LSE launches covered warrants trading

The London Stock Exchange (LSE) launched its covered warrants market this morning, giving UK private investors direct access to equity hedging tools.

The LSE said 160 different contracts can now be traded, but it expects to launch more covered warrants in the next few days. Several dealers – Commerzbank Securities, Dresdner Kleinwort Wasserstein, Goldman Sachs, JP Morgan Chase, SG and UniCredito – have been cleared to trade the products.

“Investors in the UK now have access to a low cost financial product, which opens up a much wider range of investment strategies on a variety of assets,” said Clara Furse, the LSE’s chief executive. She added that a key attraction for investors will be the product’s gearing, which means exposure to the underlying share can be gained at less cost than trading the share itself, plus the opportunity to trade free of stamp duty on cash-settled warrants.

A covered warrant is a type of equity option issued as a security by a party other than the issuer of the underlying asset. It gives the holder the right to buy or sell the underlying at a certain price over a specified period.

The UK covered warrants market should have launched in September but was delayed because of uncertainty surrounding the product’s tax status. This has now been cleared up and stamp duty – a UK tax on stock and share purchases – will only be charged to investors if they choose to settle their covered warrant in stock rather than cash.