Contineo, a bank-led technology consortium for trading structured products in Asia, is in the process of expanding its services to Europe, with aspirations to go live in the first half of 2018, says CEO Mark Munoz. But, he adds, different market conditions mean the uptake will be slower than it was in Asia.
The service is deemed a success by the investment banks and private banks supporting it in Hong Kong and Singapore. But that doesn’t translate into an obvious benefit to users by extending the platform to Europe.
Contineo was established in 2015, using the technology of AG Delta (a co-investor) to electronically connect investment banks, which manufacture structured products, with the private banks that distribute said products to wealthy Asian clients.
For example, a private bank’s relationship manager (RM) might want to pitch a trading idea to a wealthy client. She can set out parameters on the Continue platform and investment banks can automatically respond with prices; these prices aren’t advertized, but the system will offer up the most competitive bids, for the RM or her client to accept or reject. Transactions of vanilla products can be packaged and sold in minutes.
Contineo has been a hit thanks to its speed, its algorithms to immediately construct and price products, and its use of a common protocol (FIX, for execution) that allows multiple players to interact. The platform has allowed participating banks to cut headcount, and made it simple for both issuers and distributors to do business amid a marketplace with many counterparties.
In Asia, Contineo competes against Singapore-based FinIQ Consulting, a standalone vendor, and as a result of these various solutions, bilateral issuer-to-distributor deals for structured products are now limited to esoteric situations. The two players each have close to half the market, reckon bankers. (FinIQ did not respond to requests for comment.)
And the market is big: Munoz says the Hong Kong and Singapore market for structured products is $180 billion a year in notional contracts. He says the average transaction size on the network is $500,000, with the underlying mostly equity flow products.
Europe is a smaller market, but still attractive, at around $120 billion, Munoz says. But it throws up the same problem that Asian banks previously faced: “There’s no digital solution to streamline the business,” he told DigFin.
Hence the users have been requesting the consortium extend its services. But it’s not an apples-to-apples situation.
Asia vs. Europe
Asia’s industry involves many family offices and wealthy individuals who demand customized, bespoke products for short-term trades. Accumulators, a type of equity forward that is popular with Asian customers, can hit targets and pay out within a week. And rich Asians like to spread their trade among multiple private banks, adding to complexity of price discovery.
Ultimately, the cost of product design and execution plus the market’s big size and confusing variety of bilateral relationships incentivized banks to invest in any multi-issuer platform, says Lemuel Lee, head of equities for Asia at JPMorgan’s private bank, in Hong Kong.
“In the past, it would take an hour, if everyone focused on it,” he said. “Now it just takes minutes to price, quote it and trade.”
But these conditions are not replicated in Europe. Structured products are designed to last three to five years. The sizes are smaller. Payout structures, and therefore compliance rules, differ. And there’s no need for banks to race to close a price before the day is out.
The competitive landscape is also more mixed, with vendors such as ITG’s RFQ-Hub, LeonTeq and Vontobel’s platform (called derinet) already serving different niches.
Munoz says private banks in Europe have expressed a desire to see Contineo operate there. “It’s not a revenue drive by us,” he said.
Bankers in Asia see the benefits their counterparts in Europe would receive, although they recognize the need may be less acute.
“It will come over time,” says Frederic Dussaux, co-head of electonic market-making and commerce at BNP Paribas’s global markets division, in Hong Kong. “Private banks [in Europe] should demand it in order to automate operations and deliver execution capabilities to their RMs.”
But what happens in Asia often stays in Asia: for these global financial institutions, regional executives follow their own market needs, and their own incentives. And service providers like Contineo can’t leverage opinions in Asia to sway those in Europe without risking annoying its clients.
So for Contineo, the European business has to be established organically. As a consortium fintech, Contineo needs to make sure enough of its members will support the move. Some investment banks are happy with the status quo in Europe, where the environment is already competitive, and may not welcome a system that makes pricing more transparent.
“It would be a challenge if clients felt like we weren’t giving them a choice,” Munoz said. “We want them to see the long-term benefits.”
To some degree, a slower pace is natural to a consortium business model. A fintech servicing multiple financial institutions across jurisdictions faces high costs, and Munoz says it took Contineo six months before members started using it, and while longer before they began to pay.
To that end, Munoz believes some of the more enthusiastic private banks will join the European platform by the end of this year, but it may take longer to activate investment banks. But he is betting the allure of transparency, speed, efficiency and client demand will eventually win enough of them over.