SocGen, Citi in first North American warrants push

Citibank and Société Générale are set to sell the first warrants to the North American retail market when they start trading them via the Bourse de Montréal, Canada’s financial derivatives exchange, on Monday.

The expansion is significant for the banks, both of which are market leaders in the warrants business, as it could open the way to selling the products to the US retail market - viewed as the biggest prize of all. A tight US regulatory environment currently impedes the selling of warrants in the US.

“My major goal is to build up a successful business in Canada that I hope the US will look to,” said Markus Mueller, the Toronto-based head of warrants for Citibank in Canada, adding that for the first time warrants will be available in all major time zones. Mueller confirmed that he hopes eventually to sell warrants to the US retail market. They are widely sold across Europe and Asia.

David Escoffier, the New York-based global head of structured products and warrants for the Americas at SG, the investment banking arm of French bank Société Générale, said: “This is completely new for North America and clearly we’re looking to sell warrants to the rest of the continent.”

The Canadian warrants will be branded 'sponsored options' when they go on sale next week. Escoffier added that SG is also looking to sell warrants in Latin America, but refused to be more specific.

Warrants are simple equity options that let investors bet on the movement of individual stocks and stock indexes. They are also used to hedge equity portfolios. The International Warrant Institute, a Paris-based independent market data collector, lists Citibank and Société Générale as the world’s largest issuers of warrants with, respectively, 14.5% and 14.3% of the market.

Underlyings for the new warrants consist of big-name Canadian firms such as TD Bank and Bombardier, but also include firms listed abroad such as Microsoft and Intel. Warrants on stock indexes such as the Nasdaq 100, the S&P 500 and the EuroStoxx 50 will also be available. The warrants will be European-style – the right to buy or sell has a fixed exercise date – and will be cash settled.

Escoffier said the timing of the move is right for the Canadian market. “There is a lot of potential here for Canadian investors to diversify their portfolios, especially into foreign stocks.”

Key to the introduction of warrants to Canada, said Escoffier, was the relative ease to have new warrants listed on the Bourse de Montréal. “With warrants, you have to be able to list very quickly because they are very responsive to market movements. The registration process at Bourse de Montréal is just one week, rather than the months it would take in the US or on the Toronto exchange.”

Mueller said his bank first approached Bourse de Montréal with the suggestion of creating a new market for warrants around 18 months ago. The exchange then asked Société Générale to join the venture as a second market-maker to ensure customers had a competitive market.

Bourse de Montréal said its role in selling warrants will be to safeguard trading transparency and fair execution. “The launch... has set the stage for a new market that will allow investors to gain long-term exposure to the underlying instrument at a fraction of the cost of involving that underlying,” said the exchange.