What are Warrants & Certificates, the different types available on the market and how to navigate through them?

Alexandre Atlani, Head of Warrants & Certificates at Euronext answers these questions.

Listen to the full interview, watch the video:
 

 

What are warrants & certificates?

Warrants and certificates are classified by the European regulation MiFID 2 as “Securitised Derivatives”.

Unlike derivative contracts, they are not issued by an exchange but they are created by an issuer, usually a large financial institution.

Warrants can be compared to options, in terms of pay-off and risk but there are many other types of warrants and certificates which don’t have their counterpart in the derivatives world.

Warrants and certificates are mainly tailored for retail investors. They allow them to take positions on many types of underlyings: indices, equities, commodities, fixed income, etc.

They also allow them to take strategies with more or less risk and yielding more or less return. As well, investors can access a wide geographical coverage of underlyings allowing them to trade or take positions on foreign underlyings without having to pay cross-border fees or commissions.
 

What are the different types of Warrants & Certificates available on the market?

There are many types of warrants and certificates. Some offer leverage, some don’t.

• Leverage allows to magnify the variations of the price of the underlying, either in a positive way if in the same direction as the investor’s strategy, or in a negative way if in the opposite direction of the investor’s strategy.
• Some instruments can have a fixed or constant leverage, a fixed or constant leverage, some have a variable leverage.
• Some instruments will appreciate (or depreciate) in a short amount of time, or with a small variation of the price of the underlying.
• Some instruments will have a bullish strategy (or upward), some products will be adapted for a bearish (or downward) strategy, and some products will be used for a neutral strategy.
• Some products will be only sensitive to the variations of the price of the underlying while some other instruments or product types will be sensitive not only to the price of the underlying but as well to the time passing by, to the volatility of the price of the underlying, to changes in the interest rates, or changes in the dividend rates.
• Finally, some instruments can have a knock-out barrier (or kill switch), which will early expire or deactivate an instrument rendering it worthless.

How to navigate the different types of Warrants & Certificates?

Over the years, naming standardisations have been implemented to navigate across the many different types of products. This mostly under the influence of industry associations, issuers and stock exchanges. Nowadays, the mostly used classification is that of EUSIPA: the European Structured Investments Products Association.

This is a three-level classification where each product type is associated to a 4-digit code.

• The first digit, whether 1 or 2 will indicate if the product is an investment or a leverage product.
• The second digit will provide a bit more granularity for investment products for example, we will know if it’s a capital protection product, a yield enhancement, a participation or a credit linked note and for leverage products, whether it is one without knock-out or with knock-out or a constant leverage product.
• The third and fourth digit will provide even further granularity.

On Euronext’s website live.euronext.com, investors can find the EUSIPA code and EUSIPA name of each warrant and certificate listed and traded on Euronext.