A stable, well-functioning financial market for allA stable, well-functioning financial market for allThe warrant market – a review of information provided to non-institutional investors
It has been possible to trade warrants on the Swedish market since 1995. A warran tis a financial instrument that gives the holder the right, but not the obligation, to either buy or sell a share at a predetermined price at a specific date in the future. Payment at redemption is effected by cash settlement. Since its introduction, warrant trading has fluctuated but in recent years it has increased in conjunction with the increasingly strong stock market. From January-June 2006, warrants were traded for a total of SEK 12.1 billion* on the Stockholm Stock Exchange and an additional SEK 7.1 billion on NDX, which is a part of the Nordic Growth Market NGM AB exchange. The majority of trades involve non-institutional investors.
Because the number of complaints from non-institutional investors on the warrant market registered with Finansinspektionen (FI) is increasing, FI decided to review the written information that is provided to these investors. The report is based on the information provided in the prospectuses issued in connection with the trades and on the websites of the issuers, the market places and the brokers. FI has in particular reviewed the prospectuses issued by UBS, FöreningsSparbanken, Carnegie, Société Générale and Svenska Handelsbanken and the websites of the same to receive a general overview of the warrant market.
FI found that the complaints sent to FI concerning spread, i.e. the difference between the purchase and selling price, and the pricing of warrants, are essentially caused by lack of knowledge about warrants and the warrant market. FI does not believe that there is any reason to regulate or by any other mean intervene with the pricing or spread of warrants. However, FI believes that it is crucial that the information provided to non-institutional investors is clear and adjusted to the target group, i.e. the fact that they are private investors.
FI found that information about how the value of the warrant is affected is insufficient, both in the prospectuses and on the web sites. Several of the issuers have online education about warrants on their home pages. These are generally good, although in some cases information about the importance of certain factors, such as implicit volatility, dividends, interest rates, underlying shares and the value of time, is scarce. FI considers that sufficient and clear information about these types of factors is crucial since such information has considerable influence on the value of the warrant.
FI has discussed the above findings with the issuers, brokers and the market places. From now on, FI requires that the information provided in the warrant prospectuses and on the related websites is sufficient, clear and adjusted in relation to the target group. As a consequence, FI will tighten its review of the prospectuses as regards the information provided. For the avoidance of doubt, the prospectuses that have been approved before the publication of this report will not be affected. Moreover, 1 Sales were calculated for both the buyer and the seller.
FI recommends that the issuers, the market places and the brokers describe the implicit volatility of warrants in more detail. In particular, FI would prefer that the issuers, the brokers and the market places describe the implicit volatility of warrants on their home pages in the same manner as is currently done in Germany, France and Great Britain.
* Sales were calculated for both the buyer and the seller.
