Best in the Nordic region

Commerzbank

After successfully following a lead on bull and bear certificates and answering the demands from retail investors for a better commodity-based structured product, Commerzbank is staking its claim to be a financial pioneer in the Nordic region.

The German bank introduced bull and bear certificates on the Nordic Derivatives Exchange (NDX) in April, and now boasts a 30% share of a market that sprung into life in the summer of 2009. “They are a business alternative to exchange-traded funds (ETFs),” says Peter Olsson, manager of public distribution in Sweden, equity markets and commodities at Commerzbank in Frankfurt. “They were already in the market but we offered them with a higher leverage of three or four – this was a new product characterisation and proved very popular.

“In May 2010, we had 10% of the bull and bear certificate market, now we have 30% to 40%,” he continues. “The certificates are very similar to ETFs, only these have constant leverage that is re-leveraged every day. This leverage factor means dealers and investors can get the same exposure on an underlying with less investment. In other words, you get better results with less money – it is one of the success factors of that product.”

Besides great results, these products have given retail investors trading tools for commodities, argues Olsson: “Before these certificates, the only instrument retail investors had was a future, and with this product there is no problem with rollovers anymore.”

Commerzbank views itself as one of the most flexible in terms of underlyings. “We have shown an eagerness in the Nordics and have created local baskets and indexes,” explains Jakob Palmqvist, who works in financial institutions marketing, equity markets and commodities at Commerzbank in London. “As soon as we see something interesting, we try and utilise the platform we have. So we move concepts we have developed between asset classes and between underlyings.”

To this end, the bank has tried to combat the problem of underperforming underlying futures contracts – due to contango in commodities – with the Commerzbank Commodity Index (CBCI).

“We came up with a solution where the CBCI still gives the same flexibility in underlyings but has a simple algorithm to reverse the contango trend,” says Fredrick Borreschmidt, who also works in the financial institutions marketing, equity markets & commodities for Commerz in London. “The index does not suffer in a contango environment and we consider this to be a solution that is transparent and makes sense to investors.”

Unlike the S&P GSCI (formerly the Goldman Sachs Commodity Index) index, which rolls into the nearest contract and thereby suffers negative roll yield, the CBCI goes short on the nearest future and long on the futures further out so investors get a calendar spread plus a long future. “This is a simple position that reverses the GSCI issue of contango,” says Borreschmidt. “We have done research into knowing which underlyings to be short or long in, and which position to take.”

Klaus Oppermann, global head of public distribution, equity markets and commodities for Commerz in Frankfurt, goes further. “We have provided a structure that investors would have confidence in and we are pioneers in the Nordic countries,” he says. “We are a key player that is developing the structured product, FX and derivatives markets.”

In Finland, the bank teamed up with FIM bank and launched the FIM Tähtirahastot Sijoitusobligaatio, a five-year capital protected note, which can be leveraged at 110 or 100, and uses three of FIM’s flagship funds as the underlying. “On top of this, we put a volatility cap of 15%,” says London-based Jaime Uribe, co-head financial institutions marketing, equity markets & commodities at Commerz. “This feature cheapens the option, but is also says that we believe in the Finnish funds. It is aimed at outperforming the benchmark and then boosting the participation. It has raised about €25 million.”

“We feel the level of service and activity by Commerzbank sales representatives has been on an outstanding level throughout the year,” agrees Berndt Barner-Rasmussen, senior manager, Alternative Investments at FIM in Helskinki.

“We have created a very strong infrastructure in the Nordics,” adds Helio De Silva, head of public distribution international, equity markets and commodities for Commerz in Frankfurt. “We have partnered up with specific people in the countries and this connection – from market making into specific exchanges – is a very important part of the business because we issue the products we provide on the market every day. We are fast on the issuing side and reactive to market changes.”

One hurdle Commerzbank came up against was the 30% capital gains tax in Sweden. To combat this, the capital insurance account acts as an insurance umbrella where investors can trade structured products and pay tax on the nominal value of the product at the end of the term.