Derivatives set for European expansion

With the country’s derivatives market having enjoyed several years of booming sales, German issuers are currently weighing up plans to expand their success abroad. Speakers at the Frankfurt leg of the PWM European Fund Series tour – supported by BNP Paribas Investment Partners - shared these plans with 120 delegates from Germany’s fund houses and distribution platforms. “We are prepared to massively export certificates, because our sales platform has a truly European reach”, said Christian Hille, who heads the “Go” certificate platform at DWS, the asset management subsidiary of Deutsche Bank. The German certificate market is emerging as a role model for other jurisdictions on the continent, said Uwe Becker, head of retail structured products at UK investment bank Barclays Capital in Frankfurt. “Europe is learning from us, especially the markets in southern Europe, Spain and Greece,” Mr Becker told the audience, with these countries eager to copy the German success story. However, a long-term annual growth rate exceeding 30 per cent in the private client and retail derivatives market was dampened in March this year, in the wake of the global financial crisis that has severely hit investor confidence. But April figures from the derivative issuers umbrella association, Deutscher Derivate Verband (DDV), once again show steady inflows due to rising equity markets and a rush to invest before the new flat rate withholding tax, to be implemented in 2009. At the beginning of the second quarter of 2008, DDV recorded net inflows of E3.4bn gathered by 15 issuers representing almost 75 per cent of the market. That brings total outstanding market volumes to E133bn. These figures make Germany by far Europe’s biggest retail derivative market. The strongest performer was bonus certificates, which gathered net inflows of E1.6bn in April, representing growth of 8.8 per cent. But, all in all the first six months of the year were disappointing, said Mr Hille. However, he expects a rally towards the end of 2008. “Structured products are still en vogue,”he added. Hans-Ulrich Lauermann, head of financial services tax for Germany at PricewaterhouseCoopers (PwC), also called for German groups to conquer new, foreign markets. “We should look for international money, not only with certificates but with real estate funds as well,” said Mr Lauermann, adding that German issuers should follow their Anglo-Saxon peers who have a strong footprint in the fund business. As emphasised by Mr Becker of Barclays, the secret of German success in the derivatives market lies within the flexibility of products. “We are able to launch almost every exotic or exceptional product you can imagine,” he said. This is what other countries are trying to copy right now. “The Italian exchange in Milan is creating its own derivatives segment as Deutsche Borse and Swiss Exchange SWX did with the ‘Scoach’ platform.” The quick and easy launch process proves a further advantage of the derivatives industry compared to mutual funds. “With funds, you sometimes need four weeks to launch a product, way longer than with derivatives,” commented Mr Hille of DWS. Nevertheless, the derivatives industry should look at the fund industry in terms of sales strategy. “Still, fund products are being sold while derivatives are being bought. This pattern is changing, certificates are being sold more actively now,” said Mr Hille, calling for an even more aggressive product sales strategy. Besides, structured products are getting more and more transparent. “The price structure should be open to everyone,” the DWS boss told the conference. A call also came from Barclays for the industry to solve the issuers’ default problems, which occurred as collateral damage during the financial crisis. “Every issuer in the industry tries to find a solution because structured products are a mega trend,” said Mr Becker. “This is not only about performance, it is also about sentiment,” said Mr Lauermann from PwC. “Many buyers of certificates fear the risk of an issuer’s default, which could destroy their complete investment.” The possible consequence of a breakdown of a financial company is currently one of the biggest topics of concern amongst investors, according to the findings of the German think tank Mannheimer Zentrum für Europäische Wirtschaftsforschung (ZEW). Another outcome of the ongoing crisis in the financial markets is the prospect of harsher regulation, particularly in the US hedge fund industry. Still, Europe’s mutual fund industry has escaped from this so far, but if German groups go abroad they need to come to grips with that issue, said tax expert Mr Lauermann. “It would be better for us to anticipate what the authorities will do,” he said.