Luma Insights:

Using technology to drive better access to capital market alternatives  

When most people think about structured products within the capital market alternatives space, they tend to think about those linked to equities.  

Capital market alternatives, or Cap-Alts, are investment strategies or asset classes that provide investors with exposure to non-traditional pay-off opportunities. 

As one of the first solutions of the kind, structured products were initially designed to offer stock market exposure with a degree of capital protection.  

That heritage helps explain the link in many investors’ minds with equities. 

But it is also, to some degree, a function of accessibility.  

As the technology to create structured products first developed around stocks, its evolution naturally tilted towards the equity asset class. Today, advisors and wealth managers can easily create bespoke equity-linked products through platforms, even at small sizes. But this is not true of products linked to some other asset classes, like rates. 

While they have been a significant feature of the market for years, creating and trading interest rate products has traditionally been a largely manual process involving complex workflow negotiations. That has meant minimum sizes are typically high and choice is relatively limited. 

For advisors and wealth managers seeking to leverage rates products in today’s higher interest rate environment, this situation has been less than ideal. 

That’s why we at Luma have recently extended our investment proposition to allow users to create and trade interest rate products across our growing panel of issuers. Through Creation Hub, Luma clients can now access a wide range of rates products and tailor them to match specific investment strategies, just as they would with equity-linked structures or credit-linked notes. 

Leveraging higher rates 

The volatility and uncertainty in the global rates market is a perfect environment for rate products, which help advisors bring higher levels of principal protection and sophistication to investment strategies. 

A product like a Floored Floater, for instance, allows advisors to lock-in a rate that reflects central bank policy rates, while allowing them to benefit from further increases. For advisors or clients who think rates could fall but also see a possibility of them rising, a Floored Floater makes perfect sense: they can secure a minimum rate now without foregoing exposure to any future upside. In today’s market, where there is little certainty over peak interest rates, this could be a great time to explore how this type of product could enhance a client’s investment portfolio. 

Custom built for clients 

While we are committed to improving accessibility to a range of asset classes, it’s Luma’s cutting-edge technology that really allows users to maximize the potential of Cap-Alts for individual investors. 

Interest rate products are a case in point. Not only have they been unavailable on platforms until now, but they have long been difficult to customize. As a result, issuers have typically built products they hope have mass appeal and advisors, if they found one that their suited their client’s requirements, would buy it off the shelf. 

Luma’s Creation Hub flips this dynamic on its head, so advisors and wealth managers can build and customize products tailored to a client’s needs from the outset. Users can easily discover how different floor levels influence floating rates, for instance, or how specific tenors impact the minimum return. Once they have found the right risk-return profile for their client, they can trade the product quickly and efficiently.  

In this way, we can support product managers and trading teams with their price discovery and best execution workflows, enabling them to efficiently request prices from issuers. With our technology lowering the barriers to entry for tailoring products compared to other alternatives, users can take control over the product creation process, handing a key advantage to advisors seeking to build the right solution for individual clients. 

Looking ahead 

Automating the process for creating and modifying custom deals is, of course, a crucial benefit for our users. 

But advisors and wealth managers also need tools to keep track of products once they are traded and service them accordingly. That’s where our Lifecycle Manager comes in, allowing users to assess investment opportunities, track product events, visualize performance, and manage transactions. Users have long been able to leverage these tools with other asset classes; now they can also do so with interest rate products.  

Our innovation will not, however, stop there. We see developing possibilities to expand into other product sets where the payout is defined and potentially determined by the investor. Cap-Alts is a clear area in which there are exciting opportunities for the future. 

As we evolve our proposition and leverage our technology for the benefit of our users and their clients, we will continue to make it easier, more efficient and advantageous to incorporate solutions including structured products into investment portfolios.