Decrement indices

A decrement overlay is represented as a constant markdown or ‘decrement’ applied to the index. The decrement overlay is constructed by periodically deducting a predefined fee, either in the form of a fixed percentage or index points, from the underlying index.

Decrement indices (single): sales & issuance

Decrement indices (single): sales evolution by region of offering (US$m)

Decrement or synthetic dividend overlays used in indices underlying structured products continue to grow and increase their market share across markets - specially in France - since early 2020 when the dividend crisis triggered by the Covid 19 first lockdown reverberated through the market.

The decrement methodology has been applied to different index strategies – thematic, ESG, single stock underlyings.

The use of decrement overlays where a fixed dividend is periodically deducted from the underlying index has been identified as an area of particular complexity by several regulators including the Belgian FSMA and the Central Bank of Ireland which are calling for enhanced disclosure as the decrement feature can act as a ‘downward drag’ on

Decrement indices (single): market exposure - market share by sales volume (US$m) performance where it is higher than the actual dividend paid, and in particular where the index falls below its initial level.

Product providers using a fixed dividend deduction in the form of a fixed point value rather than a percentage should be aware that regulators will expect further disclosure as this ‘drag on performance’ will be accelerated if the index falls below its initial level, and that a sustained fall in markets will accelerate the decline in the value of the index if the performance is negative.

The first decrement index seen on SRP’s database was the Euro iStoxx Equal Weight Constant (ECW) 50 Index, which replicates the Eurostoxx 50 Equal Weight Index while assuming a constant dividend of 50 points per year. The index was used

Decrement indices (single): Emea - market exposure

Decrement indices (single): Americas - market exposure

Decrement indices: breakdown per type of synthetic dividend (US$m) as the underlying for Objectif Février 2015, which was issued by Société Générale in France during February 2015.

Since then, many more products followed with more than 16,300 products linked to a decrement index listed on the SRP database, including some 12,750 that are currently still live.

Single indices

Some US$22.5 billion was invested in structured products linked to a single decrement index in 2022 – down 11% YoY but an increase of 136% and 206%, respectively, compared to 2020 and 2019.

Issuance, at 5,300 products in 2022, remained stable YoY (2021: 5,280) but the increase in issuance compared to 2020 (1,240 products) and 2019 (625) was quite remarkable.

Emea has always been the dominant region for decrement indices. It claimed almost 82% of the market in 2022, up nine percentage points YoY. In the Americas, decrement has also been making inroads, with the region increasing its market share from 0.2% in 2019 to 18% in 2022.

Asia Pacific is the only region where decrement indices remain virtually non-existent.

By exposure, it comes at no surprise that Emea held the largest market share. In 2022, products linked to decrement indices with focus on Emea sold an estimated US$12 billion – the equivalent of a 53% market share. Exposure to Canada was also high (16%) while Transatlantic (US & Europe) and World captured 15% and 14%, respectively.

Emea was dominated by pure Emea indices and Emea indices with a country focus, while Transatlantic and World indices both increased their market share in 2021-22.

The former two had claimed 97% of all sales volumes, and even though their market share has since somewhat declined, by 2022 they still held a respectable 61%. Transatlantic indices sold a combined US$3.3 billion in 2022 (18% market share), including US$700m invested in products on the iEdge ESG Transatlantic Water EW 50 Decrement 5% NTR Index that were issued in France by Natixis.

Indices with exposure to World, which started to gather momentum in 2021 had reached sales of US$3.1billion by

Decrement indices: breakdown of synthetic dividend in points (US$m)

Decrement indices: thematic exposure - market share (US$m) Decrement indices: breakdown per value of synthetic dividend (US$m)

2022, mainly on the back of the performance of the MSCI World Climate Change ESG Select 4.5% Decrement EUR Index, which was exclusively licensed to Deka Bank in Germany.

Single stock indices with Emea exposure held 3.8%, up from 1.6% in 2021 when they first appeared. In the Americas, market share for indices with exposure to Canada reached 88% in 2022, driven mostly by several Solactive indices targeted at the country such as the Solactive Canada Bank 40 AR Index and Solactive Canada Insurance AR Index.

Traditionally, products linked to decrement indices that deduct a fixed percentage have always achieved the highest sales: in 2020, their market share was almost 73%. Since then, decrement in points have become increasingly common, which is reflected by a market share of 50% in 2021 and 46% in 2022.

In 2022, some US$12.1 billion was invested in decrement indices that deduct a synthetic dividend in percentage, slightly down from the total for the previous year (2021: US$12.6 billion), but a significant increase compared to 2020 (US$6.9 billion) and 2019 (US$4.8 billion).

