Policy Issues Raised by Structured Products

This post is by Allen Ferrell, Harvard Law School.

The Program on Corporate Governance recently issued my discussion paper with Jennifer Bethel, Policy Issues Raised by Structured Products, which will be published in 2007 in the Brookings-Nomura Papers on Financial Services. Our abstract describes the paper as follows:

The structured products market has experienced explosive growth in the United States over the last five years. The growth of this market is expected to continue in the 20-25% range given the still comparatively small size of this market in the U.S. and the expected increase in demand for fixed-income type investments by retiring baby boomers. While often performing an invaluable role in facilitating the transfer of risk and improving the ability of investors to more fully diversify their portfolios, these products also raise important investor protection concerns. Investment banks are increasingly offering structured products to retail investors through their broker networks. Whether retail investors adequately understand the complicated payoff structure of these products, which often include embedded options, and the implicit fees being charged for these products is the source of these investor protection concerns. The illiquidity of most structured products, including even listed ones, heightens these concerns. The current regulation of structured products and possible reforms are examined with these investor protection concerns in mind.

The full discussion paper is available for download here.

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