Regulation, tax and technicalities recast European turnover, as French volumes plummet and Italian activity recovers

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.

In the wake of the implementation of the FTT in Italy on March 1, 2013, over-the-counter cash equity volumes dropped by around 79%, with on-exchange falling by only around 20%, while the market was up by around 8%. The FTT was implemented on March 1 for all Italy-domiciled companies with a market cap of €500 million, regardless of the venue on which the transaction takes place. "Early indications are an increase in the proportion of trades on the listed market at the expense of OTC transactions," says a London-based structured product banker.

The May turnover figures for the Boerse Stuttgart in Germany show securitised derivatives account for the lion's share of its on-exchange trading, although on-exchange trading has fallen in Europe's largest listed market. On-exchange turnover of leveraged products in Germany and Switzerland was down by more than 25% and around 20% respectively, according to Eusipa. "In Germany, the move off exchange has already happened, with probably 70% off exchange," says Armbruster. "But the on-exchange figures are fairly representative, although they only show a third of the market. And the investor gets the same price on or off exchange."

The small Austrian market for on-exchange investment products rose by 40% over the period, making it now half the size of the French market. Volumes in the same category were lower in Germany by 20% and in Switzerland by 10%.

In France, the number of exchange-listed leveraged products rose by 74%, in Italy by 45%, by more than 25% in Sweden and in Germany by 15%. The number of exchange-listed investment products in Germany rose by 4%, and was 2.5% higher in Switzerland in the first quarter, compared with the same period in 2012.

The number of on-exchange products in Eusipa's member countries (Austria, France, Germany, Italy, Sweden and Switzerland) was 8% higher in the first quarter of this year against the same period this year, with the number of leveraged products up by 15%. New issues in these countries are also up, and nearly 16% higher than in the first quarter of last year. The on-exchange trading of investment products was up 20%, to €12 billion, with leveraged products up by the same percentage, to €12.9 billion in the first quarter of this year.

In general, 2012 volatility in shares and bonds was a lot higher than expected, says Wulf. There was also a series of regulatory actions across Europe, in France, and in Belgium and the UK. While the UK structured products trade association has joined Eusipa, the same is not true of the newly created Belgian Structured Investment Products Association, founded in January 2013.

"The big thing is the recovery, with some exceptions like the Swedish market, which has always been fairly stable, but Europe is not a booming market," says Armbruster.