Brexit Hastens Structured Product Losses for Yen Speculators

  • Holders of so-called accumulators face margin calls: Barclays
  • Yen may rise above 100 per dollar as safe haven: SocGen

Investors in structured products that lose money when the Japanese yen appreciates are facing escalating losses over the U.K.’s vote to leave the European Union.

Holders of so-called accumulators, a market estimated to be as large as $10 billion, and many similar products are now facing margin calls after the instruments fell in value, according to Danny Chan, head of private banking solutions, non-Japan Asia at Barclays Plc.

“Brexit has impacted currencies and bank stocks,” he said in a telephone interview on June 28. “In Asia, some investors are betting on yen depreciation, but the trend has been working against them this year,” he said. “It’s the same for clients holding bullish bank-linked structured products.”

Investors in a 12-month dollar-yen leveraged accumulator typically buy, say, $100,000 of the Japanese currency per month at a pre-determined discounted price, which generates large gains when the yen depreciates. But if the currency instead appreciates beyond a certain trigger point, the investor is committed to buying twice as much, or $200,000 per month at the same yen level, which accelerates losses if the currency doesn’t change course.

Yen Surge

After Britain voted to exit the EU, the yen gained 3 percent versus the dollar, making it the best-performing developed market currency this year. It traded at 102.74 per dollar as of 10:28 a.m. in Tokyo. Steven Englander, the New York-based global head of Group-of-10 currency strategy at Citigroup Inc., the world’s biggest currency trader, said earlier this week that the dollar-yen could reach 95 in the next month or two.

To unwind their exposure, investors in dollar-yen accumulators will have to decide to sell their holdings or restructure the trade to exit at a level where they lose less money. Many products were issued with the yen at 115 or 120, according to Andrew Scott, the head of flow strategy and solutions for Asia Pacific at Societe Generale SA.

The yen may rise above 100 as “it’s a safe haven,” Scott said in a telephone interview on June 27. Uncertainty will remain until article 50 of the Lisbon treaty is invoked - which triggers a two-year period of formal negotiations for Britain to leave the EU - and new bi-lateral contracts between individual EU states are drawn up, he said.

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