Structured products and impact on financial markets

Abstract

By "structured products" we refer to a variety of financial products that combine various cashassets and/or derivatives in order to give a particular type of risk/reward payoff that allowsinvestors access to broader opportunities for investment. The return of a structured product istypically derived from the performance of one or more underlying assets.Examples of underlying assets include, but are not limited to: interest rates; an equity or debtinstrument; a basket of securities; a securities index or indices; an individual commodity; acommodities index; an individual currency or currency basket; creditworthiness of a security orbasket of securities; or any combination thereof.The majority of structured products are debt instruments issued by investment banks or similarlarge financial institutions. They have a fixed maturity date like ordinary bonds. Structuredproducts originally were used as a way to customize a financial instrument's risk/reward profile toan individual institutional investor's specific need. This was done if that need couldn't be metwith existing investment products. However, structured products also have been developed whichare suited to individual investors. A structured product can be of various types. It may beregistered with the Securities and Exchange Commission (SEC), listed on a national securitiesexchange or traded in the secondary markets like a stock or bond-Exchange Traded Notes (ETN).Some structured products offer full or partial principal protection, while others have no principalprotection at all. Some offer a yield whereas others do not. It is possible that the value of anindividual structured product may not increase in proportion to the underlying asset, or maydecrease even more than the underlying asset. Some structured products may offer individualinvestors access to new asset classes that may otherwise be difficult to access through otherinvestment alternatives. This is a huge advantage in portfolio diversification.Structured products can be either more or less risky than other investments. There is nonecessary link between product complexity and investment risk - complex products may be lowrisk, and noncomplex products may entail high risk. It is important that an investor mustunderstand the role in an investment strategy that can be played by any particular structuredproduct in light of the investor's specific investment objectives, risk tolerance, and investment horizons