GLOBAL - European institutional investors are planning to increase their use of structured over-the-counter (OTC) equity options and swaps in the coming year, but are growing increasingly cautious about counterparty risk, a new survey has found.

According to the latest Greenwich Associates 'European Equity Derivatives' study, 60% of European institutions are seeking to step up their use of equity options over the next 12 months, while 30% are expecting to increase their use of equity swaps.

Jay Bennett, consultant at Greenwich Associates, said: "Since these products have now been fully integrated into the equity investment process, trading activity in options and swaps is largely determined by the same macro trends influencing market activity in cash equities.

"Because global stock markets throughout the period covered in our research were characterised by depressed trading activity brought on by a lack of investor conviction that left cash on the sidelines, equity derivatives trading slowed in step. This may have changed given extreme volatility and market activity over the past month."

However, the current market turbulence will push institutional investors, as they become more active in the OTC space, to look even more closely at developments in the banking sector.

European institutional investors have also changed their priorities when selecting a broker for a trade.

While 29% of European institutions said they ranked brokers' willingness to provide liquidity as an important consideration, only 17% shared these thoughts a year later.

The survey found that institutions focus more on the expertise of brokers' sales professionals and firms' understanding of institutional investment strategies and hedging needs.

Bennet said: "The past banking crisis brought this business to a halt and elevated concerns about counterparty risk and access to liquidity.

"With a new crisis possibly beginning to unfold among banks, institutions are likely to re-emphasise assessments of counterparty strength and liquidity provision for the year to come."

An analysis on OTC trades and the use of credit support annex (CSA) agreements will be available in the December issue of IPE magazine.