Eighty five percent of sales in 2022 came from products linked to indices with a fixed percentage of 5%, the same as in 2021. Indices with a fixed percentage of 3.5% and 4% increased their market share since 2020, while those with a percentage of 3% remained relatively stable.

The use of indices that deducted a fixed 2% has phased out in recent years. Volumes for products linked to indices that deduct synthetic dividend in points were initially quite low, at around US$2.5 billion in both 2019 and 2020. They peaked at

Decrement indices: index providers - market share by sales volume (US$m)

Decrement indices: top 10 by market share 2019 - 2022

US$12.4 billion in 2021 before slightly tailing off the following year (2022: US$9.8 billion).

Indices with a points tally of 50 dominated, especially in 2019 when their market share reached 100%, but they continued to perform well in subsequent years, claiming 62%, 46% and 58%, respectively, of all volumes in this segment. Indices that deduct 30 points and those that abstract more than 50 points have increased their market share since 2020 while those that deduct 40 points made their mark in 2022 when they captured a 22% share. The latter was mostly driven by the popularity of the Solactive Canada Bank 40 AR Index, which collected US2.6 billion in Canada alone that year.

In 2019, ESG and ‘Broad market’ were the main thematic exposures for decrement indices, with a market share of 44% each. Since then, ESG has increased its market share, which was around 56% in 2022, while that of ‘Broad market’ fell to 11% that year.

Another thematic that has been making inroads is the industry sector, which was non-existent in 2019, but was linked to sales of US$6.7 billion in 2021 – the equivalent of a 27% market share.

Sales linked to geography themed decrement indices went from US$800m in 2019 to US$360m in 2022 while single-stock indices, which first came on the scene in 2021, collected US$720m in 2022 (+140%YoY), mostly due to their popularity in the French market.

During the reporting period, Euronext, Qontigo, Solactive, MSCI, and to a lesser extend S&P Dow Jones, have been the main providers for decrement indices, with SGX, Bloomberg and Morningstar the new kids on the block.

Euronext captured 64% of the market in 2019, when its decrement indices were used in 230 products that sold an estimated US$4.7 billion across eight jurisdictions, but mostly in France (207 products). The following years its sales volumes remained roughly the same, with the exception of 2022 (US$3.1 billion), although the company’s market share somewhat decreased due to the increased competition (2022: 14%).

Fifty-seven Euronext decrement indices were used as the underlying for 895 structured products in the period 2019-2022. They included the Euronext Climate Objective 50 Euro EW Decrement 5% Index (US$2.7 billion from 36 products), SBF Top 50 ESG EW Decrement 50 Points (US$2.6 billion from 204 products), and Euronext Euro 50 ESG EW Decrement 50 Points Index (US$1.9 billion from 134 products). The former was used by Natixis only while the other two were exclusively used for products issued via Société Générale.

Qontigo’s market share peaked in 2020 at 24% but the company achieved its highest sales a year later when the 530 products linked to its decrement indices gathered an estimated US$4.9 billion. During 2019-2022, its products were sold across 19 different markets, with France once again collecting the highest sales (US$10.3 billion), followed by Italy (US$2.6 billion), and, at some distance, Spain (US$115m).

During the period, Qontigo’s flagship decrement indices included the Euro iStoxx Equal Weight Constant 50 (US$2.3 billion from 410 products), which was licensed to Société Générale, and Euro iStoxx 50 Carbon Adaptation GR Decrement 5% Index, which was used by Crédit Agricole in France and by Unicredit in Italy.

Solactive reached its highest market share, at 34%, in 2021 when 2,800 products tied to its decrement indices sold an estimated US$8.6 billion. In 2022, its sales dropped to a still reasonable US$5.1 billion (23% market share).

The German company differs from its competitors in the fact that its focus is very much on the Canadian market, where more than 5,300 products worth an estimated US12.2 billion were linked to its indices between 2019-2022. Solactive’s main indices in Canada were the Solactive Canada Bank 30 AR and Solactive Canada Bank 40 AR indices, with combined sales of just under US$5 billion, as well as the Solactive Canada Insurance AR Index (US$1.9 billion).

In France, its second market behind Canada, the Solactive France 40 Equal Weight NTR 5% AR Index (US$675m) and Solactive Transatlantique 5% AR Index (US$285m) were popular options for investors while in Italy the Solactive US Pharma 10% Risk Control 3% Decrement Net EUR Index accumulated the highest sales (US$130m).

MSCI steadily increased its market share from 3.3% in 2019 to 21% in 2022, when it collected US$4.8 billion from 1,635 products. Its main market, certainly by issuance, was Germany, where it achieved sales of US$5.5 billion from 3,188 products between 2019-2022, although in France, where it sold US$3.4 billion from 110 products, average tickets were much higher.

