text: Structured Products Industry | Our main activity is about bringing transparency to the OTC market, IFM
  2 Nov 2017 by Pablo C Conde-Herman
  Following the launch of INTL FCStone Markets (IFM) structured products online calculator (Spoc), SRP spoke to the firm's chief executive officer Mark Maurer (pictured), about the scope of the new pricing tool, as well as the firm's activities and short term plans.
  IFM's Spoc version 1.0 provides direct pricing access and connection to clients' brokers as well as real-time pricing indications on 28 structured products featuring 40 commodities but the firm is already working on version 2.0 which will revolve around correlation, according to Maurer.
  "Spoc is a correlation type builder where we take basket options that match our customer's hedging needs," says Maurer. "Spoc 3.0 will be effectively a click and trade platform, a kind of structured products "sand box" that will enable eligible customers to build and trade in certain products."
  What are INTL FCStone Inc.'s core activities?
  About 30% of the company's segment income comes from some form of commodity hedging for customers including hard commodities (precious metals) but also soft commodities (grain) while another 25% comes from rates and equities securities, and another 25% from our global payments division. The remaining revenue comes from clearing and execution services and physical business.
  How did the initiative to develop a pricing tool come about?
  Spoc came about on the back of a plan INTL FCStone wants to implement over the next three to five years. I think there will be a turnover in the commodities space as most of the people involved in this market over the last three decades is leaving or shifting to a different activity. The new players in this segment are keen to capitalise on technology and will be way more price sensitive.
  In order to respond to the new market set up we will need to redefine high touch trading and get closer to our customers with a strong digital footprint. With Spoc, we're able to more clearly show all our offerings and products to the street so that anybody can see what we deal but to see the pricing on those products you have to become a customer. Spoc offers insight into 80% of the volume we trade and which commodities are those in. The Spoc platform helps inform our customers about where our fair value is with real time updates for any commodities and structured products we offer.
  Can you explain your responsibilities at IFM and involvement with structured products?
  I oversee the OTC division of the company. If you ask 10 people what a structured product is you will probably get 10 different answers. In our view a structured product is a combination of different OTC swaps and options based on a financial underlying mainly in commodities although we do also currency and FX as well. Our focus is in the commodities world and we have around 1.45 million contracts per year in the commodities OTC market of which a significant of contracts involve structured products.
  OTC products are designed to deliver benefits similar to exchange-traded futures and options, but can offer customizable terms (e.g. non-standard quantities, strike prices, expiration dates, etc.) that align more closely with a customer's unique hedging needs They can range in complexity from plain-vanilla swaps, which behave like conventional futures and options, to structured products, in which multiple contracts combine to pursue a larger strategy. In all cases, OTC products aim to create more flexible, customizable solutions for each customer's specific needs.
  We have a very comprehensive offering of any and all commodities so our clients can manage their exposure and find liquidity in grains, softs, energy, dairy, livestock, metals, lumber, pulp, and other commodities, as well as foreign currencies and interest rates.
  What is IFM target market?
  95% of our core business is done on the hedging side but we are using our electronic platform to go after structured products transacted on then institutional side. We are only permitted to offer swaps and OTC products to customers that qualify as eligible contract participants (ECP), and our current focus is on providing value added services to producers and consumers of commodities to facilitate the purpose of hedging.
  Our customers include the producers, processors and end users of virtually every major traded commodity, as well as asset managers, introducing broker-dealers, insurance companies, brokers, institutional and retail investors, commercial and investment banks, and governmental, non-governmental and charitable organizations.
  What makes a good pricing and valuation service?
  To succeed in any activity you have to be able to respond to the ever evolving customer user experience. You can have a platform but without a dedicated customer centric approach and the ability to customise your offering you may not be effective. This is not about winning all the deals because we're not going to deal at a loss just to get market share. In a nutshell, three things: price, customer service and customisation of new products.
  How would you describe the competitive landscape in this segment?
  There are number of players in this segment and the competition is healthy. Our main activity is about bringing transparency to the OTC market. What we're seeing in the pricing and valuation landscape right now is that some of these market making firms are backing off and widening their bid offer because of lower volatility, less players, etc.
  There's a lack of market makers on a number of segments and we see the widening of the bid offer even on plain vanilla so inherently you're going to see a widening of the bid offer, and that is where we come in. We want to price the fair value of those products using our models and bring transparency, but that doesn't necessarily mean that there will be less volume or the industry will price itself out. This is not a zero sum game and we believe there is value added on that bid offer.
  What's your take on issuer platforms in the retail structured products market? Is the commodities market lacking automation?
  That market has taken off in the equities structured notes segment but we don't see the same level of automatization around the commodities market. Our platform can be white labelled and opened to investment advisors and product manufacturers but we're not interested in this segment at the moment.
  Commodity-linked structured products is really old school and this segment has not morphed into using technology in the same way FX or equities have evolved as we have seen in the structured notes space. We have been talking about platforms in the structured notes market for years but this is fairly new around commodities. We are trying to chance that because we believe there is value in what we can offer and opportunities for growth.
  Can automated/click and trade platforms help commodities to increase their market share?
  Commodities will not compete with equities but we think they provide very good opportunities for hedging as well as investing. The challenge is on customising with a hedging mechanism that matches the payoff of the actual producer and consumer of commodities, and that's where we come in to customise pricing, offer exotic options for revenue enhancement... you cannot get all that done on-exchange.
  Do you think automation will improve the issuance and distribution of products?
  Regardless of the need for scalability and the speed of technologic advances the market place still needs the human touch and the interaction of a physical broker. Providers and distributors are interested in building relationships when hedging their exposures.
  From an investor perspective I think the move towards automation makes sense as you want a transparent and standardised venue to transact, and execute your trades. But when you talk about customisation a level of human interaction is needed. We're happy to offer customers products off the shelf but to customise the offering we want to engage with those clients and understand what their needs are.
  INTL FCStone is a provider of execution, risk management and advisory services, market intelligence, and clearing services across asset classes and markets. The company has more than 20,000 customers in 130 countries and provide products and services across five market segments: commercial hedging, global payments, securities, physical commodities, and clearing and execution services. A Fortune 500 company headquartered in New York City, the company is listed on the Nasdaq, has US$700m market cap and 1,600 employees.
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