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FDIC Warns Investors about Structured CDs

Earlier this year, the Federal Deposit Insurance Corporation issued a warning about structured certificates of deposit (CDs), which are hybrid investments combining features of both traditional CDs and structured products. FINRA has also recently investigated the market for structured CDs, which has been estimated to be as large as $30 billion.

Structured CDs are essentially bank deposits whose interest payments depend on the value of a reference index instead of a predefined fixed or floating interest rate. The reference index is typically an equity index such as the S&P 500, a single equity such as Apple stock, or an interest rate; however, any reference index may be used and some products have enormously complex payoff structures. In this way, structured CDs are very similar to structured products.

Because structured CDs are fundamentally bank deposits, they are generally eligible for FDIC insurance, despite often being very risky bets on volatile assets. The FDIC's warning highlights these potential risks, including restrictions on withdrawals, long maturities, and more market risk than many investors may realize. Our own work on structured CDs has found that many of these products are similar to principal protected structured products, and are usually sold at a substantial premium.