The Spanish Stock Exchange has admitted to trading the first exchange-traded products (ETPs) based on the daily performance of 16 short and leveraged equity indices with 3x and 5x multiplying factors, linked to four Spanish listed securities: BBVA, Inditex, Santander and Telefonica.
These products track a leverage index for each of the underlying assets in a similar way as an exchange-traded fund (ETF) but without the limitations ETFs face such as the restriction to have a leverage/inverse factor higher than 2x, according to Carlos Garcia Rincon (pictured), director of distribution, listed products, at Societe Generale CIB, Spain.
"Leverage warrants are the best way to replicate the performance of indices that have more than a 2x leverage/short factor as investors understand that they will get the performance of the index without the volatility, time value or any other elements that could impact the performance of the index and the final return," said Rincon. "We see a lot of potential in this range and this segment of the market. It's been a difficult two/three years for the equities market but we see increasing demand for alternatives to fixed income and other more traditional products. Leverage products can play an important role on investors' portfolios to complement cash position with a set of transparent and liquid products."
According to Rincon, the initial focus is on Spanish stocks because domestic investors are biased towards the country's equity market as suggested by the fact that between 90-95% of the ETF activity and assets under management in Spain is linked to local equity assets. "This is an indication that Spanish investors want to get exposure to Spanish assets," said Rincon. "However, this does not mean that there is not scope for other non-Spanish assets in the market and we have the capabilities to expand our offering according to the demand in the market. SG offers daily leverage certificates in other markets and we can also re-direct any of our clients to SG leverage products listed in other exchanges if they wish to get exposure to other assets."
In total there are sixteen series of call warrants issued by Societe Generale which have a fixed maturity date. Societe Generale acts as liquidity provider throughout the entire trading session.
This is SG's first set of products tracking individual shares in Spain which complements the bank's existing offering of leverage/short products linked to major equity indices (Ibex 35, Dax...) and other strategies such as those developed by Solactive around currency exchange and commodities (West Texas Intermediate -WTI).
"The only requirement for us to offer these products is that the underlying assets have to be liquid enough and not all stocks out there meet that requirement," said Rincon. "Our range provides different levels of leverage of up to 10x on some equity indices but this kind of leverage is not easily deployed within single stock strategies because the volatility of the shares is higher than that of an equity index by definition and therefore is difficult to use the same level of leverage, as the risk of losing the capital invested in full increases significantly."
There is demand in this segment of the market and the French bank remains committed to continue growing its range to offer investors new underlyings, according to Rincon.
"Spanish investors are getting used to these products and we believe this segment will continue to grow," said Rincon, adding that these products are not for every investor as they are not long-term investments. "These products are targeted at sophisticated investors as they are rebalanced daily. The fact that leverage products have to maintain a constant leverage ratio is something that not every investor understands. These products are aimed at opportunistic and sophisticated investors (day traders) seeking to capitalise by taking tactical positions in the short term. We saw recently some of these products swinging heavily as a result of the Brexit vote, and this kind of product would not be suitable to investors with a conservative risk profile."
This is the latest addition to the bank's listed products range in Spain available at the Spanish stock market's 'multi' segment following its debut in April 2015. SG has marketed 230 structured products in the Spanish stock exchange, of which 212 are leverage certificates. The French bank has also acted as derivatives counterparty for 13 products sold by Barclays (9), Inversis Banco (3) and Deutsche Bank (1) of which one marketed by Barclays (Bono Estructurado Autocancelable 5 años Crecimiento Global) is still live.
The Spanish Stock Exchange (Bolsas y Mercados Españoles - BME), reported earlier this month that on-exchange equity trading in June amounted to €65.8bn, up 36.2% from May, while the trading volume in the first six months of 2016 came in at €389.7bn, down 25% year-on-year. The trading volume on the warrants and certificates market to the end of June reached €394.5m, down 38.3% year-on-year, although the trading volume at €74.9m was up 34.8% from the same month in 2015.
BME remains positive on the prospects of this segment of the market as it provides investors with 'new alternatives to get exposure to assets on a leverage or an inverse basis, according to Beatriz Alonso, head of equity trading at BME. "[Warrants and certificates] is a growing market and we are ready to admit for listing new products," said Alonso.
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