EUROPE - Pension funds and other institutional investors are being targeted by Barclays Bank, with the European launch of 12 exchange traded notes (ETNs) including three based on volatility, of which one specifically uses a European iindex that could be useful in relation to Solvency II.
Uwe Becker, managing director and head of investor solutions Europe at Barclays Capital, said the launch of the ETNs was not designed to compete with existing exchange traded fund (ETF) providers in Europe.
He said: "It is more that they will complement the existing product offering. We are primarily focusing on those asset classes, and underlying indices, that typically cannot be easily replicated in a transparent way in an ETF format. This is primarily starting in Europe with commodities and volatility benchmark indices."
Meanwhile the introduction of Solvency II in Europe could drive demand for volatility products, as the regulation has nominal crash scenarios for stock performance but also volatility shocks.
Joshua Spitz, head of European index derivatives trading at Barclays Capital, said: "So there could be systematic demand from institutions for volatility products that they literally need for regulatory purposes. And an extremely, transparent, liquid exchange traded way to show they have a volatility hedge could be exactly what they need."
The ETNs, which will be dual listed on the UK London Stock Exchange and Frankfurt's XETRA exchange, are a debt instrument similar to synthetic to ETFs and exchange traded commodities (ETCs) however unlike these instruments ETNs have no swaps involved.
Becker said: "Synthetic ETFs products tend to be swap based so that means they do not follow the actual index or instruments you are looking to track with these products. The fact we have no swap gives you a lot more transparency."
He said feedback received by Barclays from institutional investors had demonstrated a clear trend for more transparency around financial instruments. Meanwhile he noted regulators around the globe "are putting a lot of effort into finding ways to ensure the financial industry increases the level of transparency and cost transparency around their products. We believe ETNs are the ultimate answer to that".
The 12 ETNs are being launched under the Barclays iPath brand, which has global assets under management of just over $7bn (€5.3bn) and a 70% market share in the US. They comprise of nine commodity ETNs based mainly on S&P indices relating to areas such as metals and agriculture with the possibility of physically backed products in the future.
Of the three volatility ETNs two are based on the S&P 500 VIX index, one short-term futures and one mid-term, while the new European ETN - iPath VSTOXX Short Term Futures Total Return - is based on the EURO STOXX 50 Volatility Short-Term Futures Total Return Index.
Spitz said the VIX ETNs had seen substantial demand from investors looking to trade US volatility, but the timing of the European launch comes as Eurozone volatility may diverge significantly from US volatility because of concerns over sovereign credit risk and developments in the macro environment.
Barclays claimed the VSTOXX ETN would allow investors to isolate exposure to European volatility and allow European investors to tailor volatility exposure to match their equity portfolio. In addition Spitz noted systematically buying equity volatility in many cases is "a great hedge for equity and credit portfolios and along many measures is even better than buying some of the more traditional hedges such as puts, put spreads and collars and things of that nature."
Meanwhile it is expected a medium-term volatility ETN would be launched in Europe once the futures have a longer track record, to complement the current VSTOXX ETN. As experience in the US had shown the short-term volatility futures ETN is used more as a trading vehicle, while the medium-term ETN is more used by institutional investors such as pension funds and insurance companies.
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