The Swiss Structured Products Association (SSPA) (Association suisse des Produits Structurés) announced November 8, 2011, a 14% decrease in turnover of structured products during the month of October 2011. But 3848 structured products were created during October, while 4565 were created during September. This means all forms of contract created refer to the terms and conditions of establishments who have put them on the market. In October 38,023 structured products were listed in Switzerland. To put this in perspective: the New York Stock Exchange lists just over 8000 stocks. It seems it is not difficult to create products known as "leverage", in other words, products that can invest a amount higher than 100% of the capital provided by investors. Leverage of 2 (or 200%) allows an investor with a capital of CHF 1.00 to invest an amount of CHF 2.00. This is obviously useful when the stock rises, but less so when it goes down, the risk being that the stock can go down twice the speed it might going up.

Who allows the introduction of these structured products on an exchange market? In fact these products are considered as bonds, in other words they are considered as a contract between two parties, one of them being a Swiss bank, Swiss insurance or a Swiss securities or foreign institution subject to equivalent prudential supervision (article 5 of Federal Law on Collective Investment Schemes (CISA). A structured product is not a mutual fund and therefore is not subject to the approval of the FINMA (Art. 5 para. 2 bed. c . CISA). It is a contract between the issuer of the product and the buyer, and as any private contract, benefiting of contractual freedom. Thus why 3848 new products have been issued in October 2011. Really without Federal State control? Indeed, as a structured product is a contract, it can be tailored to any desires of a client (maybe depending of the size of the investment) and is considered as the result of a negotiation. Basically, the definition of a structured product means a product designed by a financial institution to meet the needs of its customers combining options, swaps, interest rate, guaranteed capital etc ... (the limit being the imagination). The price is determined by mathematical models that try to model the behavior of the product depending on various factors, such as time or the evolution of one or more markets. It can be very opaque and embarrass even seasoned mathematicians, a good reason for financial institutions to preserve large margins.

A derivative is different from a structured product in that it is a contract whose value is linked to the price of something else. A derivative has what is called one or more "underlying" whose price behavior will influence the price of the derivative itself. As a derivative is a contract, it should result from negotiations, at least from some kind of discussions. The problems start when the two parties no longer negotiate but use standard contracts and even issue them without knowing their counterpart! This is what happened in the United States in 2006 and especially 2007 with standard contracts of five years duration. 2012 will be an interesting year also because a number of contracts will expire and issuers will discover if the counterparts of the contract exists or not! Thus also the huge provisions made by issuers to face the default of a counterpart and as this situation is already anticipated it might not be as bad a news as one could imagine.

 See ISDA - International Swaps and Derivatives Association, Inc..

© P.C - 2011