Structured CD with an Exotic Embedded Option
(Aug 2013)
In the past few months, we have constructed a database of thousands of structured certificates of deposit (CDs). We have analyzed and evaluated hundreds of these CDs and have compiled these results into a recently completed study . Our results indicate that structured CDs are usually issued at significant discounts to face-value (comparable to structured products), offer little if any market exposure and are often less valuable than contemporaneously issued fixed rate CDs.
We've recently come...
SLCG Research: Structured Certificates of Deposit
(Jul 2013)
Lately, we've been fascinated by structured certificates of deposit (CDs), also known as 'market-linked CDs', 'equity-linked CDs', 'market contingent CDs', etc. Structured CDs are bank deposits that have interest payments linked to market indexes, individual stocks, commodities, or any other underlying asset. Unlike structured products, which have public SEC disclosure documents, structured CDs are not well studied and even the size of the market is not perfectly clear. We covered the basics...
SEC Litigation Releases: Week in Review - July 26th, 2013
(Jul 2013)
SEC Charges Former Portfolio Manager At SAC Capital with Insider Trading
July 25, 2013, (Litigation Release No. 22761)
This week the SEC charged Richard Lee, a former portfolio manager at SAC Capital Advisors, with insider trading "ahead of public announcements about a Microsoft-Yahoo partnership and the acquisition of 3Com Corporation by Hewlett-Packard." Lee's alleged insider trading caused "the S.A.C. Capital hedge fund that he managed to generate more than $1.5 million in illegal profits."...
The Basics of Insurance Linked Securities
(Jul 2013)
Financial innovation is typically associated with banks, but lately we've seen a number of new financial products developed and sold by insurance companies. Some of the most interesting products are known as insurance-linked securities, or ILS.
In the broadest sense, ILS transfer risk from insurance companies to investors. The largest segment of the ILS market is in catastrophe bonds (or 'cat bonds' for short), whose interest and principal payments depend on a specifically defined natural...
Misrepresentation of Asset Quality in RMBS
(Jul 2013)
Investors in Residential Mortgage Backed Securities (RMBS) have suffered tremendous losses since 2007. Many junior and mezzanine investors were wiped out by the asset pools' delinquency rates coupled with the subordination embedded in these structured securities. Since then, there has been a proliferation of litigation alleging that the underwriters and originators of RMBS misrepresented the risks of these products. An interesting new paper by Professors Piskorski and Witkin of Columbia...
Similar Structured Product Premia in US and Europe
(Jul 2013)
One point we've made again and again in our research is that structured products -- debt securities with market-contingent payoffs -- tend to be priced at a premium to face value. We have documented premia in reverse convertibles, autocallables, absolute return barrier notes, principal-protected notes, dual directionals, and over 17,000 individual products freely available in our searchable structured product database.
Recently, the SEC has required structured product issuers to disclose an...
VelocityShares' New Volatility ETFs
(Jul 2013)
You've heard it here before: hedging equity exposure with volatility derivatives is very tricky.
While the CBOE Volatility Index (VIX) and the S&P 500 are negatively correlated suggesting a possible hedging opportunity, you cannot invest in the VIX itself, you have to invest in derivatives (futures or options) linked to the VIX. The simple fact is that this indirect exposure to the VIX does not behave like the VIX itself, making it in the end a rather poor hedge to equities .
But issuers of...
SEC Litigation Releases: Week in Review - June 28th, 2013
(Jun 2013)
Court Enters Final Judgments Against JBI, Inc. and Former Officer in Accounting Fraud Case
June 27, 2013, (Litigation Release No. 22735)
Final judgments were entered against JBI, Inc. and John W. Bordynuik, "two defendants in a fraud action filed by the Commission in 2012." In its original complaint, the SEC alleged that JBI, Bordynuik (JBI's former CEO) and Ronald Baldwin Jr. (JBI's former CFO) engaged in a scheme that allowed JBI to state "materially false and inaccurate financial...
Structured Investments Linked to Proprietary Indices
(Jun 2013)
Structured products are often linked to well known indices like the S&P 500 or the Dow Jones Industrial Average, but recently it has become more and more common for banks to issue structured investments linked to proprietary indices that they create themselves. The use of proprietary indices (also known as 'self-indexing') has begun to arouse suspicion from various sources and so we thought we'd take a step back and talk about the issue for a moment.
Structured products linked to well-known...
Reverse Convertibles and Event Risk
(Jun 2013)
Reverse convertibles are short-term debt securities issued by banks whose return of principal at maturity is contingent upon the returns of the linked stock. Although these notes typically pay relatively high coupons, they expose investors to losses on the underlying asset, especially if those losses are beyond the trigger level. Academic research shows that these coupons are not adequately compensating the investor for the market risk that they are bearing by investing in the notes. For...
