Investment banks and asset managers are getting ready to offer equity-default swaps to retail investors. The move is partly motivated by equity products being easier to sell to retail investors than credit, because of retail investors' lack of understanding of the fixed income arena. Equity default swaps for retail are more likely to take off than credit-default swaps, structurers said. This is because the trigger for defaults--a quantified drop in share price, usually in the magnitude of 70-80%--is easily defined. "[The product] makes a lot of sense to retail investors because it is transparent," said Martin Bertsch, head of financial engineering at JPMorgan.
Robeco Alternative Investments is one of the asset managers considering offering instruments referenced to equity default swaps to retail clients. There remain problems with the format, however. Although it is possible to sell them in a portfolio format, according to Edwin Noomen, v.p. at Robeco in Rotterdam, he explained that a CDO structure would be best suited to the retail market. The difficulty, Noomen said, is the product would need to be rated, adding that Robeco is in discussions with ratings agencies about this (DW, 2/16).
