Societe Generale has marketed the first suite of call warrants linked to the 10-year CMS Swap rate (EUR) Euribor ICE to speculative investors in Germany.
The new one- and two-year warrants will provide 100% participation on the positive performance of the underlying at maturity. If calculation agent ICE's officially fixed final price of the 10-Year euro CMS Swap Rate is above the strike price of the warrant, investors will receive the positive difference between the final price of the exchange and the strike price with regards to the nominal amount. If, on the other hand, the final price is at the same level or below the strike price on the final valuation date, investors will suffer a full loss of capital.
"We are currently pushing our offering around fixed income and FX underlyings and payoffs," said Peter Boesenberg (pictured), head of cross asset distribution Germany & Austria at SG.
The German market has over 1.5 million listed products and, although the variety of products available is broad, there are a lack of structures in areas such as volatility on interest rates, according to Boesenberg. "Until now, retail investors were only able to participate in movements around interest rates via delta one products, such as turbo or factor certificates," said Boesenberg. "So, we are filling a gap in the [current offering] with one of the oldest vehicles in the market. The payoff profile is not new, but it is a very straight forward way for investors to get exposure to long-term European interest rates."
The novelty lies in the underlying index, "which is a very liquid underlying and investors can play their views around the possibility of a future hike in the interest rate, or hedge other funding needs, such as a loans or mortgages," said Boesenberg.
Banks can hedge interest rate risks from lending and borrowing without investing money, but merely exchanging interest payments with a swap. From an investor's perspective, a high participation rate can be achieved from a flattened interest rate curve, and the constant maturity swap is, therefore, used to optimise the interest rate conditions and hedge other positions, which is why investors are demanding these structures, according to Boesenberg.
The market in Germany has seen an increasing demand for long-term interest rate strategies from investors anticipating a rate rise in Europe, "as we have seen in the US", said Boesenberg. "We have seen an increase in demand for fixed-income and FX products, which will continue this and next year. We have already issued a couple of products linked to FX because of this demand. There is a high number of products offering exposure to equities and the Dax, and a few providing exposure to commodities, but there is clearly a lack of fixed-income and FX products, which can be used to hedge portfolios.
"To play this kind of market view, investors could only invest in turbo certificates linked to the German bund future, which have a disadvantage as they are rolled every quarter because of the contraction of the bund future and you don't really know how much these bunds are going to be worth within one year," said Boesenberg. "By contrast, with the 10-year CMS Swap rate (EUR) Euribor ICE you don't have this kind of uncertainty. This product will suit investors with a long view to play interest rates."
There are over 2,800 structured products linked to different variations of the CMS rate, of which 49 were sold in the German market as structured notes (40) and structured certificates (9).
The French bank is the third most active provider in the German market this year, issuing over 6,000, including tranche-based, non-retail and flow/leverage, and €49m in sales.
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