Warsaw Voice - New Instruments at WSE

By A.R.
30 August 2006

As the Polish stock exchange has developed, it has welcomed new financial instruments. The latest are called structured products.

Trading on the Warsaw Stock Exchange (WSE) involves more than just stock shares and bonds. Derivatives, for example, are gaining popularity. An unquestionable success for WSE was the introduction of futures contracts in 1998. The contracts instantly made an astonishing impact, one that has carried on to this day.

Futures gained popularity mainly because such investments require relatively small funds. Any investor with zl.1,500-2,000 can open a contract worth tens of thousands of zlotys, which is 10 times the value of the investment. The financial leverage guarantees prospects of considerable profit for those with relatively little cash. Predictably, this instrument enjoys the highest popularity among individual investors.

Futures contracts for the WIG20, MIDWIG and TechWIG indices, Treasury bonds, nine companies, U.S. dollars and euros are currently traded. As an organizer of trading in contracts, the WSE develops standards-detailed profiles of the contracts. Clearing and accounting procedures, and the amount of security deposits are determined by the National Securities Depository, which acts as the clearing house. Trading in futures contracts is conducted through a system of fixed quotes. Fixing takes place at the opening and closing of each session, as is the case with other instruments subjected to fixed quotations.

In July, the volume of all derivatives combined totaled 577,841 units. Sales over January-July this year were almost zl.230 billion. So far this year, more than 200,000 WIG20 options have been traded, while the volume of WIG20 futures contracts is approaching 4 million units.

Recently, investors have been using new instruments called structured products. The first to appear on the WSE were structured bonds of Deutsche Bank London, offered by BDM PKO BP.

Structured products are financial instruments whose prices depend on the value of a given market index, for example, the price of shares or grouped shares, stock exchange indices, or currency exchange rates. They are issued by financial institutions, usually banks and brokerage houses. The issuer of a structured product is obliged to pay, on the buy-back date, a clearing sum to the buyer calculated according to a certain formula that defines the rules of payment, making it easier for owners of such instruments to keep track of its value at any time.

Depending on how an instrument is built, two basic kinds of structured products can be identified. The first kind includes very safe products, offering 100-percent guarantee of return of invested capital and assuring the investor with a share of the profit generated by the product's final market value. This means the investor will incur no loss whatsoever. The other kind of structured products are riskier, as the investor's share is greater with regards to both the potential profits and losses generated by the product. The investor has no guarantee of full capital protection, but they stand a chance for much higher profits.

Structured products can also be classified as short-, medium- and long-term depending on the buy-back date, and may differ in form. Among others, these products include certificates, warrants and zero coupon bonds with enclosed options.

One of the most common forms of structured products are zero coupon bonds combined with options. The zero coupon bond guarantees return of the invested capital on the instrument's buy-back date and also makes it possible to participate in the increase of the product's base assets.

Structured products are worth investing in for a number of reasons. They protect capital and at the same time provide a share of the profit. The profits they can generate outclass traditional forms of saving, such as deposits and bonds. They also provide investors with access to new markets, for example, abroad, and new instruments, such as raw materials, indices or currencies. Access to such instruments had been not been possible for a long time, especially for individual investors. It is also important that the instruments can be sold on the secondary market, where the investor can withdraw from the investment before the instrument is bought back by the issuer.

Interest in structured products is systematically rising around the world, including in Europe. Their sale value on the European market amounted to around 140 billion euros in 2005, an increase of more than 20 percent over 2004. The five largest markets for structured products for individual investors-Italy, Belgium, Germany, Spain and France-account for around 75 percent of all European structured product sales. There is plenty of room for Poland to take its place in the developing and dynamic market for structured products.