Deutsche Bank and Lyxor, the second- and third-largest issuers of ETFs in Europe, respectively, have announced important changes to their business models.

Deutsche Bank says it’s moving its ETF business from its corporate bank and securities division to a new asset and wealth management division within the universal banking group. This new division will also incorporate other fund management businesses from within Deutsche Bank—DWS Americas, DB Advisors, Deutsche Insurance Asset Management and RREEF—and control over €900 billion in assets.

Lyxor’s chairman, Alain Dubois, announced at the Irish Funds Industry Association conference in Dublin on Wednesday that his firm “will open its fund range to physical replication by the end of 2012.”

Deutsche Bank’s ETF issuance platform, db x-trackers, and Lyxor, the asset management subsidiary of French bank Société Générale, have lost significant market share to Europe’s largest ETF issuer by assets under management, iShares and, to a lesser extent, to other European ETF issuers since last year.

The iShares ETF range is based almost exclusively on physical replication, conducted by an independent asset management company (BlackRock). db x-trackers and Lyxor, however, have up to now used only derivatives-based (or "synthetic") replication for their ETF ranges. The two bank-run ETF platforms also deal exclusively in index-tracking derivatives with their parent companies’ investment banks, in a so-called vertical business model.

Increasing regulatory scrutiny of the use of derivatives within ETFs, together with pressure on banks to increase their capital levels, have both dented the profitability of synthetic ETF businesses, one ETF market observer told IndexUniverse.eu. However, added the observer, the recent decision by Europe's securities market regulator, ESMA, to request that all net securities lending revenues be returned to fund investors is also putting a squeeze on profit margins for the issuers of physically replicated ETFs.

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