Swap counterparty access blocks or alters ETFs for 84% of European issuers

84% of European ETF issuers have been unable to launch or have had to materially change a product because they could not secure a swap counterparty on acceptable terms, an Acuiti survey found. ETF Express reported the survey. The report, published Nov. 12, is based on a survey and interviews with 30 European issuers active in ETFs and ETPs. It found 96% expect their derivatives use to increase over the next three years. Acuiti produced the report in partnership with Marex.

86% of European ETF issuers said their derivatives use in ETFs and ETPs had risen over the past three years. Of that 86%, 36% described the increase as significant, according to Acuiti. Client and investor demand is the biggest driver. Defined outcome ETFs, which use options to offer buffered, capped or floored returns, lead that growth. A third of issuers have already launched a defined outcome ETF, and more have products in active development with a launch expected within 12 months.

For fund selectors, the report makes a dealer's ability to support a derivative product after launch a due-diligence question. Issuers surveyed value that ability, as well as speed and responsiveness during development. The point applies most directly to total return swaps, the most widely used derivative in European ETF construction. Among swap users, a majority cite access to exposures that would be difficult or impossible to replicate physically as a main benefit.

Options-based products face their own constraints: investor education and UCITS constraints were the most commonly cited obstacles, according to the survey. Acuiti ranks distribution and education as the most important factors for the next phase of innovation.

“Europe’s ETF market is entering a new phase of growth, and derivatives are at the centre of it,” said Ross Lancaster, head of research at Acuiti. “Issuers are moving quickly into defined outcome products, and synthetic replication continues to open up exposures that would be difficult or costly to access physically.”