The credit and tax bindweed on the growth

In 2004, the authorities loosened the legal and tax bindweed on the growth of a wider derivatives market. One of the earliest derivatives swap was arranged between Deutsche Bank and Eurohypo in 2005, and brought together a buyer and a seller of UK property risk. The seller exchanged a total property return (based on the IPD Index) for a LIBOR-based return paid by the buyer based on a notional principle. Prudential, the UK life assurer, and British Land also agreed on a commercial property swap at about the same time.

The formal launch of the Property Derivatives Interest Group (PDIG) on 16 September 2005 has set the crucial signal for the property market in the UK, which may serve as a role model for property derivatives trading elsewhere. However, the UK is somewhat fortunate because the available indices that are run by IPD are mature and widely accepted as accurate. That is not (yet) the case in most other countries.

In 2006, the market could build on the growth of the previous year and attracted further investment banks. Several banks started to quote option prices on IPD’s main index. Further, it was hoped that the arrival of sectoral transactions would deliver a further boost to the market. However, after a few trades on sector and even subsector indices in 2006, there were no more such deals in the first half of 2007. In essence, it remained a simple swap and forward market on the All Property Index with a few option trades, before trading volume soared in the wake of the US subprime mortgage crisis. The uncertainty introduced by the crisis attracted a number of new participants in the property derivatives market.