In Germany, its most popular index was the MSCI World Climate Change ESG Select 4.5% Decrement EUR Index (US$3.7 billion from 1,950 products), which was exclusively licensed to Deka Bank, while there was also demand for MSCI Germany Climate Change ESG Select 4% Index (US$700m) and MSCI EMU Climate Change ESG Select 4% Decrement Index (US$450m).

The MSCI Europe Select Green 50 5% Decrement Index (US$1 billion) and MSCI France Select ESG 30 5% Decrement Net Index (US$715m) were the preferred option for the French investor, while MSCI decrement indices were also seen in Belgium, Italy, Finland, and even China (MSCI World ESG Screened 5% Risk Control Index).

SGX was the calculator and publisher for the iEdge indices, which were licensed to Natixis. They were first seen as the underlying for structured products end-2020 and by 2022 their market share was 6.5%. In total, 106 products worth an estimated US$1.9 billion were linked to the iEdge indices, including 101 that were issued in France, with the remaining five targeted at investors in Finland. At US$975m, halve of the total volumes were invested in nine products linked to the iEdge ESG Transatlantic Water EW 50 Decrement 5% NTR Index.

Bloomberg decrement indices made their first appearance in January 2022 on the SRP database, and by the end of the year they were used across 144 products worth an estimated US$650m (2.9% market share). Again, France was the main market (US$595m from 136 products), whilst there was also activity in Italy (US$57m) and Finland (US$2.5m). Its most used index was the Bloomberg Luxury 2021 Decrement 50 Point EUR Index, which gathered US$215m from 47 products.

FTSE Russell’s presence was limited to the UK and France. In the UK, the bulk of its volumes came from the FTSE Custom 100 Synthetic 3.5% Fixed Dividend Index (US$115m) and, to a lesser extent, FTSE 100 Equally Weighted 45 Point Decrement Index (US$20m), while the FTSE Transatlantic EW Decrement 50 Points TR Index (US$80m) and FTSE France 40 Low Carbon ESG Screened Decrement 50 Points Index (US$65m) were its main indices in the French market.

Morningstar, which, like Bloomberg, made its first appearance in 2022, saw five of its decrement indices used in 33 products across France, Finland and Sweden. Of these, products linked to the Morningstar DM Europe Large-Mid Oil & Gas Decrement 50 Point Index and Morningstar Eurozone 30 Basic Resources Banks Energy Decrement 50 GR EUR Index were the most popular, selling US$60m and US50m, respectively.

Nasdaq’s decrement indices were limited to Nasdaq Yewno Global Innovative Tech Ex Idx EUR ER 5% Index, which was seen in 27 products sold across six different jurisdictions between June 2020 and September 2022. Additionally, its Nasdaq 100 Total Return 2% Decrement Index was used as part of a basket, together with Russell 2000 2% Decrement Index and S&P 500 3% Decrement TR Index, in five products targeted at investors in the US.

Decrement indices (multi): sales & issuance

Multi indices

Volumes invested in structured products linked to a basket of decrement indices were much lower compared to those of their single index counterparts (2019-2022: US$1.8 billion vs US$64.8 billion). Some US$668m was invested in structured products linked to a decrement basket in 2022 – down 24% YoY but a two-fold and 15-fold increase, respectively, compared to 2020 and 2019.

Issuance, at 323 in 2022, remained stable YoY (2021: 352) but the increase in issuance compared to 2020 (27 products) and 2019 (26) was significant. The Americas was very much the dominant region for products linked to a basket of decrement indices, mainly on the back of their success in the Canadian market, where 672 products collected US$1.4 billion between 2019-2022.

The three most used indices in the period were Solactive Canada Insurance AR Index (441 products), Solactive Canada Pipelines AR Index (417), and Solactive Canada Telecommunications AR Index (255).

In the US there was far less appetite (US$3.8m from seven products), while in Emea, which was the main region for products linked to single decrement indices, they gathered sales of a mere US$125m between 2019-2022.

Here, three MSCI indices were the most used in a basket: MSCI Europe Top ESG Select 4.5% Decrement Index (14 products), MSCI Europe ESG Leaders 5% Decrement Index (13), and MSCI Switzerland ESG Leaders 5% Decrement Index (13).

Sales in Asia Pacific between 2019-2022, at US$385m, came solely from 54 products sold in the Korean market, where S&P 500 KRW Hedged 2% Decrement Index ER, Euro iStoxx 50 KRW Hedged Decrement 3.5% ER, and S&P 500 80-Point Decrement Hedged Index, were among those the most frequently seen.

Decrement indices (multi): sales evolution by region of offering (US$m)