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Sun 1 Apr 2007 03:59 PM

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ABN Amro takes a MINI adventure

The investment bank launches exchange-traded MINI Futures in Europe based on UAE stocks.

Investment bank ABN Amro has announced the launch of its first exchange-traded MINI Futures based on UAE stocks, which will enable European investors to gain exposure to the stock and which could later be introduced in the UAE.

The MINI Futures will be traded on the SWX Swiss Exchange and their small denomination means that they are suited for use by retail investors as hedging or investment instruments.

The share prices of Emaar, Emirates Integrated Telecommunications and Dubai Investments will act as the underlying assets.

The MINI Futures will incorporate leverage to boost the potential upside to investors but are designed to ensure that losses cannot exceed the amount originally invested. If a MINI Future had a leverage factor of eight, it would mean that a movement of 1% in the corresponding share price would result in a change of 8% in the value of the MINI Future.

Ruggiero Lomonaco, head of Middle Eastern and Islamic private investor products at ABN AMRO, said: "One of the fundamental problems currently in the UAE market and generally in the Middle East is that people borrow on their personal account to invest in local stocks, which means that if the stock falls they may be required not only to make so-called margin top-ups but they may have personal financial problems."

Unlike conventional futures, MINI Futures do not require investors to deposit a margin with a clearing house and so are not subject to margin calls if the underlying stock moves against the investor.

Lomonaco said he intended to meet with the UAE stock market regulator to discuss the possibility of introducing MINI Futures on exchanges there.

He said: "The reason that I decided to list them first on the Swiss exchange is exactly to show that these things do exist, and to raise the awareness in the market among the regulators. Hopefully if they like the benefits offered in this kind of derivative instrument listed locally we may have also something done locally."

He added that trading in MINI Futures was unlikely to require changes to the regulatory framework.

"Although these are derivatives instruments they are issued as securities," said Lomonaco. "What the regulators may be concerned by is the level of volatility of this instrument.

"Because of the embedded leverage, for every 1% up or down in the underlying shares, you may have quite a wild fluctuation of the product: you could have plus or minus 5% or 6%.

"It may boil down to a qualitative assessment saying that these products are not suitable for a developing market, or they may say completely the opposite and say it is better that local investors trade these instruments on a regulated exchange rather than doing this DIY leveraging whereby some of them even sell their homes and cars to buy local shares."

There are two kinds of MINI Futures: MINI Longs, which benefit from a rise in the price of the underlying investment, and MINI Shorts, which benefit if the underlying investment drops in price. All MINI Futures issued by ABN Amro on UAE stocks to date are MINI Longs.

Lomonaco said: "The challenges of producing a MINI Short are slightly greater than a MINI Long but if we can overcome these challenges we may have the product ready. It doesn't believe if you have a MINI Short that you believe the product is not a good investment - the MINI Shorts are a hedging instrument."

Trading in the Emaar MINI Future began on the Swiss Exchange at the end of February. The other two MINI Futures were listed at the beginning of March.

ABN Amro currently has over 600 products listed on the SWX, of which more than 150 are MINI Futures.

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