Historically, the leading retail structured investment markets have been Germany and Switzerland where they benefit from listing on innovative local exchanges. The London Stock Exchange (LSE) has listed structured investments and covered warrants for a number of years now, but how does it compare with overseas competitors?
Structures have been listed on exchanges internationally since the nineties and more recently on the LSE. In some markets such as Germany and Switzerland they are traded on and off exchange, whereas products listed in Luxembourg and the Channel Islands have historically tended to transact off exchange. More recently, regulators and politicians have tended to favour exchange-traded derivatives and other structures because they feel that there is more transparency than executing over-the- counter.
What are the benefits of listing?
Transparent daily pricing for investors
Liquidity – the provider or a third party needs to provide a market
Opportunity for fund managers who can buy listed products only to invest
A known cost of executing a transaction, although the provider’s net income may not be so clear
Accessible through your local or online broker
Opportunity to appoint more than one market maker, further improving transparency and liquidity
Settled through CREST [a central securities depository for Guernsey, Jersey, Ireland, Isle of Man and UK equities and gilts]
Easier to obtain a valuation for your portfolio and track performance
Scope for CREST to offer security backed structures such as Scoach in Switzerland
Are there limiting factors?
Cost of listing which can make the terms less attractive
Requirement for the provider to enable daily trading, which is not available to all providers who cannot hold inventory
Stamp duty may be payable, as with shares
Unable to accommodate structured deposits
What are the alternatives?
Specialist structured product platforms like SRPWrap and more generic platforms such as Cofunds offer many of the benefits of exchanges. Depending upon where the assets are held, they may not provide quite the same comfort as CREST but many use reputable custodians. However, most wrap accounts and platforms can provide access to a wider range of investments and tax efficient means of holding assets, including pensions and independent savings accounts (ISAs). They also enable investors to see their assets as part of their portfolio, which is helpful in measuring performance and managing risk.
It is worth noting that being listed and therefore included in a daily price feed to major data providers can make structures easier to hold on most platforms.
How does the LSE compare?
The Swiss and German exchanges such as Scoach and Stuttgart have very good offerings with structured products in the front of the shop window. They offer lots of information about the investments and their performance. Of course, they have been listing structures for longer and, in the case of Scoach, are more specialist. The latter even offers to collateralise structures to give investors greater credit protection. Theses exchanges openly promote structured investments and encourage investors to use them. For example, this blog featured an interesting article on Rupertus Rothenhauser in March 2013!
The LSE offering has improved over the last few years but there are a number of players in the industry who have experience of listing products on the exchange and feel that it should do more to match the competition. Otherwise, it risks being overtaken by competitor exchanges and fund platforms!
In their defence, the LSE may say that their volumes are too low to justify spending more money. It is a reasonable point to make as they too are accountable to shareholders. However, there is an element of chicken-and-egg here. There are numerous examples of retailers re-energising their offering and improving the layout of their physical and virtual stores to increase sales and profits.
The time has come for the LSE to engage with providers and investors to find out what it can do improve its structured investment offering and generate growth in the sector. I would be interested to hear other people’s views?