Spain’s ambitious derivatives market has reiterated the importance of retail flow to its and Europe’s future growth, marking the latest call for a concerted effort to support Europe’s retail trading community.

BME Derivatives Exchange, formerly known as MEFF and acquired by Switzerland’s SIX Group in June 2020, is an established European venue, trading index and single stock futures and options.

But the Spanish derivatives exchange has seen volumes decline over the past decade, trading last year 30 million lots which was down 47% on the 56.3 million lots in 2014.

This trend has focused minds on the opportunities to reinstate growth in the Spanish derivatives market which has led to consensus about the latent potential in the European retail trading community which mostly trades contracts-for-difference (CFDs).

Clotilde Salmeron, the head of BME Derivatives Exchange, is convinced this is a key opportunity not just for her group but Europe more widely: “For BME Derivatives Exchange and for the rest of Europe, the main growth opportunity is in retail which relies on financial literacy and trying to move retail traders in Europe to exchange-traded derivatives (ETD).”

Salmeron added: “There is a lot of talk about the growth in the US and in Asia for example, and there is no growth in Europe but this is wrong. There is growth in Europe but it is not in ETD, rather it is in the over-the-counter world with CFDs.”

Looking globally, the CFD picture is mixed. They are banned in the US and Brazil for example, but there are allowed (with various restrictions) in the UK, Europe including Spain, China, Australia and Canada.

Given they are traded in the over-the-counter (OTC) market, normally through retail brokers, reliable data on relative market sizing is not available. But we do know there is a small, vibrant community of retail traders in Europe and its ranks can be boosted, according to Salmeron.

“There is a relevant representation of retail traders in Amsterdam for example but this is not across all of Europe so there is a lot for us to do and this is an area where we are investing. We find financial literacy crucial to improve client trading in ETDs.”

CFDs are attractive to retail traders because they are easy to understand and the fees are low but these instruments are crucially not cleared through a central counterparty which loads them with risk in the event of a broker default.

Salmeron said: “We have worked for years with the BME Institute to educate in universities but also with exchange members and asset managers how they can use derivatives to hedge or improve their portfolios.”

The BME Derivatives Exchange chief said, as well as education about the benefits of cleared derivatives over CFDs, part of the challenge is working with regulators to allow futures and options to compete on a level playing field with CFDs.

Salmeron said: “We have to find a balance with the regulators between maintaining and improving investor protection, which for us as exchange is crucial, and the increase of regulation in Europe relating to ETDs which are making these products so difficult to trade.”

Gustaf Renkwitz, a supervisor at BME Derivatives Exchange, added: “We are working with the regulators to clearly differentiate OTC and the products traded on exchange because sometimes the difference between those two products is not presented to the public including the clear benefits of trading on an exchange with a central counterparty behind.”

The BME (Bolsas y Mercados Espanoles) published in February a huge report designed to boost the competitiveness of the Spanish capital markets which included recommendations for the ongoing oversight of listed derivatives.

Salmeron said: “In our recent white paper, there were three main topics in derivatives. One was that the authorisations on the exchange side are pretty good but the European procedures on the clearing side are quite long.”

Given Spain is part of the European Union, any new cleared products need to be approved by the Paris-based European Securities and Markets Authority which can slow down their launch.

Salmeron added: “When we really want to offer something to our participants, we don’t see the necessary speed from the European process in the central counterparty world.”

She continued: “Another issue is that we have been trying to convince European regulators and policymakers that, if they need to make an intervention on ETDs as they have in the past, they should take into account the industry including the exchange participants to understand what is going on and to give the industry enough time to adapt to this new regulation."

Salmeron concluded: “The third part is that we have asked the companies that we have derivatives on to communicate clearly their dividend policies which is crucial for derivatives participants. We conducted a campaign with the companies which was great and we’ve had no major issues on this in the last four years.”

Speaking at FOW Trading Amsterdam 2024 last month, Tanya Pieters-Gorissen, the head of Capital Markets Integrity Supervision at the Netherlands Authority for the Financial Markets (AFM), said greater retail involvement would help boost European markets.

Pieters-Gorissen told the delegation: “If we really want to raise the capital markets to a higher level, we need markets with a higher level of retail participation.”