seeking with underlying markets facing uncertainty, the distributor said. Those features combined with accelerated returns and bearish notes could attract investors who have a neutral to bearish view of underlying markets, the distributor said.

'Protection doesn't come free'

But investors who expect downside cushioning must give up some of the upside.

"There's no way to get around that," the distributor said. "Protection doesn't come free. But if you think the market's not going to do that well anyway, it makes sense.

"And in these kinds of markets, I expect a lot of people will think that way. I could own a stock and my capital will track it whether it goes up or down. A structured product with downside protection and an accelerated upside will give me my principal if the stock is down by up to 30%, for example, and I could get a multiple of the upside if it goes up. Now, most accelerated products will cap your return, so if the underlying goes up enough, you're actually worse off than owning the stock. But if you're already not too confident with the stock and the market, you don't expect it to go that high anyway."

Investors seeking such risk protection suggest a good outlook for structured products, the distributor said.

"This is one of the main things which structured products offers," the distributor said. "It can offer you exposure to an asset with the risk adjusted to a more accessible level."

Morgan Stanley sells ETNs

Morgan Stanley said it sold $8 million of its new currency-linked exchange traded notes.

The sales are the first installment of two deals that could reach $100 million each.

In filings with the Securities and Exchange Commission, Morgan Stanley said it sold $4 million of the Market Vectors-Chinese Renminbi/USD ETNs due March 31, 2020 and $4 million of the Market Vectors-Indian Rupee/USD ETNs due March 31, 2020 at the inception of the offering.

A total of $100 million per series is being offered, with each note having par of $40.

The renminbi-linked note tracks the S&P Chinese Renminbi Total Return index while the rupee-linked note tracks the S&P Indian Rupee Total Return index. The renminbi product will be listed as CNY on NYSE Arca, while the rupee product will list under the symbol INR.

The notes will be marketed by Van Eck Global.

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