Payday loan with a substantial amount of market risk
ABN Amro, Goldman Sachs, Merrill Lynch and the Royal Bank of Scotland were among the most active from 2005 to 2007. Starting in 2006, Goldman Sachs offered property swaps and promised full liquidity; i.e. the bank was ready to warehouse a substantial amount of market risk. ABN Amro and Merrill Lynch also started to warehouse risk to an undisclosed limit. Some trades had a milestone character for the UK property derivatives market.
ABNAmro and Merrill Lynch claim to be the first banks that traded a sector-specific property derivative in November 2005, a 15-month swap based equally on the All Property Index on one hand and the Retail Sector Index on the other hand. The notional was GB£ 30 million for each transaction leg. The deal was brokered by a joint venture between the London property adviser CB Richard Ellis (CBRE) and interdealer broker GFI, set up to handle property derivatives transactions.
It was followed by the first subsector deal in August 2006, a GB£ 10 million total return sw p linked to the IPD Shopping Centre Index, again between ABN Amro and Merrill Lynch. It was also brokered by the CBRE–GFI joint venture at an undisclosed price. Merrill Lynch brought structured notes on this index to the market the same year.
In August 2006, Goldman Sachs launched the first London Stock Exchange-listed certificate linked to the IPD All Property Index. The denomination of such a certificate is as small as GB£ 10 and it has a maturity of five years. The investor receives a one-for-one exposure to the performance of the index return, subject to the fixed annual index adjustment of 2.8 %. Goldman Sachs marketed the product to both institutional and private investors.