Demand for derivatives wrapped as mutual funds surged this year, but bankers are struggling to understand how instrumental a pending change in European regulations is to the sector's success. Originally bankers thought Undertaking for Collective Investments in Transferable Securities III would open up the European Union markets to funds structured with derivatives, but it appears the rules it will be more restrictive than bankers had hoped.
Bernard Desforges, global head of sales and structuring at BNP Paribas in London, estimated that volumes of mutual fund derivatives trades, excluding CPPI structures, have grown this year by as much as 70%.
Another indication of market expansion was Deutsche Bank and UBS's decision to open desks focusing on the European mutual fund derivatives business (DW, 4/13).
Some bankers think the growth comes despite, rather than because of, the pending implementations of UCITS III. Benedict Peeters, a director in the global equity products group at Deutsche Bank in London, said, "To me, 90% of the work of UCITS III is useless without a tax addendum. Pan-European harmonization of regulation has to go together with the breaking down of discriminatory tax legislation that exists on a local level."
Other bankers are more positive about the impact of UCITS III: one possible explanation for this year's market growth is the renewal of interest in the equity market. This trend is supported by the E.U. directive because it allows for a capital protection aspect to derivatives wrapped as funds which makes them particularly appealing to investors wary of returning to equity. Henrik de Koning, executive director at UBS in London, said, "People are looking for capital protected products that can be publicly sold in various jurisdictions. UCITS III will make this possible."
"The way the UCITS III directive will be implemented should facilitate the use of derivatives in funds" he added.
