Offshoring of ‘Toxic Waste’?

Stock market volumes are down, arbitrage is comatose, margin trading is down, lending for IPOs is down, IPOs themselves are down, proprietary investments are down…………….

So what are the hotshot investment banks and brokers up to? They all are busy creating and selling Structured Products. Quarterly earning numbers are to be released after all. We in our own humble way have been contributing to this madness for structured products by combining some simple debt instruments and exchange traded long term options.

However there are a lot of unanswered questions relating to some of the Structured Products being vended in the market place.

1. Where is the debt portion of the structured product being deployed? What is the credit risk associated with the same?

2. How is the option risk of the product managed?

3. Are private placement of debenture guidelines not being violated in spirit (if not in letter) by selling the same to the mass market in lots of Rs. 10 lacs?

4. Why are investors being fooled by giving simple interest or cumulative returns in product literature instead of annual compounded rate? Does “innovation” in financial markets mean a new way of fooling investors?

5. Why are investors being fooled by having a different participation period for equity linked returns and a different maturity period of the underlying debenture (much longer than the participation period)?

6. Do the rating agencies understand the risk of these instruments when they are giving AAA so or AAA r etc to these instruments?

7. Why are internationally discredited issuers being given AAAs freely? Why are investors falling over each other in the rush to invest in paper backed by these issuers?

8. Does RBI know that associate companies of foreing banks are dabbling in these derivatives? on the other hand do the investors know that these instruments are issued by small private limited companies and not the banks?

This frenzy for structured products coming so soon after being discredited internationally and in the foreign exchange markets in India is quite surprising. Calling out to regulators to bring some semblance of order to this wild wild market………….