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...
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...
IRS Could Put a Halt to REIT Conversions
(Jun 2013)
We've talked a lot about real estate investment trusts (REITs) before. In the US, REITs are companies that invest at least 75% of their assets in real estate, pay out almost all of their annual income in dividends, but also pay little or no corporate income tax. As we've discussed before, many companies have tried to qualify for the REIT designation to reduce their tax liabilities, even if their business is only peripherally related to real estate.1 This 'REIT conversion boom' has been...
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...
SEC Litigation Releases: Week in Review - June 14th, 2013
(Jun 2013)
Former Yahoo Executive Settles SEC Insider Trading Case
June 12, 2013, (Litigation Release No. 22726)
A final judgment was entered against Robert W. Kwok, a former Senior Director of Business Management at Yahoo! Inc., for allegedly trading on nonpublic information "concerning Yahoo and Moldflow Corporation." According to the SEC, in April 2008 Kwok learned of an upcoming acquisition of Moldflow by Autodesk, Inc. from Reema Shah, "a former mutual fund and hedge fund portfolio manager at...
Alternative Ways to Gain Municipal Bond Exposure
(Jun 2013)
We've been covering municipal bonds, with a focus on markups, this week on the blog. So far we've discussed some basics, given an example of an excessive markup and introduced SLCG research on excessive markups in municipal bonds . Given that retail investors may be charged excessive markups when purchasing municipal bonds directly, it may make sense for them to purchase municipal bonds indirectly.
Jason Zweig has written a great follow-up to his coverage of the muni markups issue with a...
SEC Warns Investors About Binary Options
(Jun 2013)
The SEC has issued an Investor Alert on binary options, which are derivatives that pay out a fixed amount if an event happens and zero if it does not. We've covered binary options before, so do check out that post for a detailed background and an Excel spreadsheet that explains how binary options work in some detail.
The Alert highlights several risks of binary options, mostly relating to how they are traded. It notes:
Much of the binary options market operates through Internet-based trading...
SEC Litigation Releases: Week in Review - June 7th, 2013
(Jun 2013)
Final Judgments Entered Against Former Nicor Senior Officers Kathleen Halloran and George Behrens
June 5, 2013, (Litigation Release No. 22715)
Final judgments were entered against Kathleen Halloran and George Behrens, former CFO and former Treasurer of Nicor, Inc. respectively, for allegedly overstating "Nicor's financial performance...by, among other things, making or authorizing false and misleading statements about Nicor's performance in multiple filings with the Commission." The SEC...
Investors Bristle at New Structured Product Valuations
(Jun 2013)
Back in February, the SEC issued a letter to structured product issuers that required them to estimate and prominently state the estimated value of the notes to investors. According to Risk.net, as issuers have begun doing so, many investors have "expressed surprise" at how low those valuations are.
However, these valuations should be no surprise to anyone familiar with the structured product literature, which has documented significant discounts for a wide variety of product types. You can...
Investors Returning to Capital-at-Risk Products
(May 2013)
Yakob Peterseil of Risk.net recently noted that "[b]anks are boosting issuance of leveraged notes linked to US equity indexes and notes that pay out when yield curves steepen." According to the article, reverse convertibles and buffered notes are seeing a resurgence as investors begin to be more optimistic about stock market growth. In addition, principal-protected structures like structured certificates of deposit and principal-protected notesare falling out of favor as attractive terms are...
