A EUROMONEY SURVEY - MARCH 1996
Background
The past couple of years have seen major developments in the Spanish equity markets, with increasing sophistication and more complex products becoming available. Consequently, the derivatives market is growing in importance. There is continued high-volume trading of futures on Spain's IBEX-35 index, on the equities futures exchange MEFF-RV. Growth in the domestic market has been sharp.
Index futures account for about 70% of MEFF-RV traded contracts. These type of contracts have witnessed explosive growth. Total exchange-traded equity derivative contracts are up from just over five million in 1992 to 37 million in 1995.
Derivatives on Spanish equities only commenced in 1992 with the introduction of futures and options on the capitalization-weighted stock index, the IBEX-35. The introduction of these derivatives paved the way for a growing volume of business in the last few years and the launch of new products such as traded stock options on Spanish giants Telefonica, the telephone company, and Endesa, the electricity company. Volumes in stock options have also grown tremendously.
During 1995, equity options and futures traded at MEFF grew by 5%, reaching a nominal value of Pta13 trillion.
The Spanish market for futures and options on equity is regulated by MEFF-RV.
Futures
Futures on the IBEX-35 were first introduced to Spain in 1992. In 1995, the total number of contracts traded was over 28 million, with an average daily trading volume of 114,214 contracts. Volume in 1992 was just 2.8 million. Trading is on a fully computerized basis. The main investors in IBEX35 futures are foreign and institutional investors (45% share) followed by individuals (21%). Spanish mutual and pension funds have a share of about 11%.
These investors account for approximately half of MEFF-RV's turnover, with the other half being made up from local market-makers.
When the market started there were very few players arbitraging futures against the stock market. Therefore the market could go to a premium or discount of 3%. Now the future is priced more closely to the underlying shares. However, some foreign players are still reluctant to enter the futures market in Spain, due to the fact that there is not perfect convergence between futures and stocks on the expiration day.
An exchange-for-physical market, in which futures are traded for baskets of stocks, has yet to fully develop in Spain.
Normally, there is 30 minutes on the expiration day in which to convert futures back into the underlying stocks. This is a very risky undertaking, and can result in the loss of a lot of money. However, a couple of banks, including Santander, now convert the futures into stock without any risk to the holder of the futures.
Exchange-traded options
Options on IBEX-35The most liquid exchange-traded options by far are the European-style options contracts on the IBEX-35. Prices are expressed in index points. There are four dominant players in the Madrid traded options market and customer interest is mainly domestic (64%). Unlike futures on the IBEX-35, the IBEX options contracts are favoured by domestic mutual funds, which account for over 26% of market volume. Foreign and institutional investors and individuals account for a further 37% and 15% respectively. Again, this trading accounts for about 40% of total turnover.
Trading is telephone-based, which replicates an open outcry system. Tenors are one, two, three, six, nine and 12 months with settlement overnight. The options market has grown considerably from just under 2.5 million contracts in 1992. In 1995 contract volume varied but overall growth was strong at 8% to over eight million contracts (average daily volume 33,250). Contracts traded were 3.99 million call options and 4.18 million put options.
Stock optionsThe market is becoming more liquid in traded American-style stock options as turnover continues to climb. From a total volume of 158,516 contracts in 1993, total volume in 1995 was 831,326 contracts, a 240% increase over the previous year. Stock options are available on Telefonica, Iberdrola, Repsol, Endesa and BBV. From April, there will be five more, including Banco Santander.
OTC options and structured productsOTC activity on company stocks is increasing and the market is becoming more liquid. OTC options are available on companies such as Repsol, Telefonica, Banco Santander and Iberdrola. The players in this market are the London-based banks and several of the large Madrid-based banks. Because the derivatives culture in Madrid is still underdeveloped, volume comes mainly from the foreign players. However, the last two years have shown that domestic investors are learning to optimize their portfolios.
On the structured product side, the market is small compared to plain vanilla. This is expected to increase as people begin to understand more about structuring opportunities.
WarrantsThe warrant market is over-the-counter. Because several of the original issues were priced expensively, warrants have proven unpopular with Spanish investors.
Today, there is more activity. The sector, however, has by no means boomed. A recent development that is proving more popular is the availability of warrants on baskets of stock. These come at the moment from the banking and electricity sectors.
ConvertiblesThere are a small number of convertible bonds in Spain but the market remains a niche one. Despite some excellent opportunities, domestic investors largely ignore this market.
Derivatives volume
Options and futures volumes, 1995
IBEX volatility
Foreign/domestic share of derivatives volume 
Stock options volume
For further information, please contact:
José Luis Pérez EsteveMiguel A GilAna TabarneroEquity Derivatives
BSN, SA,
Sociedad de Valores y Bolsa
Paseo de la Castellana, 32
28046 Madrid
Tel: (34-1) 520 90 08
Fax: (34-1) 575 7335/ 7364
Santander Investment