Covered Warrants FAQs

What are Covered Warrants?

Covered Warrants are derivatives issued by financial institutions which give the holder the right but not the obligation to buy (call) or sell (put) an underlying asset at a specified price on or before a predetermined date in the future.

 

Currently in the UK, all Covered Warrants are cash settled. This means that although the terms of the warrant express a right to buy or sell the underlying security they could more accurately be described as the right to receive a cash payment equivalent to the difference between the strike price (shown in the name of the Covered Warrants) and the value of the underlying asset at maturity.

 

The name Covered Warrants denotes the fact that the Issuer will often cover their exposure by buying the underlying stock in the marker, or by using other instruments

 

Risks and Gearing

Before trading you should fully understand the nature of Covered Warrants and the extent of their exposure to risk, indicating your understanding. If this is the first time you have traded in warrants, covered warrants or Listed CFD's you will be asked to complete an appropriateness assessment.

Covered Warrants are an opportunity to make significant profits, and the gearing means that they are potentially more rewarding than ordinary share dealing. However, this also means that the risks and potential losses are greater. Before trading you should fully understand the nature of Covered Warrants and the extent of their exposure to risk. You should consult an independent financial adviser, if you are unsure whether Covered Warrants are a suitable investment for you.

 

Placing Covered Warrants trades online

Covered Warrants Trades can be placed between 08.15 and 16.30.

You can buy and sell warrants within a MarketMaster account or a SIPP. Due to Inland Revenue regulations you are not permitted to buy or hold Covered Warrants within an ISA.

Before placing your order, you should check your 'Available to Invest' amount, 'Permanent Dealing Limit' and the status of your share 'Holdings' by going to the 'Account View' page within the ‘Portfolio & Accounts’ tab.

You can check the share price for Covered Warrants, before placing a trade, in exactly the same way as for a normal equity. Before you login you can access 'Quick Quotes' which are 15 minute delayed share prices or you can login and use the Real Time Quotes. Both options can be found on the top of the left hand menu bar on all pages. Alternatively you can use the search option on the ‘Enter Order’ page with the real time price displayed in green to the right of the screen.

 

You will be asked to confirm the following so that we can act on your instructions:

1. Choose the account you want to deal on. If you have more than one account, you will need to select the account you want to use to make your deal by selecting from the drop down box at the top of the page.
2. Enter the symbol of the shares you want to deal in. If you are not sure of the symbol, you can select the 'Covered Warrants' link from the left of the search box and choose from the list of Issuers provided. (for more information on the naming convention for Covered Warrants see below)
3. Select which order type you want to use: Covered Warrants issued by Société Générale, Dresdner and Trading Lab can be traded using either Quote & Deal, At Best or Limit instructions. We can only accept At Best instructions for trades in JP Morgan. Note: when using Quote and Deal you will only be able to enter a number of shares.
4. Choose whether you want to buy or sell. Note: when entering a number of Covered Warrants or cash amount you must enter a whole number (a cash amount including decimal places will not be accepted). If you are entering a cash amount you should include whether you want to include or exclude charges in the amount you have entered.
5. If you are unsure about any of the details you have entered then choose the red 'clear' button to clear the screen of all the details you have already input so you can re-enter your order. When you are happy with the details entered choose the green 'next' button to proceed to the next step in the process. If there are any details that have not been entered which we need to process your order we will prompt you with a message, highlighted in red, at the top of the page.
6. You will be given 15 seconds to confirm your order and accept the quote by pressing the green ‘deal now’ button. Due to the volatile nature of Covered Warrants the Issuers will only hold the quote for 15 seconds. The closer you leave your dealing decision to the end of the 15 second quote period, increases the likelihood of your deal timing out. If the quote has expired you will have to request a new quote before being able to place your trade.

 

Maturity Date and Exercising Covered Warrants

Maturity

Covered Warrants are a time limited investment – they mature on a predetermined date set on issue. This is the last date on which the Covered Warrant can be exercised. The date the covered warrant matures will be displayed as part of the full name of the Covered Warrant, see naming convention below. We also display this date on the Quote verification page for you to see before you place your trade and on the Order Confirmation page, once a trade has been placed.

 

Exercise

There is a regulatory requirement that all London Stock Exchange listed Covered Warrants will exercise automatically upon maturity when the investor is 'in the money'.

 

Although you will be able to exercise American style Covered Warrants before the maturity date serious consideration should be given to the fact that the Covered Warrant may have a greater value if sold rather than expired. If you are uncertain about which course of action to take please consult an independent financial advisor

 

 

Naming Convention

Unlike ordinary equities which normally have relatively short names such as BARCLAYS ORD GBP0.25, Covered Warrants have much longer and more descriptive names. These names provide valuable information about the Issuer, the underlying security, the Maturity Date and the strike price.

 

 

Charges and Settlement

Charges

Commission is charged at the same rate as standard equities, with covered warrants trades counting towards your deal count. At the time of trading commission will be charged at the standard equity rate.

 

Due to the fact that all UK listed Covered Warrants are cash settled, with no stock transferred, you will not be charged the 0.5% Stamp Duty usually incurred on UK share purchases.

Settlement

Trades in Covered Warrants settle 3 working days from the date of trade.

 

If you choose to exercise the Covered Warrants or it is exercised automatically on maturity, we will settle this with the market within 5 working days from the date of maturity. The proceeds will be paid to your account within 10 working days of the funds reaching us.  

 

 

Further Information

View our dedicated Covered Warrants page under the Education tab for more Covered Warrants information.