The Frankfurt Stock Exchange has set up a new segment for index-based investment products, introducin...
Following approaches from several major investment fund managers and banks, the FSE has created a high-quality market segment for index-linked products called the Index Market.
At present, many index-linked funds are automatically disqualified from the Ucits scheme because of the 5/10/40 rule that limits the weighting in a fund. The majority of indices are dominated by a small number of stocks and those indices cannot therefore be used as the basis for Ucits funds.
Such funds are automatically allowed to be marketed to the public. Managers of non-Ucits funds, however, need to persuade the regulators that the funds are effectively supervised. Even if they succeed, registration involves considerable bureaucratic difficulties.
The regulator requires at least three months to consider an application, but the preparation of the documentation needed usually increases the time needed to at least six months.
The result of this is that non-Ucits funds can have a great deal of trouble getting any public exposure.
The Index Market could be appealing to managers whose funds are not registered because listing on the exchange and on the FSE website does not count as an infringement of the rules governing publicity.
The regulation of the Index Market is extremely flexible and the Frankfurt Stock Exchange makes a case-by-case decision about which funds are allowed to be listed. The index on which the product is based is not limited to mainstream ones but can be a bespoke index.
For example, Merrill Lynch is offering what it calls its 'Babax' product, which offers returns based on the performance of those companies within the Dax 30 that are based in the German states of Baden-Wurtemberg and Bavaria.
The reasoning behind the product is that both these states have right-wing governments that are considered friendly to business, and so the seven companies in the index will always have an advantage over their competitors.
It is not only funds that can be listed but index certificates as well.
Herring said: "The difference between an index certificate and a fund is that a fund really does hold the assets contained in the index, whereas an index certificate just has a note that says 'we will pay you the performance'."
The underlying investment is not regulated. Index funds have recently suffered and so the new segment has not yet taken off. However, Herring added: "The FSE is visiting potential users such as Merrill Lynch and Morgan Stanley to put forward their plans."
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