Friday, April 28, 2006

Lawyers, Banks and Brokers: Making a Property Derivates Market

In my last post I raised the question of what lawyers do. On Wednesday this week I attended a seminar at Olswang, a law firm. The seminar was about property derivatives. Derivatives of all kinds have become the investment du jour for many companies and so banks and others are always looking for new, creative ways to market new instruments.

The seminar brought together a group of lawyers, bankers, brokers and investors. It was clear they were talking about a nascent market, but one they advocated with much potential to grow. At present it exists in a few mature economies only, but the transactions market was worth 150 billion euros in 2005. Essentially property derivatives enable investors to hedge against risk in the property market by contracts based on property indices.

Interestingly, it was the lawyers who organised the seminar and brought together the other professional groups. Lawyers have the ability to spot market gaps and think of ways of filling them. What was represented here was a collaboration between the salient groups--banks, lawyers, brokers--that thought carefully how to manage the development of the market. Early adopters have an advantage over others. Their advantage is only partially gained through their expertise, because eventually expertise is disseminated generally. Advantages are gained by establishing a reputation that attaches your name with a particular activity. This creates a nebulous barrier to entry that can be difficult to overcome. If the lawyers show they have created the right set of relationships so that transactions can be pursued without difficulty, it creates confidence among others. And this is a legititmate part of the lawyer's role: to act as counselor and adviser to clients. Part of this is to be able to say "I know the field", but just as important is to say "I know the key players in the field because we created it."

As I sat through the seminar, I watched a field being created through a collaborative enterprise. But it is one thing to see the creation of it, the other is to observe the forecasts of its future. While the brokers and bankers talked of the market and its potential, it was left to the lawyer to speculate on what the future possibilities might be. That's where the creativity comes in.

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