Opinion on the new financial products issued by financial institutions - structured products

Laurentiu Paul Baranga 1
  • 1 The Bucharest University of Economic Studies, , Bucharest, Romania

Abstract

Structured products are financial instruments issued by a financial institution where the amount claimed by the investor from the issuer depends on the variation of the price of the underlying instrument based on which the certificate is issued, namely: individual shares, share costs, stock indexes, currencies, commodities or combinations of these according to the prospectus. These products appeared with the development and diversification of financial services during the recent years, as well as due to the emergence of liquidity suppliers of international importance. The liquidity providers have developed on their own platforms a new range of derivatives which are different from the classical derivatives. These new derivatives, similar to contracts for difference (CFDs), have given to other institutions the possibility of transferring their risk more easily, regardless of the nature or type of the underlying asset. Thus, the financial institutions issuing structured financial products have found in liquidity providers the possibility of developing the CFDs required for their risk transfer operations. The issuers of structured products do not accept new risky positions when they issue certificates because they neutralize them through suitable risk transfer operations. The issuing financial institutions structure certificates from a variety of financial assets and/or commodities in order to adjust them to the various risk profiles of investors both in terms of expected return and in terms of the response to risk. Thus, products are issued that quickly respond to the trends of the financial or commodity markets. Investors in structured financial products benefit from the economic effect of a derivative but are exposed to financial risks that are more complex and more difficult to understand and at the same time depend on the reliability and stability of the contractual relationships between various financial institutions.

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  • Commission Directive 2006/73/EC implementing Directive 2004/39/EC as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive.

  • Commission Regulation (EC) No 1287/2006 implementing Directive 2004/39/EC as regards record keeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading, and defined terms for the purposes of that Directive.

  • Directive 2004/39/EC on markets in financial instruments.

  • Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.

  • Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012.

  • Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR).

  • Regulation (EU) No 1286/2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs).

  • Directive 2014/91/EU amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards depositary functions, remuneration policies and sanctions.

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