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ESMA Reports on Diversity in National Structured Product Markets

Joshua Wynn, StructuredProductReview

In its Report on Trends, Risks and Vulnerabilities published last month, the European Securities and Markets Authority reported on the national structured product markets in Europe, finding a high level of diversity between nations.

According to the report, structured products are ‘a significant vehicle for household savings’ throughout the continent, with around EUR 500bn invested overall (about 4% of EU households’ net worth). Germany, France and Italy were by far the leading countries in terms of sales volume, with the UK seventh behind them, Austria, Spain and Belgium.

Using information acquired from StructuredRetailProducts.com, the report noted some interesting findings as to how the trends in each country are divergent from one another. For example, that the EU-wide trend has been towards decreasing product terms on the whole, although with average terms having increased in France. From our own observation we know that in the UK there have also been quite considerably greater terms offered in recent years (not least since the introduction of the 10:10 Plan series) and maximum potential plan durations in excess of six years are now commonplace.

The paper focuses on the three largest continental players, stating that the most popular product variants are Protected Trackers in France, while Germans prefer Reverse Convertibles. In Italy, on the other hand, no clear favourite emerged with a majority (much as in their recent election), although Auto-calls without capital protection barriers took a modest plurality.

ESMA made some concerns clear, for example that capital-at-risk products make up more than 95% of the continental structured products market, and that they consider the costs of the products to be high in comparison to other investments due to their intrinsic ‘complexity’. However, the provisions of MiFID II that require providers give individual plan fees to two decimal places in their brochures should go some way to allay apprehension on this latter topic.

The most striking finding of the report is that outstanding volumes have decreased by almost EUR 300bn since 2012; this fall of more than 30% comes as ‘the number of outstanding contracts continued to rise, passing the five million mark’. The tightened regulatory environment and the increase in exchange-listed products were both pointed to as possible explanations for this dramatic fall, but a logical angle from which to read this data would simply be that a greater (and increasing) number of retail investors are investing smaller sums into more products. The vast array of bespoke options available on the continent that is so alien to the UK retail space seems to have saturated the market over the Channel.

Whilst the UK still lies someway behind continental Europe in terms of structured products sales, given the simplicity of payoffs and fair terms now found in most product offerings, as more investors and advisers gain confidence, the scene is set for a resurgence and renaissance in these investments.