FINRA Investor Alert: Leveraged and Inverse ETFs
Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors
The Financial Industry Regulatory Authority (FINRA) issued an Investor Alert to help investors understand the performance objectives of leveraged and inverse exchange-traded funds.
Exchange-Traded Funds is an investment fund that holds stocks, bonds, or commodities and typically tracks specific indices representing such asset classes. Introduced in 1993 by State Street Global Advisors, ETFs...
SLCG Research: Abuse of Structured Finance
SLCG released today 'Regions Morgan Keegan: The Abuse of Structured Finance'.
Six Regions Morgan Keegan (RMK) bond funds lost $2 billion in 2007. In the paper, we argue that the loss was not due to 'flight to quality' or 'mortgage meltdown' but to RMK's portfolio concentration in subordinated tranches of asset-backed securities.
We also find that RMK misrepresented to investors and the Securities and Exchange Commission (SEC) in several ways. Firstly, RMK did not disclose to the SEC...
FINRA Investor Alert: Cat Bonds
Catastrophe Bonds and other Event-Linked Securities
The Financial Industry Regulatory Authority (FINRA) published an Investor Alert on catastrophe bonds, or 'cat bonds'. Cat bonds pay higher interest rates compared to the equivalent corporate bonds.
However, there are risks involved in holding cat bonds. Investors of a cat bond can lose interest and principal if the catastrophe, to which the bond is linked, occurs. Cat bonds are quite illiquid, the pricing information are generally not...
SLCG Research: Collateralized Mortgage Obligations
SLCG released today 'A CMO Primer: the law of Conservation of Structured Securities Risk'.
Recently, the finance industry witnessed the bailout of two Bears Sterns hedge funds and the collapse of Brookstreet Securities. Both had portfolio holdings of collateralized mortgage obligations (CMOs) and suffered huge losses thereof. We have seen such CMO losses before, when in 1994 interest rates rose, CMOs fell in value and bond mutual funds suffered unexpected losses.
In this paper, Dr....
Registered Rep.: A Tempest Over Structured Products
A Tempest Over Structured Products
Registered Rep. issued a news release today reporting on the state of the structured products market. The sale of structured products has grown by an estimate of 33% from 2005 to 2006. Yet the general features of structured products seem to make these products unattractive: complex, expensive, and illiquid. Financial advisors might favor structured products for it enables portfolio diversification and for its ability to tailor to the specific needs of...
Forbes: Guaranteed to Go Up
Guaranteed to Go Up
Forbes published an article examining structured products sold to retail investors around the world. It describes how a structured product works, the payoffs and risks, using an example of the principal protected note. It then explains how the principal protected note is equivalent to and can be replicated by a combination of traditional securities and derivatives.
A principal protected note returns at least the face value of the note at maturity. If the reference...
FINRA Press Release: Structured Products
NASD Provides Guidance Concerning the Sale of Structured Products
The Financial Industry Regulatory Authority (FINRA) published a NASD Notice to Members 05-59 providing guidance to members concerning their sales practice obligations when selling structured protects to retail customers.
The complexity of structured products can often obscure their risks. It is therefore important that investors are protected from unscrupulous sales practices that might arise in an unregulated...
FINRA Press Release: Best Practices
NASD Recommends Best Practices for Reviewing New Products
The Financial Industry Regulatory Authority (FINRA) published a NASD Notice to Members 05-26 providing best practices guidelines for firms on "developing and vetting" new structured products. This notice was motivated by the increasing popularity of structured products and the increasing complexity of these products.
Because structured products can be so complex, investors should be careful when considering them. They should...