Sep 26 2008
Structured products under scrutiny
The recent collapse of Lehman Brothers has put a question mark on the transparency of structured financial products operating in the financial markets. With Lehman Brothers signing for bankruptcy in the recent past, the security of these structured products have come under the scanner. Also this recent development is also expected to have a major impact on the new product development because the structured products need the backing of an issuer and Lehman Brothers was one of these major issuers. These recent happenings are going to make the market all the more conservative and not at all conducive for new products to come in. The structured products are designed to create an investment product which combines the features of both equity and fixed income options and involves the use of derivatives to meet specific investment objectives. This aim can be best achieved by creating a mixture of different types of investments which could include various kinds of commodities, bonds, currencies, real estate options, equities etc.
These structured products might seem similar to mutual funds or exchange traded funds but are not so. The main point of difference lies in the fact that unlike mutual funds or exchange traded funds, these structured products come with a defined maturity date along with the option of principal protection and the ability towards customization so as to suit the individual need of the investor depending upon the market conditions. Though enabling greater transparency in regard to the structural products is essential to regain back the customers faith and confidence but this wont be the only measure necessary to be adopted.
The producers of these specialized products need to be more forthright and active to explain these products better to the investors and to help them in clearing their doubts and queries pertaining to them. I recommend paying more attention to the protection issued to the investors in case the issuer goes belly up. Therefore to sum up the fears I would state that the biggest challenge posing in front of the structured product issuers would be to improve and work upon the education and communication aspects revolving around these products which would automatically instill confidence amongst the investor community.