The issuance of inline warrants on the German market has surged since the beginning of 2015, with 26,275 new products brought to market and an increasing number of provider active in this segment.
Inline warrants are a type of leveraged warrant with a range digital payoff that sit alongside knockout warrants and factor certificates in Germany and represent 2.3% of the total outstanding volume in Germany. However, leveraged product turnover on the Stuttgart and Frankfurt exchanges amounted to 54.6%, or €2.8bn, of the total turnover, according to the DDV’s exchange turnover data reported in January 2015.
“Commerzbank has been offering these warrants for a long time,” said Anouch Wilhelms (pictured), director, equity markets and commodities, public distribution at Commerzbank. The German bank has increased its issuance and become the second largest provider in Germany, according to Wilhelms. “By widening our product range for warrants, we are aiming at diversifying the market, as there are currently only two other providers in Germany offering these is type of warrants.”
Societe Generale, “by far the biggest provider for inline warrants in the German market”, according to Peter Boesenberg, head of public distribution Germany & Austria at SG, has also increased its issuance. “In 2014, we issued in total 31,000 inline warrants,” said Boesenberg. “So far this year, we have issued around 19,500. This enables us not only to cover further underlyings but to offer also inline warrants on the Dax with a monthly maturity, as so far [we only issued inline warrants] with a maturity on a quarterly basis.”
The increase in issuance has been attributed to macroeconomic developments. “Exotic products like these are interesting, especially spread warrants and inline warrants, and we see an increasing demand,” said Nicolai Tietze, director at Deutsche Bank. However, according to Tietze, this product type is highly speculative and only suitable for sophisticated investors as they bear a high risk of either returning €10 or nothing at all.
“Therefore, it will stay a niche product,” said Tietze. “The turnover of inline warrants equals to 1% of the turnover of the warrants overall, excluding knock out warrants.”
Inline-warrants are a niche product, of special interest to certain investors who find these product attractive, said Wilhelms. “It is certainly not a mass product,” he said. “The demand is constant but significant. However, the inline-warrants product category is still small compared with the knock out warrants or the warrants in general.”
The most popular underlying in inline warrants is the Dax, said Wilhelms. “Besides [the Dax], we offer a wide range of German blue chip single shares, while currency pairs (EUR/USD, EUR/JPY, EUR/GBP, EUR/CHF) are also in demand,” he said. “These are specific to Commerzbank as they are not offered by other market participants.”
However, said Boesenberg, over the last few months there has been an increasing demand for inline warrants linked to oil and US shares.
Deutsche is using the Dax but also looking at underlyings such as gold, oil and currency pairs, specifically the euro versus the US dollar and the euro versus the Japanese yen, said Tietze. “These are the underlyings that matter now and in the future,” he said. “Other providers are issuing inline warrants on single shares which I think will rather decrease in the future, when the market becomes more unsettled.”
“The outlook remains uncertain as it depends on the market environment”, said Tietze. “If the market volatility increases, we will issue more products,” he said. “However, we are focusing on our core leverage product, the knockout warrant.”
SG has also issued new inline warrants, according to Boesenberg. “These are a variations of the classic inline-warrants that work the same way, except the KO-levels are increased by a fixed amount every Monday, so that with time it results in an upward trend corridor,” he said. “We offer this product type on the Dax and on Apple shares.”
Commerzbank, the newest member of this burgeoning market, has linked up with local online banks to distribute its range of inline warrants including Consorsbank, DABbank, Onvista Bank and Sbroker, on which investors have been able to trade inline warrants for free since the beginning of 2015, according to Wilhelms.
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