Regulation, tax and technicalities are recasting Europe’s structured products market

The turnover of listed structured products on exchanges in Europe in the first quarter of 2013 has fallen against the same period for last year, although commentators are buoyed by a market that started to show strong signs of improvement towards the end of last year.

Structured products turnover in the first quarter of 2013 was €24.9 billion – €5 billion lower than in the same period a year earlier, according to the European Structured Products Association (Eusipa).

“While the last quarter of 2012 has seen the market stabilising at low levels, the first quarter of this year has been much better again, which has reassured people,” says Thomas Wulf, secretary general at Eusipa in Brussels. “Macroeconomic reasons are there for this improvement – quantitative easing has had an effect, and made equity markets better-performing. That always gives an encouragement to structured products.”

The business climate is much better for some than last year, agrees Stefan Armbruster, managing director at Deutsche Bank in Frankfurt. “The stock market is better and the feeling on the Street is better. The client mood is better and flows are much more stable. Let’s not get over-optimistic, a lot of investment products are still very conservative. As a result, there are only five or six payoffs that make up 90% of the market, although this is good for clients.”

The most dramatic change to the European market included in Eusipa’s first quarter statistics is an 86% reduction in the on-exchange turnover of investment products in France, which has plummeted to €98 million from €734 million in the first quarter of 2012. At the same time, Italian volumes rose steeply, from €618 million to €988 million. Wulf noted though that open interest numbers for France and Italy were not yet available, “so we can’t see whether the drop or increase in exchange turnover is complemented by a drop or an increase in the outstanding volume”.

The falling volumes in France have been attributed to a number of different factors. “In France, more is happening off exchange, because the biggest discount broker cannot have a product that is traded on and off exchange due to their internal booking programme,” says Armbruster. “So they try and do all their high-volume business off exchange. And this is interlinked with Cats and Lox (Limit Order Xervices) being used by the online broker and financial information portal Boursorama… off exchange is cheaper for everyone involved.”

Another issue was a series of product reclassifications implemented by the French trade association, leading to the sharpest drop in turnover – between Q2 and Q3 2012 – from €865 million to €120 million. “In there, a number of products were re-grouped and considered investment products when they should have been considered leveraged,” says Wulf. “Leveraged products jumped at the time by only €300 million (instead of an expected €700 million) because the turnover of leveraged products was going down.”

The changes in Italy and France have followed changes implemented by regulators and tax authorities. Each country has a financial transaction tax (FTT) in place, which excludes derivatives in France but includes them in Italy. Both tried to encourage trades on exchange by use of new tax laws.

The on-exchange move in Italy may be due to higher taxes on off-exchange trades than those on public platforms, says Wulf. The new tax law was introduced in late 2012, which ties in with the change in volumes in Italy in the third quarter, and the point where equity markets started to recover. Recoveries in equity markets filter through more quickly into leveraged products than investment products, he says.

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